In an extensive interview, Gluskin Sheff’s Chief Economist David Rosenberg offered his latest thoughts on Greece, Europe, the US economy, and also explained why he’s still bullish on stocks.
Here is a partial transcript of his interview that just aired on the Newshour Podcast page and on our iTunes page.
Financial Sense: What’s your outlook on Greece if they exit the euro?
David Rosenberg: They can try and develop some sort of parallel currency—it wouldn't be the first time that's happened—but it wouldn't be backed by anything and there would be a complete collapse of the Greek banking system without the immediate life line of the ECB. You know, the country has an export to GDP ratio of 20% so, to me, it is fool hardy to believe that they can just depreciate their way to prosperity.
FS: What are the wider implications if Greece were to exit the currency union, especially when we look at other European nations like Italy, Spain, and Portugal?
DR: A currency union is exactly that—it's a union; so once you lose a member you set potentially a very dangerous precedent towards the ultimate breakup of the entire euro area. So, to me, firstly that sets a precedent; secondarily, there's no question…Greece will never be able to repay these debts...which is why even a haircut or some sort of restructuring, to me, would've made perfect sense as part of a deal. That's not what the Troika wanted but the second complication—you mentioned Italy and you mentioned Spain and Portugal—we all know that these countries carry inordinate amounts of debt. They're more diversified economies than Greece is and can probably carry on for longer but in the next crisis or next recession, who knows once you set this precedent what it is going to mean for these other countries, which probably can never pay off their debts either.
FS: Given the items you just mentioned, what’s your economic outlook for the Eurozone?
DR: The multi-year contraction of their monetary base has reversed course so I think that the Eurozone in aggregate is doing quite a bit better... Although it's hardly a boom, the Eurozone is out of a recession; their economic growth is probably running between I would say 1-1.5%, which for that part of the world is actually pretty good and my sense is that it will gather momentum once we get through this. There's going to be a temporary period of disturbance for the markets related back to the economy but if you ask me if I am constructive on the European economy right now for the next 12-24 months, the answer is, yes, I am. The big risk always was going to be whether or not the Greek problem was going to translate towards a financial contagion and that's not happening just yet. I mean the markets are jittery but nothing like we saw in 2010 or 2012 and so the ECB has built up this machinery which I think is going to be successful in containing whatever damage to the rest of the system this Greek situation into the periphery and my sense is that the economy there is going to pick up moderately over the next year or two.
FS: What about the US economy? We contracted slightly in the first quarter and appear to be tracking slightly above 2% for the second when we look at the latest Atlanta Fed GDPNow forecast. What’s your outlook there?
DR: What's interesting is that GDP gets all the advertising but it's not the only statistic that illustrates how well the economy is doing. That's the spending side of the economy. There's something also called the Gross Domestic Income, which is the income part of the economy, and that actually did not contract in the first quarter. On a year-over-year basis, real GDI is running at 3.6%. In nominal terms it's running at 4.5% so it's interesting that the income numbers and the spending numbers have a gap between them right now that I expect that gap is going to be closing and probably closing because GDP is going to catch up to GDI and we're seeing it already in the second quarter. The estimates that I'm seeing have moved up above 3% for growth in the second quarter...[and] I think people will be surprised that the momentum will build in the third and fourth quarter this year as well.
FS: Do you think the Fed will hike rates this year?
DR: I just go back to that period of '97-'98 during another period of global turmoil—at that point it was Asia and it wasn't so much Europe—and the Fed barked for about 2 years about hiking rates and in fact the move they ultimately made after Russia defaulted was to cut rates 3 times. So I think the Fed may talk the talk but I'm not so sure they walk the walk. I would say for sure rate hikes are on the table but I don't think September is guaranteed; and if they bypass September then they really only have December when the banks close their books for the year and there's no liquidity on top of the liquidity challenges we have right now...and then maybe it comes in March of next year, which, by the way, when you go to what Janet Yellen had to say after the last FOMC meeting, she outlined three dates: she outlined it could be September, it could be December, and it could be March of next year and as time goes by I'm thinking more and more of March next year than September of this year.
FS: In this kind of environment do you still favor stocks?
DR: I do favor stocks in this environment [and] I think…we are going to be seeing better top-line growth, earnings are going to come in better than expected and, alongside what's still going to be a dovish Fed even if they raise rates moderately, that's still going to keep the equity market in my opinion in an upward tilt. It doesn't mean we're not going to flatline this year... we've had many years in the past where the market pauses but still in the context of a secular bull market...you don't get outright fundamental bear markets without there being a recession and I don't have a recession in my crystal ball any time not just in the next 12 months, but the next 24 months. So my sense is…this market will continue to grind higher.
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