Crash ...!!!

Rosenberg sees bright future for Canadian markets

David Pett, Financial Post Published: Monday, May 25, 2009

Two weeks less two days after starting his new role as chief economist and strategist at Gluskin Sheff & Associates, the Toronto-based wealth management firm, David Rosenberg remains particularly prickly about the near term prospects for both global equity markets and the world’s economy.National PostTwo weeks less two days after starting his new role as chief economist and strategist at Gluskin Sheff & Associates, the Toronto-based wealth management firm, David Rosenberg remains particularly ...

David Rosenberg has not had much occasion to put on his "optimistic hat" of late, but now that he is back home in his native land, he sees a bright road ahead for Canada's equity markets.

Mr. Rosenberg, who for nearly a decade sang the siren song of doom on Wall Street as chief North American economist of Merrill Lynch, says Canada is well positioned to benefit from both Washington's extravagant intervention into its wounded financial and economic system and the resumption in the secular commodity bull market.

"There is an old saying that in the land of the blind, the one-eyed man is king and Canada is going to be looking like the one-eyed man," he said. "When you look at the future and global investors looking to allocate capital toward the U.S. and Canada, Canada is going to come out ahead."

Two weeks after starting his new role as chief economist and strategist at Gluskin Sheff & Associates, the Toronto-based wealth management firm, Mr. Rosenberg remains particularly skeptical about the near term prospects for both North American equity markets and the economy.

While he thinks a very large chunk of the credit shock is behind us, he said we have yet to work through widespread housing deflation and falling employment. Realistically, Mr. Rosenberg believes it could take years to make the transition to the next economic cycle and notes markets, which have risen almost 40% over the past two months largely on the proposition the economy is in recovery, could easily fall back to new lows in the coming weeks.

What has become more evident to Mr. Rosenberg as the current downturn progresses is the growing advantage that Canada appears to have gained over its neighbour to the south. At the heart of this advantage is the change in the economic world order.

"I think the U.S. is now in the sunset of its economic hegemony and the economic power is shifting towards Asia and China," he said.

In addition to a diminishing share of the global pie, Mr. Rosenberg is troubled by the massive incursion by the U.S. government into its economy via TARP, near-zero interest rates and other stimulus efforts. He also sees a much more regulated capital market in the United States going forward and predicts a loonie above par with the greenback and higher top marginal U.S. tax rate.

"We just do not have the structural fiscal deficit that the U.S. has right now," he said.

"They have a fiscal mess to clean up. If you look at their tax rates globally, there are still relatively low. The tax gap between Canada and the U.S. is going to grow inexorably over the course of the next decade in our favour."

Mr. Rosenberg added that the power shift away from the United States and towards Asia is likely secular and not cyclical in nature, noting Asia went through its recession and restructuring a decade ago. Given China's dependence on raw materials, he believes the commodity space is ripe for a sustained rebound, to which Canada will be a primary beneficiary.

"We are a huge net raw material exporter and the China is a huge net importer of raw materials. If the Asia story proves to be a secular story that plays well into our balance of payments and importantly for our equity markets," he said.

"Remember just because the economy is hitched to the U.S. it doesn't mean our markets are. In fact they are much more sensitive to what is happening in Asia because about 50% of our stock market is based on materials. And that's where we come out ahead."

The plan is for the federal government to take a 60 percent ownership stake in the new GM. The Canadian government would take 12.5 percent, with the United Auto Workers getting a 17.5 percent share and unsecured bondholders receiving 10 percent. Existing GM shareholders are expected to be wiped out.

GM Owes $172.8 Billion to Creditors

OTTAWA -- Fresh off his company's acquisition of Germany's Opel, Canadian auto parts magnate Frank Stronach was in Ottawa on Tuesday seeking federal funds to start building electric cars in Canada for sale within as little as three years.

"In 12 years we see 30% of all cars being electric. There will be very fierce competition in the world for that market, but I feel very strongly Magna will be among leaders," Mr. Stronach, the chairman of Magna International, said at a news conference adjacent to Parliament Hill, where a Ford Focus battery electric car being developed in partnership with Magna was on display.

"One of the main reasons I'm here today . . . is that I would like to see that the first electrical car facilities are in Canada. If we could get a loan we know we could speed it up. If we could get a loan, we could make sure it's in Canada."

I did find a chart that I think every Californian Republican should print off and carry with them in their wallet or purse, and that is a chart that shows, by gross income, who pays what in Californian state taxes:



Boy, I sure hope you guys out there finally stick it to the rich. They haven't been paying their fair share all this time! Matter of fact, you should double their taxes! That will get your economy going and attractive investment.

To paraphrase "Comic Book Guy"

"Dumbest state EVER!"

But as bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s.

About eight months ago, starting in early September 2008, the Bernanke Fed did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.



The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base -- which prior to the expansion had comprised 95% of the monetary base -- has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

YEKATERINBURG, Russia -- Leaders of emerging world powers discussed creating a new global order on Tuesday, one less dependent on the United States and the West.

Existing reserve currencies, including the U.S. dollar, had not performed their function and it was time for change, said Russian President Dmitry Medvedev as he hosted a summit of the so-called BRIC nations of Brazil, Russia, India and China.
"We are likely to witness the creation of a supranational reserve currency ... which will be used for international settlements," Mr. Medvedev said.

"The existing currency system is not ideal."
Countries should use their national currencies more for trade, he added.
The range of topics on the summit agenda and the line-up of presidents attending showed the growing economic and political power of the world's emerging nations and their desire to forge new levers of influence.

Mr. Medvedev hailed the Urals city of Yekaterinburg as "the epicentre of world politics" as he said the need for major developing world nations to meet in new formats was "obvious."
The BRIC nations called for reform of international financial institutions, sweeping changes to the United Nations to give a bigger role to Brazil and India and a "stable and predictable" currency system.

The BRIC summit ended with a statement by Mr. Medvedev and a communiqué that demanded more power for developing nations. It did not mention the two key Moscow initiatives -- a smaller role for the U.S. dollar and a supranational reserve currency.
The Kremlin's top economic aide, Arkady Dvorkovich, said the International Monetary Fund should expand the basket of its Special Drawing Right (an international reserve asset) to include the Chinese yuan, the Russian rouble and gold.

Last week it was also announced that Russia and Brazil had joined China in plans to diversify their debt holdings by becoming the first countries to buy a new bond to be issued by the IMF. Russia said some reserves may be moved out of U.S. dollars to fund the IMF purchase.
However, one analysts said the move appeared to be more of a political statement rather than a serious attempt to diversify their assets away from their large holdings in U.S. debt.

On Tuesday, the dollar fell 0.9% against a basket of major currencies on world markets after Mr. Medvedev's comments. The slide "underlines the likely sensitivity of the [foreign exchange] market to comments emerging from today's meeting," analysts at Barclays wrote.
Between them, the four BRIC nations represent about 40% of the world's population and 15% of its GDP.

Underlining its growing economic influence abroad, Chinese President Hu Jintao offered Central Asian states US$10-billion of credit support to help counter the global economic slump, though he did not mention the proposals for diluting dollar dominance.
Beijing, with its massive holdings of U.S. dollars and bonds, has been cautious about these ideas.

In a snub to the West, the leaders of the Shanghai Cooperation Organisation summit - taking place at the same time and venue - welcomed Iranian President Mahmoud Ahmadinejad, making his first foreign trip to attend the summit since his disputed re-election on the weekend.
Russia and China lead the SCO, a security and economic co-operation forum that also includes four Central Asian states, plus Iran, Mongolia, India and Pakistan as observers.

Mr. Ahmadinejad arrived a day late in Yekaterinburg after mass protests against his disputed victory in Tehran but Kremlin spokeswoman Natalia Timakova said the SCO presidents had congratulated Mr. Ahmadinejad on his victory.
"America is in the grasp of political and economic crisis," Mr. Ahmadinejad told the SCO leaders in a speech that touched on the Palestinian issue and reform of the world order.

"The United States and its allies are unable to deal with the crisis."
On the sidelines, Indian Prime Minister Manmohan Singh met Pakistani leader Asif Ali Zardari for the first time since the Mumbai attacks and asked him to ensure that Islamist terrorists could not operate from Pakistani territory.
"The territory of Pakistan must not be used for terrorism," Mr. Singh said.
Reuters
http://www.nationalpost.com/news/story.html?id=1702643