One on One with David Rosenberg, Chief North American Economist at Merrill Lynch

This is a transcript from the Nightly Business Report interview with David Rosenberg last night. He has consistently been one of the best economic commentators on Wall Street during and after the bubble. His comments regarding consumption, a second stimulus package, inflation and the Fed should be noted.

I take his comments on the whole to suggest he sees a negative feedback loop between the real economy and the credit sector as a true worry going forward — in fact it should be policy makers main concern. He correctly states that an RTC-style stimulus package would be the appropriate policy adjustment at this point.

Also see the running tally of Total Writedowns, the latest Writedown News and Writedowns by Company.

SUSIE GHARIB: With the credit crisis now a year old, Wall Street is assessing the state of the economy and we checked in with one of the nation’s most prominent economists. David Rosenberg, chief North American economist at Merrill Lynch was one of the first to forecast a recession for the U.S. This morning, I asked him to describe the health of the economy now.

DAVID ROSENBERG, CHIEF NORTH AMERICAN ECONOMIST, MERRILL LYNCH: The economy right now is in the middle of a recession that started off with housing, morphed in to credit and now it’s gone in to the consumer arena which is 72 percent of GDP. So right now we’re in to a new chapter. It’s the consumer side of the equation. And recession started in January in my opinion, probably is not going to end until the mid part of next year.

GHARIB: David, a lot of people are talking about a second stimulus package by the government. Does that make sense to you? Will it boost growth?

ROSENBERG: If the question is, will the government come out with some RTC-style of package to take the bad assets out of the financial system to help re-stimulate credit growth, that is a fiscal package that will get me excited. Another temporary tax rebate, I’m sorry. That’s a band-aid that will last two months.

GHARIB: Is there anything that the Federal Reserve can do to get us out of this rut?

ROSENBERG: There is more that the Fed can do. Ben Bernanke is an absolute expert on monetary policy. He’s a student of the great depression. I’m sure that the Fed has not used up all the bullets in its chamber. And I think the next stage is probably going to be more non- conventional measures to stimulate credit growth and probably is going to mean that they’re going to have to expand their balance sheet and more dramatically inflate (ph) the economy. I expect to see that over the course of the next 12 months.

GHARIB: In terms of interest rates, what can we expect from the Federal Reserve as the next move? Is it going to be a hike in rates or is it going to be a cut?

ROSENBERG: I think it’s going to be a cut. But even that’s up in the air right now. There surely not going to raise interest rates. To raise interest rates irrespective of inflation which is a totally backward looking indicator, to be raising interest rates in this very tentative and very fragile economic environment I think would be a huge policy mistake. So my sense of that, once credit developments become more positive, the Fed is probably going to cut interest rates and then I think we’ll see lower interest rates through most of 2009. But I think the Fed is basically for the next six months just on hold.

GHARIB: Let’s talk about inflation because everybody has got kind of worried about this including the Federal Reserve. How serious a problem is it?

ROSENBERG: I don’t think it’s a very serious problem any more now that the commodity bubble has been popped. I think the commodity cycle is over. And we don’t have any significant monetary growth, there’s no credit growth, there’s no wage growth. So the question is, how do you get a sustained inflation environment with no wage growth, no monetary growth, no credit growth, pretty difficult. So I think that now that the commodity bubble has been broken, the near of deflation is going to start to show up more visibly I think over the next 12 months. (INAUDIBLE) we’ll be talking about deflation 12 months from now, not inflation.

GHARIB: Are you saying that high oil prices are no longer a threat to the economy?

ROSENBERG: What I’m saying is that oil prices are probably not going to be going up any more than they already have. They’re probably going to come down. So oil has been a problem. It’s a problem now in terms of what some of the auto sector, what it’s done probably to spending. And now what’s happening is spending on energy is contracting. Oil prices are going down. What I’m saying is that the fact that oil prices going down is going to feed right into lower inflation, much lower inflation over the course of the next 12 months. So it comes back to your previous question about inflation. I think inflation is yesterday’s story.

GHARIB: Are you saying that deflation is going to be the next concern? Tell us why?

ROSENBERG: I’m not sitting here saying that the CPI is going to go negative. But what I am saying is that the same factors that gave us the deflationary backdrop back in 2002, which is widening excess capacity in the labor market, widening excess capacity in the product market and weak commodity prices, alongside what’s happening in terms of asset deflation is going to be a fundamental backdrop next year. So one of the reasons why I think interest rates end up being a lot lower than they are today.

GHARIB: Tell us about the job market. When do you see businesses ramping up to hire again?

ROSENBERG: We can see housing bottom out and we have to see the credit situation improve. And then we’re going to start to see the hiring. And I expect that is going to be a 2010 story. I don’t think it’s going to be a 2009 story. If you are going to ask me do I think that we’re going to see an employment rate growing about 6 percent towards 7 percent in the next 12 months, I’d be braced for that.

GHARIB: Why do you see the unemployment rate going up to 6-7 percent?

ROSENBERG: Because I think companies are going to be forced to cut their payrolls more aggressively over the course of the next 12 months. In light of the fact that we’ve morphed from housing recession to a credit crunch to now the consumer, this is a very big deal. The U.S. consumer is 72 percent of GDP. So if the consumer starts to spend less, that has feedback impacts right through back into the credit market, back to the housing market.

GHARIB: David, thank you very much for your time.

ROSENBERG: Thanks for inviting me back.

PBS, 9 Aug 2008

  1. Anonymous says

    Rosenberg is a hack. He’s going to look stupid when the dollar sells off again and commodities skyrocket 20% in a week.

    Its a shame shills like Rosenberg aren’t ever held accountable for the drivel the spew as analysis.

    More banks are going to fail. The EU will stay hawkish. Heating oil will wipe out the consumer. The U.S. economy will falter. Bernanke will lower interest rates. The dollar will tumble causing all commodities to skyrocket, again.

    The EU wants to make the euro the new world reserve currency. They’re not going to weaken the Euro. Think “Paul Volcker” in the 80’s giving the dollar credibility after Nixon et al destroyed the dollar over the Vietnam War.

  2. Aaron Krowne says

    Rosenberg is in la-la land. Interest rates have *already* been raised throughout most of the economy — including permanent capital injections to banks. The 2% rate only applies to a narrow window of short-term money from the Fed.

    As far as keeping the banking system afloat, only the Fed’s laundering programs matter, and it will have to expand them, and monetize, as Rosenberg does seem to realize.

    But the whole system is in an unstable state. Eventually the Fed’s attempt to hold down short term money for the banks will face an unremitting pressure from supply of sovereign debt and waning demand from major foreign institutions.

    There is no need to continue with this farce of negative real interest rates if the laundering programs are kept in place. It is impaired assets the Fed needs to smooth over, not interest rates (if that were the case it has already failed).

    I also don’t see a redux of the 2002 “deflation”. That was due to the introduction of Asian labor and products into the global economy. But the prices for both are just starting to go up. The dollar is inevitably going to continue heading down, pause notwithstanding. How will the 2002 factors repeat? I don’t see it.

    This is formulaic thinking.

  3. Edward Harrison says


    Great to hear from you! You and I have had this debate for some time about inflation versus deflation. It’s only a matter of time before we know the answer — perhaps a year at most.

    On the most important issues, we do seem to agree — negative real interest rates are a farce that is inflationary which will end in disaster.

    As far as the Asian economies go, I would say they had already been introduced into the global economy well before the so-called 2002 deflation scare that gave us 1% fed funds. But, you and I agree again about their ‘deflationary’ impact being well and truly over.

    The only point where we disagree is whether the Fed’s reflationary ploy will lead to hyperflation (you) or credit revulsion and deflation (me). Earlier in the year, I would have been fine taking either side but I think deflationary credit contraction forces will take hold.

    As for the dollar, it will head down eventually. But, for now it is undervalued versus European currencies (Euro, Swissy, Swedish Krona, Sterling). The next leg down for the dollar may be against busted pegs.

    Any additional thoughts?


    ps – I don’t think Rosenberg is formulaic. He is very much outside the Wall Street trend.

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