ROSENBERG: Deutsche Bank is too interconnected to fail

Despite his deep seated concerns for US growth, popular Canadian economist David Rosenberg is more optimistic for the global growth outlook, which he thinks could surprise on the upside, based on the turnaround stories in emerging markets and a fiscal stimulus out of Germany.

In an interview with Real Vision TV, Rosenberg welcomed the realisation, even among central banks, that policy has really hit the limits, saying it’s time for something new, with fiscal policy able to pick up the baton.

“There are some interesting things happening right now overseas in Southeast Asia, even parts of Latin America, and in India,” Rosenberg said. “And I think that actually when you do a bottom-up approach towards your global GDP growth forecast, say, for the next year, the next two years, it’s probably going to be higher, not lower. And the question is going to be, how much higher? And then will it be sustained?”

These views and plenty more, including Rosenberg’s call for a multi-trillion-dollar fiscal boost in the US to stave off the threat of recession, are featured in the full length interview on Real Vision. You can see a short clip here:

Starting to Believe the Numbers Out of China

Emerging markets are starting to improve, despite the weakness in the US economy, and Rosenberg is impressed that the growth rate in China has stabilised at around 6-6.5%, but more significantly that the private sector numbers are validating the official statistics. 

“Now there’s all sorts of concerns about the state-owned banks and about the credit bubble. That much is true. But their economy, it looks as though it is stabilizing and at the margin doing a little bit better,” Rosenberg said.

“You’re seeing a lot of other turnaround stories there,” he added. “Philippines is doing quite well. I’m noticing the numbers out of Korea, Taiwan, the export and production numbers have started to pick up in Asia.

Indian Prime Minister Narendra Modi attends the ASEAN-India Summit in Vientiane, Laos September 8, 2016. REUTERS/Soe Zeya Tun

Thomson Reuters
Indian Prime Minister Narendra Modi attends the ASEAN-India Summit in Vientiane
India Ready to Resume China’s Growth Mantle
“And they all have huge savings rates that, if they can draw them down, they have real interest rates of 300 basis points. So if you’re looking at the part of the world that has the capacity to ease policy, it’s that part of the world.”

He also noted that the stock market — which is a discounting mechanism – for the emerging market world was up 20% year to date. “That’s a dynamic part of the world that could end up making a difference in the coming year,” he said.

Emerging stock markets have been indicating the same sort of turnaround story all year, Rosenberg said, with the BOVESPA up 30%, while he was particularly bullish on India, which has the same share of global GDP that China had 20 years ago. “Unlike China, their demographics are phenomenal. And Modi is doing right now a stellar job. And the one thing that he just did in the past few weeks was get through some major tax reform to reduce the complexity and increase the simplicity of the system.”

Deutsche Bank — Too Interconnected to Fail

While the Emerging Markets are doing their bit for global growth, Rosenberg’s perspectives on Europe are a touch more sanguine than some of the views more prevalent in the media lately. Offering a more “rational” view on Deutsche Bank, for example, Rosenberg doesn’t think it’s going under and not because it’s too big to fail, but it’s too interconnected to fail. “Once you do something to Deutsche Bank, you open up the door for something to happen. And I think that will get resolved,” he said.

“The political risk, actually, in Europe is less dire than it seems because a lot of the anti-EU rhetoric and a lot of the anti-EU parties, it doesn’t look like they’re going to be strong enough to form any governments,” Rosenberg said. “In light of the fact that we have a German election, a French election, a Dutch election, it doesn’t look like we’re going to be going for all the concern that these right-wing parties that are anti-EU. I don’t think they’re going to be able to form governments to make Brexit into something that’s going to be a domino effect.”

Less worried about the political risk in Europe, Rosenberg is calling on Germany to take the lead and ease fiscal policy which they certainly have the latitude for. Elsewhere across the continent, he welcomed how Syriza in Greece have now seemingly joined the establishment, while some of the structural reforms taking place in Spain and in Portugal were seen as very impressive.

“Look. I’m not saying that Europe is going to be a primary source of growth,” he stated. “The question is, how unstable will it become? I think that a lot of the narrative– and there’s lots of narrative. Look, being bearish is a lot of fun. People want to listen to you when you’re bearish because, let’s face it, fear is a more primal emotion than greed is. “

Brexit was all about immigration, he said, drawing parallels with the upcoming vote in the US. “So it’s about a new form of xenophobia that’s taking hold, which I guess textbooks would say, history would say, after a near depression and lack of recovery, this is what happens,” Rosenberg said.

German Fiscal Policy Can Be the Game Changer 

“Really, what ails Europe, what ails the global economy is fundamentally because we still have far too much debt relative to the income to support that debt. Well, so basically, I guess we could try and write down some of that debt. Or maybe, let’s try and grow the income line.”

Rosenberg said he still holds Germany culpable in that respect for the austerity imposed and for not trusting the Club Med countries, but recent talk of easier fiscal policy would be a step in the right direction. 

“This could be a game changer, fiscal stimulus in Germany,” he said. “As far as what it means for aggregate demand in Europe, this is a very big deal. And it takes a lot of pressure off the ECB. And imagine if the fiscal stimulus coming out of Germany is so big that it gives the ECB the opportunity to get off its negative interest rate policy, which clearly is one of the problems for Deutsche Bank and the banking system in general.

“It’s the killer for the banks. So there’s a lot of good things that can actually happen under the context of the fact that we are in a very fragile environment. The fiscal stimulus that comes out of Germany may, in fact, be even more important for the global economy than what we’ll see out of the US next year.”

Real Vision is the world’s only video-on-demand channel for finance. It’s where the world’s best investors share their ideas. You can sign up for a 7-day free trial here

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