We’ve been covering the writing and prognostication of economist David Rosenberg (the economist at Gluskin-Sheff) for years.
And though he’s been known as a permabear, his real consistent theme is not bearishness, but a belief in an ongoing deflationary or disinflationary trend.
And on this measure, he’s been dead on. David Rosenberg is a top-calibre economist.
Even with the recovery seemingly having gathered pace, the deflation/disinflation call has been dead on.
One need only look at the year over year change in core CPI to see that inflation remains at levels that are the lowest in decades.
Interest rates also remain incredibly low (by historical standards) though they’ve come up a bit lately. And again, on this, Rosenberg has been dead on.
The question of whether the economy remains in this kind of trend, or finally reverses course is perhaps one of the most crucial questions of this moment.
So it’s VERY strongly worth noting that David Rosenberg has written a note and slide deck today (which we published at Business Insider) wherein he departs from the deflation camp.
His basic argument is that the deflation camp is way too crowded, and that just as Paul Volcker eventually whipped inflation, so too will Bernanke be successful in his anti-deflation drive, and that when you combine that with an economy with less and less capacity “slack” (think the shrinking workforce) it’s only time before prices rise again.
The whole thing is a must read, and his conclusion is especially strong.
So if you are an issuer, the time for refinancing is now, not later. And if you are an investor, don’t spend too long debating whether you should be starting to hedge your portfolio against the prospect of a rising long- term interest rate environment, even as central banks continue to keep short-term policy yields at the floor. From the perspective of an economist at a wealth management firm, this means embarking on strategies that over time will effectively hedge out interest rate risk, for example with exposure to hard assets, credit arbitrage, and screening in the equity market for companies with high fixed costs and low variable costs, high ratios of capital to labour, and firms with a proven history of being able to pass on cost increases to protect profit margins.