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Money Talks
June 3, 2011, 6:24 a.m. EDT
By Jonathan Burton, MarketWatch
SAN FRANCISCO (MarketWatch) "” This is the world according to David Rosenberg, chief economist and strategist at Toronto-based investment manager Gluskin Sheff + Associates Inc.:
It's a world of disinflation, not inflation "” a reality of a dramatically weaker global economy. In this climate, U.S. bonds rally as interest rates remain low or even decline. Not only corporate bonds, which reflect the strong financial shape of U.S. companies, but also Treasurys and municipal debt.
Slow economic growth pressures U.S. and international stocks, except for cash-rich companies that boost dividends, plus shares of oil, natural-gas and agriculture producers.
Uncertainty and rising volatility is also good for gold, which finds new life among central bankers as an alternative form of currency that pushes its price to $3,000 an ounce.
"All the economic data is starting to roll over," Rosenberg said. "We are positioned for the type of disinflationary slowdown that we're going to be seeing over the next 12 months."
Rosenberg, the former chief North American economist at Bank of America-Merrill Lynch, has a reputation for being skeptical of Wall Street's generally optimistic nature. Yet he's not predicting gloom and doom for stocks. What Rosenberg does expect is a less forgiving environment where capital preservation and income are prized, and careful stock and sector selection is paramount
When it comes to the outlook for Treasurys , Rosenberg is squarely on the opposite side of the fence from Treasury bear Bill Gross, the Pimco bond king who just this week said current Treasury yields do not compensate investors for the risk of holding them. Read more: Gross warns on Treasurys again.
Rosenberg said he's baffled by Gross's view. "I've never understood ... the negative case for Treasurys," Rosenberg said. "What is the weakest part of the U.S. economy? It's housing. If you want to be bullish on the economy and the housing sector, be bullish on interest rates. How else are we going to get the housing sector going?"
Low interest rates would be a byproduct of a cooling U.S. economy. So would low inflation. Rosenberg said he just doesn't buy the argument that inflation will ravage the U.S. economy. Yes, he acknowledged, prices are rising for essentials "” oil, food, energy "” but inflation isn't nearly as pronounced in the service sector and, crucially, Americans spend the bulk of their income on health care, financial and other services.
"This time next year inflation is going to be between zero and 1% from over 3% now," Rosenberg said.
What happens to Treasurys then? /quotes/comstock/31*!ust10y UST10Y -1.02% Only good things. "Who's got 1% inflation in their forecast?" Rosenberg said. "That will come as a very big and pleasant surprise for the Treasury bulls." Read more: Greece, Moody's threat, weigh on Treasurys.
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