'We're not just talking about stopping at $1.50, we'll probably have to go to $1.60': Rosenberg

How could the Canadian dollar weaken to $1 .50?Our next guest says productivity challenges, trade uncertainty and potential rate cuts are creating headwinds, and the loonie is in a fundamental bear market.So let's get more now from David Rosenberg, founder and president of Rosenberg Research.Good morning.Great to have you join us.

Thanks for inviting me on.

So you expect continued pressure on the Canadian dollar.Walk us through why you think that.

Well, there's a variety of reasons.And the premise is really just based on pure math.because the lack of productivity growth in this country in absolute terms, in fact, it's running negative, compared to the 2 .5 % trend in the United States, what that's done, and this is amazing because we have a loose labor market, it's tighter in the U .S., but what matters most for competitiveness is productivity -adjusted labor compensation, otherwise known as unit labor costs.And in the United States, they're running close to flat because their productivity performance has been phenomenal.

In fact, over 90 % of the growth in the U .S.economy in the past year has come from productivity.Canada has no productivity growth.And what that means is that labor costs have been rising here at an annual rate, hang on to your hat, of around 8 % compared to almost zero in the United States.So we're driving this competitive wedge, this disadvantage, increasingly over time.

And what that means is this, to remain competitive with the United States, our principal customer, our principal competitor, we have to rely ongoingly on the crutch of a weaker Canadian dollar because of this ongoing cost competitiveness gap.So the question is,becomes, you know, barring some sort of positive endogenous shock, I don't know, maybe you're talking about pipeline expansion and infrastructure, you know, meanwhile, we heard a lot of lip service on that in the last federal budget, and capital spending in Canada is actually down 2 % over the past 12 months.And that feeds into what's happening on productivity.So to stay competitive, we need to have a weaker Canadian dollar.I mean, that creates advantages and disadvantages.

It's obviously great news for domestic tourist operators and exporters, but it also means we're cutting our price on the global market to gain back the market share we're losing because we can't seem to get productivity in this country domestically on a more discernible upward track to compete with the United States and other countries around the world as well.So that's really what the math is.There's other reasons why.We're fundamentally bearish on the Canadian dollar.But we talked about not just moving to 150, but borrowing something significant internally in the economy.If these trends continue, if this gap continues in terms of relative unit labour costs, we're not just talking about stopping at 150, we'll probably have to go to 160 or 62 .5 cents, which is where we were back in 2002 during the SARS crisis.

At the recent European Central Bank Forum in Sintra, Portugal, we heard Bank of Canada Governor Tiff McAllum warning that the current economic conditions create a, quote, dilemma for policymakers.What's your take on that?

Well, you know, it's interesting.Well, firstly, the question that kept on being asked of Lagarde and of Warsh and of Bailey and of Tiff McAllum was, why aren't you raising rates?Look at headline inflation.Why aren't you raising rates?So Tiff Macklem's turn comes, and he says, yeah, he says, you know, inflation is 3 .2%.It's a dilemma for us.

And I was just, like, shaking my head, because it's as if this interview was being taken back in May, when WTI was north of $100 a barrel.Like, these central bankers, do they not see in real time what all prices have done?because that's been the entire inflationary impulse.So yes, it's 100 % true that inflation before the war with Iran, headline was 1 .8, now it's 3 .2.But when you strip out energy out of the CPI in Canada, strip out energy, and inflation right now is running at 2 .1%.That means that 93 % of the pricing pie in Canada is running at the Bank of Canada's target.

So what's the dilemma, especially now that oil prices have reversed pretty well all of their wartime run -up?The ex -energy inflation rate in Canada was 2 .1.Where was it before the war?In February, it was 2 .6.Where was it a year ago?It was 2 .7.

So when you strip out energy, which is 7 % of the index, inflation in Canada is trending lower practically each and every month and is at the Bank Canada's target.You see, that would have been my answer.My answer would have been, no, it's not a dilemma.We had an inflation hiccup because of oil.Now oil is retraced.And by the way, in the latest data point, the year over year X energy Canadian inflation rate was right at our target.

So that's why we're not raising interest rates.So the fact that hesaid, and I was astounded because the markets are already expecting the bank Canada to raise interest rates, which to me is ridiculous.And here's an opportunity for him to sort of push back on that.But instead, he says the headline 3 .2 % inflation rate is a dilemma.Well, no, it's not a dilemma.

I guess it would be a dilemma if oil, you know, WTI went from 60, to 110 and on its way to 160.Now, maybe if Donald Trump decides to invade, you know, decides to attack Iran again, maybe that's going to happen.But in real time, it's not happening.We reversed almost the whole bloody thing.And here the central bank governor in front of the camera is talking, but he's got a dilemma.But in reality, there is no dilemma because you strip out the inflationary impulse, which has gone away.

And inflation in Canada is running at 2 .1 percent.So, you know, my head was spinning after he gave that answer.I really couldn't believe it.

We don't have a lot of time left, but I do want to move on to American markets, even though they are closed today for the holiday.But we saw yesterday the Dow Industrials closing at a record high, even though the Nasdaq on the flip side is continuing to struggle.What's your take on what's going on there and the direction of the markets?

Well, it's a you know, it's really interesting because at any given day you're seeing all the major averages move in different directions.The S &P 500, the Russell, the Nasdaq, the Dow.Two of them will be up one day, two will be down the next day.So it depends, you know, on what your flavor du jour is. I think that what the action is telling you is that we're seeing a rotation.out of tech, broadly speaking, and into value.So you've seen consumer staples doing better, you've seen healthcare doing better, the financials, of course, that's the big story in Canada.

So the stock market right now is trading at a range, but the more interesting dynamic is that you're seeing this rotational shiftas you've seen before, out of growth and into value.That's the story beneath the story.

OK, we'll leave it there.David Rosenberg, founder and president of Rosenberg Research.Appreciate your time.Thanks for joining us.