Uh Oh ... The Price is Still Wrong

In both my Winter and Spring 2008 Newsletter, I discussed the current credit crisis and its impact on the global economy. I finished the Winter article by stating...

"We believe the crisis is not intractable and that markets will get through this, and globally the economic impact while significant will neither be debilitating nor a precursor to global recession. We believe the uncertainty is causing many to forecast very dire consequences for the US economy. We believe if there is a risk of an economic surprise, it is that the economic growth in the US could be considerably more robust than the consensus of economists suggest. We further believe that this renewed fear has created another buying opportunity, as it has restored the potential for double-digit returns over the next 12 months."

Well, here we are several months later and have already had significant double-digit gains since January of this year.

The primary theme that I have spoken about since returning from India in October has been Agricultural commodities, as well as metals and oil commodities, dominating the global economy for a number of years to come. This is playing out nicely.

Thus, I would like to return back to a theme that I touched on in my Fall 2007 newsletter. In Fall 2007 we wrote an article" The Price is Wrong" pointing out massive and unsustainable price gap for many goods between the US. and Canada.

Among the many reasons cited for the gap in the months that followed was that it takes time to adjust for sudden changes in the currency. Well, the loonie has averaged almost parity over the past year (98.8 cents (US) to be precise), so time's up! Looking at a broad basket of items, we find that while there has been some movement in the past year, the price gap remains extraordinarily large, and there are plenty of signs to suggest that the bulk of the discounting is over. In other words, without further pressure, this may be as good as it gets for Canadian shoppers.

We first attempted to update our initial basket of 17 goods from last year, and found that the average price gap had narrowed from 24% in 2007 to 18% now. The main items that saw serious movement in prices were books, autos and some magazines arguably the most high-profile items on the list. We broadened the list to take a wider range of products into account this time, and found that this time, and found that this still produced an 18% price gap between the US. and Canada on the overall basket.

Given that the loonie has dipped below parity again (currently 98.3 cents), this means that prices in Canada are now roughly 16% higher on an average basket of goods than stateside, taking today's exchange rate into account. We would point out that even with the hefty price cuts in both books and autos, we found quite considerable price differences remained even on these headline-grabbing items

The loonie-led price cuts on many items have played a key role in keeping overall Canadian inflation in check at a time when the rest of the world is grappling with soaring food and energy costs. The most significant price declines since the 1920s for vehicles, books, and clothing and all with much deeper drops than in the US. over the past year have played a big part in keeping Canadian inflation under wraps.