Monday, September 21, 2015
WHAT A PLUMMETING CDN. DOLLAR WILL DO TO BOATING BUSINESS IN CANADA?
So there is talk out there now by some that are suggesting the Canadian dollar could go down as low as 55 cents. Right now at the time of this blog post the dollar is at 75 cents. It is widely expected to fall down to around 70 cents but who are these money traders that are putting out targets of 55 cents and why?
This September US Fed Chair Janet Yellen decided this was not quite the right time for the first hike in 9 years ... citing lower inflation and global turmoil. Worries about the Chinese economy and wild swings in global stocks had weakened the consensus that the U.S. needs a rate rise. The opponents for a rate increase claimed to speak for the emerging markets, those developing economies hit hard by a rising U.S. dollar. People like former U.S. Treasury Secretary Larry Summers and representatives of the IMF and World Bank warned rising U.S. rates could have a devastating effect on the global economy because a rising US dollar would suck money out of the developing world. Yellen suggested that falling U.S. unemployment which hit a seven-year low of just over 5% will have an impact and eventually prices will begin to rise. She said holding off too long created the danger that the central bank would have to raise rates suddenly and sharply once inflation started to soar. Canadian borrowers get a reprieve but probably only a short one. Most likely Yellen will make the rate increase move in October or January at the latest.
So what does this mean to Canada? Well first of all, with the first rate increase money invested elsewhere will flood to the US dollar. All currencies will fall against the US dollar and it will trigger some level of inflation. Infrastructure dollars and investment money in emerging markets may well slow down as that money makes it way over to the US dollar. It’s hard to know how much of the effect of a US interest rate hike is already priced into the North American stock market but at least initially there will likely be some level of correction in the markets. Canadian retailers would be once again forced to up their prices for American goods sold and away we go with inflation.
So what about boats? Well there are positives and negatives. First it looks like the Saudi's won’t blink and it may be a long time before oil gets back up to profitable levels for Canadian drillers. While low oil prices have some benefit to consumers they have a very negative affect on our resource industries to generate cash into the countries GDP and they also negatively impact government coffers to balance budgets and spend on infrastructure.
So our dollar gets hit on both sides – US dollar goes up and we go down further. Until the Canadian economy begins to fire on all cylinders and emerging markets pick up, we are likely going to see our dollar stay very low. Most new boats are coming from the US and that is going to make them very expensive and most likely out of reach for many Canadians. Our used boats will get more valuable and those boats that are sought after in the US can be sold in US dollars at a very attractive profit. Problem is we could be running out of good used inventory in a hurry. Maybe it will encourage some new boat manufacturing in Canada ... but much of the raw product comes from the US also and the cost of goods sold will still rise. Besides our energy and labour costs are way to high in comparison to both US and foreign competition.
So here’s a few things to consider if the Cdn. dollar falls into the 50 - 60 cent range:
1/ New boats are going to get really expensive in Canada.
2/ Good used boats are going to get harder to find.
3/ While the US dollar seems very expensive now it may get a whole lot more expensive and there may still be some time for buying select used US boats that will certainly rise in value up here if our dollar continues it’s decline and the US dollar continues it’s ascent.
4/ Fuel will be cheap still but repair costs will rise with inflation.
5/ Some may elect to sell their boat in US dollars while the going is good.
6/ Many will elect to not buy a new boat while our dollar is weak.
7/ Most likely you will see many Canadian boat owners downsize for two reasons ... one is, that they can sell in US dollars and bank some decent money and perhaps buy the smaller boat just from the profits of the larger boat sale ... and two is, demographically the larger boats have owners that are getting older and they may want something smaller that they can manage more easily.
8/ There will likely be more consolidation and shrinkage in the marine industry in Canada and in the US there is marine industry growth and there will soon be a number of new players emerge as the economy continues improvement down there.
9/ Home ownership will continue to get more expensive and that will temper disposable income for boats.
10/ Canadians will be travelling less to the US so they may do more boating at home.
So as you can see there is all these pro’s and con’s. Savvy boat owners can do alright in this market but those just entering the market can easily get burned if they are not careful. While a boat isn’t an investment, every boat sale and purchase should be treated as if it were. Timing and quality of the boat you buy or sell is paramount to doing the right deal.
Eventually our low dollar will come through for us and our economy will also begin to fire on all cylinders. When that happens our interest rates will also rise and inflation will already have taken hold. Most likely this is a few years out for Canadians though.
In an upcoming episode of Boating Georgian Bay TV we're going to show you how existing Canadian Boat owners can profit on buying the right Canadian boat or even a US boat when our dollar is weak.