ZPI: Back to Normal?

Energy, interest and equities are the main drivers of the ZPI, and the “new normal” that appears in the chart (after
April of this year) may be attributed to the bursting of gas, house and equity price bubbles from the heady days of
2008. Statisticians have found that, over time, extreme cases tend to return to the direction of the average, or in the jargon, revert to the mean — which seems to be what we can reasonably hope for the economy after the extreme deviations of the last year. Optimistically, in terms of your portfolio, the phenomenon of mean reversion can contain your net loss to money you invested during periods of irrational exuberance and bubble prices. As an individual investor who has been putting money away for a long time, if you have survived to read this, you are probably going to be okay. Mean reversion is the mathematical way of saying, “This too shall pass.”

This month, the data show that energy prices are rising seasonably, and some high-profile corporate mergers and acquisitions suggest that as the tide rolls back in after a shipwreck, the sharks are arriving to pick off some corporate
survivors weakened by the storm. It is perhaps apropos of the current political climate that the technical term for
average is also the one we use for “selfish, unaccommodating and nasty.” Governing during an economic upswing is a
more desirable prize than the hard slog of weathering a crisis, so this month, Zoomers can expect the moral high
ground to be sacrificed to more pragmatic and expedient ends. A reversion to the mean, indeed.

–Jamie Reid

The ZPI is a weighted price average of a basket of goods that includes gas, coffee, the LCBO wine of the month, the average Toronto house price, flights from Toronto to Vancouver, interest rates, the TSX monthly close and the Global Luxury Index.