Last week, I wrote about various “indicators” for markets that just don’t make sense — like the Superbowl Indicator. The lesson from those indicators is that we crave order and look for signs that make markets seem a little bit more predictable, even where there are none. This is especially true in complex systems like the stock market, where so many variables and factors are at play that it can be difficult to predict or explain why things happen.
Now, it doesn't mean there aren't patterns - and benefits to watching them. Warren Buffet has proven that. In order to improve your understanding of "markets" you can focus on the fundamentals of individual companies and industries rather than broader market trends. By conducting thorough research and analysis of financials, management, and competitive landscapes of companies, you can make informed decisions about which stocks to buy or sell. Another way to improve your understanding of the market is to focus on long-term trends and avoid getting caught up in short-term fluctuations. It's about focusing on what doesn't change - instead of what does. But, ultimately, you should realize that if you don't know what your edge is ... you don't have one. And, market movements are getting faster, more automated, and harder to predict over time, not less.
With that said, Wall Street is still inundated with theories that attempt to predict the performance of the stock market and the economy. More people than you would hope, or guess, attempt to forecast the market based on gut instinct, ancient wisdom, and prayers.
While hope and prayer are good things ... they aren’t good trading strategies.
It’s true that there are many indices and economic indicators that can provide valuable insights into the workings of economies and markets. While some of these indices may seem “out there,” or even frivolous, they can often shed light on underlying economic trends and realities.
One example of this is the Big Mac Index, which is published annually by The Economist. This index is based on the idea of purchasing power parity, which suggests that exchange rates should adjust to ensure that the price of a basket of goods is the same in different countries. The Big Mac Index uses the price of a McDonald’s Big Mac burger as a proxy for this basket of goods. It compares the price of a Big Mac in different countries to determine whether currencies are overvalued or undervalued.
While the Big Mac Index is not a perfect measure of purchasing power parity, it can provide valuable insights into the relative value of different currencies and the economic factors that influence exchange rates. By looking beyond the headline numbers, and digging into the underlying data and trends, investors and economists can gain a deeper understanding of the forces shaping the global economy.
Ultimately, the key to using economic indicators like the Big Mac Index is to approach them with a critical eye and a willingness to dig deeper. By looking beyond the surface level and using data-driven analysis to understand the underlying trends and drivers of economic performance, we can gain a more accurate picture of the economic realities shaping the world around us.
In 2020, when I last talked about the Big Mac Index, the Swiss Franc was 20.9% overvalued based on the PPP rate. That math was based on the idea that, in Switzerland, a Big Mac costs 6.50 francs. In the U.S., it costs $5.71. The implied exchange rate was 1.14, and the actual exchange rate was 0.94 - thus, 20.9 was overvalued. At the time, the most undervalued was South Africa.
As of the end of 2022, The Swiss Franc is still the most overvalued but has now increased to a whopping 35.4%. Meanwhile, the South African rand has “increased” to only 45.9% undervalued, making the Egyptian Pound the most undervalued currency at 65.6%.
Click the image below to see the interactive graphic.
via The Economist
Obviously, there are more factors at play if something can be significantly overvalued or undervalued for multiple years without significant consequences.
It is not meant to be the most precise gauge, but it works as a global standard because Big Macs are global and have consistent ingredients and production methods. It’s lighthearted enough to be a good introduction for college students learning more about economics.
You can read more about the Big Mac index here or read the methodology behind the index here.
The Illusion of Choice
What happens doesn't matter nearly as much as what you make it mean ... and what you choose to do.
For example, Dallas has been 100+ degrees almost all summer, and nothing stops. You'll see people running outside, dogs walking, sports being played. My son plays 8+ hour rugby tournaments in that heat, and no one bats an eye.
Growing up in New England, we were woefully underprepared for that heat. The world would stop. On the other hand, 8 inches of snow was nothing, but a little bit of ice ... and Texas shuts down.
Snow isn't 'good' or 'bad' … and neither was the change of plans.
Perspective.
Fund managers recognize the importance of sensibly diversifying risks and opportunities.
Be that as it may, as Mother Jones reported in the wake of the 2009 financial crisis, the nation's ten largest financial institutions held 54% of our total financial assets (compared to the 20% they held in 1990). Meanwhile, the number of banks has dropped from almost 15,000 to barely 4,000.
via Statista
Many people are shocked by a chart like this. It must be 'bad' to have so much controlled by so few, right?
But it isn't hard to find a version of this story playing out in other industries: Print Media, Music, Broadcast Channels, and Consumer Products … this type of consolidation happens for a reason.
A firm that marshals more resources gains a competitive advantage and has more ways to win.
They benefit from economies of scale, transactional leverage, better distribution and partners, and more ways to diversify risks. In addition, if they work to communicate, collaborate, and coordinate their actions (and data), they can unlock opportunities that others don't have (or can't see).
Here is a Chart Showing Some of the 'Winners' at that Game.
The following chart highlights our "Illusion of Choice." A surprisingly significant portion of what you buy comes from one of these ten mega-companies (Kraft, Coca-Cola, PepsiCo, Kellogg's, Nestlé, Proctor & Gamble, Mars, Johnson & Johnson, General Mills, and Unilever).
It's amazing to see what these giants own or influence. Click the picture to see a bigger version.
via visualcapitalist
Here is a more specific example. You probably think you are familiar with Nestlé. It is famous for chocolate. But did you realize it was an almost $300 billion corporation … and the biggest food company in the world? Nestlé owns nearly 8,000 different brands worldwide and takes a stake in (or is partnered with) many others. This network includes shampoo company L'Oreal, baby food giant Gerber, clothing brand Diesel, and pet food makers Purina and Friskies.
Kind of cool? Mostly terrifying...
Posted at 09:11 PM in Business, Current Affairs, Food and Drink, Gadgets, Ideas, Market Commentary, Trading | Permalink | Comments (0)
Reblog (0)