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 "Chart Of The Century" in 2023: A Look At Consumer Price Inflation
This post considers the “Chart of the Century” created and named by Mark Perry, an economics professor, and AEI scholar. This chart has gotten a lot of attention because it’s loaded with information regarding the challenges faced by the Fed and other Washington policymakers.
VisualCapitalist put together the most recent version of this chart. The most current version reports price increases from 1998 through the end of 2022 for 14 categories of goods and services, along with the average wage and overall Consumer Price Index.
It shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down worldwide. Costs of so-called non-tradeable items — hospital stays and college tuition, to name two — have surged.
From January 1998 to June 2019, the CPI for All Items increased by approximately 74% (up from 59.6% in 2019 when I last shared this chart). The graph displays the relative price increases for 14 selected consumer goods and services and average hourly earnings.
Lines above the overall inflation line have become functionally more expensive over time, and lines below the overall inflation line have become functionally less expensive.
At the beginning of 2020 (when I shared the 2019 post), food & beverages and housing were in line with inflation. They’ve now skyrocketed above inflation - which helps to explain the unease many households are feeling right now.
There are a lot of ways to take this chart. You can point to items in red - whose prices have exceeded inflation as government-regulated or quasi-monopolies. You can point to items in blue as daily commodities that have suffered from ubiquity, are subject to free-market forces, or as goods that are subject to foreign competition and trade wars. Looking at the prices that decrease the most, they’re all technologies. New technologies almost always become cheaper as we optimize manufacturing, components become cheaper, and competition increases. From VisualCapitalist, at the turn of the century, a flat-screen TV would cost around 17% of the median income ($42,148). In the early aughts, though, prices began to fall quickly. Today, a new TV will cost less than 1% of the U.S. median income ($54,132).
Compare “tradable” goods like cell phones or TVs (with lots of competing products) to less tradable “goods” like hospital stays or college tuition, and unsurprisingly they’ve gone in opposite directions. In 2020, I asked what the Coronavirus would do to prices ... and the answer was less than I would expect. If you don’t look at the rise in inflation, but instead the change in trajectories, very few categories were affected heavily. While hospital services have skyrocketed since 2019, they were already skyrocketing.
There are a lot of complex economic relationships displayed in this chart, and we’ve only covered the basics.
What did you take from the chart?
Posted at 04:08 PM in Business, Current Affairs, Ideas, Market Commentary, Trading, Trading Tools | Permalink | Comments (0)
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