Gross Domestic Product (GDP)
The Mother of All Economic Stats, or is it?
Insights from Manufacturing
  • Why is manufacturing still so important as a small component of U.S. GDP?
The Big Mac Index

bigmacEconomic indicators don’t have the most exciting names. Sometimes, it seems like they were intended to be look as archaic as possible. Consumer Price Index? Gross Domestic Product? More functional than imaginative for sure.

But here’s an indicator that’s completely from left field – the Big Mac Index. The American esteemed burger is now sold in almost every country in the world – indeed it is one of the few products that have reached these heights. The Big Mac Index, produced by the Economist since 1986, tests whether the prices for all of these countries’ big Macs are fairly valued or not. For instance, the Chinese Big Mac is priced at $2.61, while in the US it costs an average of $4.56. Over 50 countries are indexed, so it is interesting to see the differences in prices. Check out the full index here.

Should the prices of all Big Macs be the same though? According to purchasing power parity (PPP), they should. In the example above, an enterprising trader could buy a thousand Chinese Big Macs and sell them on the American market for a profit of $1950. Yet clearly no one really does this – transport costs are high, the product is degradable (somewhat), and no one wants their entrees to be made in another country. Further, the Big Mac is not perceived to be the same product everywhere its sold – in the US it has its reputation of being “junk food”, while in India or Pakistan, McDonalds is for the elite of society.

Dial M for Misery

The Economist recently charted the Global Wage Report’s figures for this year — and the results are pretty miserable.

Several countries have posted significant wage losses since 1997. Romania in particular. What Romania was doing with such high wages to begin with confuses me.

But what is really interesting is how linear the pattern of wage and productivity goes. When wages fell, productivity generally fell in lockstep. Its a good reminder that despite that the new age notions of “passion” and finding your calling might boost productivity, cash remains king.

A hedgy relation

Gold Gold Gold! As the greediest species on the planet, we can’t get enough of it. And the US is no exception. Ever since the California Gold Rush in 1848, Americans have had an unnatural obsession with gold, and have creeped in some illogical economic advice into the average investor’s mind.

I’m talking about using gold as an inflation hedge. Here’s how the logic goes: despite the fact that gold is only slightly more useful than the green in your wallet, there is a limited supply of it, but an unlimited supply of potential money (all the Fed has to do is update an electronic balance). This means that if inflation increases prices so high that money is unusable, gold will come in and replace it. After all, all paper money was backed by gold only 50 years. So as inflation numbers increase, gold should increase in step right?

Perhaps not, take a look at this chart comparing monthly gold prices with the monthly CPI numbers.

http://www.economiq.org/series/cpiaucsl/?field=percentY&start=1970&end=2012&chartseries=CPIAUCSL,GOLDPRICE&indexed=false&userinput=1

Despite all the gold-inflation link talk during QE1 and QE2, the correlation between these two series from 1970 to 2012 is about 43%, which means that there’s hardly a connection to be seen. Now why could this be? Warren Buffet explained this in an article from Forbes. Since I’m not trying to outdo the Oracle, I think I’ll let his words speak for themselves:

Today the world’s gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce — gold’s price as I write this — its value would be about $9.6 trillion. Call this cube pile A.

Let’s now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world’s most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?

Beyond the staggering valuation given the existing stock of gold, current prices make today’s annual production of gold command about $160 billion. Buyers — whether jewelry and industrial users, frightened individuals, or speculators — must continually absorb this additional supply to merely maintain an equilibrium at present prices.

A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops — and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil (XOM) will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond.

Gold does not produce productive value as real money can in our current economy. So while we may see some short term connection during another quantitative easing run, don’t expect an investment in Gold to outperform something like TIPS when inflation starts to go bonkers.

 

Key Indicators
(Index 1982-84=100 SA, Jun 01 2014)
0.94, 1.22, 1.49, 1.62, 1.03, 1.42, 2.06, 2.27, 2.04 +2.0%
(% SA, Jun 01 2014)
7.30, 7.00, 6.70, 6.60, 6.70, 6.70, 6.30, 6.30, 6.10 6.1%
(Bil. of Chained 2005 $ SA, Q2 2014)
1.20, 2.79, 0.15, 1.15, 1.67, 4.96, 3.23, -0.48, 0.99 +1.0%
(Thous. SA, Jun 01 2014)
2.13, 2.17, 2.13, 1.98, 1.96, 2.02, 2.05, 2.08, 2.12 +2.1%
(Index SA, Jun 01 2014)
56.40, 57.30, 57.00, 51.30, 53.20, 53.70, 54.90, 55.40, 55.30 55.3
(%, Dec 22 2012)
0.33, 0.31, 0.31, 0.31, 0.31, 0.31, 0.31, 0.31, 0.31 0.3%
(10-City Composite, Feb 01 2011)
160.92, 160.90, 160.52, 159.14, 157.20, 156.61, 155.84, 155.36, 155.00 155.0
Leading U.S. Indicators
(Index 1966=100, Dec 01 2013)
10.60, -0.47, 1.19, -3.53, -5.60, -5.55, 2.60, 9.85 +9.9%
(Index SA, Jun 01 2014)
11.81, 26.44, 27.63, -3.94, -5.71, 7.20, 5.35, 16.60, 13.49 +13.5%
(Thous. SA, Jun 01 2014)
0.50, 0.55, 1.05, 0.73, 0.82, 0.92, 1.15, 1.31 +1.3%
(Index 2002=100 SA, Jun 01 2014)
106.20, 106.70, 106.60, 106.70, 106.30, 107.80, 108.10, 108.30, 108.50 108.5
(Number of claims SA, Jul 19 2014)
-7.03, 2.96, 1.60, -1.26, -0.32, 0.96, -3.48, -0.98, -5.96 -6.0%
(Millions of $ SA, Jun 01 2014)
-0.72, 3.50, -4.83, -2.17, 1.95, 2.38, 2.40, -0.89, 0.67 +0.7%
(Thous. of Units SA, Jun 01 2014)
889.00, 1,091.00, 1,048.00, 880.00, 907.00, 946.00, 1,072.00, 985.00, 893.00 893.0
(Thous. of Units SA, Jun 01 2014)
19.98, 13.13, 9.75, 3.65, 7.99, 10.53, 6.19, 3.18, 5.71 +5.7%