Why the Big Mac’s Rising Prices Are More Alarming Than Its Fat Content
The rise in the price of a Big Mac has risen faster than the official rise in consumer prices and has been doing so since the late ’90s. In 1998, the average price of a Big Mac was about $2.50. As of July 24, 2014, The Economist reports that the price of a Big Mac is $4.80. If we were using the Consumer Price Index (CPI), the price of a Big Mac today should be about $3.67.
Believe it or not, the price hikes represented by the Big Mac will impact you more than the saturated fats in popular burger. By understanding the price disparities, you can make better decisions for you and your clients. The rise in the price of the Big Mac foreshadows how the printing of money is eroding the financial system’s arterial walls. The impact is broad based:
- Each dollar we own is buying less.
- For individuals relying on Social Security, the compensation for inflation is not keeping up with the prices people actually pay.
- The price of bonds should be much lower if interest rates fully accounted for the rise of inflation based on the Big Mac.
- The official economic growth rate would be lower now if prices were based on the Big Mac index.
And what about bond prices and inflation? In a normal market, the price of bonds should reflect the rate of inflation. Ed Easterling, founder of Crestmont Research, links inflation to the rate of interest rates. By printing money to buy bonds, the government has pushed the interest rate of a 10-year government bond down to about 2.3%. However, Ed Easterling shows that the 10-year government bond rate should be about 1% above inflation. The current rate of inflation reported by CPI is 2%. Adding 1% for the increased risk of holding a bond for 10 years gives you a rate of at least 3%, and that’s using official inflation estimates. However, if we base our calculation on the Big Mac Index, inflation is 9.6% and adding 1% to that for the risk of holding a bond for 10 years gets a rate of 10.6%. The current interest rate of a government bond is 2.3%, but if we were to account for inflation as seen by the rise in the price of a Big Mac, the interest rate would be 10.6%. Consequently, if 10-year government bonds were to increase from 2.3% to 10.6%, bond indices would decline by about 64%. In other words, long duration, 10-year government bonds are overvalued by about 64% mainly due to persistent intervention (manipulation) by the Federal Reserve.
DYI Comments: DYI's sentiment indicator one notch from the very top at Delusional for long term bonds.
Market Sentiment
When the next recession arrives and pushes down interest rates will rates for the 10 year Treasury fall below the low set in July of 2012 at 1.53%? Who knows? Whether it does or not I'll move up the sentiment indicator to Max-Optimism at that time. The bond rally of a lifetime is over especially for capital appreciation. Currently we have more deflationary conditions than inflationary. However, as the Baby Boomer's begin to retire placing massive strains on Social Security and Medicare governments will resort to the printing press and monetize a portion of these costs. This will begin in earnest towards the end of this decade as prices will move up sharply and not just the Big Macs.
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Think you’re better off with a lump sum over a monthly pension? Think again.
The lump sum has some appeal, not the least of which is the lottery effect of getting your hands on a wad of money. There is also the reality that many pensions come without cost-of-living increases, which means they lose buying power to inflation every year. Still financial planners are nearly unanimous in saying that the choice, tempting as it may be, should be rejected by most people. Not only do retirees run the real risk of outliving lump sums, but also most of them are ill-equipped to manage investments effectively. So many retirees are more likely than not to blow at least some of the cash.
People who have the option for taking lumps sums often do. But that does not mean it is the wisest course. Generally, the cash option works best for people who do not expect to live long and have no spouse who will need the lifetime income. It also works for those who are financially set for retirement and would enjoy the freedom that comes with a substantial pot of money. The rest of us -- save for the investment sharpies -- are probably best off with that slow but steady monthly check.
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The 35.4 Percent: 109,631,000 on Welfare
109,631,000 Americans lived in households that received benefits from one or more federally funded "means-tested programs" — also known as welfare — as of the fourth quarter of 2012, according to data released Tuesday by the Census Bureau.
The 153,323,000 total benefit-takers at the end of 2012, said the Census Bureau, equaled 49.5 percent of the population. The 150,026,000 taking benefits other than veterans' benefits equaled about 48.5 percent of the population.
When America re-elected President Barack Obama in 2012, we had not quite reached the point where more than half the country was taking benefits from the federal government.
It is a reasonable bet, however, that with the implementation of Obamacare — with its provisions expanding Medicaid and providing health-insurance subsidies to people earning up to 400 percent of poverty — that if we have not already surpassed that point (not counting those getting veterans benefits) we soon will.DYI
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