Guest Contributor: The Economist's "Big Mac Index" Doesn’t Cut the Mustard

Takeaway: The "Geo-Graphics Mini Mac Index" deep fries the Big Mac once again.

Editor's Note: This piece is reposted from the Council on Foreign Relations’ Geo-Graphics blog.


by Benn Steil and Emma Smith


Guest Contributor: The Economist's "Big Mac Index" Doesn’t Cut the Mustard - z big mac


The “law of one price” holds that identical goods should trade for the same price in an efficient market.  But to what extent does it actually hold internationally?


The Economist magazine’s famous Big Mac Index uses the price of McDonald’s Big Macs around the world, expressed in a common currency (U.S. dollars), to estimate the extent to which various currencies are over- or under-valued. The Big Mac is a global product, identical across borders, which makes it an interesting one for this purpose.


But you can’t buy a cheap burger in Beijing and eat it in New York.  So in 2013 we created our own Mini Mac Index that compares the price of iPad minis across countries. iPad minis are a global product that, unlike Big Macs, can move quickly and cheaply around the world.  As illustrated in the graphic above, and explained in the video below, this helps equalize prices.



The Mini Mac Index suggests the law of one price holds far better than does the Big Mac Index.  And it has done so consistently year after year since we started it. Both indexes currently show the dollar overvalued against most currencies.  But the Big Mac Index puts the average overvaluation at 24 percent—a Whopper. Our Mini Mac Index puts it at only 7 percent—Small Fries.


Guest Contributor: The Economist's "Big Mac Index" Doesn’t Cut the Mustard - z s burg


The Mini Mac Index also suggests that the dollar has become slightly less overvalued (down from 9 percent) since the beginning of the year.  The pound is now 12 percent undervalued, after its sharp fall on the back of the Brexit vote. Having been undervalued by 10 percent at the beginning of the year, the yen is now slightly overvalued, threatening to derail efforts to push inflation to the Bank of Japan’s 2 percent target.


No wonderJapanese officials are contemplating currency market intervention to weaken the yen.  The renminbi has weakened slightly and is now 7 percent undervalued—a more sensible estimate than the 45 percent undervaluation implied by the Big Mac Index.


The evidence is clear—the Big Mac Index doesn’t cut the mustard.


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This Hedgeye Guest Contributor research note was written by Benn Steil and Emma Smith. Mr Steil is director of international economics at the Council on Foreign Relations and author of The Battle of Bretton Woods. This piece does not necessarily reflect the opinion of Hedgeye.

CHART(S) OF THE DAY: Slowing Jobs Growth = Slowing U.S. Economy

CHART(S) OF THE DAY: Slowing Jobs Growth = Slowing U.S. Economy - CoD1

U.S. Jobs growth slows again...


Total nonfarm payroll employment increased by 156,000 in September. The unemployment rate rose to 5.0%. But no worries. It's all good right?


  • "Payrolls in U.S. rise as more Americans go back to work," Bloomberg writes.
  • "The economy created 156,000 new jobs in September, another solid gain in employment," writes MarketWatch.


Once again we disagree with mainstream media which is missing the mark. 


As we wrote yesterday, jobs market growth (year-over-year) continues to fall off the 2015 cycle peak of 2.3% (see chart below). Today's year-over-year growth came in at 1.7%. Simply put: #EmploymentSlowing...


What does this mean for U.S. GDP? It ain't good. Hedgeye U.S. Macro analyst Christian Drake describes the Chart of the Day (see above) in this morning's Early Look (our morning newsletter to subscribers):


"I like today’s Chart of the Day because it’s simple, intuitively tractable and cuts through any narrative fallacy.  It’s just the data, alone and self-contained.


Simply – and taking a labor centric view of growth - if you have negative second derivative trends in the number of people working, the number of hours those people work each week and in how productive that collective labor force is …. you can’t get a positive second derivative trend in output."


It's simple really...

#EmploymentSlowing = #GrowthSlowing


CHART(S) OF THE DAY: Slowing Jobs Growth = Slowing U.S. Economy - nfp growth

Stockman: The Larry Summers ‘Jackass Scenario’

In this excerpt from a “Real Conversations” interview with David Stockman, the former Reagan budget director discusses what the Federal Reserve would look like with Larry Summers at the helm. He explains to Hedgeye CEO Keith McCullough why “Summers is one of the greatest jackasses in the Western world” and how his appointment would lead to a long overdue examination of Fed politicization. 


Want to see the whole interview?


Watch this edition of “Real Conversations” in its entirety below.

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Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

Cartoon of the Day: Trump vs. Clinton

Cartoon of the Day: Trump vs. Clinton - Clinton Trump cartoon 10.06.2016


Political uncertainty is at historic highs across the buyside and in corporate boardrooms. Trump or Clinton... you nauseous yet?

Reality Check: Twitter Faces 'Severe Challenges'

Takeaway: Trying to close a deal by the 3Q print seems too ambitious to be plausible, especially since its only real suitor may just have bowed out.

Reality Check: Twitter Faces 'Severe Challenges' - twitter vortex


It's been a bad day for anyone who bought yesterday's pop in Twitter (TWTR). Shares are down -20% today, after Twitter takeout rumors were shot down.


Hedgeye Internet & Media analyst Hesham Shaaban has noted in the past that Twitter is struggling to monetize it's user base and reiterated yesterday that he doesn't think the company has "enough potential suitors to actually field a competitive bidding process." But he also warned that CRM’s hesitation to kill the TWTR rumor (despite mounting pressure on its stock over the past week) suggested that Salesforce CEO Marc Benioff could actually be interested.


However a few hours later, Benioff appeared to have gotten the message and was essentially forced to put that story to rest going live on CNBC saying: "[Twitter] is a great product. It's an exciting product, but obviously the business has a lot of challenges, very severe challenges."


So Salesforece appears to be out. It was also reported that Disney and Google won’t be bidding either. In short, all three of the headlined Twitter suitors aren’t moving forward.   


Shaaban writes in a note sent to institutional subscribers earlier today: "If TWTR is still public by the 3Q print, it would effectively kill its own M&A prospects in the eyes of the street.  Going back to our original thesis, if there is any whiff of potentially declining revenues in the near future off the 3Q print, we suspect TWTR will be on its own for a while”   


We're guessing CEO Jack Dorsey wishes he never came back.

Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea

Takeaway: The U.S. labor market peaked in the first quarter of 2015. Raising rates into that is a bad idea.

Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - rate hike cartoon 11.05.2015


The Federal Reserve is pinning its 2016 interest rate hike hopes on a strengthening U.S. labor market. We think that's a mistake. We've been warning that the jobs market is past peak and jobs growth will continue to slow.


Here's a look at the latest jobless claims data (as interpreted) by Reuters:


"The number of Americans filing for unemployment benefits unexpectedly fell last week to near a 43-year low, an indication of firmness in the labor market which may support an interest rate increase by the U.S. Federal Reserve this year."


we disagree with reuters' rosy interpretation.


Take a look at the chart below. It shows year-over-year growth in non-farm payrolls. As you can see, jobs growth peaked in 1Q15 and has rolled over ever since. (Once labor growth peaks, it doesn't come back... something to be aware of ahead of tomorrow's September jobs report.)


Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - nfp 10 6


On The Macro Show this morning, Hedgeye CEO Keith McCullough responded to a subscriber's question about labor market strength. 


Is this time different? Will labor market strength remain? And will the Fed raise rates as a result?


He pulled up a chart from our latest Macro Themes deck. It shows a 6-month moving average of jobless claims. In a nutshell, what it shows is that jobless claims peak following the previous recession, and then roll over during expansion.


Once the data hits 300,000, it takes about 20 months before the next recession hits. In the current cycle, we just hit 21 months. Here's analysis from McCullough:


"We’d agree that it’s quite often 'different this time' but it doesn’t mean that it’s going to be different forever and all of the time. Something can happen at a surprising rate then mean revert the other way."


"Take a gander at jobless claims. At any one of these points, 18 months, 19 months, and 20 months, you hit 300,000 then jobless claims jump and eventually recession sets in. So it’s not different this time in that regard."


Why a Fed Rate Hike On "Strong" Jobs Data Is A (Really) Bad Idea - unemployment


"Now, if the Fed raises rates, people are going to get fired left, right and center. So again when you really start to get concerned about the Federal Reserve acting on one of these data points you should start to get really excited about buying all the things we’ve had you in for about 17 months." (For more on what to buy, click here and here.)


In other words, the Fed will speed-up the deterioration of already weak economic data by hitting the monetary policy brakes. Caution is advised.


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