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Dow 22,000, gold $2000, and why it won't mean anything

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The infallible Big Mac Index (BMI) tells us that inflation has been cruising along at around 5.4% since 2002. Furthermore, I swear the price of a double cheeseburger is relevant to the latest chapter of my perpetual pooh-poohing of the stock market.


Anyhow, I've been seeing lots of headlines breathlessly awaiting the Dow Jones Industrials' next all-time numerical high, as if the new record would usher in a new era of prosperity, leaving our troubles behind. Here's the problem:

The Dow hit 11723 in January of 2000, which in terms of Big Macs is equivalent to 19,616 today. That makes our current high of 15409 look pretty bad. It's a 22 percent loss in value over 13 years.

b2ap3_thumbnail_chart_7.png 

I'll make an extremely optimistic assumption, and say that things will continue to putter along the way they are before I drop this bomb:

By 2020, assuming no gains whatsoever, we'll be seeing the Dow at 22,000 and the price of gold busting $2000. All it takes is 5.4% inflation and the total stagnation of equities. We'll also be seeing $5.00 gasoline.


Newcomers, you might be wondering, "why is this guy stuck on Big Macs?"

b2ap3_thumbnail_Big-Mac-2010-ad.jpg

Full disclosure, I hate Big Macs, but you and I both have to admit the Big Mac is an aggressively priced basket of many, varied goods like labor, electricity, transportation, food, fertilizer and chemicals, fuel, management and advertisement. It represents a typical expense profile (unlike something like software that requires a preponderance of skilled labor and very little material), and it is efficiently produced at low margins. If you can find a more representative collection of expenses that are produced year after year, please let me know and I'll name the new index after you.


For now, I'm sticking by the BMI!

 

 

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Richard is an engineer by day, and a political activist by night, fighting would-be totalitarians and government busybodies everywhere.

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