Tuesday, October 20, 2015

ConvergeX Q3 2015 Off the Grid Economic Indicators

I forgot to post this when it came out September 30.
ConvergeX trades around 10% of the total daily equity options volume.
They don't forget.

From ConvergeX:
Summary: We may have discovered what separates the doves from the hawks at the Federal Reserve: those not inclined to raise rates eat a lot of bacon cheeseburgers. That American food favorite is in the midst of its first bout of serious deflation (+3% price declines) since 2010, with similar episodes only occurring in periods like 1991/92 and 1998. OK, that’s probably not the whole story but our Bacon Cheeseburger Index is part of a suite of “Off the grid” economic indicators that seek to fill in gaps left by standard (and, let’s face it, dull) measures of the U.S. economy. This quarter we have some good data (car and truck demand is fantastic), and then some “Meh” and some bad (workers aren’t quitting their jobs enough, food stamp usage is down but still at 14% of the US population, gold coin demand is skyrocketing, mutual fund redemptions are too, and people still want to sell their kidneys). These indicators, quirky as they are, have been remarkably prescient over the past year at outlining the frail domestic economic recovery.  Read on for all the details.

The history of the hamburger is lost to the fog of human memory, but culinary historians have pieced together a likely migration path starting with the Mongol Empire and ending in Tulsa, Oklahoma about 100 years ago. It goes like this: 
  • The Russians of the Middle Ages called Mongols “Tatars”, and noted that these invading hordes ate finely chopped raw meat (probably horse). Yep, that’s where the dish steak tartare supposedly gets its name. Minced meat is, presumably, easier to digest than a slab of horsemeat.  
  • From there the dish moved to Germany, and the Hamburg-America line of boats served it, salted, smoked, or cooked, to immigrants coming to America in the 1850s. 
  • Delmonico’s restaurant in New York City offered it in the 1890s, with the recipe calling for a mixture of kidney and bone marrow seasoned with salt, pepper and nutmeg. 
  • Oklahoma stakes the claim for the first hamburger on a bun, and went so far as to make an official proclamation to that effect in 1995.
You know the rest – hamburgers are a wildly popular American food to this day (just go look at any Shake Shack around noon), even without the kidney and nutmeg.  And because of that popularity, consumers have a remarkably good grasp on the price of ingredients. That makes the humble hamburger with equally popular toppings like cheese and bacon a remarkably good measure of observed inflation – something that consumers use to anchor their own inflationary expectations.  
And that’s where the bacon cheeseburger stops being a food and starts its life as economic indicator.  The details here: 
  • Using the Consumer Price Index dataset, we pull the information for ground beef, cheese, and bacon prices back to 1980.  In deference to history and those on a low-carb diet, we omit the bun. 
  • We evenly weight each input and create a Bacon Cheeseburger Inflation Index and measure year over year price trends. 
  • The most recent data makes us think that the doves on the Federal Reserve must eat more than their share of bacon cheeseburgers. Our index shows outright deflation since May 2015 of 1-4% price declines versus last year. 
  • Go back through the price history, and negative 3-4% price declines for bacon cheeseburgers are often a sign that the Fed needs to cut interest rates and push liquidity into the domestic economy.  I know that sounds weird, but the last time our Bacon Cheeseburger showed negative price trends of this magnitude was in 2009. Before that, it was 1998 (Asia crisis) and 1991-2 (Gulf War I). 
That’s one example of what we call an “Off the grid” economic indicator – a piece of data that is never going to make it into a “Real” economist’s presentation, but does inform a specific narrative about the state of the American economy.  We’ve been doing these reports for the better part of 5 years, every quarter, and over that time the analysis has always helped illustrate some facet of the real world that dry government statistics gloss over or just outright miss. For this installment of the data, we’ve broken up the indicators into positive, “Meh” and bad. Biggest Positives: anything to do with car and truck sales. 
  • Used car prices are rock solid according to Manheim, a leading auction house for such vehicles.Prices here have been stable since 2011, allowing consumers to trade in vehicles at high prices for new cars.