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When Every Option In The Financial System Is Grounded In Absurdity, It's Time To Look Elsewhere

Tyler Durden's picture




 

Submitted by Simon Black via SovereignMan.com,

If you’ve ever picked up a copy of The Economist magazine, you’ve probably heard of the Big Mac Index.

This is an interesting tool where a bunch of reporters from around the world are forced to go into McDonalds and find out the price of a Big Mac in local currency.

In Santiago, Chile, for example, a Big Mac runs 2,100 Chilean pesos, which is around $3. Meanwhile the average price for a Big Mac in the United States is $4.79.

This suggests that the US dollar is substantially overvalued against the Chilean peso.

It’s the same story across most of the world. In Russia, a Big Mac costs 107 rubles, which is just over $1.50.

The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world.

There are some subtle differences, but McDonalds generally serves the same pink foam disguised as beef wherever you go. So in theory it should all cost the same.

When a Big Mac is too cheap or too expensive, this suggests that the currency is either undervalued or overvalued against the US dollar.

Now I’d like to add a new way of comparing currencies: airfare.

As I travel around the world, I often buy what are known as round-the-world tickets (RTW).

RTW tickets are issued by airline alliances like OneWorld or Star Alliance, and they’re typically very cost effective.

RTW is just like it sounds. You fly, for example, from London to Chicago to Shanghai to Dubai and back to London, all for one special fare.

It’s a cheap, easy way to see the world.

But I’ll let you in on a little secret that I’ve picked up over the years: the price of a RTW ticket varies dramatically depending on the city where you start.

As an example, I just researched a OneWorld RTW ticket with the following itinerary:

Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg – London – Los Angeles.

Six different cities around the world on five continents.

Now, if I start and stop that itinerary in Los Angeles, the price for a business class ticket is $14,164.60.

That’s not a bad price for a business class experience. But if we experiment a little bit, something interesting happens.

Starting and stopping the journey in Los Angeles means that OneWorld prices my ticket in US dollars.

But it’s also possible to fly the same route by shifting the cities. For example, instead of starting/stopping in LA, I can start/stop in Sydney.

So the route becomes Sydney- Bangkok – Hong Kong – Johannesburg – London – Los Angeles – Sydney.

It’s the same flights to the same six cities, I just start/stop in a different place.

Here’s what’s crazy: if I start/stop in Sydney instead, the price changes. Now instead of $14,164.60, it’s $15,272 Australian dollars, which is about $10,900 USD.

So the same six flights now cost you 23% less.

Note that the RTW ticket is always priced in the local currency of the city where you start.

And unlike the Big Mac Index where the results are skewed by the costs of ingredients, property, and labor, here you’re comparing the exact same product.

I did the same with each city on the list, and the most incredible difference came when I started and stopped the trip in Johannesburg.

Johannesburg – London – Los Angeles – Sydney – Bangkok – Hong Kong – Johannesburg.

Flying to the exact same cities, the price is now 81,395 South African Rand.

Based on current exchange rates, this is just barely over $6,000.

In other words, you pay over $14,000 by starting/stopping in LA, and just $6,000 to start/stop in South Africa, even though you’re visiting the exact same six cities on the exact same flights in the exact same business class cabin.

What’s even more amazing is that if you do the exact same itinerary from LA in economy class, the price is $7,545.

So that means that if someone flies from LA, they’ll pay more to fly in coach than someone starting in Johannesburg pays to fly in business.

Clearly, you’d be better off buying a separate ticket to South Africa and beginning your RTW journey from there.

Or you could spend about $200 and get a ticket to Vancouver, and start a RTW from Vancouver, which costs about $10,000 in business class and gives you a $4,000 savings.

Now, I’m not here to tell you about how to save money on airfare (though I hope you give it a try).

The bigger idea is that it’s clear that the US dollar is painfully overvalued against nearly every currency in the world.

Right now the dollar appears to be the “safe” place to put your money. However, this isn’t based on anything.

The fundamentals for the US dollar are terrible, but people keep dumping money into it like trained monkeys simply because nothing else in financial markets makes any sense.

To be clear, I fully expect the dollar to get even stronger as even more trained monkeys pile into US dollar assets.

But it’s important to show that this perception of ‘safety’ is based on a complete myth. Every credible fundamental suggests that the dollar is dangerously overvalued.

In the long run these things tend to equalize, and the dollar’s strength may end up being the biggest bubble of all.

Of course, it raises the question– if not the US dollar, then which currency is the safe haven? The euro is garbage, the Chinese are fighting a depression, Japan is a disaster.

And that’s precisely the point.

When every option in the financial system is grounded in absurdity, the only solution is to start looking for safety outside of it.

 

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Mon, 08/31/2015 - 16:40 | 6491936 HonkyShogun
HonkyShogun's picture

The Fed is a barbarous relic.

Mon, 08/31/2015 - 16:58 | 6492006 CrazyCooter
CrazyCooter's picture

The Big Mac index is, and has been, bogus. Don't believe me? Go to Mc Donald's and order a double cheese burger, no mustard, no ketchup, add mac sauce, add shread lettuce ... and order a big mac. When you get both sammiches the difference is the style of bun and a middle bun and a piece of cheese and the packaging.

Then look at the cost difference on your reciept.

Regards,

Cooter

Mon, 08/31/2015 - 17:01 | 6492022 HonkyShogun
HonkyShogun's picture

And be getting a case of the shits either way.

Mon, 08/31/2015 - 17:36 | 6492156 max2205
max2205's picture

If we start in Detroit it should be free .99

 

Mon, 08/31/2015 - 17:41 | 6492177 FinalEvent
FinalEvent's picture

Something like bitcoin perhaps?

Mon, 08/31/2015 - 17:58 | 6492229 Billy the Poet
Billy the Poet's picture

"I don't always fly RTW but when I do prefer to start in Johannesburg." -- Simon Black

Mon, 08/31/2015 - 18:44 | 6492395 Doña K
Doña K's picture

A little disagreement here Simon,

The business fare Delta non stop Atlanta Johannesburg (16 hours) is 10k to 14k depending on advance purchase.

The same in reverse is 6K to 8K (17 hours) I however believe that it has to do with affordability, not FX

Cheers

Edit. The ATL Joburg flight is always full as most custumers in Bussiness/First/ are government who are obligated to fly American owned carriers

Mon, 08/31/2015 - 17:07 | 6492041 Dis-obey
Dis-obey's picture

I sold my car on craigslist Los Angeles.  It was a 2001 Toyota Camry.  I got $2400 USD for it.  I moved to Poland and bought a 2001 Volkswagen golf comfort line for 8000 PLN now equal to $2118.76USD.    Same year and the Golf is definitely nicer.

PLN is basically pegged to the EURO.  Yep US dollars are overvalued on this side of the pond. 

Mon, 08/31/2015 - 17:27 | 6492116 Urban Redneck
Urban Redneck's picture

Bosch Hammer Drill (made up the road from me)

Over in Germany I can buy it for EUR296,53 

Here in Switzerland I can buy it for EUR310,80

In the US I can buy it for EUR 240,44 

Who knew both the Baltic Dry Index and Brent had turned negative?

Americans are spoiled by USD hegemony, and when the rest of the world decides that it would rather receive a currency other than USD, many (even some of the supposed non-interventionalist libertarians at ZH) will BEG their masters for MOAR WAR... and artificial USD demand... and a return to the Petrodollar paradigm.  

USD was 50% overvalued (ex MIC) before Bernanke took over at the Fed.

Mon, 08/31/2015 - 18:41 | 6492400 atomp
atomp's picture

19% VAT gets you from 240 to 285. So, pretty close.

Mon, 08/31/2015 - 18:33 | 6492366 robertsgt40
robertsgt40's picture

High O Silver away!!!

Mon, 08/31/2015 - 22:04 | 6493273 Macon Richardson
Macon Richardson's picture

Cooter! Wow! You're really up on your McDonaldsology.

Mon, 08/31/2015 - 17:15 | 6492075 Jumbotron
Jumbotron's picture

When things get absurb......time to drink absinth.

Mon, 08/31/2015 - 16:42 | 6491939 kchrisc
kchrisc's picture

"When Every Option In The Financial System Is Grounded In Absurdity, It's Time To Look Elsewhere"

The answer lies in the mirror, and also in family and friends. Don't forget your good buddies AK, AR, Glock, Gold, and Silver.

Zion is a scheme, not an ethnicity..

Mon, 08/31/2015 - 16:50 | 6491955 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

what's the price of pink slime and sawdust, how could I compare that across the world?........

The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world.

 

AK, Au Ar, Glock etc. also the same product around the world.

Mon, 08/31/2015 - 19:44 | 6492644 New_Meat
New_Meat's picture

Yo, ali'n'shit:

"The reason The Economist uses the Big Mac is because it’s basically the same product no matter where you go in the world."

Au Contraire Meathead: unless u have actually tasted a "Bigu-MakU" in Japan (at like $25/each) and all, you can't compare it with Singapore or Melbourne or Roma or ...

You don't get out much do ya?

- Ned

{and I sincerely hope that u are ... er ... "using" those same products from undifferentiated suppliers from around this world}  Good on ya!

Mon, 08/31/2015 - 16:46 | 6491956 Caveman93
Caveman93's picture

Back to basics. I love simple.

 

5 G's (Gold, Guns, Grub, Gas and Ground)

Mon, 08/31/2015 - 16:46 | 6491959 manofthenorth
manofthenorth's picture

GOLD AND SILVER.

Mon, 08/31/2015 - 16:49 | 6491972 chrsn
chrsn's picture

I'm investing in metals. So far I have AC/DC, Black Sabbath, Megadeath and Iron Maiden

Mon, 08/31/2015 - 17:28 | 6492122 Cast Iron Skillet
Cast Iron Skillet's picture

you need to work on that. Think about Disturbed, Rammstein, Within Temptation, and Five-Finger Death Punch.

Mon, 08/31/2015 - 18:37 | 6492385 Jumbotron
Jumbotron's picture

+ 1000 for the Within Temptation reference.  May I add to that Nightwish.

Mon, 08/31/2015 - 18:25 | 6492334 ali-ali-al-qomfri
ali-ali-al-qomfri's picture

Bang your FED

Precious metals ‘til your dead

Mon, 08/31/2015 - 16:49 | 6491973 Anglo Hondo
Anglo Hondo's picture

I have chosen the Honduran Lempira.  You can't fly anywhere from there, but who cares.

Mon, 08/31/2015 - 17:03 | 6491980 Urban Redneck
Urban Redneck's picture

Back when the Concorde was flying, it cost the same price as a regular first class ticket between NY (or Washington) and London or Paris, and you saved a LOT of time (in practice you could actually gain an entire working day, versus one of those slow moving clunkers people fly in 40 years later).  In this case, the "good old days" actually were better.  

I live in Zurich, so Johannesburg is basically due south of me... OVER 10 HOURS EACH WAY, and that is assuming you Escape from Joburg on time.    

If you live in LA and can afford a business class ticket, what is your time worth? (opportunity costs, not monetary costs...)

The notion that those flights are an apples-to-apples comparison, or even an interchangeable economic substitute is misguided.

Mon, 08/31/2015 - 17:56 | 6492224 Helix6
Helix6's picture

Ummm...  yeah... whatever happened to that Concorde anyway.  Seems to mee that if they were making money at those prices, we'd still see them flying.

Mon, 08/31/2015 - 18:41 | 6492396 Urban Redneck
Urban Redneck's picture

By that logic, there shouldn't even be a domestic airline industry in the US, since so far this century they have an aggregate net income of negative 27 billion dollars.

http://www.transtats.bts.gov/Data_Elements_Financial.aspx?Data=6

Mon, 08/31/2015 - 19:53 | 6492676 New_Meat
New_Meat's picture

UR:

"The notion that those flights are an apples-to-apples comparison, or even an interchangeable economic substitute is misguided."

Well, it really does depend upon who is paying the freight, n'est ce pas?

If there is actual prospective company financial benefit, then the MBA finance folk, who couldn't find a deal on a bare dance floor, will nix the expense.

Go ahead and try to justify "opportunity cost" to a bunch of niggardly accountants in India!

Rotsa' Ruck

- Ned

Mon, 08/31/2015 - 16:52 | 6491986 RopeADope
RopeADope's picture

You see this phenomenon in other areas as well. Part of the total price you pay is the "how likely is this person to be a sucker" price. This surcharge is very high for Americans.

One place that comes to mind is in tuition costs at top tier universities. If you start out at a foreign graduate university you will get a substantial discount on graduate tuition costs at the American university. An American can save $15,000+ on the annual rate if they enter externally rather than internally. Poor American students are being ripped off above and beyond the already outrageous graduate degree inflation rate they pay.

Mon, 08/31/2015 - 18:29 | 6492350 MSimon
MSimon's picture

My #2 son was totally on scolarship to UChicago. There are many ways to beat the system.

Mon, 08/31/2015 - 20:02 | 6492726 New_Meat
New_Meat's picture

Float-like-a:

"One place that comes to mind is in tuition costs at top tier universities."

Actually, if you look at "list price" the so-called 'top tier" and the next 2 tierz are , well, like the same.

And I agree with the total rip-off, cuz Granny Warren has been bought to continue the college loan scam for her colleagues (Havhad, the world's most perfect university, doesn't throw money away, they are way too skilled for this).  Instead, she is a fighter, A Fighter I Say!!! for the reduction of student cash flow to attend perfect universities.

We here in the most perfect Commonwealth among the four are actually following the nasty but  getting better state of California.  We are also encouraging "dreamers" to get in-State tuition rated, funded by taxpayaz of course, to keep our junior college system expanding.

- Ned

Mon, 08/31/2015 - 17:06 | 6492037 q99x2
q99x2's picture

Great info. I hope all the airlines start accepting Bitcoin soon.

Mon, 08/31/2015 - 17:19 | 6492087 Consuelo
Consuelo's picture

"In the long run these things tend to equalize, and the dollar’s strength may end up being the biggest bubble of all."

 

'May end up'...?

 

The entire edifice ($UST 'strength') and its henchman, the $USD, are based on confidence and the convenience of doing things the way they have been done for nearly half a century.   That's pretty thin - especially right now, whilst playing a dangerous game with a nation that holds 'launch codes' to both.

Mon, 08/31/2015 - 17:22 | 6492102 GooseShtepping Moron
GooseShtepping Moron's picture

The recent dollar strength is not a result of people pouring money into the dollar as a safe haven play. It is the result of the collapse of Eurodollar funding, which is in turn the result of a dearth of genuine collateral. Someone please remind Simon Black that two major national banks (Swiss and Chinese) just broke their dollar pegs, and that even the yen (the poster child for derelict currencies) counterintuitively strengthened against the dollar out of a desperate reach for liquidity.

There is even now a global liquidity famine that even trillions in central bank fiat can do nothing to reverse, because the stock of worthy collateral supporting it simply doesn't exist.

Mon, 08/31/2015 - 17:28 | 6492124 Secret Weapon
Secret Weapon's picture

Sorry, this article would have been a lot better if it featured a picture of a pretty girl with big tits. 

Mon, 08/31/2015 - 17:33 | 6492141 blindman
blindman's picture

When rich people fight wars with one another, poor people are the ones to die.
Jean-Paul Sartre
.
“The absurd man will not commit suicide; he wants to live, without relinquishing any of his certainty, without a future, without hope, without illusions … and without resignation either. He stares at death with passionate attention and this fascination liberates him. He experiences the “divine irresponsibility” of the condemned man.”
? Jean-Paul Sartre

Mon, 08/31/2015 - 17:33 | 6492146 Rehab Willie
Rehab Willie's picture

Looks like we're getting close to breaking out the wheelbarrow to buy a loaf of bread.

Mon, 08/31/2015 - 17:33 | 6492147 CarpetShag
CarpetShag's picture

Yet more proof that the USD is the least syphilitic cock in the dermatologist's office.

Mon, 08/31/2015 - 17:36 | 6492154 ramgold2206
ramgold2206's picture

Ordinarily I'm not big into the apocalyptic articles but August has turned out to be as mental a month as I can remember nothing makes sense anymore! Whatever sanctuary gold and arable land provides is the best we can get.

www.teamramgold.com/about-us

Mon, 08/31/2015 - 17:37 | 6492158 Oxygen
Oxygen's picture

The solution is a new world currency
It's planned since at least 1989
I suppose stock market will crash,
then people will go in US dollar
'because it's the safest'
Then I think the 'Monster dollar Bubble
will Pop... And then a new World Currency
'The Phenix'

Mon, 08/31/2015 - 18:02 | 6492247 Helix6
Helix6's picture

I don't think a world currency will fly for long except possibly in international trade, and even then, the scope for manipulation and corruption would be enormous.  Currencies work best when they span the same territory as national laws and customs.

Mon, 08/31/2015 - 18:23 | 6492329 RaceToTheBottom
RaceToTheBottom's picture

"I don't think a world currency will fly for long ..."

At least not in the Concord....

 

Badumbumpbump.

I'll be here all week.  Try the Veal.....

Mon, 08/31/2015 - 18:11 | 6492286 ramgold2206
ramgold2206's picture

@oxygen sounds worryingly like a new world order

Mon, 08/31/2015 - 18:12 | 6492275 lunaticfringe
lunaticfringe's picture

Interesting article. It takes me about 20 thousand dollars gross to buy a net 14,000 dollar ticket which does nothing. That 14,000 is an investment in nothingness. It does not grow food, it leaves nothing tangible. It provides nothing that I can use to make my life easier or safer.

Why would anybody waste 14,000 dollars on an airline ticket?

Therein lies the rub. People think they need to fly. Like they need a Big Mac. The truth of the matter is- it's all useless shit and I wouldn't buy it at half the price. The dollar and those commodities have all been price fixed anyway because the providers have convinced a bunch of dumb shits that they have some utility in the first place- thus they create artificial demand. Why would I waste a 1/2 year of hard labor for a an airplane ride or to eat a substance that causes type II diabetes and death?

Suckers are born at a rate that far exceeds every minute.

Mon, 08/31/2015 - 18:24 | 6492307 RaceToTheBottom
RaceToTheBottom's picture

deletededed

Mon, 08/31/2015 - 18:26 | 6492338 jon dough
jon dough's picture

I bought a round-the-world out in Nevada once, didn't cost me no $14k.

 

Simon, D-bag Extraordinaire...

Mon, 08/31/2015 - 18:34 | 6492374 MSimon
MSimon's picture

Simon, D-bag Extraordinaire...

 

Can I be included in that? It is a HUGE attractant for the females.

Mon, 08/31/2015 - 19:28 | 6492586 Charles Offdensen
Charles Offdensen's picture

If the feds policies are always wrong how can their solutions be right?

Answer: they cant!

Next fucking question.

Oh and who says that the feds policies are meant to provide a solution for us and not them?

Answer: they aren't meant for us.

Wow see how easy this shit is?

Next fucking question.

Mon, 08/31/2015 - 20:01 | 6492717 Niall Of The Ni...
Niall Of The Nine Hostages's picture

Well. A fairly-valued dollar would prevent the FSA from being able to afford the latest iTurd, and allow people who aren't afraid of work to find jobs in manufacturing again. Worst of all, our masters' junkets in the Third World would cost them real money. Nobody wants that.

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