Friedman Fails; Chat GPT bombs; "Social Network" Booms
Friedman Fails; Chat GPT bombs; "Social Network" Booms
Cheap Big Macs in Cairo. Investment of the decade
Read on nicholasvardy.com
Welcome to the 1250+ Global Guru fans and 2090+ Twitter followers (@NickVardy) who have joined us in our first eight weeks on substack.
Today at a Glance:
· One Anecdote: Milton Freidman as a Failed Speculator
· One Indicator: What Big Macs Can Teach You About Currencies
· One Investment Insight: Long-Term Return on Asset Classes
· One Technology: Why Chat GPT is a dud
· One Flashback: Facebook and “The Social Network”
One Quote
Not-so-smart Nobel Prize Winners
Question to economists:
“If you’re so smart, why aren’t you rich?”
Economists’ retort:
"If you're so rich, why aren't you smart."
A fistful of Noble prizes to William Sharpe, Harry Markowitz, Myron Scholes, and Eugene Fama may have changed how investment is taught at business schools across the planet.
But winning a Nobel prize did not turn these elite economists into market mavens.
Economists are as bad at reading the markets as any of us.
Economic historian Deirdre McCloskey recounts the following anecdote in her 1990 book titled “If You’re So Smart: The Narrative of Economic Expertise.”
In the book, McCloskey wrote that senior faculty members actively speculated in the bond market when she was at the University of Chicago in the 1970s.
Milton Friedman – a then-recent Nobel Prize winner- told her that interest rates were bound to fall. “This was when interest rates were at 6 percent,” she wrote.
How did Friedman’s prediction turn out?
“They in fact rose to 10 percent” soon after, “and the wise economists lost their shirts.”
One Indicator
What the Price of a Big Mac Can Tell You About Currencies
In 1986, Britain's The Economist first published its Big Mac Index – an irreverent way of measuring purchasing power parity (PPP) – that is, the relative overvaluation and undervaluation of the world’s currencies.
By comparing the cost of Big Macs – a good produced in about 120 countries – the Big Mac Index calculates the exchange rate (the Big Mac PPP) at which Big Macs would cost the same in the United States as they do abroad.
According to the textbooks, In the long run, the exchange rate between two countries should converge to a rate that equalizes the prices of an identical basket of goods and services in each country.
The Price of Big Macs Across the Globe
According to The Economist’s latest survey, the average price of a Big Mac in the U.S. is $5.36.
In contrast, a Big Mac will set you back $7.26 in Geneva, Switzerland.
So according to the Big Mac Index, the Swiss franc is overvalued by 35.4%.
It also makes the “swissie” the most overvalued currency in the world.
In China, the average cost of a Big Mac is only $3.54.
So, the Chinese yuan is undervalued by about 34%.
Where are the cheapest Big Macs in the world?
According to The Economist's most recent data, in Cairo, Egypt, you can pick up a Big Mac for $1.84(66% undervalued). In Indonesia, you can grab one for $2.31(56% undervalued.)
Source: https://fxssi.com/big-mac-index
Time to Visit Europe
Over the years, you can see some surprisingly big swings in currency valuations.
Before the global financial crisis, the British pound was 50% overvalued against the U.S. dollar.
Today, it is undervalued by 12.9%
A Big Mac in the European Union will cost you an average of $5.27
That means the euro is overvalued by a modest 1.4% compared with the U.S. dollar.
But that's a far cry from July 2008, when the euro was overvalued by a whopping 50%.
The takeaway?
Today is an excellent time for that trip to the U.K. and Europe. Both have rarely been this cheap for Americans.
One Investment Insight
Asset Class Performance Over the Past Decade
The chart below shows annual returns for selected asset classes ranked from best to worst within each calendar year over the last ten years.
Source: BlackRock
I want to highlight three takeaways:
1) Return rankings change dramatically from year to year. Varied returns highlight why diversification -investing across various asset classes- helps smooth returns.
2) The top-performing asset class over the past decade has been U.S. equities,
But take out the tech mega caps stocks, and returns for every year between 2015 and 2021 would have been negative.
3) U.S. stocks' average annual returns of 12.5% are more than twice that of Japanese or European equities.
But emerging markets have been the far greater disappointment, returning a minuscule 1.3% per annum over the past decade.
So much for the oft-hyped BRICs.
One Technology
Chat GPT and the AI Revolution
The launch of Chat GPT signaled the entry of Artificial Intelligence (A.I.) into the mainstream.
It has been the fastest-adopted technology in history. It has reportedly passed medical board examinations. It did the same for a Wharton business school exam.
Chat GPT has thrown academic institutions into a tizzy. For example, yesterday, a college applicant I interviewed told me that his exclusive school- Eton in the United Kingdom -had already banned its use among students.
I recently tried out Chat GPT for myself.
The writing it generated was OK. But I would not submit anything written by Chat GPT as a college paper. It read more like an encyclopedia entry.
I then searched for my name. I was shocked at the inaccuracies.
Here's a screenshot of my result:
Three paragraphs, three egregious errors:
First, I did not write either of the two books it attributed to me. (I would not be amused if I were the author of either book.)
Second, I don’t host a podcast.
Third, I did graduate from the universities I searched for. One of my classmates was the guy on the right in the pic below. (Go ahead and check- just not on Chat GPT!)
My verdict on Chat GPT? I’m unimpressed.
One Flashback
Revisiting “The Social Network.”
This past weekend, I re-watched The Social Network (2010). The film is a biopic of the rise of Facebook through about 2010.
It stars Jesse Eisenberg as Mark Zuckerberg. Eisenberg even earned an Academy Award nomination for his portrayal of Zuckerberg.
Here are two Mark Zuckerbergs appearing alongside each other on Saturday night live.
I had three takeaways from the film.
· I was a member of one of the student clubs at Harvard depicted in the film- the now-defunct Lincoln's Inn Society. The "Inn" boasted many Supreme Court Justices- including my classmate and current Supreme Court Justice- Neil Gorsuch. But it was neither as elitist nor exclusive as The Social Network suggests. As a kid from Pittsburgh who grew up in an immigrant family, I was proof of that.
· If you want to make it big in tech, you need to go to West to Silicon Valley. That remains as true today as it was when Zuckerberg dropped out of Harvard. No wonder Harvard drop-out Bill Gates’ and Steve Jobs’ daughters were friends at Stanford. Two generations earlier, they would have attended Harvard.
· The screenshot below shows how much Facebook has grown since the movie was made.
Today, Facebook (META) is (still) worth $400 billion- 16X what is shown here. It also boasts 2.9 billion users- an almost 6x increase.
Only in America. And only in Silicon Valley.