Let’s provide some fair warning before we dive into the subject. This column deals with economics. Now, to be clear, I have no inherent hatred of economists. I just don’t understand them. Generally, when an economist starts talking, my eyes quickly glaze over and roll back in my head. I’m sure the information is important, but when it comes to these matters it’s much akin to the difference between talking to the emergency room doctor who stitches up your wounds and trying to make out the chants of a witch doctor.
With that said, I found myself drawn into a discussion and analysis of a chart provided by Joe Weisenthal of Business Insider. This is a graph – helpfully updated by Joe after I pressed him with questions – which tracks the value of the S&P 500 divided by the cost of a gallon of gasoline for just over two decades.
Why should a value like that be important to us and our understanding of the state of the economy? When I began this conversation I had no idea. But once Joe finished patiently explaining it to me, it became a bit more clear. So here it is. Please note that the red line is the ratio value described above and the blue line is the average cost of a gallon of gas. (Also please be sure to follow the link, as Joe explains it far better than I will ever be able to, I’m sure, and he will take questions if you submit them.)
If you’re anywhere near as easily as confused as me, you might be asking, why would we divide the S&P average by the cost of gasoline? What would the resulting figure possibly tell us? Well, it turns out there is some value to it after all.
The short version for the layman goes something like this. If the economy is truly robust, you’d see the value of your investments grow faster than the value of the commodities stripping dollars out of your wallet. What’s worrisome is that for the past decade, investments haven’t been able to keep up with the cost of many basic goods. (To prove the point, Joe also provides a similar index versus the price of coffee and the price of wheat.)
But if the economy is truly sick, even when the prices you pay for these commodities is falling, and your return on investments is doing even worse, then you are experiencing a net loss. With that information in mind, go back and take a look at the the original chart and you’ll get an idea of the real state of the recovery.