Having just returned from two weeks in the US, I felt compelled to write a standalone piece about the twelve dollar shake and other topical financial musings.
Our trip took the form of an organised driving tour, with a group of twenty of us piloting V8 Ford Mustangs and Dodge Challengers around California and Nevada. We covered a lot of ground during the fortnight, visiting San Francisco, Santa Cruz, Santa Barbara, LA, Las Vegas, Death Valley, Mammoth, Lake Tahoe, Sonora, Redding and finally Fort Bragg.
It was an incredible experience and despite my best efforts to disengage ‘work mode’, as usual, I found it impossible to switch off my financial brain. This was partly due to the staggering cost of things in the US. Eating three meals a day in restaurants, hotels and diners, is never going to be a cheap endeavour. However, from the moment we arrived, I was shocked by how much prices had changed since my last visit five years ago. Inflation has been the hot financial topic of the year and nowhere has this been felt more profoundly than in America.
Inflation and Cost of Living in the US
At first we assumed things were expensive simply due to being in the touristy part of San Francisco. However, over the course of our two-week adventure, high prices presented everywhere we went, from restaurants, to general stores, gas stations, and clothing shops.
In the evenings at the bar, it was usually $10 to $12 for a bottle of beer. You could easily make that $15 for a glass of wine. At restaurants, hotels and diners, appetisers or breakfast items tended to be between $10 and $20 dollars, with most main meals between $15 and $40. Sure, we certainly weren’t slumming it, but we weren’t exactly dining at Dorsia either.
The one thing that really focussed my mind was the $12 milkshake.
I was reminded of a famous scene from the film Pulp Fiction. Vincent Vega (John Travolta) has been burdened with the task of chaperoning the wife of his gangster boss, the flirtatious Mia Wallace (Uma Thurman). She demands that he takes her to Jack Rabbit Slims, a rock and roll themed diner and dance hall. When the waiter arrives, Vincent is aghast when Mia orders the ‘Five Dollar Shake’. “It’s a shake, right?” he asks in stunned disbelief. “Just milk and ice cream?” “Do they put bourbon in it?!”
No Vincent, mine didn’t have bourbon in it either. Delicious as it was (let’s just forget about the calories), $12 for a glass of milk and ice cream is just as much of a shock in 2022, as $5 was in 1994.
Adding more context was a glimpse at US earnings. Just like in the UK, in the US there has been massive upwards pressure on pay and salaries in the past year.
We walked past a fast-food restaurant in San Francisco that was advertising roles with a starting salary of $20 per hour. Assuming a 35-hour working week, this equates to a salary of $36,400 per annum, which in turn is equivalent to a not-insignificant $2,483 per month. It’s telling that only twelve months ago this was the very level of pay that sparked a furore on social media, when it was revealed that a restaurant in Washington was paying its employees $20 an hour. At the time they were an outlier by a significant margin, as the average counter worker in the US was making just $12 an hour, prompting a heated debate over fair pay and reward for front-line workers. Just twelve months on, it seems that what was only recently an outlier, has become the new standard. If this is the movement in pay for those in entry-level roles, then you can only imagine the rises in salaries for skilled trades and professionals.
So, my adventures in California and Nevada gave a direct taster of the realities of inflation in America, in both pay and prices. This is why it’s so important that the FED gets things under control, and why we’ve seen such aggressive interest rate hikes in the year to date, as they seek to halt the inflationary spiral.
The same applies here in the UK, as whilst our inflationary pressures have lagged the US a little, so too has our central bank policy. In economics, they say when America sneezes we catch a cold, so let’s hope the BOE can bring our own inflation to heel, before we follow the spiralling price and wage increases of our US cousins.
Painful Pound Parity
Along with lots of talk about inflation, you might have seen some discussion in the media about the weakness of the pound, especially versus the dollar, with the term ‘parity’ frequently popping up. So, what does the ‘strength’ or ’weakness’ of a currency actually mean? And what is ’parity’ exactly?
Our pack of intrepid British petrolheads are the perfect example. For us, compounding the impact of high US prices, was the exchange rate between pound sterling and dollars.
The pound has been ‘weakening’ versus the dollar for years. Back when I was in Miami around fifteen years ago, we were overjoyed, as the exchange rate was around 2 dollars to the pound. This, combined with cheap prices in the US, meant our money went a long way on that holiday.
Ten years on, during a more recent trip to Vegas, the pound had weakened significantly in the intervening period. This resulted in us getting around 1.4 dollars for each pound exchanged. We didn’t really feel the impact of this too badly however, as things were still relatively cheap in the US at that time.
On my recent trip, the overall exchange rate was around 1.1 dollars to the pound. In reality, once we’d accounted for spreads and charges, we were often getting less than 1 dollar for each pound. This is what is meant by ‘parity’ when it comes to currency exchange. Parity is where the exchange rates between two currencies are virtually equal. This meant that our aforementioned $12 shake, was effectively a £12 shake. Ouch – better not tell Vincent… This is what is meant by the current ‘weakness’ in pound sterling. It simply isn’t worth as much relative to the dollar and many other currencies right now.
So clearly, a weaker pound versus the dollar was the cause for much consternation within our group, resulting in our trip costing significantly more than we expected. What might the effect of this be on our spending habits in the future? Well, for now, I don’t think any of us will be rushing to book our next US holiday that’s for sure. Why are our future holiday plans relevant in a broader sense? Well, this is an ideal real-world example of what impact a weakening pound can have on the broader economy.
Whether it’s hungry holiday makers begrudgingly ordering pricey pancakes in a US diner, or UK companies buying goods and services from abroad, the impact of a weakening pound is the same. For British consumers and businesses, buying anything from America, or many other countries, recently became a whole lot more expensive. For a business that is reliant on sourcing goods from overseas, their operating costs just increased, meaning they either make less profit, or increase their prices to compensate, potentially losing customers in the process. Apply this across the spectrum of British businesses and it can have a big impact on broader economics and stock markets.
This isn’t necessarily all bad news, however. Just like those of us now looking to other travel destinations where our money will go further, or perhaps more ‘staycations’, many UK businesses are likely to do the same. Some may now look for new suppliers in other overseas territories where the pound isn’t so weak in relative terms. Others may now look to source goods from domestic UK suppliers instead, which may be good news for many British businesses. Additionally, businesses in the US and overseas are now more likely to buy from British companies too, due to the relative strength of their currencies against the pound. More good news for UK companies and our economy as a whole.
The Impact on Investments
So hopefully that provides some context and gives you a greater understanding of what is meant by the relative ‘strength’ and ‘weakness’ of sterling and other currencies. The media have a tendency to take the negatives of a situation and leave out the positives, with some having proclaimed weakening sterling as another portent of doom of the coming financial apocalypse. In reality however, every crisis also brings opportunity. There are winners and losers in every situation, but successful businesses are successful because they adapt, rolling with the punches and finding new ways to prosper in changing economic conditions. We only need to look back at the Covid crisis for evidence of this…
So, when inflation, exchange rates and economic activity is in a constant state of flux, how can we possibly keep track as investors, or hope to benefit? The answer is quite simple – keep doing what we’ve always done. Hold a diversified portfolio, that invests in the largest and most successful companies, all around the world.
In finance, everything moves in cycles. Whilst it’s currently a challenging period for some households and businesses, as we deal with inflation, a weakening pound and other issues, like it or not, it’s all an integral part of the economic cycle. We cannot expect markets and economies to perpetually grow. They need to time to regroup and catch their breath before they set off on their next growth spurt.
As investors, we naturally feel the effect of this in the short-term, hence the retrace we’ve continued to see during 2022, as values have fallen back. However, the broad reach of our portfolios leaves them well-positioned to benefit from a return to growth, as economies move through - and beyond - the current turbulent market conditions. I’ve quipped tongue-in-cheek in recent newsletters, that the key to getting a good return on your money is to invest in the stock market then stare out of the window. In all seriousness though, this is the truism that I always talk about. When your capital is invested in the right places and well diversified, patience and a long-term view bring rewards, provided you are content to ride out the odd storm from time to time. Don’t measure the returns on your investments in weeks and months, measure them in years and decades. And even more importantly, how they have enabled you and your family to realise your life goals.
So with that I’ll close for now. It’s time I went for a run to work off that milkshake. It might be cold outside, but I’m hoping my $35 baseball cap will at least keep my head warm…
