The Economist founded the Big Mac Index more than a decade ago as a very interesting way to gauge currency valuations. From The Economist:
Burgernomics is based on the theory of purchasing-power parity, the notion that a dollar should buy the same amount in all countries. Thus in the long run, the exchange rate between two countries should move towards the rate that equalises the prices of an identical basket of goods and services in each country. Our “basket” is a McDonald’s Big Mac, which is produced in about 120 countries. The Big Mac PPP is the exchange rate that would mean hamburgers cost the same in America as abroad. Comparing actual exchange rates with PPPs indicates whether a currency is under- or overvalued.
The Index currently looks like this:
Short Euro, Short Dollars, Long Yuan, Long Yen – Looks dead on to me. God bless the Royale with Cheese…
Update – Reader Andi was nice enough to inform me that the Royale with Cheese is in fact a quarter pounder with cheese. I believe the line from Pulp Fiction that I was grasping for was “Le Big Mac”. But I could be wrong about that one also….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.