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A Big Mac to Go in China Please
My former employer, The Economist, once the ever tolerant editor of my flabby, disjointed, and juvenile prose (Thanks Peter and Marjorie), has released its “Big Mac” index of international currency valuations (click here for the link at http://www.economist.com/node/16646178 ).
Although initially launched as a joke three decades ago, I have followed it religiously and found it an amazingly accurate predictor of future economic success.
The index counts the cost of McDonald’s (MCD) premium sandwich around the world, ranging from $7.20 in Norway to $1.78 in Argentina, and comes up with a measure of currency under and over valuation.
What are its conclusions today? The Swiss franc, the Brazilian real, and the Euro are overvalued, while the Hong Kong dollar, the Chinese Yuan, and the Thai Baht are cheap.
I couldn’t agree more with many of these conclusions. It’s as if the august weekly publication was tapping The Diary of the Mad Hedge Fund Trader for ideas.
I am no longer the frequent consumer of Big Macs that I once was, as my metabolism has slowed to such an extent that in eating one, you might as well tape it to my ass. Better to use it as an economic forecasting tool, than a speedy lunch.
To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “Hedge Fund Radio Archives” in the upper right corner of my home page.
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would not gold or silver or bread be better indexes?
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I'm a vegetarian. Is there a Boca Burger index..??
The next leg down ...
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I know I'm just a troll, but The Economist issued a retraction in the next issue after releasing the Big Mac Index regarding Argentina's price. Apparently, the $1.78 was due to a promotion McDonald's was running at the time the data was gathered. In the correction the actual amount for Argentina was somewhere in the $3.00-$4.00 area.
"$7.20 in Norway to $1.78 in Argentina"
Norway: High taxes, high cost of labor, high cost of energy, comparitively high cost of real estate, most ingredients probably imported
Argentina: Low cost of labor, lower tax burden, lower energy cost, lower cost of real estate, huge domestic supply of beef cattle
Just look at the price of a steak dinner in NYC versus rural Nebraska, its the same thing. Or for example I just had a Killian's draft for $1 in Kentucky - that would easily be $4 or $5 in NYC or Boston. Its the same currency, just different cost imputs to the business selling the beer. Or are "Kentucky Dollars" undervalued, lol.
No, the beer in Kentucky has the same value as the beer in NYC or BOS. (maybe a little less due fact there are more people in the big cities = more beer to chose from and need beer to be competitive) It's actually the Greed factor that are in those cities. Causes 1) 10+X overvalued real estate, Thank you FED. b) A small but over valued/paid Talent/Professional pool to fill those houses and drink those beers and do nothing to add to the GDP, except waste management. c) Not enough manufacturing, making the dollar "faith based" ie worthless so you can pay 8-10 bucks for a beer at Fenway or Bankster field. d) A great disparity of wealth where we no longer have a middle class. Mostly serf that might enjoy a $1 beer with the boys once or twice a month after they're through cutting the lawn of some bankster's mansion .
I don't see how this shows currency value, when the price of a Big Mac includes labor inputs (high in Norway, low in Thailand) as well as the VAT and other taxes burdens (high in Norway, low in Hong Kong), etc. Then there is the cost of energy (high in Norway due to "green" regs), the local availability of beef (high in Argentina - lots of ranches), and the price of the real estate the McD's sits on (lower in Argentina and Thailand - higher in Switzerland, etc). Really its more of an index of the cost of running a McDonalds in a particular location than a reflection on currency values.
The Big Mac Index reflects the approximate cost of doing business in a given market, and by extention the general cost of living there. Absent any currency manipulation, I suppose it also serves as a first-order approximation of the relative value of currencies. Countries like China manipulate their currency, so the BMI may not be as accurate there.
If McDonald's were a central bank, Ben Bernanke was Hamburglar and Big Macs were the unit of currency, it too would be guilty of manipulation given the belief that since the '70s Big Macs have progressively shrunk in size, and deteriorated in nutrition and overall value; yet they are still sought after and consumed by the masses.
Benny B would be in charge of the lettuce cleaning and burger flipping department.
So you mean the consumers/money supply would get sick (from the dirty lettuce) and die (from under cooking).
I am so sick of your drone shit. STFU!
You big dumbie, the Big Mac index has nothing whatsoever to do with whether a currency is under- or overvalued. The Economist editors apparently taught you nothing.
The Big Mac index is merely another way of telling you where personal incomes are lower or higher, subject to some distortion as McD's targets different social classes in different countries (eg lower in US, higher in China).
It's quite common for a country to have low incomes, and thus a low Big Mac index, and still have an overvalued currency. For example, poor countries getting large amounts of foreign aid.
Likewise, Norway proves the possibility of a high Big Mac index and undervalued currency, as they are purposely suppressing the value of their currency and living less large than they could, in order to pile up reserves for when their resource boon runs out.
If you're looking for currency under/overvaluation, try the current account balance (positive = undervalued).
If you're looking for currency under/overvaluation, try the current account balance (positive = undervalued).
Not too sure about that. I always thought that the balance of payment is a better indicator.
err, the balance of payments is always zero.
the equation is balance of payments = 0 = current account balance - capital account balance - financial account balance
capital account balance is always too tiny to matter
resolve and you get: current account balance ~= -(financial account balance)
hence i say look at the current account balance, although the financial account balance, being just its mirror, is equally good
but just because a currency is under- or overvalued on current account basis doesn't mean it's likely to correct anytime soon, depends on the trend of the balance of investment inflows/outflows and central bank foreign exchange reserves policy.
A Big Mac Meal is 24HKD in HK or about 3USD. But the more important development is you can now buy a grilled chicken salad for about the same price. I'm lovin it!
I was recently in Thailand for 2 weeks and yes the Baht is seriously undervalued on Soi Cowboy.
http://1.bp.blogspot.com/_WBTU2J9p3E8/SUf9rIWvVbI/AAAAAAAAEIk/0VR8cRbD2s...
I'd like to see the DOW graphed in Big Macs. You know, like gold ounces.
I see Mexico is relatively cheap at $2.50. Are we sure it's beef in all these countries?
A few months ago I was in Nepal Katmandu for business. I felt like going Mac because over there all the crap they eat is mostly veggy. So I felt like eating meat, a good old Mac. Hhhmmm....
After passing 3 security guards at the entrance, I went to the counter and wanted to order... I didn't recognize A SINGLE BURGER! Not one with meat on it!
I got out, and took a cab to the closed KFC. And man! I felt like at home!
Don't compare burgers anymore, they are all diferent all over the world. But when you see a KFC, nuggets are just like at home! A 100% perfect copy.
The only difference I could see was that the entire staff where hot Azian chicks. At home, the staff always makes you look skinny, over there you get that feeling of: Should I really take the family portions all for myself?
KFC ROCKS! :)