Big Mac Index July 2015

The U.S. dollar has been on a tear lately.  Its value relative to a basket of other currencies that Atlas follows has been increasing steadily since the middle of June 2015.  The measure of this move, combined with its rapidity, has caused more than a few eyebrows to lift.

Understanding why this surge has elicited some concern from various quarters can be laid to a variety of expected results, some contradictory.  For instance, a stronger dollar could hamper our exports, causing concern among domestic manufacturers.  Simultaneously, it could boost our purchases from other countries that see their products more affordable in dollar terms as their currencies fall in value.  Since some attribution for this rise is given to perception that dollar-based interest rates are soon to climb, the IMF’s recent suggestion our Fed delay any such hike is interesting, suggesting perhaps their concern about Yankee bonds outweighs trade issues.

If all that sounds like a load of gobbledy-gook, allow me to take a different tack.  Somewhat infrequently, The Economist publishes a study on purchasing power parity (PPP).  It asks and answers how much items as close to identical as possible currently cost in countries around the world.  Given strict quality controls combined with ubiquity, this study chooses to use McDonald’s Big Mac as the standard.  By taking the price of that delectable in Japan for instance, and converting it into our dollars, we find a Big Mac there costs just $2.99, a deal relative to the $4.79 average cost stateside.  Russia had placed sanctions on the McDonald’s in Pushkin Square as push back against the sanctions we levied for their unfriendly incursions.  Now that Putin has had them lifted, the comparative cost of such a meal there is a measly $1.88!  In fact, should your palate be so inclined, only Switzerland and Norway are more expensive and to be avoided when taking the grandkids out for dinner.

Should we see the cost of this symbol of American influence decline locally, it might portend either incipient deflation or a temporary surfeit of cows.  Alternatively, a rise might suggest an outbreak of Brucellosis or rising wages in the service industries.  As a global standard of PPP it suggests U.S. markets are the place to be, especially in view of monetary concerns elsewhere.  And so long as fixed-income rates stay extremely low, a corollary to our currency’s favorability, equity choices will likely also remain popular.  Chew on that for awhile.    (by J R)