The smartest guys in the room (CEO’s of major financial institutions) were not so smart after all. Their own economic forecasts asserted that home prices would continue to climb at 20-50 percent per year indefinitely. And they made HUGE housing loans - lots of them - to anyone with a heart beat. Jobs and down payments were optional. That house of cards is still crumbling, proving just how insanely stupid those CEO’s were. Thank you for your wise economic insight, but I’ll stick with the more accurate Big Mac indicator for my future economic insight.

The Big Mac indicator was introduced by the Economist in 1986 as a humorous illustration, but has been published every year since. It is based on the rule of purchasing power parity, which states that exchange rates should move to make the price of goods the same in each country. The price of a McDonalds Big Mac in the United States ($3.57) is used as the base for comparison. From the chart below, the Big Mac indicator is telling us:

  • The Chinese Juan is undervalued by 50 percent
  • The Thai Baht is udervalued by 50 percent
  • The Euro is overvalued by 50 percent
  • The Norwegian Kroner is overvalued by 121 percent

Currency exchange rates don’t make such dramatic changes to parity overnight, so there is still plenty of time to make your currency bets on what the Big Mac is telling you.