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An Obvious Trade in the World's Cheapest Big Currency

By Dr. Steve Sjuggerud
Monday, February 5, 2007

You have to dig as deep in the barrel as Pakistan to find a country where a Big Mac costs the same as it does in Japan. 

It's been a while since we put on a True Wealth currency trade... but the time is close to do it once again. 

The last time we put on a trade, the euro crashed by about 20%. At the time (the end of 2004), everyone hated the dollar and loved the euro. But the euro was very expensive, so we went against every trader we knew and bet against the euro... 

In fact, it was the big theme in our True Wealth newsletter for 2005 – "the buck stops here." The buck – the U.S. dollar – did stop then... it rose versus the euro for the whole year in 2005... by about 20%. And we closed out our position with a nice gain. 

Since then, we haven't seen a glaringly obvious trade like that one. Until now...

While in Tokyo, I was surprised... I paid full price at the Westin – an extremely nice hotel in Tokyo. My room charge was about $300 a night. Now I know that isn't exactly a Motel 6 rate... but I stayed at a Westin one night in Paris a few months ago, that was walking distance to the Louvre, and the room charge alone was over twice that (and quite frankly, the room wasn't very nice at all... seriously!).

I'm not saying that Tokyo was cheap... What I'm saying is... by international standards, Tokyo wasn't nearly as outrageous as I imagined it would be. In fact, it wasn't particularly outrageous at all. While there, I heard that Class A office rents in Tokyo are one-fifth that of New York, and one-tenth(!) that of London. Sounds cheap! 

This week's issue of TheEconomist confirmed my thoughts... with its latest "'Big Mac" Index. This index simply compares the price of a McDonald's Big Mac in all the major currencies of the world. 

The theory goes that countries with similar levels of development should have similarly priced Big Macs. A Big Mac should cost roughly the same in Europe and America. But in island nations like Britain and Japan, you could expect Big Macs to cost a hair more. 

The idea works surprisingly well... For example, a Big Mac in Britain has never been cheaper than a Big Mac in the U.S. But in mid-1992, a British Big Mac reached its highest premium to a U.S. Big Mac in history – it was 39% more expensive. The British Pound crashed a few months later... losing a quarter of its value over the next year. The Big Mac Index turned out to be a valuable indicator of an extreme in the currency.  

There haven't been many extremes among major currencies in the last few years – until lately... 

Back in the mid-90s, a Big Mac in Japan used to cost twice what it did in the States. Now, it's 28% cheaper.  
Yes, the yen is cheap now. But that doesn't necessarily mean it's time to "go long the yen" immediately. 

As you can see from the chart, the lesson of the early 1990s was that an expensive currency can get even more expensive. So it is true that the cheap yen could get cheaper... But it's hard to imagine...  

Right now, a Big Mac is more expensive in Argentina, Brazil, Colombia, and Mexico than in Japan. Big Macs are more expensive in Latvia, Estonia, and Lithuania than in Japan. They're more expensive in Turkey and Saudi Arabia. You have to dig as deep in the barrel as Pakistan to find a country where a Big Mac costs the same as it does in Japan. 

The Economist points out the big discrepancy in the current Big Mac prices:"Perhaps the most telling numbers are those for the Japanese yen, which is 28% undervalued against the dollar, and the euro, which is 19% overvalued." 

Time to go long the yen and short the euro? Anyone bold enough for that trade? Not me, not yet. The trend is still against us. But when the trend changes... it will be time to pile in. At that time, the yen will be cheap, hated, and in an uptrend... just the recipe we look for! 

Interestingly, by owning Japanese real estate, you get the double benefit of owning cheap real estate that can go up in value, and cheap yen that can appreciate (by owning the buildings) at the same time. Also, you get the rent that increases in dollar terms as well. 

We have three ways to win... Real estate prices rise, rents rise, and both of those rising in dollar terms as the yen strengthens. It's the making of a great trade that will last for years...

Good investing,


Market Notes

Van Kampen Muni Trust (VKQ)... muni bonds
Silver Standard Resources (SSRI)... silver miner
Pan American Silver (PAAS)... silver miner
Southern Copper (PCU)... copper miner
Companhia Val do Rio Doce (RIO)... iron ore miner
PowerShares Dynamic Pharmaceutical (PJP)... Big Pharma
Agrium (AGU)... agriculture
Deere & Co. (DE)... farm equipment
Bunge (BG)... agribusiness
Terra Industries (TRA)... agriculture
Magellan Midstream (MMP)... oil & gas pipelines
Atlas Pipeline Holdings (AHD)... oil & gas pipelines
Enbridge Energy (EEQ)... oil & gas pipelines
Boardwalk Pipelines (BWP)... oil & gas pipelines
Redwood Trust (RWT)... mortgage REIT
Texas Industries (TXI)... cement
Posco (PKX)... steel
Plum Creek Timber (PCL)... timber
Pope Resources (POPEZ)... timber
iShares Real Estate (IYR)... U.S. real estate doing just fine
iShares Financial (IYF)... Wall Street rakes in the cash
Dow Jones Industrial Average... blue chips continue to lead the market
iShares Dow Transportation (IYT)... Dow Theory is confirmed
Pork Bellies


Japanese Yen, Canadian Dollar
Sugar, Lumber

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