Starbucks Index
If someone were to ask us how much their currency is worth, we’d ask them how much it costs to buy a tall latte. Not necessarily because we’re thirsty, although anytime is a good time for a latte, but because the price of a tall latte is an excellent indicator of a currency’s strength against the U.S. dollar. At least, that’s the thinking behind the “Starbucks index,” which basically says that when lattes cost more in one country than they do in another, the first country’s currency is more valuable.
Of course, that’s assuming there’s the same level of demand for lattes in both countries. If in one country people drink lattes all day every day, and in another everyone despises them, then obvi they’re going to cost more in Country #1. That’s just basic supply and demand. But let’s assume everyone everywhere loves lattes equally. If a tall latte costs $5 here in the United States and $6 in Russia, we could say, “Wow, that’s more.” But if we also take into account the currency exchange rate between the American dollar and the Russian ruble, we might find that $6 in Russia actually feels more like $13 or $14 here. It’s this number that the Starbucks Index is looking at.
Is the Starbucks Index the same thing as the Latte Index? Kind of, except that the Starbucks Index is the brainchild of The Economist, and the Latte Index is handled by the Wall Street Journal. Same idea, though. Might make us think twice the next time we treat ourselves to a latte.
Related or Semi-related Video
Finance: How Do You Judge the Performanc...132 Views
finance a la shmoop. how do you judge the performance of an index fund? very
carefully. actually performance means something very different when it comes
to an index fund versus an actively managed fund. in an index fund the
manager doesn't really do anything per se other than rebalance the indices so [man sleeps at a desk]
that they conform to whatever the product was that you bought in the first
place. for example a technology index fund might claim that 12% of its
holdings will have wireless telecommunications related stocks as a
target, but never less than 10% and never more than 15% .and in most cases the
actual stocks that go in the fund are identified beforehand like before the [man smiles at camera]
funds actually really launched. and the relative weightings of those investments
is also predetermined .ie the fund might target having three percent of its total
as shares in Verizon. but if Verizon suddenly does extremely well and doubles
in price in a short period of time well the index fund might have to sell
shares of that stock so that it's weighted holding amount won't pierce the
maximum weighting of 15%. but all this relates to the composition of the fund [pie chart]
not necessarily the performance. since an index fund is a reflection of a given
area like these examples they conform to a general theme, like the Vanguard total
stock market index. the broadest based reflection of the overall market. like
the S&P 500 plus Nasdaq plus the New York Stock Exchange indices or another
one might be the Vanguard small cap Value Index, largely companies under a
few billion bucks in market cap which trade at relatively low price to [value index listed]
earnings ratios ie they are value stocks rather than say growth stocks. all right
next one might be the Vanguard emerging markets stock index. that one's all about
third world countries trying to become second worlders how's that Nigerian
oil exchange looking? or what about investing in Vietnam these days? the
Napalm is mostly washed away by now. and then move it on. yep there's the Vanguard [sink with the water on]
intermediate term bond index, and yes there are bond index funds as well.
intermediate just means that the bonds in this set of bonds mostly come due
within about five years or so. the bottom line is that an index fund
isn't really a managed fund. it's just a reflection of whatever group of stocks
or bonds it is supposed to reflect. so if an index performs poorly, all of the [man holds stock]
fault lies in the one who chose that particular index fund, not the manager of
the fund because well there basically wasn't one, so if your fund as poorly and
you want to scream at the idiot moron financial manager who screwed up your
retirement by picking a bad investment vehicle ,well go find a mirror. [woman grimaces and cries]
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