Federal Reserve Responsibilities Outsourced to China


The Fed Chairman was overheard to remark: “If we can’t do it, maybe they can”

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The Peoples Bank of China (PBOC) announced to day that they
are effectively taking over the interest rate responsibilities from the US
Federal Reserve.

The Chinese Central Bankers announced that, effective
immediately, they are beginning a series of incremental rate hikes in the
United States. The first rate hike was for 10 basis points on the 30 year.

The Fed’s inability to significantly impact long rates
anymore is what led to the outsourcing.

Unlike the United States Federal Reserve, who hold interest
rate meetings monthly, the Chinese Bankers will now meet daily. Look for rate
announcements each day at noon.

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Trillion Dollar Baby
All
tongue-in-cheek analysis aside, today’s actions are the net result of the
United States consuming far more goods or services than it produces. Because of
that, the Chinese have accumulated nearly a trillion dollars of US Treasuries.
That makes them a de facto player in setting our interest rate policy
and impacting our economy.

The brunt of the de-pegging on the U.S. economy will not likely be felt for some time to come. But war-gaming the various scenarios of this new development, we can see that many dangers are apparent. If we play out this scenario to its logical conclusion, we are led to some unsettling
possibilities:

    1) As we have been writing for quite some time now, the Real Estate Complex has been the most robust segment of the U.S. economy. If the Chinese can succeed (where the Fed failed) in raising U.S. long rates, the strongest
part of the US economy is at risk. While we know real estate had to slow eventually,
the question is how fast will it occur, and how dramatically.

   2) US Consumers have grown reliant on ultra low interest rates and ultra cheap Chinese goods. The de-pegging will cause incremental increases in costs, while raising rates. This will negatively impact Wal-Mart, the largest importer of Chinese manufactured products, as well as other Chinese goods resellers.

    3) Some theorists have worried about US reaction in the event of
a Chinese attack on Taiwan. In an unlikely – but possible – scenario, the
Chinese can, at will, and without ever firing a shot, inflict as much
economic damage on the U.S. as if we were at war. Armed conflict becomes
unnecessary when countries can net impact their competitors as if they were at
war.

    4) The United States Dollar is the default currency of the world.

That gives an unprecedented amount of flexibility to US policy makers. Is the de-pegging the beginning of the end for this global currency structure? It’s too soon to tell. But we wonder how this might play out elsewhere.

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What now becomes significant is the basket of currencies to
which the yuan will become ever more pegged. A likely composition will reflect
a basket of currencies in proportion to China’s external trade.

According to the Bank of NY, there are 10 currencies that
make up almost 90% of China’s overseas trade: the U.S., Japan, Hong Kong, EU,
Indonesia, Malaysia, Singapore, South Korea, Thailand and Taiwan.

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China’s top ten trade partners (in Dollars):

The European Union (18.5%)

Japan (18%)

United States (17.5%)

Hong Kong (11%)

ASEAN nations (11%)

South Korea (9.5%)

Taiwan (8.5%)

Russia (2%)

Australia (2%)

Canada (1.5%).

Source: Bank of NY

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It makes some intuitive sense for the PBOC to replace their
US Treasury holdings with an equivalent amount of Sovereign Treasuries of the
currency basket (Hey, that’s what I would do).

The ultimate impact of today’s events will depend upon how
quickly and how much the PBOC decide to sell off some of their US Treasuries.
Unlike the Fed, the Chinese Central Bankers do not believe in much in the way
of transparency. Their plans have been somewhat uncertain.

What is not uncertain, however, is that our Current Account
Deficit has granted a degree of control and authority to another sovereign
nation over our own economy. The net results of that may be determined over the
coming decade . . .

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Why is Movie Theatre Revenue Attendance Declining?

There’s been plenty of chatter about declining movie theatrical revenue attendance. You just know the MPAA is itching to tie this onto piracy somehow and thus get some favorable legislation.

Let’s nip this one in the bud, shall we? 5 6 7 factors are hurting theater attendance:

1) Social factors eroding theater environment (talking, cell phones, babies crying, etc.); 
2) Sacrificing long term relationships with theater-goers for the increase in short term profitability (commercials, no ushers, etc.);
3) Higher quality experience elsewhere (Home theater);
4) Declining quality of mainstream movies;
5) Easily available Long Tail content alternatives (Netflix, Amazon);
6) Price;
7) Demographics: Aging babyboomers simply go out to movies less.

While content quality has indeed worsened over the years, it shouldn’t be the main concern this Summer:  As of late, there have been a spate of movies which have been either well-reviewed (Batman Begins) or had good word-of-mouth (Wedding Crashers) or incredible special effects perfectly suited to the big screen (Revenge of the Sith or War of the Worlds).

So what else might be the source of declining theatrical fortunes?

Well, how about the movie theater-going experience itself? The adventure of heading to a cineplex is becoming a less and less pleasant form of entertainment. Many of the headaches involved have been painfully detailed by Bob Lefsetz’ readers (see their ordeals below).

Note that we are not even discussing content quality at this point.

Then there are the adverts. A recent L.A.Times article – Now playing: A glut of ads — points out that even studio executives were stunned by 15 minutes of commercials theatre goers had to endure after paying their 10 bucks:

"As head of production at New Line Cinema, Toby Emmerich is not your typical moviegoer. So when he wanted to see "War of the Worlds" the other night, his choice was between seeing the film in a theater with a tub of popcorn or watching it in a screening room at Jim Carrey’s house, with a private chef handling the culinary options. Despite this seemingly loaded deck, Emmerich opted for a real theater.

"I love seeing a movie with a big crowd," he says. "But I had no idea how many obnoxious ads I’d have to endure — it really drove me crazy. After sitting through about 15 minutes of ads, I turned to my wife and said, ‘Maybe we should’ve gone to Jim Carrey’s house after all.’ "

When DreamWorks marketing chief Terry Press took her young twins to see "Robots" this year, she said, "My own children turned to me and said, ‘Mommy, there are too many commercials!’ Now, when the lights go halfway down, I’m filled with dread. The whole uniqueness of the moviegoing experience is being eroded by all the endless ads."  (emphasis added)

So while the industry laments piracy, consider if you will why going to the theatre has become so much less enjoyable than watching DVD films on your own big screen in the comfort of your home theatre.   

The theatres have adapted Radio’s disasterous Hamburger Helper approach: Short term increases in profitability in exchange for alienating your core audience, who eventually seek out a more enjoyable substitute. Quite frankly, I’m astonished the film industry has (contractually)
allowed theatre owners to degrade their copyright protected product by
diminishing the experience so dramatically.

As Radio has so painfully learned, the end result is a big fat Buh-bye!

To a large degree, this is  a zero sum game: The theatre chains losses are Best Buys’ gain; Is it any surprise that high quality home sound systems and large screen TV sales have gone through a ginormous growth spurt over the past 5 years? Even as the lowest common denominator productions falter, Netflix (and its rivals) allow home theater owners to enjoy a Long Tail orgy of DVD content. 

Yo, theatre owners, when a segment of retail electronics called HOME THEATRE explodes in sales, that is your wake up call. You seem to have been oblivous, and missed the bell ringing.

Good luck getting the toothepaste back in the tube!

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UPDATE: July 25, 2005 7:37pm
At Slate, Edward Jay Epstein explains the numbers behind decreased attendance on increased revenue. Fascinating stuff . . .

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UPDATE II: August 30, 2005 12:07pm
A weekend NYT article, titled Summer Fading, Hollywood Sees Fizzle quotes an exec as blaming the quality of flicks:

"Part of this is the fact that the movies may not have lived up to the
expectations of the audience, not just in this year, but in years prior," said
Michael Lynton, chairman of Sony Pictures Entertainment, which had some flops
this summer, including the science fiction action movie "Stealth"
and the romantic comedy "Bewitched."
"Audiences have gotten smart to the marketing, and they can smell the good ones
from the bad ones at a distance."

 

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Sources:
Now Playing: A Glut Of Ads
The Big Picture
Patrick Goldstein
L. A. Times, July 12, 2005
http://www.latimes.com/business/custom/admark/la-et-goldstein12jul12,1,35978.story

Lefstz Letter
June 5, 2005
(complete sourcing below)

Summer Fading, Hollywood Sees Fizzle
By SHARON WAXMAN
NYTimes, August 24, 2005
http://www.nytimes.com/2005/08/24/movies/24slum.htm

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Continue to see Lefsetz’ readers critique of the theater experience . . .

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