Playing With Fire?

John Mauldin points to a recent piece of research from GaveKal Research Limited (Hong Kong, Stockholm and New York) on the Chinese RMB peg to the US dollar. I cannot say I’ve seen their work before, but it is rather intriguing:

"As we never get bored of pointing out, structural bear markets and deflationary busts only happen when policy makers commit one, or several, of what we call the "five cardinal sins". The five sins are:

1. Protectionism
2. Tax Increases
3. Increases in Regulation
4. Monetary Policy Mistake
5. A War.

The common thread behind these five policy mistakes is that, when committed, they reduce the returns on invested capital and consequently, asset prices are pushed lower. And this puts the financial sector in trouble etc…

Now why do we return yet again to this long-held, and long-exposed, belief? For the simple reason that we are very confused by the recent protectionist rhetoric coming out of Washington DC. Indeed, the efforts to push China to revalue appear to us to be both clumsy, and dangerous.

It is dangerous because it is playing into the hands of the protectionist lobbies all over the world. It is clumsy for a revaluation, even a large one, would have no impact on the US current account deficit. Why? Because given the state of excess capacity in China in almost all industries, the costs of a RMB revaluation would simply be passed on to the margin of Chinese companies (already inexistent) and not unto the US consumer. In other words, if China revalued tomorrow by 20%, Wal-Mart would tell its widget manufacturer in Guangzhou: "last week you were producing this for US$1. This week, you will continue to do the same… Or I move my production to some guy in Shanghai/Saigon/Jakarta etc…)." So can China really afford a revaluation?

We will turn that question around and ask you to put yourself in the shoes of a Chinese policy maker. This is the situation you are facing today:

a) you have the world’s worst performing stock market which is hitting 8 year lows);

b) you have the world’s best performing bond market (Chinese 10 years have moved from 5.25% to 3.7% in the past ten weeks),

c) you have industrial production rolling over (weak oil consumption, weak iron ore imports, weak Baltic, weak steel prices, weaker industrial production numbers…),

d) you have real estate activity rolling over (our friend Simon Hunt reports that an "indicator of the real slowdown in real estate is that a major supplier of chiller tubes (chiller units are the central air conditioning units for all apartment and office blocks, hotels etc.) reports a 25% fall in 2nd quarter orders with no visibility for the 2nd half of the year. After talking with his customers, he was told that other suppliers are faring even worse…",

e) inflation has fallen from +5.3% to 1.8% in ten months,

f) M1 growth has fallen from +20% to +10% in the past year…

In other words, nothing in China’s economic data, or market performance points to the need for a RMB revaluation.

And yet, the Bush administration keeps banging on about it? Why?

Explanation #1: Could it be part of a greater geopolitical game? In other words, what President Bush is really worried about in Asia is North Korea. He does not really care about the RMB; he just pretends to care. This allows him, in negotiations with the Chinese, to say: "I will fold on the RMB, if you give North Korea up; in that way, you guys can give up your embarrassing ally without losing face".

Explanation #2: The Bush Administration, given all of the above, is getting worried about the potential for RMB devaluation and is kicking up a fuss to make sure that this does not happen.

Explanation #3: the Bush Administration is clueless and playing with fire.

Meeting clients around the US in the past ten days, it felt that 100% of our clients subscribed to the third explanation. Time and again, we were told that "no way are these guys smart enough for Options #1 or #2". And, while we have never been accused of throwing stones at the current US President, we fear that our clients might be unto something. The current administration is playing with fire.

Interesting. Personally, I find Explanation #1 the most compelling, but we’ll have to see how this plays out.


Playing With Fire?
GaveKal Research
via Outside the Box

Category: Currency, Economy, Politics

Minor Metals

Category: Commodities, Markets

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!


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


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."



Now Playing: A Glut Of Ads
The Big Picture
Patrick Goldstein
L. A. Times, July 12, 2005,1,35978.story

Lefstz Letter
June 5, 2005
(complete sourcing below)

Summer Fading, Hollywood Sees Fizzle
NYTimes, August 24, 2005


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