Is Japan enjoying a NICE period?

NICE stands for non-inflationary continuous expansion, those countries have high continuous growth but low inflation can be said that they are experiencing a NICE period.

The Bank of Japan has abandoned its plan to hit 2 per cent inflation target around 2019, this does not create a shock in the market as it is already believed. Japan has been experiencing a long period of low inflation, and the danger of deflation has threatened the Japanese economy for many times. The Bank of Japan has almost tried every channel to create inflationary pressure for its economy, and the 10-year government bond yield is capped at 0 per cent. Meanwhile, the Japanese wage growth had a surprising increase in March. According to the official report, the earnings (not adjusted for inflation) gained a 2.1 percent year-on-year rise. In general, when a country experiences a rise in wages, the economy should also expand. So wage has always been an important indicator for economic growth (almost equally important as the GDP growth).

Then we can see Japan has a low inflation rate and is likely to have a high economic growth, so maybe we should say Japan is experiencing a NICE period. It is undoubtedly that Japan is experiencing low inflation; however, its economic growth is questionable. The supporting rate of the Japanese Prime Minister is low due to several scandals. More importantly, his economic policies (often referred as Abenomics) has not been felt by many of the Japanese population. This might indicate that the wage growth may not be fairly shared by the entire Japanese population. Japan has actively tried to find more trade partners that China, Japan and South Korean are actively negotiating trade issues.

Overall, the Japanese economy might be partially qualified as NICE, but there is some uncertainty ahead Japan and the wealth distribution within the Japanese society could be questioned.

When a "total war" comes

Martin Wolf, the chief economics commentator at the Financial Times,  wrote an article on Financial Times, "Donald Trump declares trade war on China" (https://www.ft.com/content/dd2af6b0-4fc1-11e8-9471-a083af05aea7). He pointed out that no sovereign country would accept such humiliating demands from the US. If his opinion is true and China does not accept the demands from the US and enters a trade war with the US (what I think is likely), then what will face the world economy?

When a trade war starts, both countries will increase their tariffs on each other, and the volume of trades between the two countries will drop dramatically. The US will create more opportunities for countries like Vietnam which also export relatively cheap products to lower the cost-pulled inflation within the US economy. Meanwhile, China will create opportunities for other developed countries who have high technologies, as China needs to seek alternative companies that also provide high-tech products other than American companies. The trade war between these two countries actually create more opportunities for other countries, since both countries have enormous sizes of markets. The US has some political influence on other countries; however, it does not have the power to limit other countries not to export high-tech products to China.

To conclude, when China and the US are fighting a trade war, it opens more opportunities for other countries.

The oil price and the US bond

The oil price rises again due to the Venezuela and Iran worries. It seems 2018 is very likely to have great pressure on the oil market. Russia and the US are competing their political influence in Syria. Meanwhile, China and the US are fighting over trade, and the US has put almost unreasonable demands on the negotiation table with China. These all create global political tension.

When the global tension increases, we will expect more uncertainty appears in the global market and the financial market should fall on increasing uncertainty. On the other hand, investors will switch to more secure assets, such as the government bonds. The US bonds have been investors' best choices for safe security holdings. However, under today's circumstance, some investors may ask if the US Treasury Bills are still solid secure.

I do not think that the results of the US-Russian competition and the US-China competition will affect the security of the US Treasury Bills, unless if a war happens. As we can see that although Britain is no longer that Empire, its government bonds remain solid secure and I believe this will also happen to the US government bond no matter the results of the competitions the US is fighting.

Is it possible for China to cut $200bn trade deficit?

The US demands China to cut $200bn trade deficit in order to end the trade war between the two countries. Let's discuss if China is going to accept this deal. The deal does not only contain the $200bn trade deficit cut, but also includes others including opening up China further to US investment and a removal of the foreign ownership caps. Of course, China also has things to bring to the table, China demands Washington to drop its longstanding objections to China being treated as a market economy in the WTO and threatens to treat the US as a non-market economy to counter it.

By comparing the asks from two countries, the US is easier to accept the deals than China, as the US asks are a lot more specific. I believe if China accepts the demands made by Washington, Washington is very willing to accept the demands from China, since after shrinking trade deficits by $200bn, there is no harm for the US economy to accept China as a market economy.

$200bn deficit cut means China has to increase its imports by $200bn and the increase in its exports to the US. This is a significant large amount. If the US did not place any constraints on its exports to China, this goal would be easy to achieve, since China demands lots of high-tech products from the US and even I think China is also very happy to buy American fighters and other arms. However, we know the US has a very strict rule on its exports to China, so this goal is not easy to achieve. Without making further negotiation, this deal is not acceptable by China. As if China imports products that can be produced at home, it can create harm on its own companies as well as economy.

The US wage fails to rise according to the latest report. After the Fed starts to tighten its monetary policy, the US economy would face more pressure, so it is good for the US to end the trade war. From China's point of view, the problem is much more complicated. If all countries can unite and fight back, then it is beneficial for China to continue to fight this trade war as it can get more market shares in the world market. However, if one country makes a deal with the US, it can create a domino effect that other countries start to make deals with the US, then it is a loss for China to continue the trade war. If China can be the first one to make a deal with the US, it can win comparing with other countries which fight trade wars with the US. Comparing the three states, it is likely for China to be the first to make a deal with the US. I think that the US does not want a long lasting trade war, so the US can give up certain things to win the deal, for example the US can lift up some restrictions on its exports to China and give up some terms in its deal.

Overall, I think that China may accept the $300bn deficit cut but demand the US to lift up some restrictions on its exports to China. If the US allows certain high products to export to  China, then this deal could be a short term gain for the US and a long term gain for China.

Should Tesla have been punished by Elon Musk's bizarre moment in the Q1 earnings call?

Today the stock price for Tesla falls in respond to Elon Musk's bizarre behaviour in the company's Q1 earnings call. Here is a question that if the market should punish Tesla because of his bizarre behaviour. Then we need to answer our first question what the Tesla stock price is built on. 

The market value of Tesla is similar to the market value of General Motor which generates much higher revenues and earnings as well as cash. It indicates that the market value of Tesla is built on investors' expectations of Tesla's future growth and profitability. To boost investors' expectations, the company has to tell "good stories" about itself. Unfortunately, Elon Musk this time failed this time to tell "good stories" to the institutional investors who have been hugely disappointed since the earnings call; from this point of view, Tesla should have been punished by the market, especially those institutional investors. During the earnings call, Elon Musk answered ten questions from a YouTube blogger, who represented a group of retailer investors. This might have been caused by this group is fans of Elon Musk and Elon Musk loved to answer people who love him. In addition, Elon Musk seemed to want to change the culture of the earnings call and make the earnings call more interesting to him. Maybe Elon Musk works long hours, he has not been energetic during most of the earnings call (none I am aware of). The last US presidential election showed that the traditional force was defeated by the new force (such as Facebook), would this be true in the financial market? I do not think so because the financial market, especially the US financial market, is dominated by financial institutions and retail investors are not as influential as institutional investors. 

Overall, Tesla should have been punished by the market and Elon Musk's behaviour did affect the fundamental of the stock because it has lowered investors' expectations that crucially contribute to the market value of Tesla.

Why can free Wi-Fi boost the consumer number for coffee shops but not McDonald's?

Many coffee shops including those large chains, such as Starbucks, Costa, provide their consumers with free Wi-Fi, and many analysts argue that this policy has significantly boosted these coffee shops' consumer numbers and revenues. Similarly, fast food chain McDonald's also starts to provide their customers with free Wi-Fi, but their customer number has not been boosted up significantly. This is because of the differences between the sectors' key businesses. 

Without Wi-Fi, a significantly larger proportion of McDonald's consumers choose to sit in McDonald's comparing with coffee shop consumers, because McDonald's sell proper meals (even though it is fast food) and coffee shop consumers buy drink and their willingness to sit down and drink coffee is much less. Therefore, when providing free Wi-Fi, coffee shops give their customers more incentives to sit in their shops and this will increase the likelihood of their customers to order more coffee while they are sitting in the coffee shops. In addition, the customer groups for McDonald's and coffee shops are different. In general, coffee is more expensive than fast food, so coffee shop customers should have higher incomes than fast food chain customers on average. In addition, it takes longer to drink coffee than to eat fast food, as coffee is hot, especially for those who sit in.  

Overall, the key reason is that Wi-Fi is a complementary good for coffee to greater degree. 

The consumption plan for lifetime

In economics, especially in macroeconomics, there is one important concept that individuals tend to smooth their consumptions over time. This concept suggests that individuals tend to consume above their incomes when their incomes temporarily fall below the average income levels and consume below their incomes when their incomes temporarily increase above their average income levels. However, this may be too idealistic in the real world and the consumption habit in the real world may have a different pattern. 

Firstly, individuals can save when their incomes are high, but they are unable to borrow when their incomes are low. Usually individuals have lower incomes at their early stages of their career but they cannot borrow enough for consume more when they expect their incomes are going to rise, because the financial institutions do not believe their incomes can pay back their loans. Therefore, due to the borrowing constraint, individuals cannot smooth their consumptions when their incomes are low, even though they believe their incomes will rise and afford loan paybacks. Secondly, individuals want to increase their consumption over time. Individuals feel better only when their consumption increases. This will lead people to increasing their consumptions along with their incomes increase to receive more satisfaction. Thirdly, individuals do not necessarily have right expectations about their future incomes. When the individuals do not have correct expectations about their futures, they are likely to have more volatile consumption over time. Moreover, some may involve in the financial market, and this adds more volatility to individuals' incomes as well as their consumption. 

Because of these reasons and many others, individuals may make their consumption decisions based on their current incomes and foreseeable very near future income changes. Under such circumstance, individuals' consumption is tightly related to the economic performance, and this will violate the concept of consumption smoothing.