What does the UK Christmas sales data explain?

During the Christmas period in 2018, some UK retailers performed better than others. The online fashion group, Asos, announced a profit warning while Next (a fashion firm that targets middle market), John Lewis (a traditional department store group) and Dunelm (homewares retailer) performed better than the expectations. Of course, it will be more interesting to have some figures announced by Amazon, but the data have not arrived yet.

It would be too rush to conclude that the online shopping has reached its peak just given the disappointing figures by Asos without any information about the biggest online store, Amazon. However, we can see that the department store has gained more attention from the consumers that people are still enjoying street shopping in a nice environment. People have enjoyed the convenience of online shopping, but  convenience is not the only concern that consumers have. Some people also enjoy shopping experience rather than simply buying some products, they like to see, touch and try the products. Moreover, some people see shopping as some luxury spent with family and having some food and even watch some films when they are out for shopping. Such experience will never be gained from online shopping.

Moreover, the market confidence in the UK did not seem very impressing. The Christmas sales were not impressive overall, so far it seems there were more retailers underperforming during the Christmas period than those who performed well. This should provide some worrying signals about the UK economy, especially after the sharp drop in the UK financial market in 2018 Q4.

Can the negotiation go well?

What is the New Year's biggest news so far? The obvious answer is the negotiation going on between China and the US. The market has been optimistic about this negotiation that the market has been up since the negotiation begun. The start of the negotiation of course is a piece of good and exciting news for the global financial market, as it brings some hope of a coming end of the trade tension between the world's largest economies. When the two largest economies are fighting against each other, other economies on the earth will also be hurt. However, here comes another question that how likely the two countries will end the tension between them.

Both countries have incentives to end the tension right now. China is facing an economic slowdown that China wants to end the tension as soon as possible as the economy which depends on exporting is hurt by the ongoing tension and after resolving the trade problem with the US, it is possible to boost up its economic growth. Meanwhile, although the US economy seems not to be affected by the tension significantly as the numbers look good, the US administration is facing a political fight back at home. The administration has been attacked for many political matters; however, the tension that the administration built has been widely attacked by the US business circle which the US president Trump certainly has a special feeling about. Trump has been doing favours for the US business circle and the US wealthy class by cutting their taxes. Moreover, because the tension has a wide negative impact on a wide range of people, this has been attacked by his oppositions. Trump wants to have something to show to American people that he has achieved something by the tension he created. Therefore, the US administration wants to end the trade tension with something they can take credit of.

Therefore, although both countries have incentives to end the trade tension between them, it does not necessarily mean that the tension will certainly end, the outcome depends on how both countries want to exit the situation. I am not very optimistic about the outcome of the negotiation given the aggressiveness we have seen from the US administration.

When are firms starting competing in an oligopolistic market?

Basic game theory tells us different strategies lead to different market outcomes, the two main oligopolistic setups are Bertrand and Cournot. In an oligopoly with Bertrand competition, the market price will be the same as the price in a perfectly competitive market. However, in the real world, we do not always see a market with homogenous products. In addition, there are many factors that determine a firm’s competitiveness and profitability. Today I would like to talk which factors make firms willing to compete with each other in an oligopolistic market.

First, when companies are free to increase their productions, it will make competition more likely to happen, because if there is a production cap, the firm cannot capture a market share beyond a certain level. Competition is only sensible when a company is able to increase its profits while a production cap places a cap on the company’s profitability in the market. Secondly, it seems easy for companies to get market shares from others in the market. For example, when phone makers saw Apple gaining much larger market shares from traditional phone makers, they thought they could adopt similar strategies and challenge the existing traditional players. Thirdly, when companies see that the market size is expanding and a large market has not been touched yet, they will compete to capture more market size, because this will increase firms’ revenues.

Of course, there are other factors and often competition happens when a new sector just appears.

How long will the US government continue its shutdown?

The US government has been shut down for since 22 December 2018 and it does not seem that the shutdown is close to its end while the US President and the Democratic Party which has officially taken control of the House do not seem to compromise on this issue. The Democratic Party claims that they will not give a penny to fund the US President's Wall plan and the US President claims that he will keep the government shutdown till he has got funding for his Wall. If neither side is willing to make any comptonization, then the US government will last forever, just like that the US President Trump claims that the government can last "for years".

The US government was shut down several times in the past time, but this shutdown is different from the previous ones. In the past, all sides surrounding the shutdown wanted to reopen the government as soon as possible, because no one was clear to be blamed for the shutdown and all sides were blamed. This one is different, before the shutdown, Trump claimed he was happy to take the credit for the government shutdown. Since Trump claimed he was happy to take the credit even he tried to make the Democratic Party take the credit for the shutdown instead of him, the Democratic Party believes that the general public will mainly blame Trump for the shutdown, so they will not make any comptonization which also likely makes them seem weak. On the other hand, the Trump administration claims that building the Wall holds Trump's campaign promises.

Overall, the shutdown is highly likely to end in the near future. I do not want to make any guess about when the shutdown will end, because Trump loves uncertainty and unpredictability.

What happened to Apple?

Apple's share price fell by over 9 per cent today, following the news that Apple cut its Q1 guidance from a range of $89B-$93B to $84B. Tim Cook, the CEO of Apple, also talked about the China-US trade tension would be a challenge that Apple would face in Q1.  People have been talking about if Apple is in its decline for years since Steve Jobs passed away; now I personally think it is the time to conclude that Apple is definitely in its decline. 

Apple has been dependent of its iPhone sales heavily for years. Although some Apple products are also popular and amazing, such as iPads, other Apple products simply do not have the ability to generate revenues which possible match the revenues generated from its iPhones. Nowadays the smartphone market is very competitive that there are not only many smartphone makers, but also each smartphone makers are producing various lines of smartphones which match different needs of different types of consumers. In some way, the smartphone market is still an oligopolistic market that the main competition is between Android phones and iOS iPhones. However, now smartphone makers are producing different distros of Android on their smartphones. Such move does not only increase the competition within the Android phone market but also increases the competition between Android and iOS, since some Android distros are a lot like iOS and provide even more functions which make them more competitive when comparing with iOS. Apple's iPhones are becoming more and more expensive but having less and less surprise, this is not appealing for consumers. In China, there are many local players who also produce very good smartphones, such as Xiaomi, Huawei and many others. In fact, a large proportion of smartphone producers are Chinese companies. Therefore, Chinese consumers have more choices and face better pricing policies by these producers, and why do they still have to choose Apple? Furthermore, the trade tension between China and the US is another big issue. The tension will make Chinese people more hostile towards the US, so they will prefer their local products rather than American products. 

Overall, Apple is losing in the Chinese market because of the trade tension and also losing the battle against the Android phones because Apple does not produce much surprise nowadays while Android phone producers are catching up in this game. 

Christmas Sales

For public listed retailers, Christmas sales have significant impacts on their share prices. John Lewis claimed that its Christmas sales had been 'very strong' in 2018, and its strong sales helped other retailers to advance their share prices as well that Next's share price rose 4.5 per cent. However, would the Christmas sales provide a reliable prediction of a retailer's value? Christmas sales would definitely improve retailers' quarter revenues, but such improve is not sustainable as Christmas sales were strong last year does not mean Christmas sales will be strong this year or the sales throughout this year will be strong. 

However, the Christmas sales can have some interpretation about the performance of retailers. First, it can indicate which retailer is the favourite choice of consumers. When two retailers offer similar discounts, the one which had higher Christmas sales is more likely to perform better throughout the next year than other one is. Secondly, the numbers can provide information about how consumers like to make their consumption. When comparing the proportion of purchases made online last year with the proportion the year before last year, we can draw a trend for online shopping. We might see that the advance of online shopping is close to an end since people want to make their decisions after touching and trying for certain products or we might see that online shopping is continuing advancing. Thirdly, Christmas sales could reflect people's expectations about the coming year. If people do not expect they will have a good new year, they are likely to save more and spend less on Christmas shopping; and vice versa. However, this is not always true, since during Christmas, people can enjoy incredible discounts; therefore, some people may buy even more to avoid more expensive shopping in the near future and save some future money if they expect a bad year is coming. 

What makes a super power?

Martin Wolf, the chief economics commentator at the Financial Times, wrote an article called “The future might not belong to China” on the Financial Times (https://www.ft.com/content/ae94de0e-0c1a-11e9-a3aa-118c761d2745). He suggests in this article that he borrows some argument by Capital Economics, an independent research firm to show that there are some downside risks in the Chinese economy that prevent China from becoming the next super power. I conclude from his article that there are these several main downside factors. The first is the rapid debt accumulation which helps to generate higher investment and higher growth makes China more vulnerable to a sharp deceleration. The second one is that China is too dependent of the growth generated from high investment that Martin Wolf believes that consumption is crucial to generate sustainable economic growth. The third one is that the working-age population is declining, which can negatively the competitiveness in labour wage and the potential production frontier. These three factors Martin Wolf believes can collaborately contribute to preventing China from becoming the next super power. Furthermore, he also mentions that factors which make other countries more likely to become super power. For example, he mentions the arrival of artificial intelligence can help the US to maintain its power as the world super power. 

However, some counter arguments can be drawn. First of all, China does read the history and know how Japan losts its chance of becoming a world super power, so the government is aware of the debt level and the high investment and the government knows it is important to make the economy better structured. Secondly, the arrival of artificial intelligence is not a bad thing to China as well. China is also investing heavily on artificial intelligence and robotics, as Martin Wolfs mentions in his article that China is facing a declining working-age population, the arrival of artificial intelligence can help China to counter the issue of ageing population. Thirdly, all countries have their advantages and disadvantages. China may have some disadvantages, but it does not mean other countries do not have any serious disadvantages.

Overall, of course I am biased since I am Chinese, and I do believe China is a very strong competitor in the race of becoming a world super power. Moreover, the number of world super power does not necessarily equal one that during the Cold War we saw there were two world super powers at the same time.