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Five Things You Need to Know: PBOC: Dollar to Weaken Further, Inflection Points, Why There Oughta Be a Law..., Not Loving It, I'm a Huge Art Fan!


What you need to know (and what it means)!


Minyanville's daily Five Things You Need to Know to stay ahead of the pack on Wall Street:

1. PBOC: Dollar to Weaken Further

Hey, guess who else is now bearish on the dollar... the People's Bank of China.

  • China's central bank (PBOC) said that it is concerned over a possible slide in the US dollar if there is a widespread move to sell off dollar assets.
  • Even more worrisome for the now nearly unanimous consensus that the U.S. dollar is doomed is that the PBOC warned that Asian oil producing states may need to diversify their dollar holdings to avoid risk.
  • For China a weaker dollar could mean an influx of investment, which could in turn stoke domestic inflationary pressures.
  • China says it has been trying to slow economic growth to avoid a possible overheating in some sectors of the economy.
  • Right. Meanwhile, M2 growth in China rose 17.1% year-on-year at the end of October, ahead of the 16% rate the government says is its target for M2 growth.
  • To be fair, China has raised interest rates once and hiked the reserve requirement ratio on bank deposits three times this year in order to slow the economic expansion.

2. Inflection Points

While the focus has been on the dollar in recent months, the real action is in the euro.

  • This morning, as expected, the European Central Bank raised interest rates another 25 basis points to 3.5%.
  • The ECB also raised growth targets for 2007.
  • The ECB had previously forecast 2007 growth between 1.6% and 2.6%, with inflation between 1.9% and 2.9%.
  • However, Jean-Claude Trichet, president of the European Central Bank, said it would be "wrong" to conclude that the central bank will be lifting interest rates again in February.
  • Meanwhile, the euro, dollar and the yen are each at important technical inflection points... though these inflection points are not quite where consensus might believe.
  • The euro has risen 2.7% against the dollar since Thanksgiving.
  • Meanwhile, the dollar has dropped just 1.5% versus the yen.
  • But what about the carry trade? Are equities not in danger of seeing a similar fate that a sharp upward adjustment in the yen this past Spring produced?
  • The key is likely in the orderly movement (so far) of the currency movements.
  • Take a look at the two charts below:

    Yen, Disorderly, April 2006

    Yen Today, Orderly?

3. Why There Oughta Be a Law...

Browsing through some blogs this morning we stumbled upon this nugget from the files of Harvard economics professor and former chairman of President Bush's Council of Economic Advisors Greg Mankiw.

  • Citing a report in the exciting publication Tax Notes Today, Mankiw notes some interesting ideas on settling the growing gap in wealth and income distribution from Yale economics professor Robert Shiller.
  • The IRS should be instructed to automatically adjust tax rates to keep economic inequality from getting worse, Shiller says.
  • Shiller developed the proposal with Len Burman, director of the Tax Policy Center, and the two are planning to write a book on the idea, the report excerpt on Mankiw's blog says.
  • "We need a standard or principle of income inequality. We don't have one now," Shiller said.
  • Inequality provides motivation to work harder and benefits hard work, he said, so "we do want some inequality, but we don't have any clear idea about where we're going and what is appropriate."
  • Shiller calls such a standard "inequality indexation."
  • It would instruct the IRS to adjust brackets and rates whenever inequality worsened beyond an agreed-on level.

The path of the richest men is
beset on all sides by the inequalities
of the selfish and the tyranny of poorer men.

4. Not Loving It

According to This London, McDonald's is closing a franchise in Tavistock, Devon, because the town is simply "too healthy" and produces too much good food to support the fast food restaurant.

  • The fast food chain in Tavistock, Devon, simply wasn't being used enough by locals, This London reported.
  • John Taylor, chairman of Tavistock EatWise campaign, said: "Because of the quality of our local food McDonald's has not been able to compete."
  • So after seven years struggling to make ends meet in a town that has reportedly won many accolades for the quality of its food, McDonald's will close the restaurant this Saturday.
  • Earlier this year Tavistock won the title of Best Food Town in the South West of England.
  • Haha, for a minute there I thought you were talking about England.
  • We are talking about England.
  • Wait, Home of Black Pudding?
  • Yes, Tavistock, Devon is in England.
  • Toad in the Hole England?
  • That's the one.
  • Jellied Eels?
  • Bubble & Squeak?
  • Pie and Mash With Parsley Liquor?

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5. I'm a Huge Art Fan!

Striptease is an art form comparable to ballet and theater, a Norwegian court has ruled, according to the United Press International.

  • A Norwegian appeals court has ruled that striptease is an art form and should therefore be exempt from value-added tax (VAT).
  • The case began because owners of the Diamond Go Go Bar in Oslo had refused to pay VAT of 25% on entry fees as tax authorities demanded.
  • "Striptease, in the way it is practiced in this case, is a form of dance combined with acting," the judges ruled.
  • The strippers noted tickets for the Chippendales, a male strip act, were exempt from the tax because the act was deemed an artistic performance.
  • In the appeals court verdict, Judge Ulee Skartland noted, "I don't know a lot about art, but I know what I like... baby."
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