Sunday, September 30, 2012

29S

This weekend’s “29S” and “30S” demonstrations brought people into the squares in Europe’s capital cities. There might have been a million demonstrators yesterday just in Madrid and Lisbon. It is too early to get a good sense of the numbers in Paris and elsewhere today, but those may add up to a quarter million. Some of the signs just say “No” — “no” to the “permanent austerity treaty” under consideration in Europe.

Spain was the model for Occupy Wall Street. If the protests in Europe are so much larger than those of the United States this month it is because the austerity measures are that much more severe. If the United States goes down the same road of bailouts and austerity next year, the same scenes could be seen in New York and Washington.

Friday, September 28, 2012

This Week in Bank Failures

Banks have so far mostly avoided the cost-cutting fad sweeping over the world, but they won’t be able to put off the big cuts much longer. Credit Suisse, Barclays, Deutsche Bank, and Royal Bank of Scotland (RBS) are among the banks announcing new layoffs, closures, and other cost-cutting initiatives this week. Bank of America took the small steps of closing some child-care centers it operates for U.S. employees and cutting staff at its Tokyo trading office. More importantly, it is accelerating previously planned layoffs and closures, a move most observers had anticipated when the cuts were first announced last year. At Credit Suisse, it is the asset management division that is on the chopping block; at RBS, the cuts in investment banking and in Ireland operations will go farther than previously announced.

It is not just banks themselves cutting costs. Banks are requiring some troubled large businesses to meet cost-cutting targets as a condition of operating loans, particularly in the troubled Japanese electronics sector.

Stress tests in Spain were not as bad as European banks and traders had feared. Banks are in financial distress but the capital deficits are less than most previous estimates. Bankia is in the worst trouble, needing €25 billion to keep operating. Spain had previously signaled a need for a €100 billion financial system bailout, but now will probably be asking for between €40 and €50 billion.

Spain unveiled new cuts in government services today, while leaders in France called for an increase in taxes to narrow a budget gap, and Fitch warned of a UK downgrade in the near future. Austerity budgets and sovereign downgrades seem destined to continue for at least the next two years even if economic circumstances begin to turn around immediately. Downgrades are also affecting municipal governments across the United States. Downgrades involving schools and hospitals reflect the loss of federal funds that take effect early next year under Congress’s current budget plans, and those cuts could be far steeper under a budget adjustment proposal being floated by House Republican leaders. A related planned cut in Build America Bonds is affecting municipalities that participate in that federal infrastructure financing plan.

Libor will live on under new ownership, according to a plan released today by U.K. banking regulators. An independent board will supervise the data (still actually collected by Thompson Reuters) and rate computations. The proposal calls for legislation making it a crime to falsify data reports intended for use in base interest rates such as Libor. Bank employees would have to be certified before they could participate in Libor reports. To simplify things, the number of Libor rates will shrink from more than 100 to just 20. Libor indexes in national currencies of countries such as Sweden and Denmark will be phased out quickly. Even with the cutbacks, the report calls for unspecified reforms so that Libor is not so dependent on opinions and rate cards, but reflects actual transactions.

Separately, RBS is thought to be the next bank that will settle Libor fraud allegations with regulators.

Bank of America has filed a $2 billion settlement related to statements to stockholders about its acquisition of failed brokerage Merrill Lynch. The proposed settlement will be reviewed by a federal court.

In terms of the political calendar, tonight would be an opportune time for one low-profile bank closing, and there was one in Illinois. State regulators closed First United Bank, based in Crete, Illinois. It had 5 locations within a 10-mile radius at the south end of the Chicago metro area in Illinois and Indiana. It had $316 million in deposits. Old Plank Trail Community Bank, of Wintrust Financial Corporation, is paying a 0.6 percent premium for the deposits and is purchasing the assets.

The Bo Scandal in a Corrupt China

The scandal surrounding Bo Xilao, who today was expelled from the ruling party in China and referred for prosecution, provides a glimpse into the way a national government can serve as an umbrella for loosely linked criminal enterprises. You have to wonder how many equally corrupt high-ranking officials are still in place. Bo’s downfall came only after he participated (the ruling party believes) in the highly visible murder of a prominent foreigner. Most crime bosses and warlords, you would think, would know to steer clear of such public embarrassment.

Bo and his supporters did a lot of damage before they were “caught.” Bo spearheaded a police roundup that nabbed hundreds of people, most surely innocent workers arrested only because of their involvement in competing businesses. Many of them were put to death. The loss of life and atmosphere of fear aside, the economic damage from that disruption would have to be in the tens of billions of dollars. And that was just Bo’s most prominent campaign — there is no telling what else he did that the newspapers never found out about.

China is apparently undertaking a purge as a way to buy time as it tries to figure out a way to restore confidence. Yet there may not be a way to restore confidence in China’s government short of restoring integrity, and no one believes that is coming anytime soon.

Thursday, September 27, 2012

Reduced Data Load in iOS 6 Maps

At a glance, the new map data format used in iOS 6 appears to be twice as efficient as its predecessor. To the user, the obvious change is that the maps load and scroll faster, but there are end-to-end savings:

  • Longer battery life as the Maps app spends less time computing and displaying the maps.
  • Fewer missed turns in navigation as the app has an easier time keeping up with people on the move. This also translates to savings of time and fuel.
  • Less memory used for map data, which may also mean that map pages don’t have to be reloaded as often.
  • Reduced data load because of the smaller volume of map data. This affects the cellular network especially, but also allows a proportional energy savings at Apple’s data centers (or more likely, an increase in the number of users supported).
  • Lower data fees for cellular users who pay based on the amount of data they transfer.

The reduction in the data load on the AT&T cellular network in the United States may have been the deciding factor in changing the Maps app so abruptly. No one can claim that AT&T has plenty of excess bandwidth in major cities, or that there is an obvious way for it to acquire more. For the most part, the network will have to fit into the existing bandwidth even as the number of users increases. This becomes especially urgent as new generations of phones that aren’t as data-efficient as iOS come online between now and the end of the year. Aside from charging users for the volume of data they use, reducing the data load for map data is the most obvious way to make everything fit.

Wednesday, September 26, 2012

Financial Pressure on Cities Reaches Water Fluoridation

Water fluoridation is declining, not just from changes in the scientific understanding of its effects, but also as a result of financial pressure on cities. Among the dozen or so U.S. cities that have ended water fluoridation since summer, most have cited the cost of fluoridation as the main factor in the decision.

That cost can be substantial — around $2 a year per resident in a small city. When a city is under pressure and having to decide which employees to lay off, suddenly expenses that were previously taken for granted, like fluoridation, come under closer scrutiny.

Fluoride in water strengthens teeth in children between the ages of 6 and 11, but it can be toxic to children under the age of 6 and is more harmful than helpful in adults. Reference levels of fluoride in U.S. drinking water were lowered from 1 part per million to 700 parts per billion because of concerns about the adverse health effects, which include various forms of damage to teeth and bones. Probably the ideal level that balance out the benefits and risks is still lower, around 125 parts per billion. Nearly half of large U.S. drinking water systems add fluoride.

Tuesday, September 25, 2012

Data Center Electricity Use in Proportion

Imagine if there were robots to do all our work for us — robots to harvest our crops, drive our cars, even write our blogs. We wouldn’t have to work anymore. Now imagine that the robots decided to take over the world: eat our food, sleep in our beds, write devastating insults on our Facebook pages. That wouldn’t be so wonderful, would it?

It’s an issue that bears thinking about because robots have needs and we want to make sure we don’t get crowded out ourselves. Things end badly in the very first robot story, the 1921 Karel ńĆapek play R.U.R.: the robot army scours the world and wipes out the human race. If robots are that costly, we might decide that we don’t want them. In more general terms, it is important to be aware of the costs of any technology we rely on. Often enough, as in R.U.R., we avoid thinking about it, afraid that we will find out that the costs are untenable.

That basic fear is what gives rise to the occasional scare story about the high costs of operating computers, like the newspaper story on cloud data center electricity usage that everyone is talking about this week.

In analyzing resource usage, it is important to maintain proportion by keeping everything inside some kind of frame. Otherwise, with a few simplifying assumptions, you could easily calculate that the resource usage you are looking at is larger than the entire world. If you are attempting a back-of-the-envelope estimate of computer electricity usage, you could easily make any of a number of mistakes, confusing:

  • Capacity, peak usage, and average usage. A computer system might be rated to use 230 watts, but actually use 165 watts at peak and 45 watts on average.
  • System, device, and component. A central processor may use a small fraction of the power consumption of a computer, which in turn is a fraction of the total for a computer system.
  • Front end and back end. Every web site is located in a data center, but that doesn’t mean every web site has its own data center, or even its own server.
  • Technology generations. Every few years, the old hardware devices are replaced with new ones that have very different physical and operating characteristics. A facility planned for 2013 will not resemble the operating characteristics of one from 2006.

The news stories this week are misleading to begin with, but the discussion surrounding them is on another planet. People are coming away with the impression that data centers employ more than 2 percent of total global energy usage. To bring the wretched excesses back into the realm of reason, it helps to apply a context as a frame for the analysis.

  • Industrial scale. What percent of the large industrial buildings in the world are data centers? —A small fraction of 1 percent?
  • Electricity supply units. You’re not talking about electricity supply planning in a country like the United States until you’re talking about gigawatts at least. When you see a chart showing gigawatt-hours per year, you know someone is trying to slip a much smaller unit past you.
  • Capacity trends. If usage trends are actually going up, then eventually, facilities will have to add capacity. For data center electricity, this would mean crews running new electricity supply lines to the building. But this is the rare exception. Instead, most data centers use less electricity than they did when they were first installed, the result of more efficient hardware. With computing capacity and efficiency both increasing every year, resource totals like electricity and floor space are probably declining, though it is hard to forecast.

Data center electricity usage might not be the big problem that people are imagining this week, but it is still nice to be efficient about it. Aerial photos show places where power-intensive data centers are located within a stone’s throw of power sources. That helps, though the energy consumption of workers going to work at the facility must also be considered. On a personal level, we can minimize our use of data center capacity by avoiding peak periods. This could mean doing remote backups and installations in the evening (west coast) or early morning (east coast). Taking the time to throw away unwanted media files, especially photos and movies, can make a difference. Waiting until day 2 to download a hot software release makes the biggest difference.

But we must not confuse this level of energy saving with the savings that come from home energy audits, more efficient refrigerators, LED room lighting, and regular maintenance for fuel-burning cars — and these, in turn, are dwarfed by the potential of electric cars and rooftop solar installations. In the United States, if a huge data center uses 50 megawatts, your share of that power consumption is about one fifth of a watt, not really enough to worry about. Choosing a high-efficiency light bulb might save you 10 or 15 watts. I would rather have you pay attention to those energy-saving opportunities first.

Monday, September 24, 2012

Two Weather Records — Related?

For nearly a month, Arctic sea ice has been stuck at a record-low level.

Meanwhile, the areas of the United States in a state of drought have remained near record proportions. That is, in the history of the country, we have never seen drought affect much more of the land area of the country than it is affecting now. By some measures, this year’s drought represents a record.

According to conventional theories of weather, these two records may be related. Ice cools the Arctic region as it melts, so less Arctic ice means less cold air. Less cold Arctic air during summer (through the middle of fall) should mean fewer and weaker frontal boundaries on which rainstorms can form, and therefore, less rain, specifically in areas away from bodies of water.

In theory, the rapidly warming Arctic should change the summer climate of the central areas of North America east of the Rockies, but without much effect on the East Coast, Gulf Coast, or Great Lakes areas. The area that is expected to be most affected is similar to the area that has been most strongly affected by drought this summer. This is the broad area of reddish colors in the August 2012 Palmer Drought Severity Index map from the National Climatic Data Center. (The August drought area extends more to the east and west than the area the theory would point to.)

The question of whether the two weather patterns are related is important. As the drought drags on into fall, we want to find out the extent to which this summer’s low rainfall might actually be the new normal. Arctic sea ice will continue to decline and temperatures will increase in future summers, so a mid-continent pattern of reduced summer rainfall could begin soon — unless, a worrying possibility, it is happening already.

You cannot say anything about climate from one season’s weather, but the coming seasons may hint at what is on the way. If precipitation patterns return to historical norms in November, only to dry out again next summer, we will have to start guessing that the lack of rainfall is not merely a drought, but a change in climate. On the other hand, if next summer has a reassuring sequence of thunderstorms, then those particular climate worries can be set aside for the time being.

Sunday, September 23, 2012

Overreaching in Libya

The turn of events Friday night in Benghazi, Libya, is an example of the consequences of overreaching. The militia of a religious extremist group, which appeared more than any other group to have supported the deadly raid on the U.S. consulate last week, was forced to flee the city as protesters took over their facilities. The protesters then turned the facilities and weapons over to the government.

Members of the extremist group may have thought they had enough popular backing to conduct the raid on the U.S. diplomats, but instead some of them are under arrest and the militia group has permanently lost its base of operations in Benghazi.

Overreaching often goes along with this pattern of bravado and collapse. It is a pattern that makes the world more chaotic. When warnings are overlooked, the collapse and its aftermath can come a surprise. If you keep talking for more than a few minutes after the low battery warning, the phone may cut off, and then, all of a sudden, the conversation is over.

Friday, September 21, 2012

This Week in Bank Failures

Wall Street banks don’t like to talk about the extent of their involvement in energy trading, but sometimes they are forced to, and it seems that is happening more often than before.

  • Goldman Sachs is suspected of illegal trading practices in the California electricity market, and it misled regulators by filing a false report during an investigation of its electricity trades. As a result, the Federal Energy Regulatory Commission (FERC) is considering action to suspend Goldman Sachs’ trading privileges in California. Goldman Sachs says its error was minor and inadvertant and was corrected quickly, but its arguments may not hold much weight in administrative hearings on the matter unless it can come up with a more detailed explanation of its actions. In energy trading, supplying false information for even a short period of time can give a trader the ability to manipulate market prices.
  • Separately, Deutsche Bank is accused of similar misconduct. It faces $1.6 million in fines and forfeitures for U.S. energy market manipulation in early 2010. The bank is contesting the charges.
  • Energy swaps traders are seeking a delay in new registration rules from the Commodity Futures Trading Commission (CFTC). The new rules will require traders who handle more than $8 billion in swaps to prove that they have sufficient capital to meet their swaps contracts. The financial crisis of 2008 began after AIG issued swaps in quantities thousands of times greater than its capital would cover.
  • Banks are having trouble retaining their energy traders. Within the last month, there were reports of gasoline traders quitting Morgan Stanley. Separately, most of Barclays’ energy trading staff has left for other jobs after changes in trading rules and bonus formulas.

Money laundering investigations seem unlikely to die down anytime soon. There are reports that the OCC is investigating gaps in anti-money laundering practices at Goldman Sachs. The money-laundering investigations picked up new urgency a month ago when Standard Chartered Bank agreed to pay $340 million to settle charges of keeping false records and filing false reports in connection with more than $250 billion of transactions in order to hide money laundering activities. The bank and state regulators have reached a final settlement agreement in that case, but the bank still faces serious charges from other regulators in connection with the same money laundering practices.

Citibank’s sale of EMI, one of the world’s largest music companies, has run into so many problems it is fair to describe it as a big mess. Universal Music Group, the largest record company in the world, has now been cleared to buy most but not all of EMI’s record labels, but regulators are requiring Universal to sell off some of its assets as a condition of that deal. Most of the music publishing assets have already been sold separately to Sony and a group of music business investors.

Greece’s economy is falling into a depression as a result of its European Union-led bailout, which became necessary to repay bondholders after the country fell victim to a Wall Street accounting fraud. It is easy to say at this point that the bailout and associated austerity program have done far more harm to Greece than the original accounting failures and excessive indebtedness ever could have.

A banking executive in Switzerland warned this week that Swiss banks could lose more than 10 percent of their deposits as a result of new tax compliance rules. Tax cheats are expected to move their money out of Switzerland now that it is no longer a safe haven for tax evasion, and the amount of money involved may be larger than most people suspected.

The worldwide protests that have erupted over various issues in the past two weeks raise questions for businesses in general, including banks. In Pakistan, KFC has temporarily closed all its restaurants because of threats of religious violence. There is similar tension between China and Japan, as demonstrators in China, in a fit of nationalistic fervor, seek to force Japan to relinquish its claim to three small islands. There are widespread boycotts of all things Japanese in China, and citizens in Japan are responding with boycotts of Chinese-made products. The biggest victim so far is Japan Airlines, which next week will sharply reduce its flights between the two countries as demand falters because of the mutual boycotts. Neither KFC nor Japan Airlines is closely associated with a bank, but it is easy to imagine this kind of business disruption affecting a bank. The financial consequences could be similar to those of a natural disaster, or could be longer-lasting in nature. It is hard to say how prepared any large bank would be for that kind of scenario.

Retail As TV Declines

The dismal state of the TV screen business could last for a few years, until the next technology breakthrough.

A CNNMoney report, “LCD TV shipments decline for first time ever,” summarizes the downturn this year in global TV manufacturing. LCD occupies 84 percent of the TV market globally, and is declining for the first time ever as people have finished upgrading. Unit sales in high-end categories are falling faster, and U.S. prices are hardly falling. Prices are still higher than last year’s Black Friday sales. For some models, the same unsold inventory from last year is still on the shelves with the same price tags — hardly a formula for getting consumers excited about buying right now.

Black Friday price reductions in the last two years have been big enough to wipe away retailers’ profit margins. That’s the result of ordering too much inventory, a mistake retailers will try to avoid this year. The big Black Friday price reductions this year will probably be on designs that feature the latest gimmicks that consumers have decided they don’t care about (so if you want one of those, you could hold out for the sale prices).

Retailers are hoping for some new technology to get consumers interested in TV hardware again, but that isn’t on the horizon, as Demitri Kalogeropoulos explains in “TV Sales Won't Save These Stocks” at Motley Fool.

The retailers in the most obvious distress with the decline of TV are Best Buy, which has lost its big back-of-the-store product and the associated foot traffic, and H.H. Gregg, as it bets heavily on a blowout Christmas season that will never arrive. Walmart too is hurting in the TV department, though it (along with Amazon and Buy.com) may see an opportunity in the high-volume low-end LCD segment if other retailers go too far in emphasizing the latest high-end features. Television has become a replacement-cycle product, and retailers are still trying to figure out what to do.

Thursday, September 20, 2012

Better Credit Scores

U.S. consumers are seeing their credit scores improve, and it’s the result of the economic downturn. Better credit scores is not the first effect you would think of when you think of a recession, but it makes a kind of sense. A recession is often associated with deleveraging, meaning individuals and businesses are less eager to borrow (and banks may be less eager to lend). Then, when people pay off their existing debts and don’t take out new loans, their credit scores tend to improve.

Scores are improving the most at the low end and high end of the credit score range, according to a CNNMoney article, “Fewer people have terrible credit scores.” This makes sense to me. People with terrible credit pay the highest interest rates, so they have a special incentive to pay off debts as fast as they can. At the high end, people with the best credit tend to have a high earning ability compared to their lifestyles — that’s often how they stay out of credit trouble to begin with — so they have an easier time than others in paying down their debts. It is a trend I expect to see extend toward the middle of the credit score range as time goes on. If the people with the best and worst credit are paying down their debts, it seems likely enough that others are also, but perhaps not as quickly.

Wednesday, September 19, 2012

What the Us-Against-Them Poll Results Mean for the U.S. Economy

When people are looking for someone to blame or arguing over who is really at fault, it is one of the surest signs of economic decline. It is worrisome, then, that an us-against-them approach to economic matters was the defining theme of the Republican convention. It is a theme that was reinforced in video released this week in which Mitt Romney tried to define the U.S. economy in terms of a class of freeloaders, which he said consisted of the “47 percent” of Americans who do not pay federal income taxes. The “freeloader” theory was hinted at repeatedly and sometimes aggressively, but was not so emphatically stated, in the convention itself. According to the freeloader theory, somewhere there are huge numbers of people who aren’t interested in doing their part, and that is why the United States is in a state of seemingly perpetual decline.

We would know the U.S. economy was in trouble if this idea, absent any facts to support it, was catching on with voters at large. That would mean people in general see the country as being in decline. On this question, recent polls have good and bad news. The bad news is that the us-against-them theme put forth by the Republican party is finding significant support among poor white southern Republican voters. The good news is that the us-against-them theme is not resonating well at all with any other groups of voters.

This is an indication that the U.S. economy as a whole is not faring so badly, in spite of the many obstacles. People are still hopeful and still trying to solve problems. Yet it would seem that there are pockets of despair, where people have largely given up looking for solutions. That is something that bears watching, as it could turn into a real problem for the national economy over the next couple of years if these groups and communities continue to feel excluded.

Tuesday, September 18, 2012

Romney to College Students: Drop Dead

How long will we have to wait before we get a story about Mitt Romney’s presidential campaign that doesn’t contain the word “attacks”?

The past two weeks have cemented Romney’s reputation as an attacker. Look at who he is attacking now: college students.

Most college students have low incomes, with either low wages or no wages at all. Well, let’s face it, most college students live in poverty, almost like refugees. They have no proper place to live, just a bed and a desk. They are forced to subsist on institutional food that is not always above the standards of fast food. But they do it for a reason: to gain knowledge, skills, and a educational certificate (often a diploma) that may qualify them for specific jobs.

College students work harder than almost anyone in the United States. They certainly work harder than candidate Romney, who at a glance, obviously doesn’t have a midterm in the morning to worry about.

And so it is startling to see Romney castigate the majority of college students, grouped together with Wall Street billionaires and the various other miscellaneous groups of people whose taxable income is too low for them to pay federal income taxes. In a secret speech delivered to financial supporters in May, but which Romney reaffirmed in comments yesterday, he suggested that everyone who doesn’t pay federal income taxes in any given year is a lazy freeloader living off of the government. It is an astonishingly harsh indictment of the people who, as a group, are working harder, taking more risk and responsibility, and looking farther into the future than anyone else, but it gets worse. College students are dead to Romney. In his opinion, they will never become contributing members of society:

[M]y job is is not to worry about those people. I’ll never convince them they should take personal responsibility and care for their lives.

To be fair, the “47 percent of the people” who don’t pay income taxes is a broad group that includes more than just college students. The largest segment of people who don’t pay federal income tax is retirees. Romney surely intended to direct his ire mainly at retirees, particularly with the lines that refer to people “who believe the government has a responsibility to care for them, who believe that they are entitled to health care . . .” But he said nothing to exclude students from his remarks, and some of what he said seems to be directed more toward students than anyone else.

In any case, it makes sense to think of students as the core group of the “47 percent.” Hardly anyone really means to retire with an income so low that they are exempt from federal income tax. That’s something that happens to people as a result of ill health and other misfortune, employers’ mandatory retirement rules, and plans that go astray. Similarly, no one chooses to be among the ranks of the long-term unemployed. There are subsistence farmers, but not many, and that too is usually a desperate choice in a context where good jobs are unavailable (and proper farming equipment is out of reach). Similarly, there are business owners whose businesses lose money in a given year, but businesses are carried on for the years that are profitable. There are single parents whose living expenses are high enough that even with a full-time minimum-wage job they do not owe income taxes, but who really chooses to be a single parent? People do voluntarily choose to be high school students for a year or two after they pass the legal dropout age, but high school is is seen as civic responsibility in a way that college is not.

But people do voluntarily choose, by the tens of millions, to be full-time college students, in spite of the hard work and sacrifices required, and even if it means accepting financial support from others. So the “47 percent” is fundamentally about college students if it is about anyone at all.

This, of course, is not the first time that Romney has alluded to his low regard for students, but it is the most emphatically dismissive he has been since he became a candidate. I worry that students, who know all too well what their income and total taxes owed were the last time they filled out a form 1040, may hear Romney’s comments and worry that their country does not value or honor their efforts. And this is not just a casual or moral concern. There is so much pressure on college students already, hearing a presidential candidate tell them to drop dead could have bad consequences. I hope that today or in the coming days, a prominent public figure can make a statement to counter Romney’s attack. This cannot come from Romney himself, who since the convention seems to have become an attack specialist. Perhaps a statement in support of college students could come from Dr. Jill Biden, who has a special interest in college education. Or, perhaps everyone who cares about education and students should say something, in the hope that a chorus of support for college students will drown out Romney’s vitriol.

For my part, I can say that I know from personal experience how hard college students work, and I consider it unfair how much is expected of them. I know I regularly caution people not to take on excessive financial risk to get a college education, but for anyone who is already in college, my advice is this: give it everything you have, learn whatever you can, and cheerfully accept whatever financial support you can get for now, as if the future of the world depends on it — because, in a sense, it does.

Monday, September 17, 2012

Protest Season

In the news headlines from the weekend I saw reports of political demonstrations all over the world. In Portugal and Spain, protests against job losses and other economic hardships. On the other side of the world in China, signs and chants against Japan. Moscow and New York saw high-profile protests against corrupt institutions; Germany, a rally against sexual violence. On the streets of India, rallies against foreign ownership of groceries, something that will be permitted for the first time under emergency rules the government adopted on Friday.

And there were more than this. Some of the protests might have been secretly sponsored by governments or business interests, but the sentiments on the streets were obviously not under anyone’s control. I can’t recall ever seeing so many large protests in so many places on so many subjects all happening at once.

It must be something in the air. One theory I have been hearing is that all the protests are really driven by increases in the price of food. The latest food price data does not seem ragged enough to support that theory. Could it be Twitter? Perhaps, though the reach of Twitter and mobile communication would not seem to have expanded that much compared to last week or last year. Is it a statistical fluke, the result of random chance? If protest fever dies away by next weekend, perhaps that will be the best answer. But if large-scale protests continue to pop up in larger than usual numbers, there will have to be an explanation for it.

Sunday, September 16, 2012

We Are All Puppets

I wrote recently of the U.S. politics of the U.S. embassy attacks, but what of the protestors who are involved? That is an uglier picture of fervent religious adherents who have been so easily manipulated into abandoning their principles and doing harmful and self-defeating actions. Or as Sarah Harper more eloquently puts it at Pissed Off Woman, “Dear Muslim Film Protestors: You’re Acting Like Idiots. Stop it.”

It is easy to pick out people acting like puppets when they are strangers at a distance, but we are all puppets more readily than we would like to admit. In America, countless people watching TV edits of the protests feel compelled to complain about how easily Islam can turn evil. These people, friends of mine in their armchairs, are puppets just as surely as the people in the street. The more we learn about the mysterious movie that is the nominal target of protests in seven countries (or probably more), the more we find that this whole confrontation has been scripted in advance. Even the reactions of politicians and of bloggers like me were anticipated and planned for — not entirely, but to an extent that dismays me to think about.

Online I see puppets saying, “At least I live in a free country!” If you are a puppet proclaiming your independence on cue, that is one form of freedom. If you refuse to be a puppet, that is a step up. Refuse to be a puppet.

Friday, September 14, 2012

This Week in Bank Failures

There are more than a few reasons to worry about economic trends in the United States and Europe. Indicators are mixed and the financial sector in particular is in a fragile state. The European Central Bank and now the Fed have announced new monetary policies that are something of a departure from the past. At times, the central banks have taken actions that suggested that they believed keeping the entire financial sector intact was their top priority. The new actions tell us the priorities have changed. In Europe, it is becoming painfully clear that governments cannot go much farther in propping up the banks, and that eventually, several large banks there will collapse. In the United States, the immediate concern is not for the largest banks, but for other important institutions in the financial sector. The failures of MF Global and Peregrine Financial and the scare at Knight Capital Group strongly suggest that we can expect financial companies that may look stable on the outside to fail with some regularity. The central banks’ recent moves may make the financial sector more prepared to handle the sudden market changes that can accompany the failure of a bank, broker, hedge fund, or other institution, but they aren’t likely to prevent any such failure.

One aspect of the Fed’s new bond-buying program is an effort to lower long-term interest rates. The Fed is giving less and less emphasis to the short-term interest rates that are so critical for a bank or other business facing a cash crunch.

Peregrine Financial Group CEO Russell Wasendorf, Sr. is prepared to plead guilty to a shortened list of charges on Monday. He has already surrendered all his assets. Wasendorf is believed to have sent phony bank records to regulators to make it appear that Peregrine Financial Group had more money than it actually had.

There was one bank failure tonight. Missouri state banking regulators closed Truman Bank in St. Louis. The failure follows the bank’s involvement in several failed commercial real estate projects. The bank had been operating under close scrutiny from regulators for four years. Simmons First National Bank is taking over the deposits and purchasing the assets.

Bob Dylan on Proportion

I’ve commented frequently about the economic difficulties that arise from the limited human ability of proportion. We fail to strike a balance and make more bad decisions than good ones because we confuse small matters with large ones. Bob Dylan comments on the unfairness of this in a Rolling Stone interview. Responding to a question on recent (and spurious) allegations of plagiarism, he talks about the relative importance of his decision to play electric guitar instead of the acoustic guitar that he played for the first few years of his career.

These are the same people that tried to pin the name Judas on me. Judas, the most hated name in human history! If you think you've been called a bad name, try to work your way out from under that. Yeah, and for what? For playing an electric guitar? As if that is in some kind of way equitable to betraying our Lord and delivering him up to be crucified.

Dylan goes on to suggest that music should be judged according to the rules of music, and songwriting, according to the rules of songwriting. Looking at things in context is one way to see proportions more accurately.

Thursday, September 13, 2012

The Fed’s Real Estate Move

The Fed could end up owning my mortgage, and yours too.

The Fed announced a new monetary easing plan this afternoon. The Fed can add money to the economy by buying anything at all, and it has decided that for the foreseeable future or until the performance of the economy improves broadly, it will buy $40 billion per month in mortgage bonds and other mortgage-backed securities.

With that kind of money, it won’t take long to make the Fed a major player in the real estate market. By 2019, if the Fed were to focus on home mortgages, it could indirectly own half of the home mortgages in the country. (Someone with a better sense of the real estate market may have a more accurate way of gauging the magnitudes involved.)

This move may also signal the Fed’s worries about Freddie Mac and Fannie Mae. The Fed’s move into real estate could take away some of the stress in the mortgage markets if those mortgage-market players are ultimately shut down. That’s a move that the White House and Treasury have hinted could come as soon as next year, though others have suggested that both companies could stay open in the end.

Wednesday, September 12, 2012

Bringing The Wrong Energy to a Fight

It matters what kind of energy you bring to a fight. You can see how much it matters by looking at the position Mitt Romney finds himself in today.

Last night, Romney stumbled upon the news of a fight. Religious extremists had attacked U.S. embassies in two countries, and the situation looked dangerous. Romney decided to get involved, but he did it — and I’m sorry, but there is no other way to say it — by joining the attack.

In the same hour that U.S. officials were defending themselves against armed mobs on the streets, when it was not yet known who would live and who would die, they also had to defend themselves against the Romney campaign. Romney’s attack on the White House and State Department was simultaneous with the mobs in the streets, and to the associative mind, it comes across as three parts of the same attack. This is the worst possible way for a politician to align his energies. He has positioned himself as an integral part of an attack against his own country.

You can tell it is a question of energy by looking at the words of what Romney said. Taken out of context, the statement, though riddled with falsehoods and hinting at racism and religious intolerance, was substantially within the rules of American politics. But it is all but impossible to hear what Romney actually said because of the way he said it.

Intellectually, of course, we know that Romney is not coordinating with terrorist groups, and that his joining in the attack was just an awful decision made in haste late at night when the facts weren’t as clear as they are now, followed by the realization the next day that it was too late to apologize. But the intellectual argument will not help much. In the morning, the person who was loud, angry, and unhelpful while people were dying is remembered that way.

For Romney, this means his political career is effectively over. He will continue to campaign, of course, but it is hard to imagine that he can ever recover to the point where he was before last night. And before last night, he was already trailing badly. Now the wheels have come off the bus. The Washington Post, not known for ever writing off a major-party candidate for president, wrote that Romney’s remarks were “crude” and that his campaign was “discredited.” And all this just because Romney brought the wrong kind of energy to a fight.

Tuesday, September 11, 2012

Climate Model Fail

I keep track of Arctic sea ice because of its implications for the weather where I live in inland North America. The summer cold fronts that bring the lion’s share of the rain here depend on a source of cold air in summer, and that ultimately traces back to the ice. When the ice goes away, I imagine, we will have fewer cool nights and less rain in summer.

Other people are watching the Arctic ice for other reasons. For many, it is a chance to validate global climate models. These complex mathematical models predict changes in climate everywhere in the world. In recent days, ice-watchers have been pointing me to the ice maps predicted by some of the more reputable global climate models. These maps show a remarkable match to today’s actual ice map. When you stop to consider that the current state of the Arctic sea ice is something that has never before been seen, it is impressive how precisely it could be predicted.

Yet there is a problem. The current state of the ice was predicted, but not on the correct time scale, not even close. The maps are about right, that is, but the dates are way off. For the first climate model I saw, the ice map that matched today’s ice was dated 2075. In the next, the date was 2099. Another one: 2200. All these predictions were made between 5 and 10 years ago, and they are among the most accurate of the currently reputable climate models, based on what we know through today. Other climate models made predictions that can fairly be said to have been discredited already; for example, they predicted that Arctic ice would never decline to the levels we are seeing today. But even the more accurate models are having trouble. Events that were supposed to take a century to occur have happened already, in less than ten years.

None of this comes as a shock to ice-watchers. For years it has been obvious, in this arena at least, that reputable science is not keeping up with the pace of events. This month, with Arctic sea ice at an all-time record low, a few ice-watchers have been gleefully deconstructing some of the climate models whose predictions were particularly far off.

This should be a moment of triumph for the climate models that accurately predicted the Arctic ice collapse of 2007–2012. It should be, but if there were any such models, no one has come forward to talk about them. Indeed, any such prediction would have been rejected by reputable science even after the events of 2007. There was just one high-profile prediction of an ice-free Arctic as soon as 2013. Scientists were stunned that such a prediction could come from a research team known not to be crackpots, but they were more inclined to forgive what seemed like an obvious error than to take the prediction seriously. Here is one of the reasons why: the prediction of a melt-out around 2013 was not done with a complex climate model, but with a simple statistical extrapolation, something anyone can do at home with a spreadsheet program. Yet this prediction is the one that has come close to being accurate.

And so, as far as we can say at this point, there are no successful climate models. None were as accurate as the “naive” approach of looking at the graphs and projecting the trends forward. The global climate models can be reset using the latest available data, but that will not necessarily improve their predictive power. That is, they could be just as far off in the next ten years as they were in the last ten.

If all the climate models have failed, then we just don’t know where global climate is headed. Perhaps there are so many unknowns that modeling is futile. As one example, no one has even a vague idea of the mass of greenhouse gases being released by melting permafrost in Siberia. If that variable is unknown, then the current state of the system is unknown, and the most detailed predictions are really just guesses.

Based on the performance of climate models so far, it seems safe to say only this: climate change will continue, and some of the changes will happen faster than any of the reputable scientific models are predicting.

Monday, September 10, 2012

Hurricane Recovery in the Lower Mississippi Delta

I have been poring over news reports trying to gauge the pace of recovery in the lower Mississippi Delta. Hurricane Isaac passed directly over the area, and every town suffered flooding and wind damage, but the situation is much worse in areas where the levees failed. Main highways are still covered with water two weeks later making it difficult for anyone to get in and out.

The biggest obstacle at this point is the lack of electricity. Thousands of power poles were snapped off or pulled loose by hurricane winds. In many areas the path of the power lines is covered by water, making it difficult to put new poles in place. Initial estimates were that electricity would be restored by January. More recent estimates would put power back on for most customers by October.

Restoring electricity will speed up the process of pumping water out. With flood water removed and the main roads open again, the main work of restoration can begin. That could be October or November. To make the recovery process more civilized, safe drinking water will probably be restored in most areas by December. Obviously, the first steps are the most difficult, but life will not be fully back to normal anytime soon.

One reason I keep track is that the hurricane missed New Orleans by barely five miles. If Hurricane Isaac had come ashore one hour earlier, we would be asking how long it would take to pump flood waters out of a major city. New Orleans has never taken a direct hit from a hurricane since it became a city, but that is a disaster that, statistically, is certain to happen eventually.

Saturday, September 8, 2012

Two Notes on Cars

  1. Defying skeptics, cars get older. If you have a 21-year-old car, you’re not alone. The average age of a car in the U.S. is now 11, which means lots of cars are making it to 21. Two years ago, auto experts said people would have to start buying new cars because the old cars people are driving couldn’t get any older. In spite of this prediction, the trend toward older cars shows little sign of slowing down.
  2. Electric cars are ready — if gas prices go higher. Norway is home to some of the most expensive gasoline in the world. It may also be the country with the highest proportion of electric cars. Nearly 4 percent of new cars purchased last month were electric cars. The electric city cars commonly seen in Norway are considered a practical choice when compared to the cost of filling a fuel tank. Similar sentiments will surely surface in other countries as gasoline prices increase.

Friday, September 7, 2012

This Week in Bank Failures

Some recent headlines indicate that bankers and banks are losing status, particularly when it comes to staring down legal difficulties. This is a global trend. Some of bankers’ official problems that couldn’t have happened just three years ago:

  • The Serious Fraud Office is investigating strange-looking payments Barclays made to the Qatar sovereign wealth fund in 2008.
  • A court in Brazil issued an arrest warrant for a banker who failed to appear to testify in a case alleging securities violations.
  • Australia’s high court actually expanded the scope of a class-action suit against one of that country’s giant banks over excessive fees.

Deposit flight from Spanish banks stabilized briefly only to rush ahead again. Spain provided emergency funds to Bankia after it reported losses of €4 billion during the first half of 2012. Spain has reorganized Bankia at least four times so far and is now its majority owner.

Deposit flight is also occurring at the giant banks in the United States, if at a slower pace. It appears that many of the people who meant to move their accounts during Bank Transfer Day last year are just now getting around to it. Many workers wait until they change jobs to change banks, so the trend might continue for some years. The strongest deposit growth this year has been in credit unions.

Hudson City Bank, the largest bank based in New Jersey, has agreed to be sold to M&T Bank for $3.7 billion. The deal gives Buffalo-based M&T Bank a strong East Coast presence for the first time. M&T Bank says it will pay off Hudson City Bank’s debts by liquidating its $13 billion investment portfolio. Hudson City Bank’s profits have lagged because of low interest rates. Hudson City shareholder groups are looking for ways to derail the merger.

Bailed-out ING has been selling just about everything it owns, and now that list includes ING Direct Canada. Scotiabank is the buyer, paying $3 billion in cash, or a premium of 80 percent over the bank’s book value. ING is still looking for a buyer for the much smaller ING Direct UK.

Bank failures are surely slowed down artificially for the current political season in the United States. There was one low-profile bank failure tonight.

The bank was First Commercial Bank, with one location in Bloomington, Minnesota, and just over $200 million in deposits. Kentucky-based Republic Bank & Trust is taking over the deposits and purchasing the assets. It says the new branch office, its first in the Minneapolis area, will make it easier to serve the customers it has already in that area.

Gallup’s New Employment Statistic

When the House voted to defund the Bureau of Labor Statistics and its often depressing unemployment reports, they had something like this in mind. The government need not create its own economic statistics because the private sector would fill the gap. The House might not be happy with the new employment rate statistics from Gallup, though, because its “payroll to population” rate makes the employment picture look decidedly more grim than the official 8 percent unemployment rate.

Official employment statistics are designed to look rosy. The Bureau of Labor Statistics counts you as employed if you worked at least one hour this week. No one pretends that one hour is enough to live on, but one hour is better than zero, right?

Gallup sets its cutoff not at one hour, but at 30. The rationale is that if you are working less than 30 hours per week, it is probably a problem. Of course, there are people who choose to work at every different level of activity, but the way things are now, Gallup’s thinking is more correct than not.

The next innovation in Gallup’s approach is to exclude business owners from the count of employed workers. Business owners, or self-employed workers, form a nebulous category that includes everyone from subsistence farmers to movie stars. There are more of the former than the latter, though, and currently even in the United States, most of the people who count as self-employed are either adults who are barely scraping by or teenagers who are barely working (as bloggers, for example). The Bureau of Labor Statistics counts everyone who works for themselves as employed, as long as they meet the one-hour threshold. The problems with this are obvious. A novelist who writes every day but sells only a few copies of e-books over the course of the year does not fit the usual idea of “employed.” We need better measures of where self-employed workers fall on the continuum of success, but as a first approximation, Gallup’s blanket exclusion of business owners is surely the more realistic approach.

Finally, Gallup skips over the complex and trouble-prone issue of determining who is really looking for work, or would be doing so if there were jobs. It instead compares its count of employment to the total of all adults 15 years of age or older.

And the result? Jobs are not all they are cracked up to be. Sweden and Belarus are the only two countries where more than half of adults hold full-time jobs. In Canada and the United States, 41 percent of adults have full-time jobs. That puts these countries in the top tier, but still well behind more economically stable countries like Estonia and Denmark.

Looking at that payroll to population rate — 41 percent, or barely two out of five — it is abundantly clear that we can never realistically get to the 60 percent rate that would represent the state of good jobs for all. The political emphasis on jobs is good, as more jobs could go a long way toward solving people’s financial distress, but there must be better access to work for those who want to work but who will never consistently get on the payrolls. This need is all the more urgent in countries like Iran and Madagascar, where much of the infrastructure for employment exists, but where the payroll to population rate is much lower — only 9 percent for the two countries I mentioned.

Thursday, September 6, 2012

Global Food Shortage Propaganda and a Prediction of a Wall Street Trading Disaster

Every week, it seems, there is a new analysis or report calling for a global food shortage in the near future. These reports keep coming even though any serious analysis would reveal no basis for such a prediction.

The excuse is the U.S. corn crop, which may come in one third smaller than average because of extreme weather in about 15 states. But only a small fraction of this corn is meant to feed people in the first place. Besides, globally, larger crop failures have occurred every year in at least the last six. Not all analysts can grasp this disconnect because of the inherent difficulty of seeing things in proportion.

Some of the food shortage predictions are made out of habit and are merely meant to alarm. I have some sympathy for the alarmists, because I realize as well as anyone that global climate change will eventually bring about one food crisis after another. But it is not happening this time.

Alarmism and ignorance, though, can explain only a small fraction of the global food shortage reports. In general, as I come upon them, these reports carry the signature of something more sinister: a Wall Street trading strategy that uses the perception of a shortage to create an actual shortage, in order to profit from the resulting market turmoil. Traders attempted this a few years ago with a hint of success, and I fear they might be desperate enough to try it again now, even though the fundamentals of food distribution will not support such a trade this time.

Trading on the turmoil of a contrived global food shortage is a version of cornering a market. It can be highly profitable if you guess right, but must be done on a massive scale, resulting in financial disaster if you come up short. If the food shortages do not materialize — and based on everything we know so far about the world’s agricultural production, they will not — tens of billions of dollars in Wall Street money could be wiped out. That would be enough to take down multiple hedge funds along with a Wall Street bank or two.

If you think about it, there could be no more ignominious way for a respected financial institution to collapse. It is bad enough to bet wrong and go down in flames. If you must also manipulate a financial market in the hope that actual families and neighborhoods go hungry, in order to trigger a food panic — there could be no sharper illustration of moral bankruptcy than that. Reputations of centuries could be erased in a matter of months.

This is just speculation at this point, obviously, and I am going out on a limb by predicting a Wall Street disaster based merely on the unfolding shape of a propaganda campaign. I won’t have anything more to say on this subject until there is news of a more concrete nature. But there is one thing I can say that is not speculation: there is no basis in fact or economic theory for the widely repeated prediction of a global food shortage at the end of 2012 or in the first half of 2013. These reports are just worry and propaganda.

Wednesday, September 5, 2012

The Bigger Convention

Even though I’m only watching from a distance, it is hard to avoid the impression that the Democratic National Convention is a bigger event than the Republican National Convention National Convention last week. I am not sure how that is possible. The two events follow the same format, and it is not that there are more people or more more money or that the ordinary delegates are more involved in the process at the Democratic convention. It is not that there are more reporters or more press coverage. It is hard to make the case the Democrats have much more star power than the Republicans. Whatever the reason, the online and television statistics bear out the initial impression that there is more going on at the Democratic convention.

Tuesday, September 4, 2012

Stress at Big Box Stores

Over the past two weekends I have visited most of the large big box store chains in my local area, and my general impression is that the big box stores are under stress.

The stress was most evident at Best Buy, which has cut back sharply on its inventory of supplies and no longer carries any major brands in some categories. When we have seen this in other store chains in recent years, we have subsequently learned that the chain was in acute financial distress and unable to finance a normal inventory. Similar things happened, for example, at CompUSA and Sam Goody before their stores closed. Best Buy was getting a disproportionate share of its profits from television sales until last year, but now that the number of televisions in the United States exceeds the number of people watching, it will be impossible to keep up a steady pace of sales in that category. Video games are another category that is hurting, and Best Buy hasn’t been able to develop the same level of credibility in more domestic categories like refrigerators.

A different kind of stress was evident at Staples, which was fully stocked, but was selling many ordinary supplies at premium prices, 20 to 50 percent higher than you would expect to pay previously or elsewhere. Customers are sure to notice and to look for other sources of routine supplies. As the world goes paperless and there aren’t so many customers looking for ink cartridges, it wouldn’t be shocking to discover that there are more office supply stores than the market can support.

In general, the big box stores didn’t represent the usual exuberance of the busy back-to-school season. There were plenty of customers, so that is not the problem. It may simply be that the stores are getting squeezed.

Monday, September 3, 2012

Four Reasons to Take the Arctic Sea Ice Records Seriously

In a week since Arctic sea ice extent broke its all-time record low, it has declined another 8 percent. More decline, at least one more week, is inevitable before things level off for the transition from summer to fall. The ultimate low extent record may be about 14 percent below the previous record low set in 2007.

After reading the news reports of the record low in Arctic sea ice, I realize that many people don’t see what a big deal this change is. Weather records get set all the time, and if you believe the news reports, this is just another record. There are four answers I have to give for this.

First, 14 percent is a bigger change than it might sound. We complain about record temperatures that are just a fraction of one percent beyond previous records. A sudden 14 percent change in temperature is unimaginable, except perhaps in a Hollywood apocalypse movie. To make the comparison more personal, imagine if your height suddenly changed by 14 percent. That would be a shocking change that would require all sorts of adjustments on your part.

Second, although extent is the most reliable measurement of Arctic sea ice and the one we focus on the most, other measures are also hitting records. The concentration of ice was at a record low in August, with ice breaking up and spreading out in a pattern never seen before. At the same time, the thickness of the ice has been, for the last three years, lower than ever before seen. Combine these three effects, and the total amount of ice, the ice volume, is only half of what it ought to be.

Third, this summer’s record-setting ice melt happened in spite of unremarkable weather. It has not been particularly warm (looking at surface air temperatures) or sunny on the Arctic Ocean. There was an unusual Arctic cyclone a month ago, but it barely produced a blip on the ice extent graph. Based on the graph, the storm appears to have provided the equivalent of an extra two days of melt — significant, but hardly an explanation for a record-setting melt that lasted all summer. If this kind of melt can happen in ordinary weather, then we can expect a record-setting melt almost every year — and if that’s the case, then it won’t take more than a couple more years to hit zero. Some observers are already extrapolating this year’s melt and predicting a complete melt-out in 2013 or 2014. And those projections are based on the assumption of ordinary weather. If unfavorable weather comes along one summer, the ice will melt that much faster. Either way, there is nothing to suggest that the ponderous Arctic ice of years past can ever come back.

Fourth, it is not just the sea ice. Northern Hemisphere snow cover is also the lowest ever recorded. Water temperatures in the far northern Atlantic and Pacific oceans are higher than usual. At the moment, there is no possible source for a cold wind to cool things off — and there is not much ice left to do that either.