Sunday, December 10, 2017

In Puerto Rico, 1,000 Uncounted Deaths

According to the government of Puerto Rico, around 60 people died from the effects of Hurricane Maria. Given the storm’s meteorological profile and the extent of damage observed, the official death count is such an outlandishly low number that demographers have done their own studies to try to arrive at the true number. Two different demographic studies released this month estimate between 1,000 and 1,100 deaths caused by the hurricane. The true numbers are surely higher still for two reasons. First, demographers are not yet able to adjust accurately for the decline in population caused by people moving away immediately before or after the storm hit. Second, the effects of the storm continue, with only about half of the island having electricity and a water supply that is safe to drink and with months to go before major bridges and roads are restored. The hurricane, then, may have caused or advanced the deaths of not too much less than 0.1 percent of the people present. That would be a mortality rate worse than most disasters, but it fits what we know about Hurricane Maria. This was not just another hurricane, but by some measures the worst ever to hit the United States.

Saturday, December 9, 2017

A Day of Snow, But Little Impact at Retail

With snow falling in Pennsylvania, I didn’t think about driving anywhere today. Snow is a mixed blessing for retail in the Christmas shopping season. Snow reminds shoppers to buy winter clothes, but it also makes them stay home. An unusually large snow storm on its way from the Rio Grande to New England has taken away a shopping day across the Mid-Atlantic states, but with two weekends remaining before Christmas, today was going to be a quiet day at retail anyway. The snow is light enough, probably 4 inches where I am, that it may be forgotten by tomorrow. In the last two days the same storm paralyzed Gulf Coast cities, but there too, only for a day. I’m told the snow there has melted away already. Heavier snow is expected across most of New England, but that is a region more accustomed to snow and it won’t represent the same level of inconvenience. Despite affecting half the country, this snowfall is only a minor delay for shoppers.

Tuesday, December 5, 2017

NFL Adjusts As Fan Base Fades

The decline at the National Football League (NFL) is now plain to see. At the start of the season, the league could make the case that its decline was not as fast as the decline in U.S. television in general. It seemed possible that some of the decline at the start of the season was temporary. Now with the season winding down, it is clear that this is an ongoing trend outside of the league’s control and bigger than just the decline in television. Here are three news headlines to tell you about the downward trend that has only accelerated since the 2017 season started:

Bill DiFilippo at Uproxx: “A Pair Of Sickening Hits During Monday Night Football Highlighted The Dangerous Brutality Of The NFL” [Caution: video depicting violence]
The violence that was on display here is not unique, it’s the kind of thing that seemingly happens on a weekly basis in the NFL.
. . . last night’s MNF [television audience] dipped 2% from the previous season low of the October 16 matchup . . .
Jeff Barker at The Baltimore Sun: “Ravens, NFL scramble as fans stay home
Thousands of fans are trying to resell their tickets . . . for as little as $29. . . . Television ratings are down league-wide and empty seats can be seen at many games.

I couldn’t list all the social trends that work against the NFL, but here are a few. The sport is as brutally time-consuming as it is brutally violent. The two largest advertiser categories, beer and pickup trucks, are in long-term decline. The nature of the game encourages fans to have favorite players, yet that means for every player incapacitated there are thousands of fans disillusioned. The science of brain injuries is becoming more precise every year, so that it is now clear to fans that NFL play ruins the lives of a significant fraction of players. The league’s core fans are old men, dying one by one from the diseases of old age.

The core television audience is also old, and this is one of the reasons that television is in decline. Television is so effective at shaping culture that an inevitable cultural split is developing between the television generations, born roughly between 1940 and 1975, and the Internet generations born since 1975. The NFL is just one cultural institution now forced to grapple with this split. The NFL is so financially dependent on television that, for better or worse, it must throw in its lot with that side of the cultural split, but it must find a way to remain relevant or it will fade away as television fads away.

Monday, December 4, 2017

At the Low Point in the 2017 Christmas Shopping Season

In my own observations of weekend retail in a suburban area of Pennsylvania, there wasn’t the unusual quiet that can follow in the weekends after Black Friday. Traffic in retail areas was busy, if not quite so busy as I saw on weekends in November. This fits with the earlier observation of lighter-than-usual traffic on Black Friday itself. Shoppers have to shop, and if they did not get to the stores in November and are not placing orders online, then they will arrive in the stores eventually, and mostly on the weekend.

Macy’s defied conventional wisdom when it announced it would hire an additional 7,000 workers for its stores. It seems a nonsensical move to consider, coming after Black Friday, which could easily turn out to be the busiest day for department stores this season. It makes some sense if you look at the shopping calendar, however. In years past, the busiest shopping day has sometimes been the Saturday before Christmas. With Christmas falling on a Monday, the two days before could be unusually busy in the stores. Macy’s wants to make sure long lines do not send customers away. If that late burst seems somewhat unlikely in Macy’s case, it is only because stores have already seen strong traffic in November, so that not so many purchases remain to be made in December. There may be some bravado on the part of Macy’s as it tries to show confidence in the face of a difficult balance sheet.

If additional hiring at the tail end of the shopping season is questionable on Macy’s part, imagine the situation from the point of view of the workers. The job market remains weak enough that thousands of job-seekers will compete for the chance to work in a position in which they may have a chance to work only 21 hours, earning around $200 in total. For some of the workers, this may be the only work they have all year long. This could be a good thing or a bad thing, depending on the workers’ circumstances. On Black Friday I saw students and retirees who had been pressed into retail service just for that one day. If your schedule or health doesn’t permit you to work continuously, it makes some sense that you might work on days when you are most needed. For nearly all students, Black Friday and the weekend before Christmas fall on vacations, so work scheduling is not the challenge it would be on most weeks of the year.

While we await word on the fate of Toys ‘R’ Us, there is news this morning on its U.K. stores. The U.K. subsidiary is seeking approval from creditors to close at least 1/4 of its stores. In its statement, the company says its big-box stores are too large to function efficiently. The wording suggests to me that, besides closing some stores, the company is thinking of a future in which stores are about 1/3 the size of its largest stores currently.

That’s a sentiment that could apply even more so to the parent company in the U.S., where cultural trends work against big-box stores. The age group that includes the parents of most U.S. children tend to find big-box stores unfriendly, even alienating. This helps to explain why you may see more grandparents than parents in a Toys ‘R’ Us store. Store traffic could improve if stores were redesigned to make them smaller and more personable, more like traditional toy stores.

Wednesday, November 29, 2017

Cyber Monday Saves the Shopping Season

There are reasons to be optimistic about U.S. retail after looking at the Black Friday weekend in total. One measure of online sales on Cyber Monday, weighted toward larger retailers, estimated a 17 percent increase from 2016. Cyber Monday was the standout day in e-commerce this year, unlike a few recent years when more orders went in on Thanksgiving. The extended shopping weekend came earlier on this year’s calendar than in most years and that may have allowed more shoppers to wait until Cyber Monday to place orders.

If a quiet Black Friday was bad news for retail, a quiet Cyber Monday is always good news. This year I did not see any reports of major web store or transaction processing outages on Cyber Monday, something that happened every Cyber Monday as the crush of shoppers pushed the Internet to its limits until that streak was broken in 2016.

Online sales are still a small fraction of retail, so a large increase in e-commerce doesn’t mean retail totals will be up from last year. Retailers are saying we can expect fewer deep discounts, so it won’t be surprising if totals are down slightly from last year, but that would still make this year more profitable at retail than the last two.

Guns were a big part of the shopping weekend. U.S. gun sales are said to have been the highest ever, and by a wide margin, as shoppers bought millions of firearms as Christmas gifts. While that was good news for gun sellers, two incidents of gun violence at malls on Sunday afternoon cast a shadow over the weekend. Injuries were few, but it is easy to underestimate the impact of an active-shooter mall evacuation. More than 10,000 people were directly affected, whether by running for cover, being locked in a store while police secured the building, or having their shopping trip interrupted or canceled by the evacuation and closure. A much larger number, in the millions, were affected by traffic turbulence, hearsay, and news reports. In an era when retailers are already trying to persuade shoppers that it is safe to go shopping, the two gun incidents, coming on the heels of a series of more serious injuries caused by Black Friday fights, provide a significant setback.

Since the weekend, I have seen the usual seasonal increase in lunch-hour traffic at local retail as shoppers look for quick purchases to finish out their Christmas shopping. Cyber Monday might be seen as the finale of the shopping season, but historically, we can expect a two-week lull in stores, followed by a gradual increase in after-work and weekend shopping. There is a risk of a federal government shutdown early in December, though, and if that comes to pass, all bets are off.

Saturday, November 25, 2017

Scenes From a Muted Black Friday

I am not seeing anything in my local area, a sprawling suburban area in Pennsylvania, that suggests that the 15-year trend toward earlier, smaller, and quieter Christmas shopping is slowing down. I was out all morning yesterday. Traffic was muted. Some stores were busy, but shoppers were not spending heavily and I never saw a checkout line longer than two shoppers. Other stores were quieter than a normal Saturday. In one shopping center parking lot, the only store that had drawn a lot of cars was a small mid-market department store. In another, the supermarket, warehouse club, and pet store were busy, but there was not much going on at the other 30 stores.

The busiest store I went into was Barnes & Noble. It was crowded enough to make for uncomfortable shopping, but the number of customers checking out was not enough to keep the cashiers busy. I was there to visit the record department, and that continues to be a hit-or-miss proposition. I found the the new Yes album on its release day, and this year’s Styx and Alice Cooper albums, out of stock on an earlier visit, were back in stock — but all three titles were stocked in single copies only, which means that anyone who went to look for them for the rest of the weekend was out of luck. Barnes & Noble’s survival is an annual question, but the store traffic I saw seemed to say that it can expect an above-average season, probably strong enough to keep it going another year. Bookstores in general may benefit from the slow trend toward smaller and less expensive Christmas gifts.

I only drove past Toys ‘R’ Us without a proper chance to view its parking lot, but that retailer is probably the biggest worry at U.S. retail this holiday season. It had been counting on an above-average season to give it a chance to survive bankruptcy, but reports on the early part of the Christmas shopping season suggested that toy sales in general, including Toys ‘R’ Us, were down about 10 percent from last year. The saving grace may be found in reports that online orders at Toys ‘R’ Us were up substantially, which I think means a 10 to 15 percent increase from a year ago. The late online orders can still arrive Monday and through next week, and that could make or break the season. It seems plausible, then, that even if Toys ‘R’ Us has to close all of its stores, it could emerge from bankruptcy on the basis of its web store and a limited number of seasonal pop-up stores.

Published accounts of retailer sentiment say that the lower sales volume is not as bad as it sounds. Retailers say they have been careful not to overstock, which means that much of what they sell will be at regular price or slight discounts. We may not see the storewide deep discounts that sometimes arrive around December 10, and sometimes on December 26. Deep discounts may be a way for a retailer to salvage a weak season, but there is no profit in it. Any retailer would rather have a quiet season in which it makes a profit on every item it sells.

Seasonal hiring has also been lower than usual, with Walmart and others saying they would not hire any seasonal workers for their stores. In my shopping I have seen more than a few seasonal workers being trained, which leads me to think stores are hiring extra workers just for one or two weeks.

I came home with a few good finds myself, which included exercise gear and small kitchen appliances. In total I saved around $60 compared to everyday prices, but in economic terms, that’s not necessarily reward enough to get someone to spend half a day shopping. The shopping experience has to be fun, or people will find reasons to avoid it. The news of multiple incidents of in-store violence, despite the smallest crowds in two decades, may persuade the average shopper that the Don’t Buy Anything movement is on to something and the best Black Friday strategy is the one that involves staying home.

Monday, November 20, 2017

Hesitation on the Keystone XL Pipeline

The Keystone XL Pipeline obtained its last state approval with a route through Nebraska, but the pipeline owner’s reaction is puzzling, sounding more like a party that has lost a ruling than one that has earned the permit it was seeking. The company says it will have to study its options after the approved pipeline route through the state is partly different from the route it had been planning for. The implication is that the approved route might be too expensive to build, even though it is geologically preferable to the previously proposed route, about the same length, and less expensive in real estate terms.

There have been whispers over the last three years that the Keystone XL Pipeline is a doomed project. Analysts say it can’t operate at a profit unless world oil prices are around $80 or $90. That price level for oil seemed a sure thing when the pipeline was drawn up but now seems exceedingly unlikely. 

Contracts probably don’t allow the project to be canceled, so one possible scenario is that the pipeline is completed and operates for a few months or a year until the money runs out. In that scenario the pipeline loans will never be paid back. If you’re leading a doomed project and you don’t have the authority to cancel, one approach you can take is to slow everything down in the hope that circumstances change. Now that approvals are in, it looks like that may be the guiding dynamic for the Keystone XL Pipeline.

Tuesday, November 14, 2017

Is the Video Game Business Stretched Too Far?

The most unpopular post in the history of Reddit was the one from EA explaining the pricing for Star Wars Battlefront II. It’s a game that isn’t really there when you first install it, consumers complain. You have to go through an initial phase, think of it as a quest, to add the two main characters before the real game can begin. It’s a quest that early players estimated yesterday would take a highly skilled player about 80 hours. That’s 80 hours of grueling and ultimately meaningless play just to get the game started. Would you wait in line 80 hours to see a Star Wars movie? Probably only a hundred Star Wars fanatics would be that dedicated. The rest of us would give up long before the 80 hours were up.

In response to complaints, EA now says it is reducing the level of effort required to start the game. If we can take them at their word, that still means you start the game with 20 hours of meaningless initial play before the real game starts. Even a 20-hour quest to start a game is sure to feel like a punishment or purgatory to most buyers. If you had to wait in line for 20 hours to see a Star Wars movie, would you say it was “just” 20 hours? EA’s pricing adjustment is probably enough to sidestep the consumer fraud litigation that could have followed, but it may not be nearly enough to save the product.

As an alternative to investing 20 hours to create the two essential characters to get the game started, you can buy the two characters, but that would mean paying twice for the same product. That doesn’t feel good either. When you buy a game, you want to play the game. You don’t want someone telling you, “Well, no, you have to pay extra if you want to actually play.”

How did the video game world come to this? The fundamental problem is that games cost too much to make, while at the same time, high prices have driven most of the potential customers away. Game designers face essentially the same conundrum that TV producers have to deal with. Do you make a large investment and deliver a highly impressive product that may draw in the general public, or do you play small, keep expenses down, and content yourself with selling the product to followers of the genre you are working in? Increasingly TV producers and game developers are saying it is hard to make a profit with either approach. The economically correct answer when an entire industry is stretched this way is to stop making so many video games and TV shows, but with the economy being the way it is, the needed adjustment tends not to happen until whole companies actually shut down. In the interim, the tendency is for managers to take greater and greater risks as they try to make ends meet.

The corporate way is to make every product show a profit and I expect that Star Wars Battlefront II will do so too, but at a steep cost to EA’s credibility. Enough players will pay the high purchase price that the sales pay for the cost to produce the game. Most buyers will be disappointed and some of them will then be more hesitant to buy future game releases from EA. Some, inevitably, will be frustrated enough that they give up video games entirely. The loss of credibility and audience makes EA’s challenge that much harder the next time around.

What one would hope is that a company’s managers would say, “We have to stop making this kind of product. The costs are too high, the rewards, too low.” Today, as it scrambles to get its new game out the door, EA is not giving the impression of a well-managed company, so for all we know, it may already be too late. For consumers, though, it’s not too late to avoid the problems of Star Wars Battlefront II. The game in its packaged form might look like a nice holiday gift item, but if you’re aware of the unique hassle and frustration such a gift would mean to the recipient, you can choose to pass over this product and give something else instead.

Monday, November 13, 2017

Counting the Toys at Toys ‘R’ Us

Two months into the Toys ‘R’ Us bankruptcy, it is too soon to say whether the toy retail chain will have a strong enough Christmas season to emerge from bankruptcy relatively intact. Large numbers of toys still could be sold over the next five weeks. Early indications, though, are that toy sales are trending down this year.

There are multiple reasons for a decline in toy revenue, and it is hard to say what their relative importance is. In October manufacturers saw revenue slow from inventory consolidation that resulted from the Toys ‘R’ Us bankruptcy, and that trend could continue through the holiday season as all retailers prepare for a flood of cheap toys in a possible Toys ‘R’ Us liquidation in January or February. The depressing atmosphere of the Toys ‘R’ Us stores is part of the problem, with children and parents alike dreading the thought of being dragged around that dingy old store again. Children are also spending less time with toys as they are drawn more to games, puzzles, books, and touch-screen devices. Toy stores sell games and puzzles but at generally lower prices than toys. Selection may also be an issue with jigsaw puzzles. I’ve been told that toy stores don’t have the best puzzles.

The outlook for toys is so challenging that Hasbro is talking to Mattel again about a possible merger. The timing might not be right for the two companies most closely identified with the bankrupt Toys ‘R’ Us. It is estimated that between half and two thirds of toys sold at Toys ‘R’ Us are from these two manufacturers. I don’t know what fraction of U.S. revenue for Hasbro or Mattel goes through Toys ‘R’ Us but it could not be far below half. A merger would accomplish nothing if the merged company faces the risk of its own bankruptcy in the event of a Toys ‘R’ Us liquidation. Nevertheless the mere fact of merger talks may be an indication of how overextended the toy industry feels after seeing the early returns from this year’s Christmas shopping season.

There is another, more bizarre indication of stress around the toy sector. A new EA video game has a pricing scheme so bizarre that “a developer is apparently getting death threats.” The video game sector has been under pressure almost since the release of the iPhone ten years ago, and that kind of financial stress can lead to pricing schemes that make customers feel insulted and in the worst case, seen now with Star Wars Battlefront II, can lead to open rebellion among previously loyal customers. The stress in video games seems similar to the stress that toys are now facing, even though video games don’t provide much revenue for most toy stores.

When considering the outlook for Toys ‘R’ Us, it is important to remember that its most prominent competitors have already closed. The reduced competition has allowed Toys ‘R’ Us to keep going but has not put it on a path to profitability. So few toy stores remain that Toys ‘R’ Us cannot plan on any future boost from competitors closing.

Toys ‘R’ Us went into bankruptcy without a plan, and it apparently will not be drawing up a plan until Christmas sales are counted. As in the last four years, managers appear to be pinning their hopes on an above-average Christmas season. Everything seems to point to a down year for toys, though. The bigger the decline, the more stores Toys ‘R’ Us will have to close.

Monday, October 30, 2017

The Whitefish Energy Saga: Corruption While People Suffer

Trump emphasized that the White House saw the hurricane aftermath in Puerto Rico as a profit opportunity first, and the Whitefish Energy contract puts those comments in a new light. A virtually nonexistent electrical contractor is being paid 7 times the market rate for electrical technicians to repair broken electric lines in Puerto Rico. Had the contract run its course, the owners would have pocketed around a quarter of a billion dollars without doing any work themselves. Whitefish Energy does not have any employees — journalists have been able to identify only two people who work for the company — so it must simply have hired other companies who do employ electric workers to do the actual work. I assume the dozens of workers who ultimately arrived in San Juan did real work, though I must add that so far there is no concrete evidence of this — no photographs of workers working, no building with its electric supply restored. At the same time, there is little room to imagine that the technicians Whitefish Energy hastily rounded up on the job boards could have been as skilled and qualified as ones who had been through a regular hiring process. Essentially, the Whitefish Energy contract was little more than a vehicle to funnel unearned money to this mysterious shell of a company.

The contract did not last long after journalists found out about the terms. The largest daily paper in San Juan, though it didn’t break the story, ran an infographic showing how disproportionate the pay arrangements were. That image was seen everywhere last week, it seemed. The mayor of San Juan asked for the contract to be voided, which resulted in Whitefish Energy threatening the mayor on Twitter. The company apologized quickly, but it was too late. The Inspector General’s office looked at the case for a day and decided it wouldn’t have anything to do with it. After two more hops, the governor recommended canceling the contract. By that point, no one would admit to having anything to do with approving the contract in the first place, and it was canceled the next day. That happened over the weekend.

Except — work already underway is being allowed to continue. This makes a kind of sense, but it also means that the work will run long enough that Whitefish Energy, whoever they really are, will get to keep a lot of money, surely in the neighborhood of $10 million. That is still a huge government payout in what looks like a case of government corruption from beginning to end. It is more than enough money to allow a small group of people to retire to a tropical island, as we have seen in the final scene in more than one or two Hollywood heist flicks. This is a money bag on a similar scale to what we see in the movies. And we don’t even know at this point who Whitefish Energy really is.

FEMA seemed to own the contract originally, but disowned it after the terms became public. Over the weekend they were complaining that other parties hadn’t properly vetted the contract, though it is far from clear that the electric company owned by the bankrupt territory had the authority to question a financial arrangement set up by its federal overseers. The indirectness of rule by an oversight committee did not just mean it took five days to cancel the contract. This kind of arrangement, by allowing everyone involved to disclaim responsibility, tends to allow corruption to flourish. This is especially likely when the direction from the White House is to treat Puerto Rico as a profit opportunity rather than a civic problem to be solved. The whole situation looks like a White House-directed plot to siphon off government funds for the personal gain of someone connected to the Trump administration. The $10 million they got away with probably seems small on the scale of activities in Washington, but it will surely rankle in Puerto Rico, where most of the island is still without power and citizens now know the restoration of the electric grid was delayed by more than a week just so someone on the mainland could get filthy rich.

Sunday, October 22, 2017

Getting the Story Straight in Puerto Rico

It took an agonizing month to get here, but the world has mostly gotten its story straight on the disaster in Puerto Rico. The White House went from denying that Hurricane Maria had ever happened to mentioning the storm by name and acknowledging the human impact of destroyed power plants. Major news outlets are using terms like “post-apocalyptic” and are showing photos of empty supermarket shelves. The state government of Puerto Rico is doing better at capturing daily information on the disaster recovery and their information is slowly catching up to the magnitude of the disaster.

Looking back, the strangest thing about the Puerto Rico disaster response was the initial six-day delay in which it seemed hardly anything happened. It seemed as though federal agencies, charities, and news organizations crossed their fingers and hoped for good news in spite of the weather reports that indicated a storm likely to damage most of the buildings on the island. These were days wasted when it would have made more sense to start helping local authorities in search and rescue in any way possible.

There was surely an element of procrastination in the White House’s response, as if they hoped the story would just blow over if they did nothing at all. After ten days or so, the initial reaction from the White House felt more like a coverup than a response. Perhaps the White House did not want to highlight the early days in which it did nothing at all while the President went out to play golf. During the coverup period there were social media reports of emergency supplies in Puerto Rico being improperly diverted. This was part of the coverup story. None of the people making these reports had actually seen any emergency supplies. There were only rumors of supplies that had supposedly come and gone in the dead of night, an exceedingly unlikely scenario in a place where all the lights, including the street lights, had gone dark. The more plausible explanation for these reports is that these supplies had been promised but had not yet reached Puerto Rico. It was impossible for the supplies to be diverted because there was nothing there.

The White House has made a series of statements that indicate that it sees the crisis in Puerto Rico primarily as a profit opportunity for Wall Street. Protecting hedge funds and bond investors from losses is a higher priority than preventing deaths from starvation and waterborne pathogens, according to the way the White House describes the situation. This point of view will for years to come serve as the picture of colonialism as advocates for democracy seek to change Puerto Rico’s status.

Workers are in the very early stages of getting Puerto Rico running again, and the most optimistic plans call for electric power for close to 90 percent of customers by the end of the year. It will take longer than that for workplaces to be operating again, and in the meantime, hundreds of thousands of workers will leave Puerto Rico for jobs in the eastern United States and California. One of the big unknowns in Puerto Rico is just how many residents have already moved away. The influx of voters could affect the electoral balance in some states, particularly Florida, Ohio, Virginia, and New York. When the numbers are finally added up I expect Hurricane Maria will stand as both the most disruptive disaster and the most badly muffed disaster response in U.S. history. Voters who remember this debacle a year from now will not look kindly on the Trump White House or its allies in Washington.

Friday, October 13, 2017

Bank Failure: The Farmers and Merchants State Bank of Argonia

The FDIC reported the liquidation of The Farmers and Merchants State Bank of Argonia. This was a small bank with two locations in Argonia and Schulte, Kansas.

It did business as Farmers & Merchants State Bank & Insurance Agency. The combination of banking and insurance might seem strange. There was a brief period after 1999 when many in the banking industry thought every bank should also be working in insurance. Most such arrangements were unwound by 2010. I have never seen an example where combining banking and insurance worked well. With so little operationally to connect banking and insurance, each business would have to be a distraction from the other. There are also financial implications. When a community bank makes half of its money from mortgage loans in its local area, concentration of risk is a concern in the first place, and this only gets worse if the bank is also issuing the insurance on those loans. I don’t have any relevant information on the cause of this bank failure, but regardless of the real story, the failure of any “Bank & Insurance Agency” may serve as a further caution to anyone who might be considering that combination of businesses.

This is the first FDIC bank resolution since May 26, which means the United States went for three months without a bank failure. This is what the pace of bank failures looks like in normal times, and it means that banks are doing reasonably well, even if hundreds of banks have not yet recovered financially from the real estate crash of a decade ago.

The Lost Hurricane, or Why Strategists Are Useless Most of the Time

We are approaching the end, we hope, of the worst hurricane season in U.S. history. I am sure most of my readers have been following the stories, so for those who have, please bear with me as I engage in a quick exercise in revisionist history. Pay attention — there will be a quiz at the end.

It is the morning of September 6, 2017, and things look grim. There are hurricane warnings for dozens of islands in the eastern Caribbean. A major hurricane, Irma, has just leveled Barbuda, stripping away most of the trees and damaging almost every building on the small island. From the U.S. point of view, there is reason to worry. This is one of the biggest hurricanes ever seen in the Atlantic Ocean, and it appears to heading almost directly toward the United States’ most important territory, the island of Puerto Rico.

Fortunately, when that hour comes, the hurricane passes by to the north. Puerto Rico is close enough to sustain wind damage and power outages, but the damage is surely nowhere near as bad as it might have been. Emergency managers in Washington hope for the best in Puerto Rico while they cast a worried eye on Florida. Evacuations there are underway as the hurricane appears to heading in that direction.

As news trickles in from Puerto Rico, though, damage is worse than expected. On September 22, aerial photos arrive showing a major dam that has sustained damage from the excessive rainfall. Engineers say the dam could collapse within hours. Evacuations are ordered downstream. The dam stands, and the military is sent in to do what they can to stabilize it and slow the erosion. Elsewhere across the territory, the damage is severe. Hospitals are operating on emergency power if they are open at all. Reports are slow to come in because communications and electricity are out almost everywhere. More supplies are sent, but progress continues to be slow. The U.S. President reluctantly agrees to visit Puerto Rico to see how the recovery efforts are going. The visit is delayed until October 3, and as the President hands out paper towels and tries to cheer up residents, he is puzzled by the disaster scenes he sees. The hurricane on September 6 had delivered only hours of tropical storm-force winds. What had happened? Puerto Rico must be badly managed indeed. By October 12, with electricity restored to only one tenth of Puerto Rico, the President is losing patience. Puerto Rico, he insists, was already a disaster already before the hurricane arrived. Federal disaster workers cannot stay there indefinitely, he says.

Those of you who have already spotted the error in preceding paragraph, please consider: there are also a great many people who will not see anything wrong in this narrative. People who think this way — for my purposes here, I will call them strategic thinkers or strategists — are in positions of power everywhere in the world. As long as this point of view carries so much weight, it is important for all of us to understand it and its strengths and limitations.

It is not even really about the often-cited differences between the “big picture” and “details.” If it looks like I have perhaps falsified the details of my narrative, I assure you that I have not. You could look up and verify each detail one by one, but that would not help.

For those who still don’t know where the problem is, I must not keep you in suspense any longer. The problem with the narrative above is that I failed to mention the most important thing that happened in the whole sequence of events. On September 20, 2017, Hurricane Maria crossed Puerto Rico. The entire island was in hurricane-force winds for the entire day. In the areas with the worst damage, most of the trees were brought down and those still standing had only a few leaves. Elsewhere, there were places where most trees stood, though most of the leaves were ripped away. One-day rainfall from Hurricane Maria ranged from 10 to 40 inches across Puerto Rico.

When you know about Hurricane Maria, the narrative based only on Hurricane Irma no longer makes any sense at all. But this also means the White House response to Puerto Rico no longer makes any sense. Maria must have failed to register on the television screens at the White House, which continued to respond to the crisis in Puerto Rico as if this second hurricane had never occurred. The White House response to Puerto Rico is proportional to the disaster if you know about Hurricane Irma and its near-miss. The White House response to Puerto Rico becomes nonsensical only after you add in the effects of Hurricane Maria, something that, I feel comfortable saying, the White House somehow failed to do.

Whoops! Needless to say, this is a pretty big mistake, but it’s important to see that it is not just a dumb mistake. Such mistakes occur every day in some form when people look at the world through the “strategic” lens. To those who stick to this point of view, numbers are details that don’t matter. One hurricane, two hurricanes — who cares how many hurricanes there were? The same point of view also may confuse hurricanes with earthquakes. It’s a form of confusion that most of us have difficulty imagining, but consider: both are natural disasters that may have effects in a short time period across a wide area.

You really don’t ever want strategists running anything because the results are regularly this embarrassing. Americans are going hungry because the White House lost track of the biggest hurricane in U.S. history? Yes, that is actually happening, literally today, right this minute, and it’s no wonder if those who are hungry are angry about the situation and those who are more distant from the problem are embarrassed.

I like to imagine that strategists make such big mistakes because they are comfortable dealing in abstractions but uncomfortable dealing in observations. This also tells you why strategists are useless most of the time. We get most of our results by observing what is going on in the world and reacting accordingly. Adding a layer of abstraction, most of the time, just muddies the waters. The recovery in Puerto Rico is being conducted by local workers and officials who go from building to building, finding the survivors and dead bodies, identifying the hazards, seeing what’s working and what’s broken. To have these workers criticized from a distance by someone who says that “Puerto Rico” (as if the territory were a person) could have built more hurricane-resistant buildings and avoided much of the current work is not only counterproductive but embarrassing.

Alas, these mistakes of context occur daily when a strategist is in charge. You ideally don’t want a pure strategist running anything that creates real-world consequences, yet Washington and much of the world are run by strategists. Many large businesses hire only strategic thinkers as executives. The world is regularly embarrassed by Trump’s out-of-context declarations. Equally embarrassing situations occur when the head of Hewlett-Packard or Uber threatens journalists, when Amazon issues a statement implying that authors deserve to starve, or when a Microsoft executive explains why fixing bugs is a waste of the company’s time. In practice, strategists are in charge in many places, and if we cannot replace them, we are left to find ways to work around them.

It is important to have strategic thinkers because they help us make some of the big leaps that a more concrete and prosaic thinker would never even think of. I want to be careful not to overstate this point, because equally big advances can emerge under the leadership of people who aren’t given to the strategic mindset. Thomas Edison, Henry Ford, and Franklin D. Roosevelt are prominent historical examples, and currently, Tesla, Apple, and Ikea are companies moving the world without leaning on strategic thinking. On the other side of a big advance, an initiative based on strategic thinking can flame out when it runs into a problem that the strategists can’t think their way around, as seen currently at Chipotle Mexican Grill and Uber, and you can doubtless think of dozens of other examples. We want to have strategists, but when they decide on something harmful, we need to be able to set their decisions aside and do something sensible instead.

In the case of Puerto Rico, the President is saying in essence that if Mr. Rico is starving it’s his own stupid fault. There are legitimate questions about Donald Trump’s brain function in recent weeks, but this conclusion has nothing to do with Trump’s mental decline. This is an everyday example of a strategic thinker led astray by his own strategic mindset. What we need to do is set Trump’s conclusion aside and say instead that these are our people and with an entire agricultural season wiped out, we are going to make sure that they have food.

For those in a position to choose leaders, it is important to look past the appeal of the great leap forward that strategic thinkers promise and see the inevitable blunders. With strategists in charge, breakthroughs and flameouts are all but guaranteed — except that after the first flameout, there might be nothing left. In politics, strategic thinkers are usually advisers, not executives, and that is the way it should be in business too.

Thursday, October 12, 2017

It’s Not Just Weinstein and It’s Not Just Hollywood

The Whole Corporate System Is Rotten With Predatory Worker Exploitation, and It’s Going to Get Worse

The Harvey Weinstein story is one that is hard to miss. The movie mogul was revealed to be a sexual predator with a decades-long pattern of workplace sexual harassment in a New York Times story. Weinstein responded with a confusing combination of apology and blustery denial, but at the same time, he also went into hiding. The day that followed was a parade of resignations from his corporate board and among his legal advisers. Then what was left of the board of directors at Weinstein’s company let him know that he was fired. Other journalists had already been working on the same story, and a New Yorker story along with others in other publications gave the situation a darker color. Weinstein’s habits of sexual predation, intimidation, and character assassination were far more pervasive and violent than the New York Times story would lead one to believe. Extrapolating, it is hard to imagine that this one man had not ruined the careers or lives of hundreds of the women who had worked for him. Rumors today say that Weinstein has left the country. Supposedly he is on his way to a residential treatment program, but one has to wonder whether, if criminal indictments follow, he will ever return to the United States. Meanwhile, Weinstein’s credits are being scrubbed from movies he nominally worked on. At the Weinstein Co., the board of directors has said that it will at least change the company name, but the company is said not to be functioning in any meaningful sense at this point and it is reasonable to guess that the office will close down and the company will liquidate. Today the news came that the company’s book imprint, at least, is no more.

Attorney Gloria Allred expanded the issue of Hollywood sexual predation yesterday with an interview on CNN. Weinstein, she said, is not the only bad guy running things in Hollywood:

Harvey Weinstein is not the beginning and the end of this issue because I have been contacted by many accusers who are accusing other high-profile figures in Hollywood as well.

This shouldn’t be too surprising in the town that invented the term “casting couch.” It also shouldn’t be too surprising in light of the recent news that male actors in Hollywood movies earn roughly twice the amount that female actors earn. It is still unsettling to hear, it is a disappointment to those in Hollywood who might have hoped that the scandal would pass quickly, and it points to an image problem that Hollywood now faces. Suppose you’re someone who has just purchased a movie ticket at your local cinema. Where does the money go, you might ask. People know by now that the cinema itself keeps a vanishingly small share, not enough even to keep the lights on. A well-run cinema literally makes more money from soft drinks than it does from ticket sales. If you pay by credit card, the banks get a share of the money, more than the cinema but still small. Some of the money must go to the starring actors, but that is not as much as we had imagined either. Most writers, technicians, actors, assistants, and musicians in Hollywood work for starvation wages if they are paid at all. So if you buy a movie ticket, is the money going to someone like Weinstein? That unfortunate picture is basically accurate. That is not what you think you are paying for when you see a movie, and it is an image problem that Hollywood now has to solve.

Obviously, the problem extends way beyond Hollywood. Donald Trump hardly counts as a Hollywood figure, but the sexual predation habit he described in such disgusting detail in a television interview so resembles the pattern of Weinstein I have to wonder whether Trump had studied Weinstein’s method and taken notes. In the music business, the timing of the way sexual predators meet their victims is obviously quite different, but otherwise the stories and the effects are much the same.

And it is not just a problem associated with creative work such as films and music. It is when the contracts, roles, and bureaucracy of the corporate world make some people so much more powerful than others that this kind of predatory behavior becomes hard to keep in check. You might think corporations would have a way to enforce policies that ensure that workers can go to work with an assurance of basic dignity and security, but the economic incentives point in the opposite direction. Corporations already in a position of power with respect to their workers work to consolidate that power by further disempowering and degrading their workers in any way they think they can get away with.

I have worked, for example, in the banking sector, and I have watched over the last two decades as the sector has been largely taken over by foreign workers. American banks hire foreigners not because the foreigners are more skilled or local workers are hard to find — in fact, just the opposite is true. It is not even that the foreign workers are paid less. Banks hire foreigners mainly because a worker in a foreign land is in a more vulnerable position, less able to object, report wrongdoing, or go elsewhere when the employer is doing something that everyone can see is wrong.

But a vulnerable position is just what a predator is looking for. It is the fundamental nature of a predator to see who is the most powerless. Weinstein’s victims included temporary workers, unpaid interns, and workers who were new in the industry. These were workers who had to succeed where they were, and Weinstein knew this and took advantage. I have no doubt that unscrupulous managers in banking and every other industry are exploiting workers’ vulnerabilities in whatever ways they can think of — certainly having them work off the clock and on cloak-and-dagger activities that a more confident worker would refuse to participate in, but also at times extending to the kind of brute-force sexual assault we read about in the Weinstein case.

This won’t be fixed as long as corporations hold so much power over workers. This imbalance of power inevitably leads to exploitation, including the sexual exploitation scandal now shaking Hollywood. It is important to recognize that the sexual exploitation of workers can‘t really be corrected without correcting the institutional forces that promote all the other forms of worker exploitation. It is the imbalance of power that has to be corrected. Some of the policy fixes are obvious, like raising the minimum wage and reducing executive pay. Unfortunately, a plurality of policymakers disagree with any such solution. “Pro-business” politicians are looking for ways to create an even worse imbalance of power by taking away protections for whistleblowers and unions and creating loopholes so that corporations can effectively ignore labor laws. Even the immigration crackdown can be seen as a way to create a vulnerable pool of workers who can more easily be exploited.

The consensus of social media is that a cultural fix is called for. Men must be persuaded to be less predatory in their approach to sex. I don’t disagree with this approach. If even one sexual predator can be persuaded to change his ways, that is a good thing. At the same time, neglecting the influence of the environment is naive. To be blunt about it, corporations and sexual predators are made for each other. As long as corporations exist in their present form, sexual predators will be drawn to them. To solve the problem in a meaningful sense, the nature of the corporation has to change.

I have no illusion that this is about to happen. Currently in Washington the White House and House of Representatives are not about to take up any measure that would be beneficial to workers. Things are slightly better in some other countries and slightly worse in others. As long as laws define corporations and employment in terms that encourage exploitation, there is no realistic prospect of a solution to the plague of sexual predators in the corporate environment. I am afraid this is a problem that will get worse and will persist for a very long time, changing only after the global political climate has shifted.

Friday, September 29, 2017

This Week in Bank Failures, Raccoon Edition

A Royal Bank of Canada branch in Toronto had to close a month ago when a raccoon family was discovered living in the ceiling. [ http://www.cbc.ca/news/canada/toronto/raccoons-close-bank-1.4314306 ] Now the bank says the branch will stay closed for another month. Workers had to build scaffolding to reach the damaged ceiling and, after examining it, found that the damage the raccoons had caused was more extensive than originally thought. The branch will reopen after the raccoon damage has been repaired.

It is likely that the raccoon invasion went undetected for quite some time. Raccoons are nocturnal by nature and would have been sleeping during banking hours when people were in the bank office.

Tuesday, September 26, 2017

After Puerto Rico Disaster, We Know So Little

I’ve been waiting to hear how Puerto Rico fared in a storm that had the potential to be the worst natural disaster in U.S. history. After a week, the mere fact that we have not yet heard from half of the island is a likely indication that things have gone badly.

Weather measures looked grim in the first place. Hurricane conditions covered the entire territory for hours and lasted a whole day. Estimated rainfall totals were possibly as low as 6 inches on the southwest coast, though that is already enough for severe flooding, to 40 inches at higher elevations in the interior. You don’t get that kind of rain along with hurricane-force winds without destroying structures of every kind, and the most prominent casualty has been the Guajataca Lake dam. There is damage to the dam and more prominent damage to its spillway, and though it continues to function approximately as intended, damage has progressed far enough that engineers are telling everyone to stay away.

The Guajataca stories are emblematic of the difficulty in getting accurate information about the state of Puerto Rico. News photos have been few and undated and have not focused on the damage. Early reports were wildly inaccurate, some incorrectly stating that the dam had collapsed and misspelling the name of the river, dam, and lake as “Guatajaca,” others falsely claiming that no dam failure had taken place, and still others incorrectly placing the threat near the major city of San Juan. The faltering dam threatens two towns with populations of 70,000, but what part of that number had to evacuate? Some have said as few as 320, others, all 70,000, and it appears the lower number is closer than the higher number, but we don’t really know.

Looking at the state of the Guajataca Dam is frustrating enough to remind even a philosopher about how little we really know. Experts from the Army Corps of Engineers went to see the dam but even they are not able to add much new information. When a dam is made from compacted earth, the key question is how far into the soil the water has reached, and how much is seeping or flowing through the dam near the top. I don’t know of any direct way to measure the strength of soil buried deep underground, and the challenge is that much harder when it is not safe to walk onto the top of the dam.

The broken dam is not the biggest question now after affected residents have had time to evacuate. How about the question of how many have died? That is a question that obviously can’t be answered when roads are blocked and 100 villages remain isolated, unable to communicate with the outside world. Normally in such a situation, helicopters could land and evacuate the most gravely ill people to hospitals, but even a measure as obvious as that is difficult right now. There aren’t many helicopters, and even if there were dozens available, there isn’t enough fuel on the island. Then, where do you take sick and injured people? With the electrical grid destroyed and fuel running low, hospitals are barely functioning. If the lights and medical equipment at a hospital go out, a very present possibility, the death toll could add up quickly.

One reason the United States does not know how to handle the situation is that a disaster of this size and shape has never occurred in the history of the country. When New Orleans was submerged, Baton Rouge was only moderately damaged. It could serve as a base of operations for the relief of New Orleans. Here the United States faces a disaster five times as large, and there is no undamaged town in Puerto Rico that can serve as a starting point for recovery.

I don’t know what the first steps have to be, but it is obvious that some of the most basic components of economic functioning have to be put in place before even the planners at FEMA can relate to the situation in a constructive way. This list would include ports, roads, water, food, motor fuel, and banks. Even this short list would be obviously beyond the capacity of local authorities anywhere. The largest airport has reopened, at least, and if tourists are stranded in the airport waiting for fares to fall below $2,000 a seat so they can get home, that tells us that the airport is functioning and some supplies are arriving.

With so much at stake, hundreds of people on Twitter wonder why there is no aircraft carrier on the way to help. Or maybe there is. There is so little we really know, but it is clear enough that the crisis in Puerto Rico will get worse before it gets better.

Thursday, September 21, 2017

Disaster and Disruption

It is hard not to think about disasters this morning. At the top of the news I can read about one of the most damaging hurricanes in U.S. history. Frantic search and rescue efforts are underway after an earthquake brought down large buildings in central and southern Mexico. I know of several other disasters across North America, perhaps not to be found in the headlines today, but nevertheless in the early stages of cleanup.

It is important to stay informed, but it is hard to read disaster news and not cross over into simple worry. I can tell I have made that transition if I sift through ten more minutes of news imagining I will find a new update when everything I see just repeats information I have seen already. This is time wasted.

It is one of the old questions in economics whether disasters add to or take away from economic production. Two small examples suffice to illustrate the question. A window broken in a storm has to be replaced. The materials and labor count as new production. A bridge is underwater and workers cannot get to work today. The work they would have done can never quite be made up. Production is lost. The question is about the relative scale of rebuilding and disruption. Which is the larger effect?

In the disasters I am seeing this week, it is clear that disruption weighs heavily. Based on the photos I have seen from Mexico City, my guess is that less than 1 in 100 buildings will be demolished because of earthquake damage, but the disruption affects everyone in the city. Meanwhile, the worry that I described earlier affects a far larger number of people. Worry draws us away from productive work for varying periods of time, but it affects so many people that it adds up to a lot.

There are counterexamples, cases where rebuilding appears to be a larger effect than the disruption of a disaster, and then you can poke holes in the counterexamples. Business gurus insist that you have to shake things up to make progress, and there is more than a grain of truth in that, but merely shaking things is not a strategy. Totalitarian regimes regularly go to war on the theory that the hardship will be good for their respective nations’ fortunes, but unless an exceptionally clean and short war can be arranged, this strategy ends badly. War becomes merely a tool allowing corrupt leaders to cling to power for a few more years at most.

Recent studies in psychology suggest that productivity is improved and individual and organizational progress is faster when everything goes smoothly. There are times when disruptions help people focus, but stability boosts focus more reliably. To put it bluntly, if you want to be successful, good luck is better than bad luck. This is not so hard to believe. On which day are you more likely to do your best work: a day when the hurricane wind sounds like a freight train outside your window, or a day when the loudest sound you hear is a couple of songbirds?

It is beyond any of us as individuals to prevent hurricanes and earthquakes, but we can act to minimize the disruptions they cause. Sometimes we are in a position to make buildings more sturdy so that they are not so readily affected by shaking, pressure, heat, smoke, and water. All of us, though, are in a position to keep disaster news in its proper context. No matter the scale of a disaster, if it does not affect you or your town directly or nearly so, it is only right to set the news aside for hours at a time. You’ll still get all the news, if you choose, and the delay of a few hours costs you nothing. In the meantime, by not being immersed in the disaster, you can carry on with your own work in relative peace and productivity. Of course, the disaster news is still a distraction that can bother you even when you are not looking at it, but by reducing the extent of the distraction, you give yourself the best chance of completing something of value.

Tuesday, September 19, 2017

Trans Fat Bans Set for 2018

Removing trans fat from food turns out to be simpler than it appeared. That’s because the vast majority of trans fat in food is placed there intentionally in artificial ingredients that consist of pure trans fat. Prohibiting these ingredients, partially hydrogenated oil or PHO, is a simple administrative step and does not require any extra diligence or difficult adjustments at food factories, but it is sufficient to take away close to 99 percent of trans fat from food.

The FDA issued its final determination on PHO on June 15, 2015, and it goes into effect on June 15, 2018. As government rules go, this is an unusually simple one, indicating that PHO is not “generally recognized as safe” (GRAS) and therefore cannot be used in food for humans sold in the United States. Exceptions are made when manufacturers do detailed safety studies that are accepted by FDA. The fine print in the rule is used to make sure that fully hydrogenated oil (FHO) is exempt from the rule while not allowing food factories to sneak PHO into our food by disguising it as FHO.

To food manufacturers, though, the more important rule is the one made by Health Canada, finalized last Friday and set to go into effect on September 15, 2018. On the surface, the Canadian rule is compatible with the U.S. rule, but there are two important differences. First, Canada is adding PHO to its list of food contaminants. Unlike the more roundabout FDA rule, this action directly makes it a crime to sell food containing PHO in Canada. Second, Health Canada is not allowing the long list of exceptions for small amounts of PHO that the FDA says it will allow in the United States. My expectation is that food manufacturers will follow the Canadian rule and stop using partially hydrogenated oil completely in order to be able to sell the same product across North America.

It is difficult to overstate the effect on health that removing trans fats will produce. Trans fats are clinically implicated in blood lipid problems, especially those related to cholesterol. These problems often develop into heart attack and stroke. Separately, trans fat is known to weaken cell walls. This reduces cellular functioning and is believed to reduce metabolism, cause generally poor health, and make a person susceptible to bruising, viral infections, and fungal infections. No one should be subject to this kind of ill health as a result of eating an artificial food ingredient that does not even add any useful quality to the food. The health effects of trans fat are not as severe as those of smoking, heavy metal exposure, or chronic dehydration, but are comparable in seriousness to the effects of a sedentary lifestyle. Health will improve across North America as a result of this change.

Monday, September 18, 2017

Toys ‘R’ Us On the Brink

Attention Toys ‘R’ Us gift card holders: now would be a good time to spend those gift cards.

Toys ‘R’ Us is one of the most popular gift cards in the United States, so there must be a good fraction of a billion dollars of them in consumers’ hands. Usually consumers hold on to the gift cards until they have a reason to buy a specific toy. But Toys ‘R’ Us has been living on the edge since the 2007 recession with more debt than it could realistically repay, and now Wall Street Journal says it is preparing for a possible bankruptcy before Christmas.

It is a complicated situation. Toys ‘R’ Us owes so much it needs an above-average shopping season every single Christmas just to carry on into the next year. This is a game that will almost certainly end as soon as the next recession hits. On the other hand, the current complaint at Toys ‘R’ Us is just a repeat of last year. Its limited credit meant it was unable to fill its shelves the way it wanted to. Yet the limited stock might have saved the retailer from a post-Christmas bankruptcy. The 2016 holiday shopping season was muted by a post-election hangover, but Toys ‘R’ Us did not face a crisis of unsold inventory because it had held back on purchases. That’s a strategy it is being forced into again now, and again, it is probably what the retailer should be doing anyway. What is different this year is that Toys ‘R’ Us has a $400 million debt payment due in May 2018 (with more to follow). My guess is that executives are betting big on shoppers being more exuberant than they realistically will be during the upcoming Christmas shopping season, because how else will they meet that payment? Yet the big gamble increases the chances of a sudden collapse. Though it might not sound very businesslike, the best chance for the troubled retailer to survive financially is for it to continue to limp along as efficiently as it can and hope for a miracle. Sometimes the prospect of bankruptcy gives a troubled business more leverage to negotiate, and with luck, in this case that might allow a debt restructuring just large enough to get by.

However, the potential for a bankruptcy is hanging in the air, and for a shopper holding a gift card, the simple thing is to spend the gift card and take delivery of the merchandise before the bankruptcy filing occurs. That is, make those Christmas, Halloween, or party decoration purchases in advance. Usually a bankruptcy court will allow gift cards up to a specific cutoff date, after which they are worth nothing, but the point is, if you’re still holding a gift card on the bankruptcy date, the fate of the gift card is something for the court to decide. That’s a complexity you avoid by spending the gift card sooner. No one knows whether a bankruptcy filing is on the way or what the date might be until the papers are signed and taken to the courthouse, but the people Wall Street Journal talked to were guessing this would happen within the next few weeks.

Most retail bankruptcies happen in January after a lackluster Christmas season, and that is another possibility here. For a retailer to be planning a bankruptcy before Christmas shows how desperate the situation is. That Toys ‘R’ Us’ financial predicament gets tighter every year is a measure of how thin its operating margins are, usually a sign of a business that is trying to do too much. A bankruptcy restructuring plan can correct for that, for example, by closing most locations and shutting down Babies ‘R’ Us.

One reason for doubt about a toy retailer is that more shoppers are doing their Christmas shopping in August and September, either to avoid the seasonal rush or just to get a chore off their to-do lists. The trend toward earlier shopping provides an efficiency gain for retailers but does not help a retailer counting on throngs of shoppers in December to keep the doors open. Another trend is that more toy purchases are being made online. With that trend, it is likely that the toysrus.com web store will remain after it is all over, whether operated by the current company, a successor, or an unrelated company that purchases the brand and domain in liquidation.

If Toys ‘R’ Us goes into bankruptcy in October, it will likely enter with a restructuring plan that does not represent a large enough change for the court to approve. The plan will be scaled up or otherwise refined during the bankruptcy proceedings, a process that could take weeks or months. In the meantime, specific stores might be approved to close. If the court is not convinced of the prospects of the restructured business, it could order a liquidation at any point. There is a possibility, either way, of Toys ‘R’ Us store-closing sales during the Christmas shopping season. That’s a prospect that should give all other U.S. toy retailers pause. Buyers for all U.S. toy retailers might be spending this week dialing back their inventory purchases for the holiday season.

Update, 24 hours later: Toys ‘R’ Us filed its bankruptcy papers Monday night. A public statement indicated that a bankruptcy filing for its Canadian subsidiary only would follow. Based on public statements, Toys ‘R’ Us is expected to remain in bankruptcy beyond the end of 2017. It was not immediately known whether stores would be able to fully stock toys for the holiday season or how many stores would be expected to close before and after Christmas. Statements are consistent with an incomplete restructuring plan that would carry a significant risk of bankruptcy liquidation, though any such move would more likely be decided in 2018. A court decision covering operational issues such as gift cards, payroll, and emergency funding is expected Tuesday.

Friday, September 15, 2017

Speculation on Equifax

I’ve been watching with interest as Equifax unravels. Last week it announced the largest-ever leak of highly confidential personal data. The leak is so large that, for most of us, there is no point in checking to see whether your own data was involved in the leak. Just ask yourself if you have ever, in the United States, applied for a credit card or held a checking account that had overdraft protection. If so, it is more likely than not that your personal information, including Social Security and driver’s license numbers, were part of the leak. The leak is so large that there is now talk about doing away with the use of Social Security numbers for identifying taxpayers and financial accounts. That never happened before except in a very hypothetical way.

It is not just the data that Equifax holds on most U.S. consumers that is at issue. Credit card accounts of the much smaller number of Equifax customers have also been compromised. Other data of significance was included in the leak, too much to list here. Equifax’s public response to the crisis has been marked by the company’s indifference to and suspicion of consumers in a moment when its entire future depends on the goodwill of the public.

Nevertheless, the consensus among financial analysts is that nothing will happen to Equifax. Indeed, the company’s stock value has fallen by only a third. I believe in this case analysts have fallen into the trap of not believing in consequences. I would argue that it makes sense to look at the possibility that there are no consequences in the Equifax case but also at the possibility that there are consequences.

What happens to Equifax depends to a great extent on the facts of the situation, and those are mostly secret at this point. One of the biggest questions is the extent to which Equifax leaked data that it was not legally entitled to hold in the first place. If this is extensive or pervasive, then there is no reason to imagine that the company can continue to operate. Its liabilities in this scenario do not depend on showing a degree of negligence, since the harm would have been caused by intentional actions of the company.

It is useful to consider Equifax’s position as a private investigating business. This is not like the leak at Home Depot or Target, where the company’s customers were the victims of the leak. Consumers are not customers in this case. For the most part, consumers do not directly give Equifax permission to collect and hold their data. So what separates Equifax from the criminal enterprises that obtained the same data? Only subtle legal distinctions make Equifax a legitimate business while others who collect the same data on you are criminals. This separation is based on fine points of the law that only a lawyer would be able to explain. But Equifax is not run by lawyers, so we don’t know how well they were following the laws involved. Not perfectly, it is safe to say, but under the circumstances it is reasonable to ask whether the company had controls in place to ensure that it followed the law in general. Conceivably it did not, and in that scenario, Equifax actually is the “hacker” in this case and is not entitled to any sympathy for having been victimized by another hacker.

In between, of course, there is the question of whether Equifax made commercially reasonable efforts to protect the data it held. This question, it turns out, is also vital to the future of the company. In particular, it is important to know whether Equifax lived up to the standards of care for highly confidential data in the banking industry. Why? If Equifax is not as secure as a bank is supposed to be, then it could effectively be shut down by banking regulators. It doesn’t appear that the Fed or the O.C.C. have the authority to take action directly against Equifax, but it hardly matters. If regulators issue guidance to banks that says that sharing data with Equifax is not consistent with banks’ obligation to keep data secure, banks will be obliged to stop sending Equifax any new data. A bank that violated any such guidance would risk regulatory fines and would face legal liability of its own for any subsequent data leaks. No reputable bank would take on those risks. Similar indirect actions could come from Visa or Mastercard that would prohibit credit card issuers from sharing credit card account data with Equifax. Equifax could not operate in its current form after even one such action against it. It would instantly lose most of its legitimate sources of data and most of its revenue. In all likelihood, it would close its doors for good at the end of the next day.

Even if Equifax were found to have done nothing worse than ordinary negligence, the legal liabilities could sink the company. The financial damage caused to U.S. consumers by the first leak alone is probably between $50 billion and $150 billion — an average of a few hundred dollars per consumer. The company’s total stock market value is only $11 billion. The entire company is not worth enough to pay for the damage. The company would have to dodge liability almost completely to survive financially in the end. I’m not saying that couldn’t happen, but if a horse named Equifax presented that kind of long odds you would not want to bet on it. Imagine just paying the lawyers to defend a company against lawsuits brought by more than 150 million people. A company could claim vindication in such a case and still go under from legal fees and reputational loss.

I must conclude with a reminder that the facts in the case remain secret and that this is all just speculation. The actual facts could be better or worse for the company than they appear at this point. At the same time, when people say that nothing will happen to Equifax, remember that that is a speculative position too.

Monday, September 11, 2017

The Post-Consequence World

Hurricane Harvey was a record-breaker, the rainiest hurricane ever, and now Irma is another, one of the largest hurricanes ever and the most persistent ever recorded in its class. Despite this, the weather deniers have been out trying to debunk both weather events. During the weekend, a right-wing extremist radio host told his audience Hurricane Irma was a fake, before deciding he had better evacuate. Then one of the prominent voices of the killer faction of the Republican Party posted false reports claiming that the storm had not reached the Miami metropolitan area. When Harvey was in the Gulf of Mexico, a larger chorus of voices tried to explain why the storm would be a non-event by the time it reached the shoreline. The common threads here are a disdain for science and its quality of careful observation, and a lack of concern for accountability.

The disdain for science comes with obvious perils, but it hard to make the same claim about accountability. Those who operate under the theory that they can say anything at all regardless of facts or consequences have amply proved that they are able to continue to operate in that fashion for years, simply because the core of American culture no longer quite believes in the idea of consequences.

Consequences do in fact exist, though, and economically, one would expect that believing in consequences would eventually provide a distinct competitive advantage. If there are two parties and one considers consequences while the other acts as if consequences do not exist, you would expect the former to bury the latter eventually. The huge example is the Soviet Union, which collapsed economically in the end mainly because ordinary industrial work and matters of national policy were addressed as if there were no underlying reality to either. Now, though, Russia is on a path to repeat this failure, and the disbelief in consequences has become a global trend affecting countries from Argentina to Bulgaria and businesses from retailers to software companies.

How can this be? There are problems in getting good information, of course, and there are lags, often lasting many years, between an action and a definitive outcome. In between, effects are subject to interpretation, like the smoker who sees the medical image of masses in a blackened lung and says, “That isn’t really cancer.” Making this pattern more likely, we have all been conned. We see someone proceeding with strong confidence and say, “Well, they must know something,” even though from everything we know they are doing exactly the wrong things. We collectively face more time pressure and distractions than ever. It’s no wonder if accountability slips through our fingers.

The lack of belief in consequences now extends to the most reputable business journalism. A business that recently leaked sensitive information about more than half of Americans, most of them not its customers, now faces liabilities that are ten times the total value of the business. Reputable analysts bemoan the errors and deceit but still conclude that nothing will happen to the company or its officers.

If we cannot expect the world to return quickly to a belief in consequences, we must at least be alert to the effects of living in a post-consequence world. We regularly face large amounts of propaganda and other persistent false information. Institutions that seem permanent will vanish with little or no warning. People will present patterns of behavior that would be perilous to imitate. We must expect these things to happen.

One of the defenses against the illusions of a post-consequence world is a sense of proportion. Simply understanding the relative sizes of things can point us toward the possibilities ahead. If we hear that the largest city in Texas got a year’s worth of rain in three days, we should be able to think, “That’s big.” Unfortunately, proportion is not an innate human skill, but requires practice.

Proportion helps us spot where things are out of balance in a big way. In a world were most people aren’t looking for consequences, those are the first places to look.

Sunday, August 20, 2017

Shamanic Techniques for a Solar Eclipse

On Monday, a rare total solar eclipse will briefly darken much of the United States. A solar eclipse can be a frightening experience, but the only real danger is that someone may suffer eye damage by looking directly at the sun. A major event like an eclipse is a good opportunity to get in touch with nature, and one thing you’ll discover quickly is that human nature protects us by providing an inhibition against looking directly at the sun. This inhibition is so powerful and so useful I would argue that you should heed this inhibition even if you have eclipse-quality sunglasses or the appropriate grade of welder’s glass (obviously, not ordinary sunglasses or tinted glass) to look through. Using your will power or curiosity to overpower inhibitions is generally a bad business and the inner struggle involved can detract from the experience of an eclipse. Instead, look at the sun only indirectly. Far better than looking through a glass is looking at the sun in a very dark reflective surface. For example, if you are improvising, that would not be the windshield of a car, because that would be too bright, but perhaps the glossy paint of a car might provide a dark enough reflection. Be guided by inhibition; if the reflection seems too bright, don’t look at it. I would rather you see the eclipse on television than try to look at the sun directly.

Fortunately, there is no need to look at the sun at all to experience an eclipse. All you will see anyway is the crescent shape of the sun with the moon covering part of it, a geometric shape you have seen in photographs already. If you are in the zone of totality you can then briefly see the sun virtually disappear. That is a moment astronomers wouldn’t miss, a valuable chance to see the sun’s corona separate from the solar disk. The rest of us, though, learn more by looking at our own world as it goes dark.

The first change you notice is the shadows. By the time the moon has blocked 5 percent of the sun, you can see the change in the shape of every shadow. This is the freakiest thing about an eclipse. Even if you haven’t given a shadow a second glance all year, you’ll look at a shadow, any shadow, and say, “Wow, that looks weird.”

Everything is obviously darker by the time the sun is 10 percent covered. This is the otherworldly part of a solar eclipse. We know how bright the sun should be, and if it is a little dimmer, it is alarming or at least unsettling. When the moon is blocking one third of the sun, you see a quality of sunlight that is more like what you would see on Mars than on Earth. When the sun is mostly covered, you are free to imagine that you are on Ganymede. In fact, take this moment to imagine a world, not one that exists, but one that you might create. What kind of world would you like to see? The eclipse is a powerful time to imagine this. A prepared shaman can set aside all practical knowledge of cosmology long enough to experience the total eclipse as the death and rebirth of the entire universe. In this view, your ideas of what kind of world you want to see when the world comes back help shape the new world that is born, so hold those thoughts of the world of your choosing in your attention for a few moments. People around you might be meditating, chanting, or drumming to strengthen their thoughts of the new world.

You can easily find live commentary online or on broadcast media to explain the significance of the stages of the eclipse, but if you want a non-commercial point of view all you need to do is listen to the birds around you, especially songbirds. Birds do not know what a solar eclipse is — they have not lived long enough to remember a previous one — so they discuss it among themselves, and you are free to listen in. Even if you had your eyes closed the whole time, you would know what was happening just from what the birds are telling you.

A solar eclipse is like a touch of night as far as the weather is concerned. You might notice the breezes changing direction the way they do at nightfall. The experience of an eclipse can help you notice how strongly the human sense of time is tied to the regularity of the cycle of days. Day and night is such an ingrained assumption that you might catch yourself afterward thinking of the things that happened before the eclipse as “yesterday.” I remember this happening to me in a previous solar eclipse that darkened the world where I was by only about one fourth. The lesson here is that day and night are not intrinsic parts of the nature of time, but rather are part of our world, an effect of our natural surroundings.

Treat the eclipse as an appointment with nature. Be guided by inhibition and do not look directly at the sun. Notice the shadows and the breezes. Listen to the birds. Imagine a new world. Happy eclipsing!

Wednesday, August 16, 2017

Hauling Lee Away on a Flatbed Truck

Maryland had mused for years about what to do with its Confederate statues. Surely they didn’t quite belong in a state that believed in equality, had long since abolished slavery, and could claim only the weakest historical ties to the Confederate side in the Civil War. Then last weekend a Nazi army descended on Charlottesville in the neighboring state of Virginia, beating and killing local people, threatening to destroy the town, and doing enough harm to ultimately affect everyone in the local area. It was a Confederate monument that drew the Nazis and their allies to Charlottesville. The Nazis intended to argue against its proposed removal, and though they had their say, they made their point a self-defeating way.

Overnight, every town that had a Confederate monument wished it did not. Would the Nazis strike their town next? Would they carry through on their threats to burn the town down this time? In this context, Maryland’s Confederate statues became a clear and present danger, an imminent threat to public safety. How many people might the Nazis kill if they came to Baltimore? With the Nazi groups heavily armed, it was easy to imagine a pitched battle with hundreds of people dying, but even one or two deaths would be too many. Officials collected the necessary approvals. Last night, cranes picked up the statues and loaded them on flatbed trucks. By 5 a.m. the four Confederate monuments in Baltimore had been taken away. Officially, their whereabouts are unknown. It does not seem likely that they can be safely stored anywhere, so one hopes they can be melted down and converted to something constructive.

The outcome might seem paradoxical. The Nazis are arguing against the removal of Confederate statues, but the brutal violence with which they state their case makes the removal of most of the remaining Confederate statues almost inevitable. To a governor or public safety commissioner, the compelling point is that with no statue, there is no flash point that could trigger a Nazi invasion. The strategy of removing the statues will not stop in Baltimore or Maryland. At the same time that Maryland was at work on its Confederate statues, the governor of North Carolina was recording a speech calling for the removal and relocation of the much larger number of Confederate statues owned by that state. I imagine North Carolina will quickly approve the removal of the statues, but if not, that action will follow soon enough there and elsewhere. A state does not have to see Nazi flags and torches again and again before it is compelled to move. Each removal of a Confederate statue increases the pressure on those that remain, so that within a few years, thousands of Confederate statues could be melted down or hidden away out of public view.

The result makes sense if you look at the situation through the lens of game theory, the mathematical modeling of making decisions when one’s decisions affect the decisions other actors. Nazis overestimate their popular support, so they calculate that their arguments will rally a large number of people to their cause, when the actual number is quite small. They may also underestimate the fear and loathing they engender, so that they don’t plan on the degree of effort others may make to avoid them. These mistaken assumptions make a highly irrational strategy on the part of the Nazi movement appear rational to them.

Taking down statues that are symbols of repression can have a larger impact than you would expect on the psyche of a community. The most prominent historical example of this is the rapid demolition, after the collapse of the Soviet Union, of the Lenin statues that had littered Russia. With the statues down, there was no chance that the Soviet system could make a comeback. Last night’s work removing statues that symbolized slavery has similarly lifted a weight from Baltimore’s shoulders. It will not be surprising if this turns out to be a similar turning point in the story of the city.

Update: Also see Washington Post story http://wapo.st/2wSyyKe

Update: Congress too is getting in on the trend:

Monday, August 14, 2017

Diesel Scandal Takes Down Motor Fuel Category

The diesel emissions scandal has had a bigger impact on transportation policy than I would have guessed. As industry analysts had told us early on, it was more than just Volkswagen cheating emissions tests. In the time since the scandal broke, the global warming problem has become more dire. 

It now looks like the phase-out of diesel will take all liquid motor fuels with it. Norway is moving quickly and has set 2025 for its transition to electric cars. The United Kingdom and France have made plans to phase out fuel-burning light road vehicles after 2040. Volvo said that by 2019 — two years from now — a fuel-burning car will be a luxury item. Volvo will be selling hybrid and electric models side by side starting in 2019, but will no longer make fuel-only drives. Today the government in Germany conceded that a phase-out of fuel-burning cars is inevitable and will probably happen sooner than 2040 in practice.

In the meantime in the United States, Tesla started shipping its mass-market electric car, for which it has taken more than half a million advance orders. For everyone who has ordered a Tesla, there are 200 drivers who, like me, are looking on with a degree of envy. Tomorrow I will put another another $33 in my car’s fuel tank. A few lucky drivers won’t be doing that. I might be too cautious to buy an electric car at this point, but I have trouble imagining the logic of buying a new fuel-burning car at this point. Most of us will become electric-car drivers as part of the vehicle replacement cycle, but the transition will certainly come sooner than the 20-year life span of a current new car. In practical terms, the whole auto industry could stop making new fuel-only cars at the end of the 2018 model year and the existing stock of vehicles would serve.

Norway with its 2025 target and California with an ambitious clean-air plan might be ahead of the curve, but the United Kingdom, France, and Germany are only following the trends with their 2040 cut-over. We tolerate fuel-burning cars now out of a sense of practicality. The battery of an electric car costs more than the engine of a fuel-burning car. When this comparison approaches parity, fuel-burning cars could fall out of favor in a period of less than a model year. Automakers and dealers need to plan for this decline so that when it hits, they aren’t stuck with an overhang of obsolete inventory.

It’s easy to see the transition to electric for the smallest vehicles, harder for the largest ones. Cargo transportation and air travel make more efficient use of motor fuel. Ships have longer useful lives, are harder to overhaul, and have nowhere to plug in on most days. Upgrading all our cars is perhaps a large enough challenge to take on right now. With what we learn from the transition in cars, we will surely be able to make a better plan for buses and trucks, and then we can go on from there.

Sunday, July 9, 2017

Sears and Kmart Seek Smaller Stores

The announcement that Kmart and Sears will be closing another 43 stores was no big surprise — more retail stores have closed in the United States this year than any year ever — but hidden in the details there was another trend that might surprise some. The company as it shrinks is planning on not just fewer stores, but also smaller stores. Many stores, that is, will be shrinking in place. I saw that happen a few years ago when a mall Sears store was reduced to one floor. That location has since closed completely, but Sears indicates that we can expect to see more stores that keep the same main entrances but have less space inside. Stores are simply too large and complicated for shoppers to figure out. After a century of ever-increasing retail space, are we ready for smaller, more focused stores? My guess is that we are.

Monday, July 3, 2017

In Search of the New Hot Dog

If what I am seeing in advertising is any indication, hot dogs have completed the transition to a one-day-a-year food for most of the people who eat them. Brands that haven’t advertised all year have been in saturation mode for the past six days in an attempt to get their share of this year’s hot dog market. It is a surprisingly fast transition in cultural terms. I can easily remember when I ate hot dogs regularly, sometimes five days in a row until the package was empty. A sharp price increase broke that pattern for me, and many other consumers were dissuaded by a series of manufacturing scandals. I no longer buy hot dogs at all, and I haven’t seen one since last summer. Hot dogs have become a gimmick. No one would consider them a practical thing to eat, but they symbolize the Independence Day holiday more than any other food item. Hot dog manufacturers in the recent advertising emphasize that hot dogs have been improved this year. I feel certain the improvements are greatly exaggerated, but regardless of any number of minor changes, hot dogs are not the easiest form of food to handle safely. Given that, there is a serious problem with eating them so infrequently. Eaters are relatively likely to find that they can’t stomach a couple of hot dogs this time around. The bad experiences make people vow to eat even fewer hot dogs, and that, in turn, makes stomach distress even more likely next time around. What is needed to save the hot dog from this downward spiral is a new kind of hot dog, one that turns the tradition on its head. The traditional hot dog was made from the worst scraps of meat — a mix of brains, skin, and internal organs that was too awful to be used in any other way. This was cheapened still more a quarter of a century ago by mixing in such extras as soy protein isolate, gum, concentrated wood smoke, and chemicals. What’s needed now is a hot dog that is designed first and foremost not to make anyone sick — made with no meat at all, no soy, no chemicals or wheat gluten. I’m not sure exactly what it would be made of, but it is surely not too much to ask. The physical form of a hot dog is so nondescript — just a tube shape filled with goop hardened by cooking until it is just barely solid — and the flavor so nonspecific, there must be fifty ways to make them that don’t lean on high-risk ingredients at all. An exact flavor match is not necessary — indeed, the new hot dogs will need to look, smell, and taste different enough that the people who got sick on the hot dogs of 2017 can be persuaded to try again in a future year. Such is the ritual importance of the hot dog on the 4th of July and so great is the risk of annually eating the current output of the hot dog factories that this hot dog redesign is almost inevitable.

Thursday, June 29, 2017

Staples Goes Private

Staples has agreed to a $7 billion buyout. The paper-and-toner retail giant will be privately owned after shareholders approve and the deal closes. The buyout is not bad news in itself for the retailer, but the deal is a measure of the troubles at Staples and across the office-supply sector. Down the road, private ownership could pave the way for a rapid shutdown, bankruptcy, or more rapid store closings if the new owners cannot find a profitable niche for the company in a post-paper world.

Sunday, June 25, 2017

Italy Liquidates 2 Veneto Banks

Authorities in Italy have spent the weekend working out how to liquidate the two insolvent banks in Veneto that observers have been worrying about all year. The failed banks are Banca Popolare di Vicenza and Veneto Banca. Though not affiliated, the two banks are being liquidated together because they are facing the same regional economic problems and are in about the same financial condition.

“Good” assets — which are not quite so good as that term usually implies — are being transferred today to Intesa Sanpaolo. Having committed to liquidate the two Veneto banks while protecting depositors and keeping branches open, the government had few good options. A proposal by a hedge fund consortium was widely reported earlier in the month but rightly ignored. The hedge funds were seeking a controlling interest in the two banks but were willing to cover only a tenth of the capital shortfall. Such a plan would have postponed today’s liquidation by a few months at best, and it ran the risk of degenerating into litigation and chaos. Intesa Sanpaolo will apparently act as the government’s agent in managing and liquidating some of the assets it is not purchasing.

In retrospect, it would have been better if the two banks had been wound down five years ago. As it is, the bank liquidation will cost taxpayers an estimated €17 billion, of which €5 billion is being paid today. It was only two years ago, though, that auditors discovered problems in the loan portfolios and misselling of bonds, and not until last Friday that the European Central Bank referred the two banks for liquidation. Government lawyers then spent the weekend drafting a decree for the liquidation and transfer.

Ultimately not all of the branches will be able to stay open, but Italian regulators would prefer to have them close more quietly at another time rather than during such a visible crisis. Intesa is chipping in an estimated €60 million to protect bondholders, funds that would have been legally difficult for the government to provide. The fate of bondholders was an important political consideration because the banks fraudulently sold bonds to thousands of retail depositors, telling them that the bonds were certificates of deposit.

Tuesday, June 20, 2017

At Subway, Kiosks Over Ingredients

Embattled fast-food giant Subway had a plan to reverse its five-year decline by boosting the quality of its ingredients. Food quality has declined since the chain’s peak in the 1990s while the market has been moving in the opposite direction, and regular customers have been going elsewhere in search of a healthier lunch. As of a year ago, the plan at Subway was for the rollout of new ingredients to start this summer.

Well, forget it. Subway faces other problems that include the death of its founder and the jailing of its spokesmodel, and executives decided better food was more than the restaurant chain could take on right now. Instead, Subway’s major initiative this year will be in-store kiosks where customers can tap out orders on a touch-screen, copying the success of this approach at Panera. Subway is also rolling out a mobile app that provides the same functionality. You’ll get the same dull fare, but faster than before.

Maybe it’s the right move. The digital ordering platform should cut in-store operating costs, eventually providing the financial wiggle room needed to address the bigger issue of food quality.