This Week in Bank Failures

U.S. bank closings tonight are unlikely with a winter storm having already closed Washington, D.C. and expected to close all of the coastal Northeast by morning, with blizzard conditions over parts of the region.

Stocks of Italian banks are down sharply this year with concerns that parts of the bailout plan are illegal under EU law. Another concern is deposit flight and the expiration of €75 billion in small bonds sold to savers. There are worries that such bonds might be treated like deposits in the event of a bank failure, with the government essentially canceling the bonds, even though EU law would not seem to permit this approach. Italy is also losing some deposits stashed there from Greece as that country’s banks now look more stable than those of its neighbor to the west. With deplorable loan portfolios and all these other reasons to worry, bank stocks are down about one fourth since the start of the year, and Monte dei Paschi falling by more than half. Government officials and bank executives insist the banks are financially sound.

Bitcoin is now subject to so much network congestion and internal turmoil that senior developers are giving up on the digital currency. The currency’s de facto board of directors has not been able to agree on fixes, and the bitcoin mining cartel has resisted any changes at all. The irony of this situation is that fewer than 10 key people effectively control bitcoin, which was originally meant to be decentralized. The result of the congestion and other technical problems is that routine transactions can be delayed by more than a day. Delays will only grow as more transactions take place. The value of bitcoin has fallen by half from its peak of 2014, many merchants that experimented with it no longer accept it for payments because of the delays, and surveys suggest that the number of active bitcoin users has fallen by more than half. As with anything based on software, there is a risk of sudden catastrophic failure in Bitcoin. Absent that, it will not go away anytime soon, but it may disappear from the public eye and from popular culture as it evolves into a niche payment device, and there is a risk that its value could continue to decline.

The big surprise in bank earnings is a tentative €7 billion loss at Deutsche Bank. Plans to shut down most of the bank’s operations to cut costs and improve focus have cut into revenue sooner than expected, while most of the actual operational cuts have yet to take place. The stock is down by one fourth since the beginning of the year.

Blizzard Watch, But No Snow Shovels

There is a blizzard watch in my local area. A blizzard is a rarity in southern Pennsylvania, though it’s something we know can hit on occasion, especially in January. I’ve seen more than a few signs that the area is not prepared. It’s businesses especially that concern me. Nearly all businesses should close on Saturday if the forecast is anywhere near accurate. If you believe the forecast, we could have one foot of snow on the ground before opening time on Saturday, with heavy snow continuing all day and into the next morning, and high winds for much of the day at the height of the storm. Some local stores have made contingency plans to close Saturday and Sunday morning. At others, it’s clear that the thought hasn’t yet crossed their minds. The obvious risk in asking workers to drive to work in a blizzard, or to invite customers to come out to a store, is that people could be stranded in their cars for 24 hours, or could become disoriented trying to walk the two blocks from home to work and risk dying from the cold.

The picture of a major winter storm had entered the forecast by Sunday, and some stores were sold out of snow shovels by Monday and were unable to restock. That’s a distribution system breakdown, or as one of my less technical friends put it, “just pathetic.” It is a lost profit opportunity for the retailers. At a human level it means some of my neighbors will suffer the indignity and inconvenience of trying to clear snow with a cardboard box.

The main thing this shows is that businesses are nowhere near the ideal of agility that there has been so much talk about for the last quarter century. To respond to changing circumstances with five days of advance warning does not require agility so much as paying attention. To put it another way, business leadership remains mostly a myth. Most so-called managers know how to relay information and repeat a routine, but wait for someone else to tell them how to adapt when circumstances dictate a change. If you’re in the affected region, make a note of the businesses that weren’t able to adapt to this major winter weather event. This kind of business won’t be around 10 or 20 years from now.

Hottest Year on Record; Oil Plummets

A year ago we heard that 2014 was the warmest year on record. That’s something we can no longer say because 2015 was warmer, and by a wide margin. The increase was one sixth of a kelvin, the largest increase over the previous record climate scientists have ever seen. To put it another way, the one-year increase brings the planet one tenth of the distance to the kind of climate crisis that will cause a global economic catastrophe. The 2016 temperature average was boosted by El Niño conditions in the Pacific Ocean, but climate scientists say that weather pattern accounts for less than half of the increase. There is a distinct trend toward warmer temperatures, with records set for 10 of the 12 months of 2015, and, from NOAA:

Since 1997, which at the time was the warmest year on record, 16 of the subsequent 18 years have been warmer than that year.

Greenhouse gases last for more than a century in the atmosphere, so there is little reason to imagine that climate change can be kept within 2 kelvins of pre-industrial levels, the threshold agreed at the recent climate summit. That probably would not happen even if all fuel-burning activities stopped immediately.

The new reports of global temperature change will further reduce demand for oil and other fossil fuels. Commodities markets responded to the climate news by sending oil prices, already at five-year lows, down another 7 percent. This could be a market overreaction, but there is no doubt that the stark climate numbers will spur faster investment in energy supplies not based on burning fuel, leading to permanent reductions in demand for oil, coal, and other fossil fuels.

Oil Prices Stay Low

The price of oil has fallen to $29 and could stay low for months with Iran and the United States now rejoining the world oil market. Crude oil is the raw material for most motor fuel, and the price of gasoline in my local area has fallen to $2.039. 

There are other factors that suggest oil prices might not go up much in the near term. U.S. drivers are not boosting their driving miles nearly as much as the halving of gasoline prices in recent years would suggest. A mild winter in large parts of the United States has reduced the demand for heating fuel, and that effect is compounded by ongoing efforts to make older buildings more thermally efficient. Globally, manufacturing is increasing only slightly if at all, as consumers seem to be losing their desire for durable goods. The transition to sustainable energy sources is continuing uninterrupted, as if oil could no longer be relied upon as a source. As one high-profile example, Denmark is producing half of its electricity from wind power. Regions where government budgets depend on oil revenue are trying to pump oil faster to make up for price declines, adding more supply to an already oversupplied market. Jet fuel is never used so much as in wartime, and a global reluctance to get into large-scale war keeps demand down. At the same time, the recent shakeout in airlines has reduced the number of passenger flights.

The loss of oil revenue has had drastic effects on spending. Whole towns have shut down in North Dakota, while in Alberta, government services have been cut and will be cut again. A declining Canadian dollar is seeing far fewer Canadians going abroad for vacation. Russia has banned food imports from almost every country in the world, supposedly for political reasons, but surely in part because there isn’t enough hard currency to pay for imported food. Iran is counting on new oil revenues to help ease the grumbles of a hard-pressed working class, but may instead see its oil profits go down with the decline in oil prices. The fast-disappearing oil profits are the main reason some economists look at the world and predict a global recession in 2016.

But the loss of oil profits in some places means that energy is less of an expense elsewhere. Americans are using their fuel savings to pay off debts. Airlines will be able to continue to operate for now, with little risk of bankruptcy on the horizon. Saudi Arabia and other Middle Eastern oil countries are using the current low prices as an occasion to phase out subsidies on motor fuel, a necessary step that will make their economies more balanced and efficient in the end. Ironically, many businesses are using the money left over in their energy budgets to pay for new energy-saving measures, such as replacing low-efficiency fluorescent lights with modern, efficient lighting. The current low energy prices are helping to reduce the demand for energy in the future.

This Week in Bank Failures

A credit union was placed into conservatorship: Clarkston Brandon Community Credit Union, with 9,000 members in Michigan. The credit union will continue to operate with new management with a focus on correcting problems in its operations.

Goldman Sachs has agreed in principle to pay $5 billion to settle claims of unloading near-worthless mortgage-backed securities on unsuspecting investors.

Wall Street banks may be facing half a trillion dollars in bad loans to oil producers because of the falling price of oil. Only about $17 billion in loans have been affected by oil production bankruptcies so far, but a far greater number are effectively nonperforming because the debtors aren’t earning enough oil revenue to make debt payments. JPMorgan is thought to have the greatest volume of oil loans on its books and is preparing for loan losses approaching $1 billion over the next two years.