Wednesday, September 30, 2009

Retailers Are Having Trouble Predicting

Retailers and retail analysts are having more than their share of difficulty predicting sales this year, and those difficulties are continuing into the Halloween and Christmas seasons. Halloween sales may be down 15 percent from last year, in part because of flu fears that may keep people home from Halloween parties. Could those same flu fears keep people out of the stores during the Christmas season? If so, Christmas season sales could be down around 10 percent. But the more optimistic assessments, which don’t take flu into account, suggest the Christmas season could be about the same as last year.

One reason for lower sales is that so many stores have closed. Forecasters can only guess how shoppers will react to a Christmas season that has fewer stores than the year before — because it hasn’t happened before. Another problem is that the seasonal adjustments that allow forecasters to make a relatively smooth picture of all the seasons in a year aren’t working so well now. Consumers’ incomes and expectations have changed so much that the meaning of the seasons has changed, and seasons don’t relate to each other in the same way they have in the past.

With the government’s incentive program over, everyone knows auto sales for September and October will be less than we saw in August, but how much less? The fall-off seems likely to be somewhere between 25 and 50 percent, but that is an awfully wide range in an industry that historically has been able to forecast sales within about 3 percent. The pace of dealer closings is the highest I’ve ever seen, with some dealers using the Clunkers program as their final clearance sale, and others forced out as they could not get post-Clunkers financing to maintain their inventory. Fewer dealers would tend to point to lower sales, and so would the collapse in auto leasing. People who lease cars are prompted to turn them in after just 2 to 5 years. But when people buy a car, they may keep it for ten years or longer. So much is changing in the auto business that it’s hard to make accurate predictions. Tomorrow, when auto manufacturers report their sales for this month, we’ll get a better idea of where auto sales are going.

Tuesday, September 29, 2009

Using Goals to Stay Focused

“How do I stay focused on my goals?” This is a question that often comes up a few weeks after a workshop in time management, manifesting, or law of attraction. For these methods to work, you have to maintain a connection to a goal long enough for it to come about, but in the confusion and distraction of everyday life, people have trouble even remembering their goals.

If you’ve experienced this challenge, there is a reason for it. The strategy you’ve heard, focusing on goals, has it backward. The real benefit comes not from focusing on the goal, but from using goals to stay focused. It’s not so much a question of achieving the specific goals you choose — it’s about taking action and getting somewhere, accomplishing something of value, and usually you will end up doing that when you work toward a goal even if you do not reach the exact goal you had in mind.

Part of the difficulty is that people pick the wrong goals, and too many of them. The goal-setting process of traditional time management training encourages you to set dozens or hundreds of goals. You might select three five-year goals in each of a dozen major areas of your life, then use these long-term goals to develop other goals that have short time frames. You can’t even remember that many goals, and you can lose energy and focus whenever it seems that your various goals are in conflict with each other. Other goals are hard to remember just because they are arbitrary and don’t really mean anything to you. Joe Vitale offers a training package built around the exercise of manifesting a new car. To stay energetic about a arbitrarily selected goal such as this long enough to get through the exercise, you almost have to set aside all your other goals. But arbitrary goals can come from anywhere. In a goal-setting process, if you really don’t know what your goals are, you’ll probably just pick something, and then you have something written down that looks like a goal but that you don’t necessarily care about. It is easier to use goals to maintain your focus if you focus on no more than three to five goals on any given day, and pick goals that have obvious importance.

Another reason it can be hard to focus on goals is that people try the hardest to focus on their most distant goals: “I want to go to the moon,” rather than, “I want a new garage.” In the energy of a workshop setting, the bigger goals can seem more inspiring, but in the bustle of everyday life, it is easier to focus your energy on the more believable everyday kind of goals. If a very distant goal really is important to you, find some angle on it to make it more present today so that you can focus on it more easily.

Finally, it isn’t necessary to have distinctive goals to gain the benefits of focus. Wayne Dyer has said that his goal is to be “better today than I was yesterday.” I often suggest the goal of putting yourself in a stronger position between now and the end of the day. With practice, goals as simple as these can inspire you because you can see them working day after day.

When people have trouble remembering any of their goals or making progress toward them, it’s not a problem of goal-setting. The goals might have come out of a flawed goal-setting process, but even so, some of them have to be well-chosen, just by random chance. If there is a pattern of lack of progress, it is because of a life full of obstacles that form resistance to progress. When people look at this, they often want to focus strictly on mental resistance, but usually habits and situation are more important. When people aren’t sure of their goals and don’t feel like they are making progress, I encourage them to focus on the obstacles that get in the way instead — in other words, take on the goal of removing obstacles. I suggest starting with the most literal obstacles they can find, which for most people means starting with clutter. The book Fear of Nothing lays out an effective process to deal with clutter and go on from there to address the other obstacles in life.

When you remove obstacles, you are removing distractions that can weaken your focus. At the same time, you restore some of the flow to your life, and then it’s easier to select goals you can believe in. These goals, and any action you take around them, add to your focus. With better focus, you take more and better action and get bigger results — and that’s really ultimately what having goals is for.

Monday, September 28, 2009

Your Own Health Care Reform

If it seems like there is a lot of finger-pointing in the health care debate, that is because of the nature of the subject. You have to take on a victim mentality to accept the premise of the debate. The assumption is that how healthy a person can be depends mostly on the actions of others. It is a short step from waiting for others to do something to blaming them for their lack of action.

Yet this is not a particularly empowering approach to life. If you want action on your own health, the simple place to start is with your own action. That’s not to say that you won’t run into problems when you try to improve your health. As Tara Stiles put it, “We have to be present, aware, and involved in our choices to maintain health and educate and inspire those around us to create a healthier society. Our world can be an obstacle course for good health. We have to gather the tools to navigate efficiently so we can live healthy, and enjoyable lives.”

It’s not that we don’t know where to start. Everyone knows something simple they can do for their health that they’re not doing, at least not consistently. Stiles quotes Bill Maher ragging on people for whom a political march was “the first exercise they’ve gotten in years.” It’s funny because it’s true. The best thing to do if you want to be healthy is to get started on what you already know. This works best if you are healthy now — it is easier to avoid illness than to cure it. And in case you’re wondering whether it’s worth the effort, these are just some of the benefits of improving your health:

  1. When you’re more healthy, you have more ability to work. You might get more work done, get a better job, get a bigger raise, keep your job when everyone else is laid off.
  2. Avoiding illness means less work for everyone who would have had to help you with your illness. This includes everyone from members of your household to the clerks at the insurance company. Less work, of course, could mean you’re spending less money.
  3. You can live longer and feel better.
  4. If more people are healthy, health care won’t be so expensive, and that will make it easier to get health care reform passed.
  5. You’ll have more energy and make a bigger impression on people. That means you’ll be more popular.

Undertake your own health care reform, and you won’t have to spend so much time wondering what the politicians will eventually decide. And as I said, this works better if you don’t wait till you’re sick. It’s not really fair, but it’s true: the healthier you are, the easier it is to take action to stay healthy. At the same time, the sicker you are, the more urgent it is make yourself healthier. Either way, don’t wait. It’s no fun to be waiting for someone else to do something about health care reform. It feels better to take action, to do what you can to create your own health.

Sunday, September 27, 2009

The Last G20?

It was a grim G20 meeting in Pittsburgh, as the leaders of 20 influential countries got together for an invitation-only photo opportunity and carefully choreographed discussion. World leaders were careful not to smile as they discussed the unspecified military consequences of Iran’s actions in opening a second uranium processing facility. They were also careful not to go outside, where they would run the risk of being handcuffed and shoveled into police vans along with other innocent bystanders.

The police, for their part, used the event as a rehearsal for the military-style operations they might need if actual civil disorder broke out at some point in the future. There were not many protesters, so police practiced enforcing the unofficial curfew by arresting a group of sports fans, clearing customers off of commercial streets, and lobbing tear gas onto a university commons. (It sounds like the people in Pittsburgh are making this up, but the videos prove this is what actually happened.) The massive police presence, augmented by the military, presented such a danger to the actual summit meeting that any future G20 meetings perhaps ought to be held on a military base or behind the fortified walls of an embassy compound — there is no local color to be had in these meetings anyway.

But I am not so sure there will be any more G20 meetings. The only substantial policy announcement at this G20, concerning tighter rules for bank assets (they couldn’t agree on the part about limiting compensation for bank executives), could just as well have been conducted by carrier pigeon. A few paragraphs describing policies that may or may not be implemented over the next three years is hardly worth the travel time for the British prime minister, let alone the 19 other heads of state who had to make the trip. And while the G20 participants are careful not to let their disagreements ruin their photo-op, stories hint at testy exchanges behind the scenes that called into question not just the structure of the G20, but the whole world order.

If it is this hard to hold a summit meeting this year, how much harder will it be next year, when more things are actually in flux? The next big summit meeting might have to be postponed until after the world’s pressing problems are solved, and by then, it could very well be a different group of countries holding the meeting.

Saturday, September 26, 2009

Smoking Causes Heart Attacks

Two new studies, widely reported in the news Monday, highlight the connection between smoking and heart attacks. Researchers used epidemiological data to determine the decline in heart attack rates after smoking bans went into effect. One study found 36 percent fewer heart attacks three years after smoking bans in North America and Europe, with half the the reduction occurring in the first year.

Less than 1 in 4 adults smoke, and both smokers and non-smokers suffer heart attacks, so the size of the smoking ban effect shows that smoking bans reduce heart attack risk among both smokers and non-smokers. Previous studies, however, have shown that the reduction in heart attack risk is found mainly among non-smokers.

Smoking bans typically only affect places of business. They may encourage some smokers to stop smoking completely, but the more immediate effect is to separate tobacco smoke from non-smokers. What these new studies suggest is that cigarette smoking is linked to most heart attacks among smokers and that, prior to the smoking bans, cigarette smoke triggered about half of heart attacks among non-smokers.

The heart attack risk for non-smokers exposed to low levels of tobacco smoke had long been suspected. Being in the same room with tobacco smoke for just a few minutes causes specific changes in blood and blood vessels that are clinically measurable. Most obviously, platelets clump and blood vessels constrict, two conditions that are known to cause heart attacks. People with known heart conditions have been cautioned to avoid smoky areas since the early 1990s. The smoking-ban studies, though, show how pronounced this effect is by showing that tobacco smoke led to heart attack and death in large numbers of non-smokers.

The results of these studies confirm that it is not possible to dismiss cigarette smoke as a vague danger with possible future consequences. Smokers and non-smokers alike have to regard cigarette smoke, wherever they come upon it, as a clear and present danger that has a slight chance of causing immediate death in anyone who is nearby.

One of the components of cigarette smoke that could contribute to heart attack is carbon monoxide, and fruit additives in tobacco create more carbon monoxide than the tobacco itself. The new U.S. ban on fruit-flavored cigarettes took effect Tuesday, and this too can be expected to reduce the number of heart attacks. Policymakers can look for similar rules that can reduce the prevalence of tobacco smoke and its harmful components in order to further reduce the health damage caused by tobacco.

Friday, September 25, 2009

This Week in Bank Failures

The party’s over — that’s the message from the UK’s Chancellor of the Exchequer, Alistair Darling, as he describes forthcoming regulations that will put restrictions on compensation at banks. The new rules are meant to prevent banks from rewarding failure. Rules will also require banks to disclose more about the nature of the assets they hold.

Darling’s comments also contained a veiled warning for the United States. As the G20 prepares to tighten restrictions on offshore banking centers, the U.S. risks being put in that category if it allows Wall Street to maintain the current level of secrecy about assets, something President Obama hinted at in a speech last week. What this means is that U.S. regulators will have to require a sufficient level of disclosure about assets and transactions to make foreign regulators comfortable, even if that means being stricter than the White House would like.

As the FDIC burns through its remaining cash, it is working on a plan to borrow money from banks. Borrowing from banks makes sense for the FDIC because banks have to pay an assessment on their deposits to the FDIC every year anyway. A loan to the FDIC can be structured so that it does not have to be paid back. To a bank, this is the most secure kind of loan it can have on its balance sheet.

The FDIC is authorized to borrow from the Treasury, but it may not have to. It can use its line of credit with the Treasury as a loan guarantee, to tap only if contingencies force it to pay back loans suddenly. It makes little difference economically whether the FDIC issues its own debt or the Treasury sells bonds to finance the FDIC. Either way, the FDIC can probably plan on being in debt for the next five to ten years. If the FDIC issues its own debt, though, this may prevent the Treasury from exerting any inappropriate influence over the FDIC.

Is GMAC about to make a quick buck — or just digging itself in deeper? GMAC’s Ally Bank is hiring 10 former employees of Taylor Bean & Whitaker, the mortgage lender that filed for bankruptcy last month under the weight of a criminal fraud investigation in a sequence of events that also included the failure of Colonial Bank. GMAC plans to buy home mortgages from small banks, filling a gap in the market that developed when Taylor Bean & Whitaker shut down. GMAC has been losing money for the last two years and has been experimenting with various business approaches to try to turn its fortunes around. It created Ally Bank in May to experiment with Internet savings accounts and incentive-based loan programs for auto dealers. GMAC needs to make money quickly if it can, to improve its chances of surviving the loan losses it is likely to see if the economy worsens next year.

There was only one bank failure tonight, but it was costly. Georgian Bank became the latest casualty of the downturn in metro Atlanta real estate. Georgian Bank was one of the largest banks in Georgia, with $2 billion in assets and a similar amount in deposits. The bank had been operating since 2001 and had emphasized real estate development loans since 2004. It reported a profit last year, but that probably reflected wishful thinking more than actual success, as loan losses piled up quickly after it took a fresh look at its books early this year. The FDIC had issued a cease-and-desist order in August, ordering the bank to improve its financial condition.

Georgian Bank had only five locations and described itself as serving “high-net-worth individuals.” It is a strategy that leaves a bank more vulnerable to a run. Large deposits are not protected by deposit insurance the way small deposits are, so depositors might rush to withdraw their money on reports of trouble.

Columbia, South Carolina-based First Citizens Bank is purchasing the deposits and assets of Georgian Bank. First Citizens Bank operates across South Carolina and in neighboring areas of Georgia. It is not affiliated with a bank of the same name based in North Carolina, nor with another bank with a similar name operating in the eastern part of Georgia.

The FDIC estimates a cost of nearly $900 million from this bank closing.

Nineteen banks have failed in Georgia so far this year. The economy in Georgia peaked two years before the national economy did, and that is one of the reasons Georgia bank failures are happening faster than in other parts of the country. The epic flooding occurring in northern Georgia and southern Tennessee this week can only hurt the fortunes of banks in that region, as businesses that suffered damage or lost business in the flooding may have difficulty making payments on their loans.

The third quarter ends next week, and there is no doubt that the banks’ new financial statements will give regulators new cause for alarm.

Thursday, September 24, 2009

Economic Stability and the Credit Bubble

In a way, the ongoing collapse of Wall Street can be blamed on Alan Greenspan’s determined efforts to stabilize the U.S. economy. That, and the Law of Exploitation.

The Law of Exploitation basically says that any tendency you have will, sooner or later, be taken advantage of. So what happens when a nation shows a distinct tendency to have a stable economy?

As Fed chair, Alan Greenspan only wanted to keep the economy stable and predictable. The idea was that if you could keep economic uncertainty to a minimum, the economy could work out how to grow on its own. He was aided in this by Bill Clinton, who at least in his first six years as president, took much the same approach. The strategy worked reasonably well — well enough to overcome the “hard-core unemployed” myth.

Unfortunately, this extended period of stability led directly into the credit bubble that created the current recession. Rating agencies, which had always felt that they should caution investors about the way a security might perform if the economy went bad, decided to discount that possibility. The economy, they decided, would never really stagnate, and certainly would never face a crisis of any magnitude. They began, especially around 2003, to rate securities based on the assumption of economic stability.

Around the same time, Wall Street started to take huge chances with the economy. Their company would go bust if the economy went bad, but it was still a rational decision from the individual’s point of view. After all, if you’re a fund manager or trader, or even an executive, you’re not likely to be fired for taking risks — what are the chances that the economy falls apart before you move on to your next job? With this kind of thinking, people were exploiting the stability of the economy. They were creating points of economic instability, knowing that they were putting their own companies at risk, but not appreciating the magnitude of the risk, and not realizing or not wanting to believe that their actions were putting the whole economy at risk.

Consumers, business managers, and Congress added to the economic instability by being fully leveraged — borrowing as much money as they possibly could. The U.S. economy was as top-heavy as it had ever been. By 2006, when Greenspan was on his way out the door, the economy was obviously straining under the load. When things got shaky, lots of things fell over — and now, the economy is facing the possibility of a systemic collapse.

And it’s all happening because so many people — especially people with billions of dollars in their care — decided they could bet on the economy remaining stable. That is never a safe bet, but it looked safe to 30- and 40-year-old money managers who had never in their careers seen the economy stumble.

I have to admit, I was slow to make this connection between the stable economy and the credit bubble. The truth, though, is that even a stable-economy policy has its limits. Stabilizing the economy is a good strategy. It can produce real, robust economic growth. But stabilize the economy too well for too long, and you are doomed to see what we are going through now: a credit bubble and subsequent collapse.

Of course, now that we have experienced the link between economic stability and the credit bubble, it’s easy to say how the damage could have been minimized. After about 12 years of convincing economic stability, it is time to start clamping down on lenders, with rules that prevent gimmicks such as teaser rates, limit leverage for borrowers, and prohibit banks, at least, from concentrating too much risk in any financial category. These kinds of actions are necessary to limit the destabilizing effects of a credit bubble.

But imagine trying to tell that to Congress in 1999, or 2003. The thinking at that time was that you get the best growth by taking a mostly hands-off approach to business. It didn’t work — compare the economic growth of 1992–1998 to what we have experienced since, and you can see that the move to deregulate and encourage business has led to accounting fraud, concentration of wealth outside of the business world, and economic stagnation. But even to the extent that a hands-off approach might work, you still need to balance growth with stability, so that the economic growth you achieve doesn’t just fall away at the first bump in the road.

Wednesday, September 23, 2009

No Health Care Bill This Year

The way things look, there isn’t going to be a health care bill this year.

It has become clear in the last three days that the Baucus bill was never intended to pass the Senate Finance Committee, but was meant as a basis for discussion. Extended discussion over a period of months would be needed to remedy the hundreds of flaws in the bill. And even if that process could be completed, the result would be a bill that the rest of the Senate would not be able to support and the House would not agree with.

The House, for its part, is preparing to pass a different bill that would surely face filibuster in the Senate.

It may very well be that the health care situation simply isn’t dire enough yet to force decisive action from Congress.

Part of the debate going on is a semantic argument over whether the proposed individual health coverage mandate is a tax. In economic terms, it absolutely is a tax. Any time the government forces people to pay money unconditionally, or just on the condition of being a resident of a particular place, that is what the word tax means. The fact that this particular tax would be levied by and paid to insurance companies, at least in the Baucus bill, is horrifically bad governance and probably unconstitutional, but does not change the fact that it is a tax. The continuing confusion over this detail shows how far away the politicians are from solving this particular problem.

But the health care issue is not going away. Something cannot be one fourth of the total economy without raising questions of government policy. Adding urgency to the questions, the current system of financing health care is teetering toward collapse. If nothing is done now, the situation will simply continue to deteriorate. Eventually it will get so bad that even politicians will see the need to do something.

Tuesday, September 22, 2009

The New Newspaper

The recession is hitting U.S. newspapers harder than the Great Depression did. Newspapers are not going away, but will have trouble surviving in their current form. Here are some of the qualities of the new newspaper that we can be sure of at this point:

  • Smaller. The size of today’s newspapers strains resources on all sides. A smaller paper will make things easier for the newsroom and the printing plant. At the same time, it will help out the busy reader, who rarely has time to read more than a few pages anyway, and it will fit more easily on the morning commuter train.
  • Less advertising. Newspaper advertising revenue has already fallen by more than a third from the peak in 2006. It seems likely to drop to less than half of the peak levels by the end of 2010, where it might stabilize. Previously reliable advertising categories, such as real estate, automobiles, employment, movies, and television, may have only a token presence in newspapers in the future.
  • Older. Starvation wages combined with pay freezes make it hard for newspapers to keep younger workers anyway, and the few remaining workers under 35 are at greatest risk of losing their jobs as staffing is cut. Readers too are getting older as the average U.S. newspaper reader is now over 55 years old.
  • Less news. Newspapers have been slashing newsroom staffing for more than a decade, and that is a trend that can only continue as newspaper budgets are cut across the board. Newspapers will still get the big story, but with less staff and less space, will have to pass over most of the smaller stories.

Monday, September 21, 2009

Main Street Vacancies

At the beginning of the year, many retail analysts worried that the malls could empty out. That hasn’t happened at quite the pace that was predicted. Mall managers have gone to great lengths to keep malls mostly occupied, including deals that allow some new store tenants to go for months before paying rent.

Vacancies continue to pile up in downtown areas, though, particularly in smaller towns and in small cities where a major employer has closed its offices. Power company SCANA is moving out of its old downtown headquarters in Columbia, South Carolina, for example, and as 900 workers leave downtown, nearby stores, restaurants, and bars are preparing to cut back, and some may have to close if another tenant is not quickly found for the office space.

In other downtown areas that were already mostly vacant before the recession hit, you can walk past whole blocks of empty storefronts. In older towns, many of the stores are houses from the late 1800s that were converted into stores in the 1950s, and some of these are now being converted into apartments.

Parking is one of the reasons for downtown decline. It is hard to attract shoppers where there is a shortage of parking, or where parking lots are hidden behind buildings in places that are not so easy for visitors to find. Many cities are making the problem worse by increasing parking fines for people who park incorrectly on the street, a move that may make potential shoppers want to avoid the downtown area altogether. A better approach is to use vacant land to add off-street parking, but local governments resist this because of the expenses involved. Zionsville, Indiana, is spending $180,000 next month to remove a vacant gas station and build a parking lot. It seems like a lot to spend for a few dozen parking spaces, but it puts Zionsville in a better situation than a city like Calgary, where even parking fees of $10 an hour aren’t high enough to relieve the perpetual shortage of parking in the city.

Downtown vacancies have even hit the United Kingdom. Many American towns might envy a 12 percent vacancy rate, but in the United Kingdom, where downtown vacancies are expected to be less than 5 percent, the 12 percent vacancy rate found in a recent survey is considered a crisis.

The pace of U.S. mall store closings, over 10,000 a month this year, is not expected to slow down much next year, and this means malls and downtowns will have to compete harder to attract new stores. Ultimately, this is bad news for the landowners, as rents will have to fall well below current levels to keep retail space occupied.

Sunday, September 20, 2009

Genetic Engineering Is Risky

The death a week ago of a genetics researcher at the University of Chicago is a reminder of the dangers of genetic engineering. The researcher died after becoming infected with a supposedly harmless strain of the plague bacteria that he had been studying. The laboratory bacteria strain is said to have the plague’s harmful components removed, and did not cause plague symptoms in the researcher, but produced a highly active infection that health officials say is the only plausible explanation for his death.

In truth, whenever scientists alter the genes of an organism, no one really knows what will happen as a result. The modified plague bacteria apparently created a new fatal disease about which very little is known at this point. Rules and practices are thought to be sufficient to keep potentially virulent genetically modified organisms from escaping the laboratory, yet no one really knows that for sure. This case demonstrates that the standard precautions are not always enough, and suggests that the extreme precautions researchers often take with modified genetic material and genetically modified organisms are worth the extra trouble.

Saturday, September 19, 2009

Fewer Card Transactions in August

August was the biggest jump in U.S. retail in over a year, up more than 2 percent compared to July, largely on the basis of the Cash for Clunkers program that gave select customers a government incentive to trade in their old cars. Sales were down only about 5 percent from the year before. This shows that, despite declining incomes, consumers aren’t giving up on the idea of shopping.

At the same time, though, card transaction volumes fell 8 percent according to MasterCard, as consumers used both debit and credit cards less than in July. I believe this shows two things. First, consumers are feeling safer spending cash than paying with a credit or debit card, at least for smaller purchases, an idea I had suggested in June. With more cash purchases, there are fewer card purchases. Second, consumers are making fewer shopping trips. With fewer visits to stores, people have fewer purchase transactions, even if they end up buying the same things.

Retailers will want to know whether the move away from shopping is a trend, and it is too soon to say. Part of the decline in shopping trips can be attributed to flu. A peak number of people, especially students returning to school, had flu in the second half of August. People with flu and members of their family might minimize shopping trips to reduce the risk of spreading the flu virus, or because they are busy with trips to the doctor, or just because they don’t feel like shopping. Others might stay home more often to reduce their risk of contracting flu. Flu appears to have peaked around September 1, so the customers who were kept home by flu will be coming back to the stores soon enough. Flu affected perhaps 3 percent of U.S. households in August, so it can only account for a fraction of the reduction in shopping trips.

The other explanation is the one that retailers are afraid to think about. Americans may be getting out of the shopping habit. It could be that people are too busy to go shopping, don’t find it so much fun anymore, are afraid they will spend too much, or are just running out of money. If retail results for September and October confirm that people aren’t going shopping the way they used to, it will be an advance warning of another retrenchment at retail coming up right after the Christmas season.

Friday, September 18, 2009

This Week in Bank Failures

Most people in Washington want to keep the story of the Wall Street meltdown from getting out. They want to persuade you that nothing happened, and even if it did, it’s all behind us now — and none of that is true. President Obama in a speech on Monday proposed to let Wall Street write its own new, more restrictive regulations. The purpose of that nod to Wall Street, I am convinced, was to reassure financial executives at companies like AIG, Freddie Mac, and Goldman Sachs that new regulations will not force anyone to reveal the things people did, and continue to do, to create the large-scale financial destruction that we have seen.

The story may get out anyway. On Monday, a federal judge rejected the proposed settlement between the Securities and Exchange Commission (SEC) and Bank of America over the secret bonuses Merrill Lynch paid to its employees shortly before it was acquired by Bank of America. Keeping such information from stockholders is a violation of the fiduciary duty of a corporate officer. The judge questioned why no individuals had been indicted and suggested, in so many words, that the SEC was participating in a coverup. That case will go to trial next year. Separately, New York State is preparing charges against several of the Bank of America executives involved. In the federal trial, it seems quite unlikely that any Bank of America executive will agree to testify, forcing the board of directors to remove them — assuming that Bank of America does not go under first.

Then on Thursday, California Attorney General Jerry Brown announced an investigation into the role of rating agencies. Based on nothing more than frivolous risk management theories, rating agencies such as Moody’s and Standard & Poor’s assigned investment-grade ratings to securities derived from junk assets including non-performing mortgage loans. The SEC is considering new rules for rating agencies that would require, at least, better disclosure.

Regardless of these initial steps toward investigation and reform, there are fears that the story might never get out, and these fears were reinforced on Wednesday as bloggers were sifting for any possible connections in a coast-to-coast string of high finance deaths, most of them labeled suicides by the police and press, but without nearly enough indications to say so conclusively.

There may be a psychological explanation for a cluster of financial suicides, though. It seems reasonable to imagine that many people working in finance found the events of mid-September 2008 traumatic. For them, the return of the exact same time of year could trigger post-traumatic episodes that, if severe enough, could lead to suicide. That, of course, is not to say that a series of seemingly related and suspicious deaths do not need to be investigated.

Ireland is debating its own version of a Wall Street Bailout, which goes by the name of Nama. The proposal is to spend $132 billion to buy trouble assets from banks. Most of the assets would be loans and real estate projects connected to the country’s real estate collapse, which was similar in scale to that of California or Latvia. Because of political opposition, the program will probably be scaled back to less than half of the proposed amount.

With the number of bank failures in the United States this year set to pass 100 next month, the FDIC says it is looking into creative financing options that might let it avoid borrowing from the Treasury. The FDIC is likely to run out of cash in about two months, but says it is reluctant to use taxpayer money, even temporarily. Yet its other options appear worse. It can possibly squeeze about $20 billion more out of the banking industry over the next year or so, but only by causing considerable stress to the banks. One scheme it tested this week to get higher prices for failed bank assets appears to involve considerable financial risk to the FDIC if the U.S. economy does not quickly improve.

Tonight in Indiana, Irwin Union Bank and Trust Company failed. It had $2.7 billion in assets and $2.1 billion in deposits. Staggering from mortgage losses, it had been operating under a consent decree since last October and had been struggling all year to raise capital. It sold three of its locations to Cincinnati-based First Financial in August, and it had a plan to sell $34 million in stock, but said in an SEC filing that this would not be nearly enough and it did not know where else it could turn. Tonight, First Financial is purchasing the remaining Irwin Union offices, deposits, and assets. First Financial is paying the FDIC a 1 percent premium for the deposits. That would be a typical premium in a normal year but this year, indicates aggressive expansion by the acquiring bank. The acquisition does allow First Financial to extend its geographical base around Cincinnati while establishing a foothold in five southwestern states, where 9 of Irwin Union’s branches were located.

An affiliated bank based in Kentucky, Irwin Union Bank, also failed tonight. It was less than one fifth the size of Irwin Union Bank and Trust Company and was in similar financial condition, and it is also being acquired by First Financial. The FDIC estimates its costs for these two bank closings at $850 million.

Thursday, September 17, 2009

Meat and Dairy Industries Slow to Shrink

It is definitely a global trend. Farmers are overestimating demand and producing too much meat and milk. The oversupply is driving down wholesale prices and wiping out the profits of many of the farmers.

This situation was set up in 2007 when rising energy and grain prices led to increases in prices of animal products. Beef and milk prices went up especially fast because of the large amounts of energy and grain that go into cattle. As retail prices went up, consumers and farmers alike cut back. Farmers were slower to cut back, though, and in 2007 and 2008, many barely broke even.

This year, with energy and grain prices softening, farmers apparently felt that they could go back to normal, and they increased the size of their herds. That turned out to be a big mistake, because in spite of falling prices, consumers aren’t increasing the size of their purchases. The result is a massive oversupply and low wholesale prices, killing the profits of farmers. Belgian dairy farmers yesterday dumped 3 million liters of milk in a staged protest, and the situation is not that much better elsewhere.

And it is not just beef and dairy products. There is a massive oversupply of chicken in the United States, even though people are eating more chicken than ever. But as consumers are eating slightly more chicken as they cut back on beef, the poultry industry planned for a large increase. Now one of the country’s largest chicken producers is in bankruptcy.

Pork is also in oversupply, though this is partly a consumer reaction to the suspicion that H1N1 flu originated among pigs in U.S. factory farms. Some smaller categories of meat are being hit in the same way.

The oversupply of meat and milk this year is global in scope, even though it is not really a global market. Meat and dairy products are mostly consumed in the country of origin or a neighboring country because of the high cost of rapid refrigerated shipping. Nevertheless, this year I have read news reports of farmers’ complaints about collapsing wholesale prices for meat and milk in the United States, Australia, Europe, and South America.

Why aren’t consumers rushing back to buy meat and milk the way the farmers expected? I think there are several effects you can point to:

  • Consumers have established new habits of grocery shopping and eating that don’t include so much meat and milk. Having gone to some trouble to shift their habits, they aren’t about to just shift right back.
  • The perception of beef in particular (in its unprocessed form, as opposed to hamburgers and hot dogs) has changed. Once thought of as an everyday food, it is now reserved more for special occasions.
  • Prices are still very high by historical standards. Beef prices that are 30 percent lower than a year ago may still look shockingly high to consumers who remember the prices of five or ten years ago.
  • There has been a movement away from meat and milk for years anyway. Consumers are concerned with health effects and increasingly are concerned about obesity and the environmental effects of production. A series of highly publicized food safety lapses this year, including the largest beef recall ever, have amplified the health concerns connected to meat. In the United States there is some concern about the way consumption of meat contributes to the country’s troubling trade deficit.
  • Consumers have less money to spend, and they may find it easy to cut back on the most expensive food they buy than in most other areas of their spending.

Farmers, for their part, may have been a little too eager to produce extra this year to make up for low profits in the last two years. Yet the result of the oversupply is another year of low profits for many farmers.

Wednesday, September 16, 2009

Running Out of Uranium

How much uranium is there in the world?

It’s a question I never thought much about, but now that nuclear power is being considered as an alternative to oil, it’s a question that has to be asked. Uranium is the power source for nuclear power, so the vision of dotting the world with nuclear power stations will work out only if we can dig up enough uranium to make them go.

And no one says we can. The fact is, uranium is just another limited resource, and from everything that geologists know now, it is even more limited than oil.

As it is, the current mines are not nearly enough to supply the reactors currently in operation. The nuclear power industry is unsustainable and will only become more out of balance as reactor capacity expands while mines are depleted. The World Nuclear Association (WNA) called attention to this problem in a report released last week. As World Nuclear News explained it:

Production of uranium from mines — primary production — has been far below the amount required to fuel the western world’s power reactors since the mid-[1980]s, with so-called secondary supplies — inventories, stockpile drawdowns and use of recycled materials including uranium from decommissioned nuclear weapons — making up the shortfall.

The WNA graph shows 2004–2005 as the last period in which mines produced even half of the uranium used by the world’s nuclear reactors.

There is plenty of uranium now only because of an extra supply that comes from decommissioned weapons. That is a temporary situation that might continue only until 2013. Russia has said it will stop uranium exports soon. Within 25 years, Russia will have to import uranium for its own power stations, and it is wise to do what it can to postpone that day.

As a nuclear power trade group, WNA can only call for more mines to be opened to produce more uranium ore. It will not be the one to tell us that we are running out of places to find uranium under the ground. Others, though, are more free to sound the alarm.

People in the industry have been following this all along, and trends are not encouraging. The recent spot price of uranium has been as low as $44 a pound, but nuclear power operators are eagerly lining up 2- and 3-year supply commitments at prices more like $65. Prices are expected to go up sharply as supply falls short of demand. At least 300 new nuclear power stations are expected to open worldwide in the next 10 years, and the current mines will not be able to supply them. No one is sure where the new mines will be, but Labrador and Greenland seem like promising sources, and there could still be some uranium left in the Rocky Mountains. Still, uranium from these sources will come at a higher price, and may not be enough to fully supply all the nuclear power stations that are already in operation, let alone the many more that are being built in places like India and China.

Some believe the uranium supply has already passed its peaked or will do so in the next five years; other say the peak will come only after the first mines open in Greenland. At the other end of the spectrum, the most optimistic projections are that there may be enough uranium to supply the power stations currently operating or under construction for 150 years. But if a lot more power stations are built, the way some people are proposing, the supply could be exhausted in 50 to 60 years.

In the 1960s and into the 1970s, the nuclear power industry was promoting the idea of providing electricity to the entire world as a public service. This month, I couldn’t find any expert who thought there was enough uranium on Earth to supply everyone with electricity; if uranium could be mined that fast, it would be exhausted in just a few years.

The International Atomic Energy Agency (IAEA) in 2001 issued a report projecting three scenarios for uranium demand over the next half-century. The smallest scenario envisions “medium economic growth, ecologically driven energy policies and phase-out of nuclear power worldwide by 2100.” For this scenario, mining output would have to increase by a factor of 3 in the next 14 years, according to the projections. The other scenarios required a much greater increase in uranium production. In 2001, a tripling of uranium production seemed believable. The experience in uranium mining since then, however, has not borne that out, with some mines operating at a loss in the last two years because expenses were higher than expected and yields were disappointing.

A nuclear power station is amazingly expensive to build. It works out only if there is fuel to operate continuously for half a century. Based on this, new nuclear power stations will fail financially if they cannot go online by about 2014. That means it doesn’t really make any sense to be planning any additional nuclear facilities at this point; it will take everything we’ve got to power the ones that are already under construction, and no one can say how long that will last.

The bottom line is that nuclear power, the way the world does it today, is a risky and expensive source of electricity, and one that won’t help us much in the long run. Like oil, it is no more than a stopgap, a way to buy time while we come up with something else. If we can believe the optimists, it might supply 10 percent of the world’s electric needs over the next 50 to 100 years; to plan on more nuclear power than this is probably unrealistic.

Tuesday, September 15, 2009

Debtor’s Revolt: Why It Could Happen

Could a previously unknown woman from California organize a debtor’s revolt, in which millions of consumers refuse to pay off their credit card debts?

Ordinarily, I would say no, but this time is different.

If you haven’t already seen it, this is the video that everyone is talking about:

You might look at the video and conclude that it’s not a very compelling call to arms — until you think about what it means to pay interest rates of 23 to 33 percent. Some banks are raising credit card interest rates to 28 percent or higher for virtually all their cardholders. Others automatically apply the “default” rate, now usually 30 percent or more, whenever they hear that a cardholder has become unemployed or changed jobs. And no matter how good your financial history is, the bank can switch you to the default rate if a payment on your account is ever one day late — even if the late payment is entirely the bank’s fault.

The problem with this is that it is almost impossible to pay off debts at a 30 percent interest rate. If you owe ten months’ income at a 30 percent interest rate, you are already done for. And in a period when banks can raise interest rates on a whim, and seem particularly eager to do so, if you owe 10 months’ income on credit cards, you are living on borrowed time, financially speaking, regardless of what the interest rate is now.

Try to imagine the predicament of owing an amount equal to your total income for ten months at an interest rate of 30 percent. Taxes and insurance are already taking 53 percent of your income, and housing, if you’re lucky, is taking 18 percent. The required payments on the credit cards are another 27 percent — 25 percent for the interest payments, and 2 percent for the principal payment that will theoretically allow you to pay the debt off eventually. Add this up, and you are spending 98 percent of your income on taxes, insurance, housing, and credit card debt service. This leaves you with 2 percent of your income to pay for all your other living expenses — categories such as utilities, food, and transportation. How long do you think you can make that work? What is a consumer to do?

The numbers I am using are hypothetical, but the situation is all too real. At a guess, by this time next year, 25 to 50 million U.S. households will face debt that is financially impossible to pay off. People who think they’re doing fine now won’t be doing so well after a pay cut and an interest rate increase.

The specific point of no return depends on the details of a consumer’s situation, but as a rule a thumb, a consumer whose credit card balance is around 10 months of income, at today’s credit card interest rates, is already on the slippery slope to bankruptcy. And many consumers who owe 5 months of income in credit card debt, and who also have other debt, are in the same situation.

How can this be? Just four years ago, owing 5 months of income on credit cards was thought to be nothing to worry about — a drag, to be sure, but not the equivalent of bankruptcy. But when you’re in debt, interest rates are everything. If your interest rate goes up from 8 percent to 30 percent, as has happened with the average major credit card, your required monthly payment goes up by a factor of 3. The effect of the debt load, if it is large enough, goes from inconvenience to insolvency.

When you are insolvent, and you seriously doubt that you can ever pay off all your debts, deciding not to pay any more on your unsecured debts is not just a bold way of standing up for yourself. It is the responsible thing to do. It might even be your legal responsibility. Any bankruptcy judge will tell you that if you are probably facing bankruptcy, it is your responsibility to preserve your assets. As a practical matter, if you are unable to pay off your credit card, you may have to stop making payments entirely before the bank will consider negotiating with you — and that may be your only chance at ever paying off the debt.

And so there really could be a debtor’s revolt — not so much because so many people think it’s a great idea, but because so many consumers are backed into a corner and have few other options.

Monday, September 14, 2009

Ghost Towns in Siberia

In the global recession, “Many of the old Soviet factories have been forced to close down,” says BBC News. When this happens in a factory town in Siberia, like Baikalsk, which built up around a paper mill in 1961, the only thing that can happen is that the town starts to empty out.

It is one of the ironies of the boom and bust cycle that the areas that were overbuilt during the boom are not necessarily the ones that go down during the bust. Economic collapse is just as likely for areas that were underbuilt because the boom years choked off their access to capital. The Baikalsk paper mill, for example, probably needed just $1 million in new equipment to cut its operating costs, but couldn’t get that money because people were investing instead in imaginary things that went up in smoke when boom turned to bust. During the bust years, as governments spend money to try to keep the wheels of commerce turning, it is the actual productive capacity of the economy that is likely to be neglected. In this way, the bust can leave the economy even more out of balance than it was during the boom.

Sunday, September 13, 2009

Irrational Risks and the Invisible Rubber Band

In the sinking global economy, more people are taking to the oceans, often crossing the Atlantic or Indian ocean in rickety, makeshift boats with the idea of migrating from one country to another. They are not the most desperately poor, as you might imagine from the considerable risk involved, but are wage earners who have managed to save several months’ pay to invest in the venture.

That so many people would risk everything they have on such foolish schemes hints at how dysfunctional the world economy is. Economists like to imagine that the economy is basically rational, yet irrational behavior, often just as irrational as hoping to cross an ocean on a makeshift boat, is found at every level of economic success, all the way up to the billionaire-investor who is so sure of his own ideas that he buys out a company only to shepherd it into bankruptcy.

Irrational economic behavior is not just a matter of taking inappropriate risks. People also behave irrationally in trying to avoid risks, and in countless other ways. But irrational risk-taking, where the payoff is almost purely imaginary, while the negative consequences are all too real, is particularly vexing to neoclassical economic theory.

Neoclassical theory is 19th-century economics based on a metaphor of physical tension, modeled mathematically in a way that isn’t true even in physics. The idea is that if you do something economically askew, there will be some kind of economic force, the invisible rubber band, if you will, to push you back toward a more rational or balanced economic behavior. For example, in theory, if you are applying for a job and asking for a salary that is too high, the many rejections you receive should eventually lead you to lower your expectations. That’s in theory. In reality, if you apply for thousands of jobs and are not hired at any of them, there are dozens of things that might be wrong, including the possibility that your salary requirements are too low, along with the possibility that you simply need to be more patient. There is certainly pressure in being unemployed, but the pressure does not tell you how to adapt, and the same is true in most other gaps that develop in the economy. Neoclassical theory should have been mostly tossed out in the 20th century as economists such as Keynes and Galbraith pointed out how weak it was, but it is still holding on, and indeed has helped to create the recent collapse of Wall Street.

If the rubber band metaphor struggles to describe the routine functioning of the job market, it is helpless in the face of the irrational risks that make up such a large part of the economy. Risk-taking leads eventually to real damage, possible on a scale large enough to wipe out the context of the previous decisions. If you cross the ocean on a boat only to find yourself sold into slavery, if your bold bet-the-company strategy wipes out the company, or if the untested vaccine you take leaves you paralyzed, you cannot exactly go back to where you were before and adjust your previous decision to make it more balanced. Knowing that your previous decision didn’t create a proper economic balance doesn’t tell you what to do now. Simply put, irrational risk-taking tends to leave people even more clueless than they were before. Even rational risk-taking can have this effect, but this is the primary economic effect of irrational risk-taking.

There is no simple solution to this. With the right knowledge, people can minimize risks and stay safe, but knowledge itself is a commodity that is subject to the same irrationality as the rest of the economy. Who hasn’t had the experience of studying a subject only to learn some things that turned out later to be not true, or dangerously incomplete?

The irrationality in the economy makes it harder to understand, manage, and predict. Economic behavior encompasses both rational and irrational decisions, and in the aggregate, it is irrational enough that it defies rational analysis. The best we can do, most of the time, is keep track of the economic trends — and this is easier to do if we do not automatically assume that there is anything fundamentally rational in the trends we are observing.

Saturday, September 12, 2009

Fasting and Creativity

On Thursday, two days ago, I went the whole day without eating anything. I did it on a hunch that going without food would relieve the cough that had been keeping me awake at night. It worked, and after two nights of normal sleep I am well on my way to recovering from the cold I’ve had.

The interesting thing about this experience was not the thought that fasting might help cure an illness — that idea has been around forever — but the way my thinking patterns changed along the way.

I noticed the biggest change about 22 hours into my 34-hour fast — around suppertime after I had not eaten all day. Suddenly, I was thinking more creatively in a fanciful, flighty kind of way. I was thinking of connections between things that wouldn’t occur to me normally and drawing lines of comparison that didn’t appear on the surface to be of any practical value. Some of these new thoughts did end up providing a useful new perspective on the subjects I was addressing, though, and that is the nature of creative thought. It’s why businesses gather workers together in box-shaped conference rooms and then tell them to think outside the box to solve problems.

When I thought about it, this shift in thinking style made perfect sense. A person who is going without food because there is no food to be found needs to think outside the box. If you think you know all about where to find food, but the cupboard or apple tree is empty no matter how many times you look at it, then you are in need of new ideas about food and about places where food might be found.

It also sheds new light on the idea of a starving artist. Hemingway wrote about hunger making him more disciplined as a writer, yet the experiences he relates do not seem to bear this out. Instead, perhaps his days without food gave him a combination of desperation and creativity that was fruitful enough to look like discipline. Fasting for a day or two might be a way for artists and writers to get past some creative blocks, when their work is unproductive or their results are trite and stale. Going without food might seem like an extreme thing to do just to get past a case of writer’s block, but fasting is not so extreme when you compare it some of the other things writers have tried over the years.

Friday, September 11, 2009

This Week in Bank Failures

The FDIC is working out its exit strategy for some of the emergency liquidity measures it put in place a year ago. In each case, it seems, the exit strategy is a tricky matter. The Temporary Liquidity Guarantee Program (TLGP) debt guarantees are scheduled to expire at the end of October. This program has been a big success, guaranteeing huge amounts of bank debts and helping to stabilize the banking system so that none of those guarantees had to be paid. The FDIC is considering keeping the program on standby for a little longer in case a few specific banks might need it.

The temporarily increased deposit insurance limits cannot be removed so easily. Any substantial decrease in deposit insurance during a time of widespread financial stress in the banking industry could lead to a run on some of the larger banks, possibly triggering bank failures. It is safer to leave the expanded deposit insurance limits in place until the wave of bank failures has mostly passed.

Multiple reports since the middle of August had called for Corus to fail last week, and after the bank failure rumor on Wall Street, that expectation seemed like a consensus. The expectation turned out to be just one week early. Corus had $7 billion in deposits and a similar amount of assets. MB Financial Bank, which has been active of late in Illinois Bank failures, paid a slight premium for the deposits and purchased the most highly liquid assets.

The FDIC is holding an auction to sell the remaining assets around the end of the month. There are several real estate investment groups interested. Most of Corus’s troubled loans were said to be for condo development in South Florida, and real estate developers from that region are among those competing to buy Corus’s assets.

The high interest rates on Corus’s certificates of deposits let it make a huge volume of real estate development loans when the economy was booming, but put it in a squeeze as soon as the economy slowed in 2007. Corus had been drifting all this year as losses mounted and key executives resigned.

Corus also had significant losses in its office development loans. The FDIC has warned that commercial real estate loans could be an important factor in bank failures for the next year or two. In addition to its concentration of loans in Florida, Corus had loans in Nevada, Arizona, and California, other areas with overheated real estate markets.

For all its assets, Corus Bank had only 11 offices, yet these locations, in and north of Chicago, will boost MB Financial’s branch network in that area.

The FDIC estimates a cost of $1.7 billion for the Corus Bank closing.

Washington state closed Venture Bank. It was based in Lacey, Washington, and had 18 offices centered around Tacoma, Washington. It had nearly $1 billion in assets and $900 million in deposits.

Raleigh, North Carolina-based First Citizens Bank is purchasing the deposits and 90 percent of the assets. First Citizens Bank had already acquired a failed California bank, Temecula Valley Bank, in July. Prior to that, its regional presence extended from Maryland to Tennessee.

The FDIC estimates a cost of nearly $300 million from the Venture Bank closing.

A small bank in Minnesota failed. Brickwell Community Bank had one office in Woodbury, Minnesota, on the eastern edge of the Minneapolis-St. Paul suburbs. It had $63 million in deposits. Brickwell Community Bank opened for business five years ago, but never really got going, reporting more losses than profits. It lost nearly $3 million in the second quarter and had been operating under a cease-and-desist order from regulators since April. CorTrust Bank is purchasing the deposits and assets. The FDIC estimates its costs for this bank failure at $22 million.

Thursday, September 10, 2009

H1N1 Flu May Have Peaked

As students were returning to college campuses, there was the biggest concentration of flu cases so far, at least since the H1N1 flu virus became widespread earlier this year. There was a surprising rush of suspected cases reported in the last week of August and first few days of September. Since then, it looks like the number of cases has fallen off by almost half.

I’m drawing this conclusion after looking at the pace of personal flu reports on Twitter and comments from officials on specific university campuses that describe the rush of flu cases as something in the recent past.

A USA Today story theorizes that sorority and fraternity rush events were the scene for many of the new flu infections. That could account for the sudden spike in flu cases. More than 10 percent of students on some campuses contracted flu in August.

It is too early to say, but it is likely enough that that was the peak of H1N1 in the United States. The rapid decline in cases this week shows that the flu is not following the exponential growth pattern that is expected in the classic model of a highly infectious pandemic. Either the H1N1 virus is not as infectious as expected or it does not spread quite the same way flu viruses did in years past, perhaps because of precautions such as washing hands and hand-contact surfaces and keeping infected individuals away from public spaces when possible.

The timing is ironic, because health workers are still “gearing up” for a flu season that may have peaked already. Typically, the winter flu season in North America does not get going until November.

Wednesday, September 9, 2009

Good Energy Day

Today is a remarkable day, and not just because the date is all 9s, 09/09/09 or 9/9/9. In addition to the many other events scheduled for today, this is Good Energy Day. It’s a day when millions of people around the world will be focusing on good energy, basically just to see if something novel can be created out of that.

You don’t have to check in with anyone to participate (though it’s easy to keep up with the flow of events on Twitter). Just put your thoughts on good energy at various times throughout the day — and especially, if you are reading this early enough, for a minute or two or just for a few seconds at 9:09:09 a.m. Eastern Time. Some people in the Good Energy Movement feel that the combined power of so many people focusing on good energy at the same moment could produce a result that might be measured in physical terms.

Whether that experiment creates anything to show or not, there is no question that focusing on good energy produces good effects in your own life. Today many people will be focused on music and games, on travel, goals, and freedom, on creating new things. Make it a habit to focus on good energy in any form, and you will start to see good energy become a bigger part of your life.

Tuesday, September 8, 2009

Trivia and Poverty in Sudan

Sudan is a very poor country. Even an oil boom has not been able to raise per capita GDP above $2,000. The median income is so low that no one has been able to estimate it.

Sudan has spent the last two months prosecuting 11 women for wearing pants, supposedly a violation of the country’s dress code, although female and male workers in Sudan wear pants every day and have always done so. One who insisted on taking her case to trial is now in jail.

These might sound like two random factoids about Sudan, but they go together. Sudan is poor not because it lacks resources, but because the people who run the country spend too much of their time focusing in trivia, instead of focusing on what might make the country successful.

The “trousers” story has been the biggest news story in Sudan for two months. It has been mischaracterized, especially within the country, as a clash between western style and the country’s religious tradition and law. The truth is closer to the opposite. The equivalent in the United States would be if the police started to haul people into court for wearing blue jeans on Sunday.

A country can’t prosper with that approach. It is always harder than it seems to use governmental authority to change the culture of a country. The government loses legitimacy when it attempts such changes without the most compelling reasons. Using the weight of government to try to create a new fashion rule, as Sudan is doing here, is the kind of corrupt bumbling that makes people question the country’s stability, not just around the world, but also within its own borders.

If only Sudan would pay so much attention to its farmers. Sudan’s farms, historically its economic base, have been ravaged by decades of bureaucratic planning that, more often than not, have seen it exporting low-value crops to the world market while not growing enough food for its own use. Solving that problem could make Sudan a prosperous country. Finding a way to settle the chaotic conditions along its eastern and western borders could make it a stable country. As for trousers — sometimes a government has to just say, “It’s no big deal.”

Monday, September 7, 2009

Holes in Your Jeans

If you have holes in your jeans, you’re not alone. The biggest fashion trend of the decade is found in people who aren’t buying any new clothing this year. In an average year, about 1 in 8 U.S. adults doesn’t buy any new clothing. This year, it is almost 1 in 2.

The result of people wearing clothing longer is that they get a better sense of what their favorite clothing is, and they wear it over and over again, and in rare instances, actually wearing it out.

And clothing is not the only area where people and businesses this year have opted for efficiency even if the effect is a little shabby. These are other examples:

  • Airlines are overbooking flights by 1 to 2 percent more than before. On some key routes, this means they are bumping 3 to 5 passengers from almost every flight. The airlines are more likely to fly with a full plane, but for the passengers, it makes traveling a more haphazard experience.
  • As web sites try to scale back on the number of servers to save electricity, they are slow or inaccessible for brief periods.
  • Delivery is slower sometimes as volume has fallen off. This is especially evident in First Class Mail and Priority Mail, which lately often take an extra day or to two arrive. Having laid off drivers, trucking companies sometimes find themselves with two-week backlogs.
  • There are more dim and flickering fluorescent lights on the ceiling as stores and office buildings let them go longer before pulling out the ladder to replace them.
  • With colder weather coming in, many buildings won’t be heated as much as they were last winter.

In other areas, things are still looking good, in spite of cost-cutting:

  • Aside from the 1 percent of drivers who bought a new car in the Clunkers program last month, the average car is 10 years old. In the 1980s, 10 years old would mean the floorboards were rusting through, but these days, a 10-year-old car is pretty good. Even some of the 20-year-old cars don’t stick out.
  • I haven’t heard any reports of restaurants or cafeterias trying to pass off moldy bread or other bad food. Twenty-five years ago, that was commonplace, but it became less and less acceptable as time went on, and this year’s financial pressure seems to be making managers more determined than ever not to scare the customers away.
  • Many businesses have suspended their usual cycle of replacing desktop computers, and hardly anyone seems to have noticed. Most of those 2004 computers still seem to work as well as they ever did, and the ones that break down usually just need a component replaced: a mouse, keyboard, or disk drive.
  • With manufacturers needing to save on shipping costs, the trend toward smaller product packaging has accelerated. Mac OS X Leopard, for example, comes in a small, very thin box that contains only the DVD, two cards, and the obligatory window stickers. The days of the software installation booklet are apparently in the past. Similarly, audio book packaging is shrinking, as publishers realize that most customers just throw the box away anyway. But this move comes just in time, as stores cannot spare as much space on their shelves, and the same apparently goes for the customers when they get the product home.

Sunday, September 6, 2009

G20 Looks at Bonus Reforms

Early G20 talks are focused on reforms of bonus payments at banks. Details remain to be worked out, but the idea is to slow down the pace of bonuses for bank executives and specialists so that they cannot just take the money and run when they collect bonuses for deals that look good at the moment, but turn out to be disastrous a year later.

Bonuses of this kind were instrumental in draining most of the capital from Wall Street, as the high cost of deals gone bad was compounded by the huge bonuses paid to the workers responsible for creating the deals. Any kind of reform in this area could go a long way toward deterring a quick return of that scenario.

A coordinated worldwide reform will have more impact than new restrictions in just one country. The Wall Street bandits who have threatened to simply move on to loot other countries’ financial systems would then have much narrower options.

Saturday, September 5, 2009

California Starts Paying IOUs; Still No Budget for Pennsylvania

California stopped issuing IOUs on Thursday, and started to redeem them on Friday. The state issued $2.6 billion IOUs, officially called warrants, from July 2 to September 3 as its budget was delayed. There probably will not be much of an initial rush to redeem the IOUs, which officially mature on October 2 and carry an interest rate of 3.75 percent. That’s just as well, because it gives the state time to borrow the money elsewhere.

Quite a few states were late in getting budgets together this year. State budgets are a struggle every year, but all the more so with a declining tax base during a time when the need for public services is greater than usual. At this point, only one state, my home state of Pennsylvania, is still without a budget, and that is expected to come in the next couple of weeks. Many workers have not been paid since June, and if a budget does not come by the middle of September, agencies will have to start shutting down.

This kind of budget indecision and procrastination is an embarrassment that makes states appear weaker than they really are, and it seems to make everyone unhappy. A new poll in Pennsylvania indicates historically low approval ratings for the state legislature and governor.

Friday, September 4, 2009

This Week in Bank Failures

FDIC head Sheila Bair was out this week warning about problems with commercial real estate loans. She expects losses on these loans, not residential mortgages, to be the main factor behind bank failures over the next year. Commercial real estate loans tend to be much larger than residential mortgages, so just a few failed loans can lead to the failure of a bank. With the economy in decline, an unusually large proportion of retail, office, and industrial space is sitting vacant, putting the squeeze on building owners and real estate developers, who may then have trouble making loan payments on time.

The earnings report from Capmark reinforced the troubles in commercial real estate. Capmark, one of the largest commercial real estate lenders, warned about a possible bankruptcy when it reported a $1.6 billion loss on Wednesday. Capmark is considered to be well-managed, so troubles at Capmark may indicate troubles across commercial real estate.

There is some confusion in reporting on commercial real estate because many analysts and some data aggregators classify large apartment buildings and some residential development projects as commercial real estate. The problems with residential real estate, including apartment buildings and condo developments, are already well-documented. The new concerns are specifically for buildings used for commercial purposes, especially retail, office, and industrial. There is less concern for other commercial real estate, such as hotels. The economy would have to worsen considerably before these categories would become a threat to banks.

The stock market, after showing less and less conviction about its upward movement as August wore on, started September in a downward move that was blamed on a rumor of an impending bank failure or bailout. The rumors were vague, but some pointed the finger at CIT Group or Corus Bank. But CIT’s recent near-death experience was widely reported, and Wall Street was already discounting Corus’s chances. If there is a much larger bank on the brink, regulators have managed to keep that under wraps for now.

CIT announced it would not make an interest payment due September 15, and that is just the kind of story that the rumor mill can blow out of proportion.

Corus shares recently have been trading between 0.27 and 0.30, down 99 percent from the peak years of 2005–2006. Its founder, who resigned in April, sold most of his remaining shares at the end of August, in a series of transactions reported yesterday. The bank’s deadline from regulators passed June 18, and there were reports two weeks ago that its failure would be coming today. That did not occur, but there was more bad news at the bank today as its auditor resigned. Corus Bank is known for its condominium loans, and less than half of the loans in that portfolio are paying on time.

The first bank failure reported tonight was First Bank of Kansas City, with a single location in Kansas City, Missouri. It was a very small bank with $15 million in deposits. It was so small it had only a business-card web page.

Great American Bank is purchasing the assets and taking over the deposits. Great American Bank is a small bank located outside the beltway in De Soto, Kansas. It was founded in 1901 as De Soto State Bank. It was sold in 2005 and again in 2008. Its new branch gives it a presence in the city.

The FDIC estimates costs of $6 million from this bank closing.

The failures got bigger as the evening wore on. The next was InBank, with three offices in the Chicago metro area. An August 7 cease-and-desist order from the state and the FDIC directed the bank to make accounting and management changes and raise capital. The bank reported a net loss of $22 million in the first half of the year, and that is before regulators ordered the bank to fully recognize its loan losses.

In an example of the kind of trouble the bank faced, it was in the process of foreclosing on the foundation of a commercial building. The builder couldn’t finish construction on the four-story building because the bank never provided the last $1.5 million in financing it had promised.

InBank had $200 million in deposits. The deposits and assets are being purchased by MB Financial Bank, a regional bank with more than 80 offices mostly in the Chicago area. The FDIC estimates its costs for the failure at $66 million.

In Sioux City, Iowa, Vantus Bank failed. Vantus Bank had 15 offices, mostly in the city itself, and $368 million in deposits.

Vantus Bank had been warned last month by federal regulators to raise capital urgently. It also received a delisting notice from NASDAQ as its market value had fallen to around $2 million. The bank’s CEO had offered his resignation, but the resignation had not yet taken effect.

The bank’s assets had declined from about $500 million at June 30 to about $450 million today. The plummeting asset values had less to do with loan losses than with rating agencies downgrading derivatives held by the bank. These were trust preferred securities, a kind of hybrid security based on collateralized debt obligations (CDOs), which is itself already a derivative. The bank bought just 14 of these in 2006, intending to hold them only temporarily, but then found itself unable to sell them as their value declined by 85 percent.

With the losses and the lack of liquidity of the assets, the bank found itself with hardly any working capital. The bank had loan losses, particularly on a few failed commercial real estate development projects, but it was mostly the losses on the securities that killed it. It is estimated that about half the banks in the country own the same type of securities, but usually in much smaller amounts that wouldn’t by themselves be a threat to a bank’s financial security.

The deposits and 85 percent of the assets of Vantus Bank are being purchased by Great Southern Bank. This is not the first failed bank acquisition by Great Southern Bank. It is still integrating the deposits from its acquisition of the offices of Teambank in March, which gave it 14 new locations in Kansas, Missouri, and Nebraska. The Vantus Bank locations extend its reach north along the Missouri River.

The FDIC estimates its costs for the Vantus Bank failure at $168 million.

The FDIC will be mailing out checks for $305 million after the failure of Platinum Community Bank, in the Chicagoland suburb of Rolling Meadows, Illinois. The payments might be less if there were deposits that exceeded the deposit insurance limits, something the FDIC was not able to determine at the time of the bank closing.

The FDIC usually prefers to sell a bank’s assets and deposits to a successor bank, but it was unable to find a buyer in this case. It has appointed MB Financial Bank (specifically the office closest to the failed bank) as an agent for the sole purpose of receiving direct deposits from the federal government. All other direct deposits will be rejected. Customers who had arranged to receive direct deposits at Platinum Community Bank should immediately on Tuesday make arrangements to receive these payments in an account at another bank.

Platinum Community Bank was the one subsidiary owned by Taylor, Bean & Whitaker, the mortgage lender that was tied to the failure and criminal investigation of Colonial Bank a month ago. Regulators, mortgage programs, and government agencies, one by one, cut off Taylor, Bean & Whitaker’s privileges while the U.S. Treasury conducted a criminal investigation. On August 7, Florida ordered Taylor, Bean & Whitaker to stop lending, which it had already done two days earlier, and on August 21, it ordered the lender to stop late charges, reports to credit bureaus, and foreclosures. To issue that order, the state must have been convinced that many of the charges and foreclosures were fraudulent and many of the credit bureau reports had been falsified. The next business day, Taylor, Bean & Whitaker declared bankruptcy. It is highly problematic, at least, for a bankrupt holding company to own a bank, and the OTS had ordered the bank to immediately sell off all its mortgage loans and to stop relying on services from its parent company. The difficulty in selling the potentially tainted mortgage portfolio may have led to the closing. This might also be the reason the FDIC could not find a buyer for the bank. I have not seen anything to indicate that the criminal investigation extended to the bank, but I also can’t imagine a banking executive who would want to take that chance on such short notice.

The FDIC estimates the cost of the Platinum Community Bank closing at $114 million.

Next, a smaller bank in Flagstaff, Arizona, First State Bank, failed. It had deposits of $95 million and assets valued at just $10 million more. Southern California community bank Sunwest Bank is acquiring the assets and deposits. The estimated cost to the FDIC is $47 million.

First State Bank’s holding company had consented to Fed restrictions at the end of July. The consent decree prohibited dividends and included other restrictions meant to preserve the bank’s capital. Previously, in June, the FDIC had ordered the bank to raise $2 million in additional capital and expand its board of directors.

The bank was founded in 1998 by a banking family that moved to Flagstaff from Kansas.

Another credit union failed this week. Kaiser Lakeside Credit Union of Oakland, California, which had 3,500 members and $24 million in assets was placed into liquidation on Monday. Deposits and memberships were transferred to SafeAmerica Credit Union, a larger California credit union with 26,000 members.

Thursday, September 3, 2009

Back-at-School Shopping

Retailers waited for the entire month of August, and for most, the back-to-school shopping season never took shape. Students and parents put off the shopping until the students were actually back in class, as most are by now. Back-to-school shopping turned into back-at-school shopping.

It’s a tough challenge for clothing retailers when this year’s biggest fashion trend is to wear last year’s clothes (or, for those who insist on being super-trendy, clothes from three or four years ago). But it was not just clothing retailers that saw declines. Nearly all retailers are reporting declines from last year, and those that are reporting same-store sales down only 4 percent are considered to be doing especially well.

A rush of shoppers during the coming holiday weekend is still a possibility, but you have to wonder how many shoppers are putting off their fall shopping because it is hard to scrape together the money to buy anything. If that’s the case, then sales may trickle in over the next two months, a complete break from the sharp seasonality retailers have come to expect in late summer and early fall.

Wednesday, September 2, 2009

The Bank Failure Rumor

Yesterday’s U.S. stock market decline has been blamed on a rumor that a major bank was insolvent and might close or might need an emergency bailout. People have been asking me what the story is.

I first have to say that there are plenty of reasons why the stock market might decline: the decline in the economy, for instance. So it is entirely possible that the bank failure rumor was planted as an excuse for a stock market that was going to decline anyway.

The stock market aside, though, the suggestion that a large bank is in financial distress is entirely correct. You do not have to speculate to say that. Three of the six largest bank failures in U.S. history have occurred since last year, and this wave of bank failures is just getting started. Most of the 50 or 100 largest banks in the United States and maybe a third of the smaller ones are in some degree of trouble right now, and the economy will get worse before it gets better.

The only thing that can save a large bank in a state of financial collapse is large sums of money. That money can come from the bank’s own operating profit, from private investors, or from the U.S. Treasury. Unfortunately, there is little hope for an operating profit for the banking system as a whole over the next three years, as the credit contraction continues and loan losses work their way through the system. There is some private investment money out there still, but not much; that financial reservoir is pretty well tapped out at this point. Congress, for its part, is hardly eager to make the Wall Street bailout an annual occurrence. And so, it is hard to imagine that all of the remaining large banks in the country will squeak by somehow for the next three years.

And the prospect of additional bank failures is not anything to be overly concerned about. If yesterday’s 2 percent stock market move was based on the thought of a single bank failure, regardless of how large that bank might be, it was an overreaction. The dim profit prospects that many banks face in the coming years are already largely reflected in their stock prices. If a series of large bank failures were to occur, it could slow down some important businesses, but it will not kill off many businesses or strike any kind of major blow to the economy. It could even be beneficial, at least for the banking sector. Zombie banks, the hapless banks that just keep bleeding money, are eating up most of the deposit base that could otherwise be available to relatively healthy banks. If deposits end up moving from zombie banks to other banks that have a fighting chance of survival, it makes it much easier for those banks to keep going.

The bottom line: More bank failures are on the way. Observe the deposit insurance limits. Reduce your cash levels if necessary by making payments before the due date. Beyond that, don’t worry about it. Banks may fail, Wall Street may never be what it was before, but the banking system will be fine.

Tuesday, September 1, 2009

More Expensive Than Food

It’s important to keep the discussion of health care costs in perspective by comparing the cost of health care to other major spending categories. Take food, for example. Food is so important that ancient economists wrote about nothing else. It is traditionally the first category of necessities we list, right before clothing and shelter. No country has ever spent more on health care than on food.

Until now.

Roughly around 2005, U.S. health care spending passed U.S. spending on food for human consumption. The United States has become the first country ever where the total cost of medical treatment is higher than that of food. And this is in a country that has the most luxurious approach to food of any country in history.

There is something screwy about this.

Think of how many restaurants we keep in business, and how much money they must take in. Then imagine this, if you can: the health insurance companies take in more than that.

We could excuse this if health care were more important work than food. But food is obviously more important. Health care might save your life someday, but not if you don’t have food. Without food, you’re dead for sure, and not someday in the unknown future, but within just a few months.

Think of the stories of people who go hungry so they can pay their medical bills. Now imagine that these are not just rare, isolated instances, but have become the norm. It sounds crazy, but that’s the direction recent trends are taking us. The way things are going, around 2021, the average employer will be paying more to the health insurance company than it pays to its workers. At the lower end of the income scale, we will see people working just for health coverage, receiving no take-home pay at all for their work.

Well, actually, we don’t have to wait for 2021 to see that. Workers have been choosing between health coverage and a paycheck for at least the last five years. Most, obviously, choose the paycheck, but the fact that it is an either-or situation shows that there is a problem.

Most people will agree that health care is worth spending a lot of money on. But more than we spend on food? It doesn’t make sense.