Tuesday, December 30, 2014

Fading Hype, 2014 Edition

While the news media is busy recapping the big stories of 2014, it is also worth considering the stories that didn’t happen, or more precisely, the hype that didn’t turn into anything. The biggest such story, as I look back, was the Ebola outbreak that never reached North America. It all sounded like high drama at the time, with governors overruling medical diagnoses and locking up medical professionals who had no symptoms but “looked sick.” The way the story faded just one week after the U.S. election should tell you the Ebola scare was created mainly for political purposes.

But that is just one story where the speculation got way out ahead of the reality. The news is filled with these stories every day. All this year there were ongoing rumors of retail bankruptcies such as Sears and Radio Shack that still haven’t happened (though there were a few — most notably Delia’s and Deb). In any given year there will be big talk about new products and experimental designs that never come to light, and that happened this year too with too many “breakthroughs” to mention. Some of those, of course, can now be found on the lists of products to watch for in 2015 (at the top of the list, a smart watch that tethers to your mobile phone). It is hard to guess how many of the products on those lists will amount to anything. When you look at the news, consider how much of it is hype, speculation, hearsay, and opinion — and weigh it accordingly.

Saturday, December 27, 2014

CFLs Disguised as LEDs

I saw a few new things in my Christmas shopping. One of the more surprising things was the new style of CFL light bulbs — they are doing their best to take on the style of high-efficiency LED light bulbs. Both the bulb itself and the packaging are designed to look like LED light bulbs. And this is not a strange exception; these are the only CFLs left in the store, occupying only one foot of shelf space near the center of the light bulb display.

The heat-diverting features of an LED bulb are gratuitous when used with a twisty CFL tube. A CFL bulb generates more heat than a comparable LED bulb but doesn’t concentrate heat at any particular point and therefore doesn’t need heat diversion. The LED-like features do not improve the CFL — they merely disguise it to pull in customers who are not paying close attention. However, when they get the bulb home, install it, and flip on the light switch, they can easily see that they have purchased a plain old CFL. You assume customers will make this mistake only once, and some surely will be angry about being tricked, but that loss of reputation doesn’t much matter for a product that has a useful life approaching 10 years. CFLs won’t even be on the shelf when customers return to buy replacement bulbs in 2024.

If CFLs can sell only by tricking customers, it is a sign that the CFL technology is nearing the end of its life already. There is hardly any defensible financial rationale for CFLs at this point. They exist because they still have an initial cost advantage over LEDs, but the savings of a buck or two up front buys you a visibly inferior quality of light and a disadvantage of perhaps $30 in the cost of electricity at the back end. I can understand seeing CFL bulbs in motels, as a conspicuously inferior product that few guests would be tempted to steal. Most people don’t want to be conspicuously inferior at home. LED bulbs have seen vast improvements over the past five years. It will take only a few more marginal improvements in LEDs to drive CFLs out of the stores.

Friday, December 26, 2014

This Week in Bank Failures

Austria’s Volksbanken AG will surrender its banking license next year under a plan approved by owners this week. The move is part of a plan to turn the bank into a bad bank. Without a license, it will no longer be subject to capital requirements. It will also stop taking deposits and making loans. It will continue to collect payments on its portfolio of loans and other assets. The idea is to make capital requirements easier to meet for the regional banks that own half of it. The national government owns nearly half of Volksbanken since a 2012 bailout. Volksbanken will also improve its capital position by selling its Romanian unit to Banca Transilvania, the third largest bank in Romania, and it will surely seek to sell other assets if it can.

Tuesday, December 23, 2014

OfficeMax Closing

Well, that didn’t take long. The last OfficeMax store in my local area is ready to close. The sign out front might say “Moving Sale,” but that description is accurate only in the sense that after the sale is over, the unsold merchandise will be shipped off to the nearest Office Depot store, in the next county. The store fixtures are not making the move, and many have price tags on them. Those are the real bargains in the store. The “Moving Sale” signs reflect the hope that customers might make the trip to the locations that remain open, but that is no more than a faint hope. Who would drive 16 miles to buy office supplies when there is a Kmart just around the corner? The 25% and 30% discounts have brought in more customers than usual, but the store is still conspicuously quiet when compared to the shopping mall it faces, two days before Christmas.

The local OfficeMax closing is part of a trend that saw a Staples store close already this year three miles away on the same street. More store closings are surely on the way as paper documents lose their central place in the business office. With fewer pages to print, an office supplier can’t sell enough ink and toner to keep the store in business. Office Depot announced the closing of 400 stores in May, but that number quickly rose to 450 and seems to be going up from there. In an ominous sign, staffing and worker hours are being cut in the stores that remain. Office Depot held off on store closings after the merger, not wanting to tell OfficeMax customers, “We bought your store just so we could shut it down.” Now that the store-closing habit has set in, though, it would hardly be a surprise if Office Depot ends up closing more than half of its locations and dropping the legacy OfficeMax name completely.

I can’t lament the loss of OfficeMax, not after what it has turned into. I would buy toner here for my laser printer, but I can’t. The printer I have was the biggest-selling laser printer model here last year, but that was last year. As this year winds down, the store no longer carries that toner cartridge. If I can’t buy toner here, what can I buy? Roaming the aisles, I picked out headphones and a USB flash drive. I tossed gel pens, Sharpies, and batteries into my basket. If I had paid full retail price my sales ticket would still have been under $100 — and I bought enough supplies to get through the next year at least. That kind of revenue isn’t enough to keep a store open.

Monday, December 22, 2014

Amazon’s 100-Hyphen Limit

Amazon hates hyphens. This was supposed to be a secret, but they let the cat out of the bag last week.

For its ebook platform, Amazon has an unstated policy of limiting any one book to a maximum of 100 hyphenated words. This turned out to be a problem for a novelist whose book refers to a “brown-furred monster” and other hyphenated creatures. Amazon pulled the novel and demanded that those frightening hyphens be removed. If you haven’t heard this saga, here is Alison Flood’s account at Guardian’s Books blog:

The novel High Moor 2: Moonstruck has since been reinstated at Amazon, but apparently only as a courtesy to one of Amazon’s more successful authors. It goes without saying that a major publishing house wouldn’t have been troubled with any such demand from Amazon that it rewrite one of its novels. Most of us, though, if we write a novel that has too many “brown-furred monsters” in it, may have little choice but to accede to Amazon’s demand that we rewrite the story to feature “brown furred monsters” instead (at least for the edition sold on Amazon).

Amazon’s ham-handed attempts to steer the literary world are hardly a threat to civilization, but it is troubling to some authors and readers that Amazon even has this kind of power, the power to permit some common, familiar styles of writing while blocking others based on nothing more than its own corporate literary preferences. It is the same suspicion that is routinely raised with any similar abuse of monopoly power. Amazon’s desire to change the way the world writes is probably most troubling to Amazon’s own lawyers, though. Amazon cannot afford to take the position that it is exercising any degree of editorial control over the products it sells. Legally, when you assume editorial control you take on a degree of responsibility for content. That is an expensive responsibility that even Amazon cannot afford. This is probably why Amazon 100-hyphen rule was a secret — to keep Amazon’s own lawyers from finding out about it. I assume now that the lawyers at Amazon will put a stop to this particular assertion of editorial control in the name of quality control. But just as certainly, in Amazon’s position of power, some kind of editorial control will crop up again. This will keep happening as long as Amazon has the kind of monopoly position that it currently occupies.

Friday, December 19, 2014

This Week in Bank Failures

The Detroit branch of the Wall Street bailout is effectively over after six years with the Fed cashing out its last shares in Ally Financial. The bank changed beyond recognition during its years on government support. Summing up the Wall Street bailout as a whole, it roughly broke even for the government in an accounting sense, but was a big loser if you consider related effects such as the lost tax revenue.

The currency collapse in Russia is a likely sign that the country spent too much this year trying to stabilize its banking system. This week more of the transaction clearing network was shut down because of wild currency fluctuations, leading to panic buying of imported goods such as vegetables and furniture. Ikea, Apple, and Audi are among foreign companies temporarily shutting off product orders in Russia because of a rush of purchases amid the currency instability. The Russian ruble at its lowest points this week was down by about half from the beginning of the year. Besides the reduced purchasing power, Russians’ income is at risk because of the pension funds used to finance one phase of the bank bailouts this fall. Interest rates were raised to 17 percent at the start of the week, possibly stabilizing the currency but adding to fears of a widespread banking collapse.

The NCUA says it does not expect to need any more money to stabilize the corporate credit unions. These are the large regional credit unions that are owned by retail credit unions. The corporate credit unions collapsed because of the mortgage-backed securities they owned.

There was another small bank failure in Minnesota on the periphery of the Minneapolis metro area, this time to the southwest in Mankato. The failed bank is Northern Star Bank, closed by state banking regulators. The successor, BankVista, is purchasing the bank’s assets ($19 million) and taking over the deposits ($18 million). The failed bank had been under regulatory scrutiny for years because of troubled assets.

This is likely the last U.S. bank failure of the year. The year ends up with a tally of 18 FDIC-insured bank failures, along with 11 credit union liquidations. These are numbers that, after the previous five years, may be described as near normal.

Thursday, December 18, 2014

Sony in Retreat

I was not the only one surprised one day ago when Sony Pictures decided to cancel the scheduled Christmas release of the assassination comedy movie that was the specific target of the recent data theft at the company. It is, of course, a bad precedent if state-sponsored spies and terrorists have enough influence to get an artistic work pulled from the market, but obviously Sony is more aware of that than most of us. My take on the situation is that Sony Pictures is more battered and bruised by the massive data release than we can tell from the outside. Perhaps the future of the organization is in doubt, or perhaps there is just an unprecedented level of chaos in the office, combined with the usual toll that December vacations take on any corporate operation. Whatever the reason, Sony is weakened enough that it does not have its usual ability to respond to a crisis.

I can’t bring myself to look through any of the data stolen from Sony, given the obvious conflict of interest that would imply. In any case, the historical documents, many of them said to be from August or earlier, won’t answer the most important questions that lie ahead, particularly the question of what else there is that Sony won’t be able to do in the coming weeks.

Wednesday, December 17, 2014

Russia’s Good Luck Holds, But for How Long?

Half-price oil is a mistake that won’t last long. The financial collapse in Russia, though related to world oil prices, is another matter.

Half of Russia’s GDP is related to energy exports, so with half-price oil, the scale of its economy is down by 25 percent. Yet a dozen other countries have a higher energy exposure, but are taking the oil price fluctuations in stride. Russia’s current problems started before the recent oil decline, and they go deeper than oil. Some of the headlines depict Russia this year as the victim of a series of unlikely misfortunes, but nothing could be farther from the truth. As the best example, Russia had near-ideal agricultural weather this year. That made it possible for the country to impose food boycotts on half the world without suffering much of a hunger crisis at home. Russia’s good luck is not just a matter of weather. Its hasty military adventures have gone better than it would have any right to expect. A large-scale banking bailout has not led to a broad collapse, at least not yet. Russia’s good fortune in these areas and others will surely change at some point.

A plurality of U.S. analysts tend to blame Putin for Russia’s missteps, but the government’s moves are hardly controversial among the public in Russia. It is a misadventure that the country is taking together, and that extends to the new moves to put the country on a war footing in response to the economic crisis. My guess, though, is that the policy consensus will fall apart when people realize that this year’s crisis adjustments are not temporary fixes for a temporary problem, but the permanent changes of an empire in decline. There is a very real chance that the Russian banking system could fail in 2015, and if it does, the public pension system and the social compact will fail with it. By the time that bridge is crossed, the public mood will surely have shifted.

Saturday, December 13, 2014

November Shopping and Less Time Pressure

All the U.S. retail data for the month of November indicates a good solid month of sales. The lull at Black Friday, then, was probably just the result of so many Christmas shoppers who got shopping done early. It makes sense with the shopping mood indicators everyone was talking about: lower gasoline prices, early snow cover, consumer sentiment, and so on. It is also consistent with the ten-year trend of Christmas shopping moving earlier in the season, as shoppers try to avoid the risks and hassles of Black Friday and the mid-December rush.

I consider this also a favorable indication for a reduction in consumer time pressure. If so many people are ahead of the curve with their Christmas shopping, it is a sign that people are getting ahead of their time pressure in general. It’s not enough to call a new trend, but it’s the first big move away from time pressure that I’ve been able to identify in the United States since at least 2002. It is too early to say this with confidence, but my hope is that this may mark the end of the long-term trend of ever-increasing time pressure on consumers.

Friday, December 12, 2014

This Week in Bank Failures

The U.S. House voted to repeal most restrictions on derivatives for Wall Street banks, setting the stage for a spectacular banking sector collapse in the future.

A credit union was closed tonight. Health One Credit Union, in Detroit, had about 4,000 members and $15 million in assets. Member accounts and assets are being transferred to New England Federal Credit Union.

Friday, December 5, 2014

This Week in Bank Failures

Responding to the impact of the recession, Russia has taken steps to limit transaction clearing activities and international transactions, with the central bank taking on a more prominent position. The central government is preparing a broad bailout of the banking system, which could extend to a financing vehicle for national infrastructure projects. The bailout is being paid for using pension funds.

Hawaiian Electric Industries’ board of directors approved a plan to spin off its $5 billion banking subsidiary, Honolulu-based American Savings Bank. It is one of three large banks based in Hawaii. The bank’s operations are not expected to be affected by the change in ownership. The new bank holding company will be one of two surviving entities in a planned electric company merger.

In Portugal, the successor to the failed Banco Espírito Santo will soon stop using that name. Workers have begun changing signs at branches to the new bank’s name, Novo Banco. Meanwhile, Novo Banco is working on selling some divisions and assets to make way for a sale of the bank to a new owner next year.

A surprisingly strong November U.S. jobs report has observers speculating that the Fed could begin raising interest rates. The current crisis-level interest rates are beneficial for banks that are deep in debt, but the artificially low rates tend to reduce the size of the banking sector and make it difficult for banks to make a profit from normal banking activities.

A credit union was liquidated this week. Metropolitan Church of God Credit Union had 191 members, who were members of the namesake church in Detroit, Michigan. State regulators closed the credit union on Wednesday, and the NCUA was in the process of verifying member accounts.

Confidence Up, Shopping Down?

Two more days of data releases confirm that Black Friday sales were down significantly this year, and that the change is not the result of shoppers squeezed for cash. How much smaller was Black Friday than last year? One indication comes from album sales, as reported in Billboard:

According to Nielsen Music, album sales declined 15.2 percent for the week ending Nov. 30, when sales were 7.28 million units, versus the nearly 8.6 million units scanned last year during the corresponding week ending Dec. 1.

In-store album sales is a declining category, of course, but it isn’t declining that fast.

The decline in shopping comes as consumers are feeling nearly as confident as they were before the recession. From Bloomberg:

Consumer confidence climbed to a more than seven-year high in November as Americans’ views of their financial well-being improved heading into the holiday shopping season.

Could it be that reduced shopping is part of what is making consumers feel more confident? That is a difficult conclusion to come to, as it is something never observed before, but it is consistent with what I have observed in the stores since the Christmas shopping season got going in a visible way on October 31. I have been seeing people shopping with more energy and optimism than in years past, feeling good about what they get, being decisive, but buying less and taking less time than in past years.

Tuesday, December 2, 2014

Search Data Shows Early Christmas Push

Ignore the snarky article and just look at the data CNBC is showing here (and the nice time series graph):

Search data from Polyvore shows Christmas shoppers started earlier this year:

Beginning of Christmas-season retail searches:
2012: Oct. 27
2013: Oct. 23
2014: Sept. 28

If shoppers are spending the entire fall season getting ready for Christmas, it stands to reason that some of us are essentially ready by the time Thanksgiving rolls around. This would explain a lower level of activity at retail in recent days. Despite mixed predictions, the reduced buying carried over into Cyber Monday and today.

Monday, December 1, 2014

Making Sense of a Shopping Lull

Are the many people who have not bothered to do any shopping over the past five days missing out?

I think that is the question that may help to explain the reports that show sluggish activity at retail on Black Friday, yesterday, and today and predict the downward trend will cut into today’s online shopping. Sales on Thanksgiving and Saturday looked like they were up from last year, but not enough to make up for the decline on the other days.

One reason the retail results are puzzling is that there were so many shoppers out at some point on Black Friday. The difference this time seemed to be that most shoppers were following a script, a preplanned sequence of stores with specific products in mind at each destination. Shoppers were trying to avoid distractions and delays so that they would not have their whole day taken up with shopping. That’s how a large number of shoppers can translate into light foot traffic in the stores, with retail workers being sent home early at the ends of their shifts.

Consumer confidence seems to be higher than the past few Christmas shopping seasons, and the mood I saw in the stores seemed to bear that out. People were in a good mood. They were feeling successful in their shopping. If they were spending less, it was not out of financial distress, but by choice or because of lower prices. Maybe the big spending of 2012 and 2013 was, in part, a way to make up for the restrained spending of the previous six years. If so, maybe that was a moment of splurging that no one ever intended to carry forward into 2014.

A Cyber Monday decline, if true, is easier to explain. There were millions of late deliveries last Christmas, with high profile media coverage of the lapses. Many of those late deliveries were for orders placed between Thanksgiving and Cyber Monday. Tens of millions of other deliveries were not made until Christmas Eve and Christmas, technically not late, but late enough to cause worry. After that scare, it is easy to imagine that a few of the more cautious shoppers might want to place their online orders a week or two earlier.

My own experience of the holiday weekend couldn’t possibly be typical, but others’ reactions to it could be indicative. When I told people I would be spending most of the weekend at home, trying to catch up on my studies and housekeeping, the consensus reaction was one of envy. There weren’t any of the “Aren’t you at least going to ___” questions that I might have faced last year. Maybe, then, we have reached the point where the hustle of Thanksgiving weekend has built up beyond what most people really want. Perhaps, then, it is now the shoppers more than the non-shoppers who worry that they are missing out on something. That would explain shoppers determined to stick to a shopping plan and get home on time.

I wonder also if there is some cultural embarrassment that Black Friday, the unofficial U.S. holiday dedicated to shopping and the consumption of manufactured products, is beginning to overshadow the more conventional holiday on the day before. I counted at least six different shopping boycotts, all poorly organized and seemingly unrelated to each other, but each one getting some traction anyway. When a boycott movement gains broad support, it usually means people are looking for an excuse not to go. Even without remembering what Thanksgiving is about you could get the feeling that turning it into Black Friday Eve would not be a step forward. The pushback against this trend has been widely remarked on for at least ten years, but may now have reached the point where it means something in a commercial sense.

Saturday, November 29, 2014

Black Friday Recap

How did Black Friday go at U.S. retail this year? I am hearing stories that point in quite different directions.

  • Store workers described foot traffic as “surprisingly quiet.” News reports mentioned generally quiet foot traffic in stores.
  • Shoppers went to several of their favorite stores and found impressive bargains, but didn’t necessarily spend much.
  • More stores, including office supply stores, opened in the early evening on Black Friday Eve.
  • Shoppers made an effort to avoid shopping for the entire day as a protest. They were protesting commercialization in general, extended store hours, a department store’s inclusion of captive marine mammals in a parade, or the street shooting in Ferguson. One mall closed completely for the day to avoid protestors.
  • Reports of a boom in gun sales, the biggest day ever by some counts, with firearms being seen as more useful after the decision not to indict the Ferguson shooter.
  • Walmart workers were on strike.
  • Shoppers who wanted to avoid the crowds made all their purchases online.
  • Shoppers said they had finished their shopping either before Black Friday started, or early in the day.
  • There was heavy highway and street traffic in shopping areas.
  • I saw a 100-car backup approaching an automobile dealer’s tent event.
  • The first big attempt at Black Friday in the United Kingdom was marred by pushing and shoving and other incidents of in-store violence.
  • Shoppers said lower gasoline prices might make them spend more freely.
  • Snow on the ground in wide areas might have reminded shoppers that Christmas is coming.

In my case, it was a busy day with little time for shopping. I spent perhaps 15 minutes in stores shopping, but didn’t buy anything. It is hard to say at this point what this year’s Black Friday indicates, but retailers counting on a single day of sales to put them in the black must be feeling a little let down this morning.

Sunday, November 23, 2014

Power Strip Meets USB Charging

Here is a sign of the times, something I came upon during my holiday shopping: a power strip that provides 2 USB charging outlets along with 4 grounded electrical outlets (made by Inland and seen in the Micro Center catalog). It makes sense as a product. If you are using several outlets at one place, there is a good chance that one of the things you are doing is charging a portable device. The USB charging port is the only well-accepted standard connector for this purpose. This combination device costs noticeably less than the combination of a power strip and a USB cube that you would otherwise deploy. Next, as the USB charging port becomes more common we may see it used for purposes other than charging, that is, to power devices such as musical instruments. This may be a bit of a design challenge. Most such devices require a higher voltage or more power than the USB charging standard provides, but the cost savings might be enough to nudge designers to make a device work with half the voltage or half the power so that it can fit within the limits of the standard.

Friday, November 21, 2014

This Week in Bank Failures

Accused: Prosecutors in Belgium say HSBC is involved in steering clients toward tax evasion vehicles in Switzerland. Belgium is thought to have missed out on probably less than €1 billion in tax revenue because of the bank’s tax evasion schemes. A similar investigation is underway in France, the bank says. Separately, prosecutors in France are looking into reports of insider trading by executives at BNP Paribas.

Layoffs: Royal Bank of Canada (RBC) is closing its offshore banking operations in the Caribbean and closing some other wealth management offices. A published report estimates 300 job cuts.

Seeking capital: Lorain National Bank in Lorain, Ohio, is seeking a buyer and expects to close a sale before the end of the year. The bank took large losses that started in 2007 but received a federal bailout, repaid in 2012 when the bank returned to profitability. It has $1 billion in deposits.

A Senate bill would require the president of the New York Fed, one of the country’s most powerful financial regulators, to be nominated by the U.S. President and confirmed by the Senate. The move comes as policymakers review evidence that the New York Fed is effectively owned by the Wall Street banks it is supposed to supervise.

Wednesday, November 19, 2014

Fuel Cells: The Other Side of Batteries

In my last post I mentioned nanotechnology as one avenue being explored as a way to make batteries that recharge faster. I may have misled by failing to mention a completely different approach that is on the way, perhaps sooner than nanotech batteries. If you imagine an electric battery that is recharged not by adding electricity but by putting in fuel, then what you have is a fuel cell. The consensus of engineers is that the fuel of choice is hydrogen gas, resulting in a term I am sure you have heard, a hydrogen fuel cell. Despite the different name and some differences in the construction, a fuel cell puts out electricity in essentially the same way a battery does. Hydrogen fuel cells have been around for years and have been much talked about, and now, the first mass production fuel cell cars are on the way next year. The first hydrogen fuel cell cars will cost about the same as a comparable battery-powered electric car, and surely within a few years we will have a good sense of how well fuel cell cars are doing.

At CNet:

Tuesday, November 18, 2014

Smaller Cells for a Faster Battery Recharge

The widespread use of electricity to power vehicles depends on making the batteries less expensive, lighter, and perhaps more durable. For the past decade, the big push in battery technology has been toward improvements in materials that increase the electrical capacity of the battery without adding too much to the manufacturing costs or weight or losing anything in reliability. The improvements, though, haven’t been coming in as fast as had been hoped, and now some researchers are looking in other directions. One thought that is showing some promise is the idea of reducing the time to recharge a battery. If the battery recharges faster, then for many applications including cars, the capacity of the battery becomes less critical.

A shorter recharge time fundamentally means a smaller cell size. Cells are the chemical components inside a battery that store electricity, with at least three layers of different materials chosen for their contrasting electrical properties. A simple battery may contain only cell, a lead-acid car battery, six cells. What if you made a battery with millions of tiny cells? With smaller cells, the distance from the middle of the cell to the edge is smaller, and that should make it possible for the battery to charge faster.

Prototypes prove this works in practice, but it is an immense manufacturing challenge to make so many small cells quickly, so that the manufacturing costs are low enough to be practical. The answer might be found in recent advances in nanotechnology. Nanotechnology creates a range of small devices by getting materials to go together consistently on a small scale.

Wendy Koch writing in National Geographic explores the nanotech side of batteries in a new story:

Monday, November 17, 2014

Behind Japan’s Two-Quarter Decline

In looking at the latest GDP report from Japan, which shows a second quarter of declining output, it is hard to avoid the effect of the sales tax, an unfamiliar 7 percent tax that seems to have sapped consumers’ courage. After the tax was put into place, consumer spending edged up only slightly in nominal terms, which means the amount of stuff people are buying is quite a bit less than before. It’s not a surprise if shoppers feel a new reluctance after the price of essentially everything jumped up. Price-conscious shoppers have to wonder what to buy; income-conscious shoppers wonder what they can afford.

It is important also not to overstate the impact of the sales tax. There were weather disasters during the quarter that gave a reason for caution. Storms temporarily took out transportation and electricity in some places. All in all, the downturn should not be taken as a trend.

It is also possible to look deeper. The reason for the harsh new tax policy is a government debt large enough to destabilize the national economy. Reducing the debt is a valuable course of action even if it is not so easily taken. Behind the government debt one may find a messy network of indirect subsidies that have gone in many directions, most especially in the direction of nuclear power. This created a financial hole that the country has to dig out of, and sooner is better than later.

Sunday, November 16, 2014

Weather, Gasoline Should Boost Christmas Season at Stores

It is shaping up to be a big Christmas at retail. I saw a big weekend in the shops October 31–November 2, and from everything I saw and heard locally, this weekend was bigger, with the early afternoon looking almost like a Black Friday. Weather may be a big factor, with weather cold enough last Thursday and Friday in most of the United States to remind people of winter and its holidays, but not snowing in too many places. Gasoline is also a factor that favors shopping, with prices falling below the psychological $3 level in most of the country. This helps shoppers feel good about driving around to local stores for shopping, and it also means they have more money to spend when they get there.

Time pressure is the major factor working against the Christmas shopping season, with no indication I can see that consumer time pressure has diminished since last year. On the other hand, time pressure hasn’t increased much either. My expectation after seeing the foot traffic this weekend is that stores will be talking about the busiest holiday season in eight years, with online sellers also having a reasonably strong selling season.

Saturday, November 15, 2014

Weather Data Disrupted

It is not just retailers, banks, research and development divisions of manufacturers, and military operations that are targets of well-organized online break-ins. Basic infrastructure is also a target. We’ve seen this in criminal groups’ attempts to collect data from hospitals, email servers, and delivery services. In October, web sites that provide U.S. weather data were a particular target. Jose Pagliery at CNN reported:

Why would criminals want to break in to weather sites, if they did not seem to be altering the weather data itself? I can think of two obvious reasons:

  • To gain access to connected military servers. Military operations are among the most avid consumers of weather data, and they also provide a small fraction of weather observations, so it seems a likely guess that there might be a data conduit set up between a weather server and a military server. Intelligence organizations and military contractors might think of the weather servers as an indirect route to gain control of military servers.
  • Fossil fuel energy suppliers, such as the companies behind proposed oil pipelines, might want to disrupt the flow of weather data to delay climate statistics. The delay would be only a matter of days or weeks, but that would still be long enough to matter for commercial groups wanting to manipulate the political process to create favorable legislative action or forestall unfavorable action.

Of course, the real reason for a well-funded weather data disruption could just as easily be something that is not so obvious.

Friday, November 14, 2014

This Week in Bank Failures

Penalized: Six banks that worked together to manipulate currency exchange rates will pay a few billion dollars in fines to settle their involvement in the scheme. Citigroup and JPMorgan Chase are each paying an estimated $1 billion in fines to regulators in three countries, with Bank of America, UBS, Royal Bank of Scotland, and HSBC paying smaller amounts. Barclays refused to settle and other banks remain under investigation.

Bond fund manager Pimco is expected to lose a third of its funds under management over the next two years, and this could cause short-term difficulties in managing its funds. Customers worry about Pimco after two years of lackluster performance followed by the unexplained exit of two top executives. Pimco saw $50 billion in outflows in October, and net redemptions may continue at half that pace even if the company faces no further hurdles in the months ahead.

Thursday, November 13, 2014

Amazon Bends on Ebook Pricing in Hachette Deal

An agreement on ebook terms between Amazon and Hachette was announced this morning. In the announcement, the online bookseller and the major publisher described the resolution only in the vaguest terms, so we really have little idea on what the resolution was. However, some of the statements make clear that the dispute was entirely about ebook pricing and that executives at Amazon had given the ebook division the power to throttle the sales of Amazon’s print book division. It shows how committed Amazon is to its proprietary ebook format and platform.

Looked at through a traditional business management lens, this is a bizarre situation. Amazon’s ebook division has never made money and does not appear to have a long future ahead of it. Its print book sales operation is generally said to be the only part of Amazon that makes a profit. But it appears that Amazon is willing to sacrifice its cash cow to possibly bolster the long-shot chances of future profits in an area that is still in the experimental stages.

For the larger economy, the most important point is that Amazon was willing to bend on its often-repeated contention that no information product should ever sell for more than US$9.99. Under the new deal, Hachette ebooks at Amazon may sell for higher prices than that. Hachette is giving up some, or perhaps most, of its profit margin on ebook sales at Amazon, but that is not a major concession. A publishers’ profit from Amazon’s ebook platform, if they make anything at all, is generally not enough money to care about.

Although Amazon’s public statements would try to persuade you that it was standing on principle, its arbitrary US$9.99 price ceiling is really just the latest expression of the old, dare I say medieval, idea that workers shouldn’t be paid for their work. This position has been a public relations disaster for Amazon, and rightly so. This morning on Twitter, some of the most repeated comments were the ones suggesting that readers might have an easier time buying books from independent booksellers, which don’t have the same history of trying to squeeze authors out of the book business.

There is one more lingering bitter aftertaste in today’s announcement — it is only a temporary truce in an ongoing dispute. Without specifying the expiration date, Amazon made clear that its deal with Hachette would last just a few years. It sounds just like those deals between cable carriers and TV channel owners. When you hear those deals announced, restoring a channel that had gone dark on your television, you can be pretty sure that same channel will be going dark again a few years later.

Monday, November 10, 2014

Catalonia Votes for Independence

Catalonia voted on the question of independence, and while it was more of a straw poll than an official ballot question, the results seem to indicate a strong case for independence. The preliminary results show 81 percent in favor of the ballot’s two questions. The central government in Madrid tried all year to block the vote, but courts did not always take its side. Voter participation was close to 50 percent, high enough to make the case that the voting results represent a solid majority in favor of independence, but not nearly enough to form a mandate. Many voters were kept away from the polls by threats of violence from the central government, but the confrontations never materialized.

The idea of independence might also be helped by the latest polls from Scotland, which show that most voters there would support independence if they could vote on that question now. Independence in Scotland was defeated after a series of extravagant promises from London, but most of those promises were abandoned in the three days after the vote. It is quite a different picture in Madrid, where the government says Catalonia will never gain independence no matter how many citizens support it. The brittle posturing in Madrid means that something will have to break sooner or later. A nation cannot be perpetually in conflict with its most prosperous colony.

Saturday, November 8, 2014

When Smart Meters Fail

The concept of a “smart” or adaptive electric grid is still years away, but already there are problems. The first tentative step toward a smart grid is the installation of smart electric meters, and there are growing pains even at this stage. Dozens of smart meters have caught fire or exploded, causing concern about the potential for building fires. I have heard reports of this problem in Hawaii and California, and of incidents near here in Philadelphia, but the defective smart meters have become the greatest obstacle in Saskatchewan. There, there have been nine reported “smart meter failures” among only 105,000 installed in a pilot program, a failure rate so astonishingly high that the province has ordered all of the smart meters removed. Here is the report of the latest meter fire from CBC News:

The design problems with smart meters will be fixed soon enough, but the extent of problems shows that even these initial, rudimentary steps can’t be taken for granted. We have to get the first pieces working before we can go on to the next step after that.

Friday, November 7, 2014

This Week in Bank Failures

Luxembourg is a country half the size of the U.S. state of Delaware. The comparison is significant because, like Delaware, Luxembourg is the nominal seat of countless corporations that do not necessarily do business there. Many of these Luxembourg-based corporations are household names. Many are shadowy operations where it is impossible to tell what exactly the corporations do or even who their owners and officers are. Many are both.

Luxembourg fell reluctantly into the spotlight this year with the spectacular collapse of the Espírito Santo commercial empire in Portugal, which had owned one of Portugal’s largest banks, Banco Espírito Santo. The dominoes started to fall when one of the bank’s parent companies filed for bankruptcy in Luxembourg. There were assurances that the bank was not affected by the bankruptcy, but those proved false, and within weeks, the bank too had failed. The blanket of secrecy that Luxembourg allows corporations to operate under had made it possible for both the Luxembourg-based holding company and its Portuguese banking subsidiary to obscure their true financial condition for years — perhaps as long as 12 years, investigators in Portugal think. The same blanket of secrecy is complicating the bankruptcy proceedings, so that it could take courts a year or longer just to determine which company properly owns which assets.

More recently it is the tax avoidance strategies of international corporations that have kept people talking about Luxembourg. A major parliamentary investigation into tax avoidance by U.K. businesses points to secret deals between U.K.-based businesses and the government in Luxembourg. A smaller U.S. investigation on the same theme has pointed to Luxembourg more than once. European Union investigators are convinced that Luxembourg is breaking EU rules with its secret tax deals with companies like Pepsi, FedEx, and AIG, along with a list of banks including JPMorgan Chase and Deutsche Bank. However, formal action is still pending because Luxembourg authorities, citing secrecy laws, are still stonewalling investigators. Some investigative journalists point to the role of major accounting firms in setting up these secret Luxembourg money funnels. They believe even the government in Luxembourg is being duped by the accountants.

The theme in all this is secrecy, or the lack of transparency. The Luxembourg tax arrangements wouldn’t be possible if the whole world knew about them. Just the way publicly held and even government-owned corporations have kept these tax avoidance schemes under wraps raises questions. The most pointed question: is it even legal for a public company to depend on billions of euros in tax avoidance without ever mentioning this or the associated risks to its owners?

One of the corporate mechanisms for secrecy is the subsidiary, an arrangement in which a corporation that everyone knows about can own another corporation whose existence is almost a secret. Every secret Luxembourg tax deal seems to involve a Luxembourg-based subsidiary, which in many cases does nothing more than own other subsidiaries. Gaps in corporate governance laws allow corporations in many cases to treat subsidiaries as trivial entities — to get all the benefit of the subsidiary while at the same time pretending that it does not exist. Subsidiaries are gaps in corporate transparency. A corporation that is laudably transparent in its own headquarters can still hide a multitude of sins in a foreign subsidiary that no one talks about.

In my opinion, the fuzzy status of subsidiaries, sometimes treated as entities and sometimes not, is the weak point or loophole in corporate law that is being exploited. The tax avoidance schemes and other financial smoke screens would be much harder to arrange if subsidiaries were required to keep records, report results, pay taxes, and face audits like the corporations that they are. This would be an easy legislative change to make, requiring only a few paragraphs of legislation. But the corporate world would lose more than a trillion dollars annually from the loss of their tax shelters, so they will never let it happen.

Exiting bankruptcy: Detroit had its bankruptcy plan approved today. The plan mostly protects creditors, reducing the city’s debts by $7 billion and cutting pensions by 4.5 percent. The court spent two months going over objections one by one, but found little legal basis for them. The court’s main concern was that the plan would still leave the city strapped for cash, but this worry was not enough to persuade the court to reject the plan, which would have directed lawyers to start all over again. In total, Detroit’s bankruptcy case ran for 16 months, a surprisingly short time. While on the subject of municipal bankruptcies, it is worth mentioning that the flood of bankruptcy filings that many analysts expected to see this year did not materialize — although that may simply be because the high-profile bankruptcies that did occur made creditors more hesitant to launch litigation against municipalities in arrears.

Struggling: Executives said it could take 10 years to fix the problems at Standard Chartered Bank, which has struggled with overconfidence, operational difficulties, and repeated penalties for money laundering (and is, the bank confirmed, now facing a third U.S. investigation).

Under investigation: Banking giants’ currency exchange practices are being investigated by authorities on at least three continents, and banks have set aside at least $2 billion to settle those cases. Some reports have suggested that banks manipulated currency exchange rates for short periods of a few minutes in order to pollute the statistics used in other traders’ analyses. A fresh U.K. competition investigation aims to find out whether the big four banks in that country really compete with each other.

Insecure: A criminal group that broke in to Home Depot’s network to steal transaction data didn’t need any advanced techniques, according to new details released by the retailer. The intruders exploited stolen credentials and a well-known Microsoft operating system flaw. Once opened, the network intrusion went undetected for seven months. With retailer networks so wide open, making credit cards themselves more secure won’t make an immediate difference. POS terminals and the associated network software will have to be overhauled before there can be a reasonable level of confidence in the security of retail networks.

Failed: El Paseo Bank, with two locations in Palm Desert, California; $82 million in deposits. Successor is Bank of Southern California.

Sunday, November 2, 2014

Halloween and Christmas Collide

Halloween collided with Christmas on November 1. I was out in the shops, which were lively with shoppers, more than twice the usual number. The background music was Christmas carols. But many of the shoppers were doing last-minute shopping, buying Halloween costumes for their Saturday night parties.

The reason for the early Christmas shopping was not to avoid the crowds, but to get the local shopping done before the end of November so that any remaining purchases that had to be made online could be placed in plenty of time. Shoppers who take this approach are just getting started on their intensive three or four weeks of in-store shopping. The result, though, is that there is no place for a gap between the Halloween and Christmas seasons. This weekend, they are overlapping.

Friday, October 31, 2014

This Week in Bank Failures

Stress tests and other examinations of European banks over the course of this year were released showing that most of Europe’s giant banks are prepared for any modest change in the economic winds. There was only a short list of 25 (or fewer, depending on which measures and tests you might want to lend credence to) that are considered too short on capital to survive an unexpected minor stress. The one bank with the glaring capital shortfall is Monte dei Paschi, the world’s oldest bank and one of 9 in Italy that were considered to have failed stress tests. Monte dei Paschi is judged to be €2.1 billion short, almost a tenth of the total capital deficit on the list. Italy’s central bank noted that the stress test scenarios were particularly unfavorable for Italy because of the way the recession of 2012 was counted as a baseline. When you imagine more realistic economic scenarios for Europe, the rest of the euro zone is probably in about the same boat that Italy is in.

A weakness of bank stress tests is that they look at only the most obvious and naive economic scenarios encompassing just a few macroeconomic variables. They can’t help you find the unexpected changes that are the cause of most failures in businesses and banks. In this week’s headlines, for example, energy analysts were talking about the possibility of world oil prices settling between $70 and $75 for an extended period, a decline of a third from the last few years. Which banks might be negatively affected by this unexpected decline in energy prices? Which might be in trouble if energy prices unexpectedly increased by a similar amount? We can only guess. The variance analysis of a stress test can’t dig even this deep.

In the U.K., Lloyds passed the European stress test, but so narrowly there are worries about whether it can pass the U.K.’s stress tests. Those results are coming up in December.

According to a published report about the “address book” break-in at JPMorgan Chase, criminals gained access through the bank’s virtual private network (VPN). VPN access ordinarily is tightly controlled, but the criminal group must have found a way around the restrictions, possibly based on a combination of IP spoofing and a rootkit attack.

Thursday, October 30, 2014

The Design Flaw in CurrentC

There is a lot of talk about a data breach at CurrentC, the retail mobile payment platform currently being tested by more than 50 U.S. retailers, but there is a more fundamental flaw that may sink the platform, at least in its current form. It goes back to the original reason for the CurrentC platform, which is that retailers want to collect shopping data on their customers. As envisioned, CurrentC will have hundreds or perhaps a thousand retailer members and a single central database of enrolled customers. Every retailer will apparently have full access to the customer database, at least insofar as customers have ever shopped at that retailer. When you think of all the retail data breaches of the past year, not just the POS problems but all the others, what are the chances that a database that’s in the possession of 1,000 retailers will remain secure? No chance at all. A leak could occur at any participating retailer and affect a good fraction of CurrentC customers, if not all of them. If recent experience is a guide, we can expect one or two participating retailers to have a CurrentC customer data leak — per month.

What makes this such a sensitive point is that CurrentC will have a shopper’s checking account number and essentially unlimited access to the funds in the account. When you think about it this way, do you really want to share your banking information, and the potential ability to empty out your checking balance, with hundreds of retailers? I suppose some consumers might decide to take that leap of faith, but you would want to think very carefully before doing so.

This stands in especially stark contrast to Apple Pay, a system in which retailers are never in possession of an actual account number belonging to a shopper. Apple Pay too, though officially launched, is essentially just testing right now; it will need to be expanded somehow if it is ever to be relevant to more than 10 percent of U.S. shoppers, but it nevertheless can serve as a proof of concept. On the surface, Apple Pay looks like a step up in security when compared to a traditional POS card payment, while CurrentC looks like a step down. Collecting and exploiting customer transaction data is a core design principle at CurrentC, and that means it faces a series of security challenges that consumers now know don’t have to be part of a transaction system at all.

Tuesday, October 28, 2014

“Unlimited” Data Plans That Have Limits

AT&T is in trouble with the FTC for identifying one of its cellular data plans as “unlimited” when the carrier does, in practice, impose limits on data use under the plan. AT&T says it explains in the fine print that “unlimited” really means “limited,” but this argument won’t carry any weight in an official proceeding, and AT&T will surely end up changing the name of the data plan to more accurately reflect its effective limits. There is a trend away from unlimited plans anyway in both wireless and wired networks, and rightly so; beyond a certain point, the bandwidth involved does in fact cost a considerable amount to provide, so it doesn’t make much sense to offer it for a flat rate.

Saturday, October 25, 2014

Halloween Shopping

From what I have seen locally, Halloween shopping was not quite so energetic this year. Stores still looked almost fully stocked today going into the first of two weekends of Halloween parties. This is in contrast to the past few years when I remember seeing half-empty racks and shelves at this point in the season.

Perhaps this reflects a cautious attitude from consumers, but that is not the same as being strapped for cash. I have seen shoppers make multiple impulse purchases, not Halloween-related, on their Halloween shopping visits. Consumers have money to spend but are holding back on Halloween purchases.

Friday, October 24, 2014

This Week in Bank Failures

One of the recurring questions this year has been whether it is realistic to count on regulatory supervisors and auditing firms to catch risky financial practices in banks. In general, the answer seems to be no: bank personnel can too easily conceal the extent of risks they are taking, not just from outside observers, but from bank executives and internal auditors. That view was reinforced in the Fed’s handling of JPMorgan’s high-risk derivatives trading which nearly brought down that bank in 2012. Bank examiners knew in 2008 of the trading risks JPMorgan was taking, but never followed up nor shared their concerns with others at the Fed and the O.C.C. By 2011 regulators had forgotten about JPMorgan’s high-risk trading, and in the meantime, the bank’s traders in London kept raising the stakes on their bets.

A Fed Office of Inspector General report laments the lack of coordination and continuity, but even assuming those problems had been overcome, it is no sure thing that a follow-up examination would have discovered the scale of the risks the bank was taking. And even if they had known everything, it is hard to imagine that regulators would have intervened to prevent the bank’s near-death experience. Wall Street banks in general were taking enormous trading risks between 2009 and 2011 in the hope of earning enough to cover their respective financial shortfalls. For a time this worked, as the markets moved generally in only one direction. The Fed must have known in a general sense of the extent of risks banks were taking, but opted to cross its fingers and look the other way — a policy approach confirmed in leaked New York Fed tapes last month that showed examiners unwilling to confront equally serious shortcomings at Goldman Sachs. The Fed must have worried, along with the rest of us, that careful, prudent bank management would not be enough in a financial sense to keep Wall Street going.

Of course, hoping for the best is hardly a strategy for avoiding a global financial calamity in the future. The need for reform is obvious, but even the Fed Office of Inspector General has little to suggest. Its ten recommendations are well taken but offer nothing to ward off the next giant bank trading debacle, whether at JPMorgan or elsewhere. As long as banks are governed by the too big to fail policy, in which a giant bank is all but guaranteed to be kept together even in bankruptcy, it is hard to see what anyone can do to get banks to take their financial risks literally.

Too big to fail may have been written into formal policy, but that does not mean that policy cannot change. On Monday New York Fed president William Dudley suggested that regulators and legislators may be forced to break up the giant banks if Wall Street’s casino culture cannot be reformed.

There was a billion-dollar bank failure tonight, the largest in a year, though perhaps not really as large as its financial size would suggest. The O.C.C. closed National Republic Bank of Chicago. State Bank of Texas has assumed the deposits and is purchasing two thirds of the assets. The remaining assets are not available for purchase because they are tied up in bankruptcy litigation, as I will explain in a moment.

The failed bank specialized in loans to hotel operators, most in New York and Illinois, and this approach became a problem by 2011 as the hospitality business was slow to recover from the recession. By 2013 the bank had completely stopped making new loans as regulators pressed it to improve its capital position. After years of impressive profits, the bank posted losses of more than $100 million between 2012 and the first half of 2014. The bankruptcy of the bank’s largest customer, the owner of 34 hotels who owes on a staggering 21 percent of the bank’s portfolio, left it with few options. The O.C.C. issued a series of orders for the bank to improve its operations, which led eventually to the removal of the bank’s president in July. That order gives little insight into the unfolding drama inside the bank at that time, but there must have been some inkling of danger to the bank, as the order gave the president only 24 hours to clear out his desk and turn in his badge.

Now that the bank has failed, the FDIC will likely seek to seize the hotel properties of bankrupt borrowers, putting their respective bankruptcy reorganization plans in doubt.

Illinois has seen more than its share of bank failures this year, with five of the national total of 16.

Thursday, October 23, 2014

The King Lives

Much of the news of the day on any given day is not new at all. Today from Ottawa we are hearing a new version of “The King Lives,” a drama that goes back at least 10 centuries. It might seem an empty exercise, just a lot of fine language and posturing, until you look at the stock markets, duly reassured today after a mini-panic yesterday. The fact that we have seen these scenes before does not take away their meaning.

Tuesday, October 21, 2014

McDonald’s Responds to Decline With Cost-Cutting

McDonald’s posted earnings that showed another step down in its U.S. market presence. In explaining its earnings, McDonald’s said it was losing many of its U.S. customers to Chipotle. This makes sense when you think about it: Chipotle might not be as friendly or pretty as McDonald’s, but its ingredients are slightly better, the food tastes better and is served faster, the restaurant is cleaner, and the prices are essentially the same.

McDonald’s could fight back by improving its food, but that would not be the McDonald’s way. It could look for another way to stay relevant to its customers, but perhaps it thinks it has already tried everything during the past five years of decline. The more radical changes that could improve customers’ view of McDonald’s are too outside-the-box for the fast-food chain to even consider. Instead, McDonald’s says a new round of cost-cutting is just ahead. This cannot be the right answer. Surely the quality of either the food or the customer experience will suffer, driving more customers away.

Monday, October 20, 2014

IBM Revenue Decline Reflects Corporate Sector Retreat

It is hard to explain away IBM’s latest quarterly report, which shows revenue falling by 4 percent compared to the year before. Executives probably would like us to believe a series of small strategic errors led to the decline, but it is hard to point to any specific error in what is generally a carefully managed company. There were no major glitches or embarrassments such as a botched product release or data leak. Sales were down in every segment and every region. IBM referred to the quarter and, by extension, the year as a period of unprecedented changes in corporate information technology, but there is little to support that assertion either.

Sales were down, it seems, just because IBM’s customers in the corporate sector were less inclined to spend, particularly in September. It must be remembered that the year-ago September was a time of retrenchment as businesses of all sizes tended to wait out the effects of the federal government shutdown. There was no shutdown looming this past quarter, yet somehow spending fell even lower. The corporate sector is doing better financially last year, so it it can hardly be said that IBM’s customers have no money to spend. My sense is that it must be a combination of corporations have gotten what they needed, so that there is no urgency in buying more, and not getting what they needed, then holding back with a sense that something is wrong. Of course, that is not much of an explanation. IBM sells mainly into the enterprise budget, but desktop budgets have faced even sharper cuts.

Perhaps it is just that corporate IT spending went too far too fast without enough of a business justification to support it. Few of the promised gains in productivity and market positioning ever materialized. Whatever the story, the changes in the computer business go far deeper than just the end of the PC era.

Friday, October 17, 2014

This Week in Bank Failures

The European Banking Authority (EBA) has clarified the status of the “non-bonus” bonuses being paid by dozens of European banks to top-level managers. These extra payments are legal, but must be counted as bonuses under new EU rules that limit banking bonuses to 100 percent of salary, or 200 percent of salary for a bonus specifically approved by stockholders. This means that most employees who received the “non-bonus” bonuses this year will not be eligible for year-end bonuses. Banks can still get around the bonus cap by raising salaries. In most businesses, limiting bonuses to 100 percent of salary would have no effect, since few workers get bonuses that high, but in banking, thousands of workers were receiving performance bonuses over €1 million every year in spite of salaries much lower than this. Bonuses in banking are a problem because they can encourage high-risk strategies that can put a bank’s future profits and solvency at risk, or aggressive market strategies that may involve misleading or cheating customers.

The White House has put its authority behind a move to more secure credit cards. Starting next year, U.S. government credit cards will have chip-based security devices. This move should give the transaction network an extra incentive to upgrade its equipment, which in turn should get banks to issue the more secure credit cards to more of their customers. Improving the physical form of credit cards should reduce the risk of fraud when credit card transaction data is stolen, something that has happened far too often in the past year. Last weekend, it was Kmart’s turn to announce a major point-of-sale data breach.

Russia’s economy continues its slide, and this was reflected by a downgrade by Moody’s, rating the country’s debts barely above junk status. The costs of military adventures, sanctions against Europe and North America, the government’s promises to prop up a stumbling banking sector, and a general malaise and industrial decline were already hurting the Russian economy. And now, a decline in global oil prices has cut Russia’s earning capacity by a staggering 10 percent, and oil prices seem likely to fall farther before they turn upward again. Russia’s currency has declined by 15 percent since the beginning of the year, largely because of the central bank’s moves to support the banking sector.

Banco Espírito Santo, which collapsed spectacularly last summer, was employing shady off-balance sheet maneuvers to shore up its capital as long ago as 2002, regulators and investigators have discovered. Among other strategies, the bank set up offshore investment funds that mainly invested in the bank’s own stock. The bank and its offshore investment funds lent money to customers which they lent back to the bank, a form of transaction that sounds illegal, but it depends on the details, which investigators are now taking a close look at.

A mid-month bank failure: Maryland bank regulators closed NBRS Financial, which had 5 locations in northeastern Maryland and adjacent Lancaster County, Pennsylvania. The failed bank had deposits around $200 million earlier this year. Deposits and assets are transferred to Howard Bank, based in the greater Baltimore area just to the west. Howard Bank will immediately be selling off about a tenth of the assets. It is a big expansion for Howard Bank, which had just 7 branch locations last month before purchasing one of NBRS’s branches in a separate transaction.

Thursday, October 16, 2014

2 Apple Notes

Two things jumped out at me in Apple’s product announcement presentation today:

  • There is another energy efficiency boost in the new version of web browser Safari, this time focusing especially on movies. Better energy efficiency is especially easy to notice on a portable computer because it translates to longer battery life, but the actual energy savings add up much faster for desktop computers, which are not nearly so energy-efficient as laptops because they don’t have to be — this is one of the main reasons desktop computers may cost less than laptops. If a few million people at any given moment save a fraction of a watt, it adds up over time to reduce global energy demand. The improvements this time might be big enough to get some users to switch to Safari from Chrome or Firefox.
  • The comparison of iPad sales to PC sales is telling. Apple said iPad sales for the past 12 months were greater than the combined PC sales of the 4 largest PC manufacturers. One reason this is possible is that the PC category declined year over year if Apple is excluded. PCs have become more durable, and that is the main reason unit sales are declining, but that doesn’t explain away the comparison when an iPad is about twice as durable as a PC on average. You also have to consider that more than half of PCs are sold to large businesses for office use. If you take those out, since they are used more as terminals than as computers, it seems as if the PC era is over and it is now the iPad era.

Wednesday, October 15, 2014

Attack of the Flag-Bearing Drone

A drone carrying a flag crashed onto a playing field during a World Cup qualifying match. Chaos ensued — actually, worse than chaos, but I’ll let you look that up elsewhere if you are curious. What fascinates me is the low cost of creating chaos in this incident. A drone costs little, a flag nothing, yet the intrusion was dramatic enough to disrupt the activities of half a million people. It is possible that the drone operator didn’t mean to be so disruptive, but merely went too far and overloaded the drone or steered it ineptly while attempting a political statement. I am only speculating, but the scenario underscores how casually such a large disruption can be created.

With new technology every year there is always new potential for chaos, but social and cultural forces work against the disruptions. It is human nature that we resist being manipulated, and now that we have seen how easily a crowd was manipulated by a flag-bearing drone, the same kind of attack probably will not be nearly so effective the next time someone tries it. Among many other adjustments, game officials will surely be quicker about getting players out of harm’s way when there is a threat from a flying object. It is this kind of adjustment of expectations, more so than counter-technology, that keeps our public lives from descending into chaos with each new technological change.

Monday, October 13, 2014

Solar Power as a Way to Save Money

You shouldn’t expect solar power to make a big splash. Only about 10 percent of U.S. houses are well-suited for rooftop solar, so there isn’t much point in advertising the technology to the broader public.

Not just any house can generate solar power efficiently. Most houses can be ruled out quickly for one of these reasons, or others:

  • No level or south-facing roof.
  • The local electric utility doesn’t permit it.
  • Too much cloud cover.
  • Trees or tall buildings nearby.

With so few ideal customers, there might not be much hype around solar this year or next, but the cost of a solar installation has fallen so much that people who can are installing solar systems just to save money. Even situations that don’t look so favorable in a traditional financial analysis may be a good investment for a homeowner who has the money. Consider a relatively unfavorable scenario in which a homeowner can spend $20,000 and save $80 a month on electricity. That works out to an ROI (return on investment) of 4.8 percent. A growth-oriented business might scoff at a rate of return as low as that, but it is nevertheless 10 times what you can get by putting the same money in an ordinary savings account, and there are other advantages. A solar installation doesn’t share the same risks you face when you rely on the banking system, particularly the risk of inflation.

At current prices, it is easy to imagine rooftop solar installations at a rate of 1 percent of houses per year, and that could go up to 2 or 3 percent as equipment prices fall. Even that is a pace of change slow enough that you might not notice it while driving around your neighborhood, but it adds up to a substantial role for solar electricity in the not-so-distant future.

Saturday, October 11, 2014

POS as a Data Theft Target

The pattern of data leaks this year shows that criminal groups looking for transaction data are finding more weakness in POS systems than anywhere else. POS systems operate at the point of sale, which you might think of as a cash register, and connect it to the data center where transactions are processed. There are software weaknesses in POS systems when compared to online stores, but the operation of these systems seems to be the bigger issue.

But first, the scale of the problem is larger than most people realize. Most of the headlines mention the largest data leaks, as measured by the number of people affected. These mostly occur at the national retail chains. These are some of the large U.S. retailers where transaction data was leaked:

  • Target
  • Home Depot (stores in Canada also affected)
  • Michaels (crafts)
  • Neiman Marcus
  • Kmart
  • Sally Beauty
  • Goodwill Industries (20 regions)

Grocery chains are also affected, including:

  • Albertsons
  • Jewel-Osco
  • Supervalu
  • Acme
  • Cub Foods

Leaks affect a far greater number of restaurant chains, more than 100 in one incident alone this year. A few of the high-profile restaurants affected are:

  • Dairy Queen
  • P.F. Chang’s
  • Jimmy John’s
  • Lost Pizza

The list goes on. Hospitals, parking garages, basically any operation with multiple locations that accept card payments is at risk.

No one should imagine that transaction data leaks are limited to those reported in the news. That would be logically impossible, when you consider that there is a delay, usually of two or three months, sometimes shorter but sometimes much longer, between the opening of a data leak and the time it is discovered, understood, and reported to the public. There certainly are more incidents in the process of being discovered. There are also others that escaped detection completely, and more going on now that will not be discovered either because the retailers are not looking very hard or lack the advanced skills to detect the server malware involved, or because the malware is designed to erase itself quickly, before it can be identified. The actual scale of data leaks must be at least 20 times more than what has been reported.

Transaction data security seems so hopeless that Publix Super Markets Inc., not yet a victim of a known data leak, is seeking public relations advice for a data leak that seems more likely than not to happen.

That’s the scale of the problem. So why is the point of sale such an easy target for criminals? It is not really the point of sale itself that is the weakness, but the multiple physical locations involved that make POS transactions hard to secure. Consider that there haven’t been nearly so many data leaks at retailers that have a single store, never mind the smaller scale involved. A single physical location means the people in charge of data security are onsite. The data still has to travel over a network, but unlike the Internet or any WAN (a physically large network), the entire network can be seen and studied by the people on the inside, while being physically protected, to a degree, from the world outside. (Of course, a retailer can give up this advantage through careless outsourcing of its POS operations.)

With multiple stores, data security depends on the actions of whoever is onsite, which usually means someone who is not effectively trained in the finer points of network security. I have heard of cases where it was the store manager or restaurant manager who was tasked with getting the data network installed, with equipment that arrived in a small pile of boxes along with a few pages of written instructions. Companies that can’t afford to hire specialists for such sensitive work also can’t afford to provide training to their staff members who must fill in the gaps. That’s not an approach that inspires any confidence.

One common scenario that security experts complain about is that POS terminals (cash registers) are shipped to retail locations with default passwords already installed. The store manager is supposed to change these passwords before operating the terminals, but as you might guess, this often doesn’t happen. These default passwords are simple phrases that are not that hard to guess in a brute-force attack, and once intruders know a default password, they can break into multiple locations quickly, providing multiple entry points to the POS network.

That is just one scenario exploiting one weakness. Compounding that weakness and others like it, most POS terminals are general-purpose computers running wide-open operating systems such as Linux and Windows Vista, allowing arbitrary software to be installed remotely by anyone who has the right password. Further expanding the range of possible exploits, POS terminals in most cases are plugged directly into the Internet, protected only by an off-the-shelf firewall — another design choice that security experts moan about.

By now it ought to be possible to design POS terminals that have all software installed at the factory or data center so that it is impossible to change the software while the machine is deployed. Such machines would cost less to manufacture and would be smaller and easier to deploy. The technology required isn’t really a mystery — a POS terminal is not really the equivalent of a smart phone, but closer to the equivalent of a dumb phone from about 15 years ago.

Without going into further detail, solutions are certainly possible, but don’t hold your breath waiting for retail chains or banks to take action. For now, if you use your credit card at any retail establishment that has multiple locations, you should consider that your transaction data may be captured in real time by shadowy criminal groups somewhere in the world. As Consumerist puts it, “Do You Ever Shop Anywhere? Congratulations: Your Data Will Be Hacked.” Besides the personal risks, the card transaction network as a whole is at risk. As I have cautioned before, on any given day without warning, the transaction networks could be hit with a pattern of fraudulent transactions so vast that they are forced to shut down. If that happened this morning, you probably would not be able to use your credit or debit card for a few months, and one or two of the major credit card banks, not to mention some of the more troubled retail and restaurant chains, could go under while the problem is being sorted out.

It is not enough, then, to accept that your personal transaction data is at risk whenever you use your cards. The whole system is at risk. It is important to have some cash on hand and a balance in a checking account so that you can carry on even if, one day, the card network cannot.

Friday, October 10, 2014

This Week in Bank Failures

JPMorgan Chase executive Jamie Dimon returned to work and used his first public appearance to warn about the destabilizing effect of the shadow banking system.

If a bank is too big too fail, then its derivatives contracts have to be “too big to cancel.” Contract terms for many derivatives are being rewritten, effective January 1, 2015, so that parties no longer have the option to cancel the contract if the counterparty is caught up in a financial crisis. These terms in the past have exposed banks to a second level of risk connected with a broad range of financial events. Under the current standard contract language, a triggering event at a bank could lead to trillions of dollars in derivatives cancellations, and that easily could be enough to push even the largest bank into insolvency. Relatively minor and unrelated financial events, such as the sale of a subsidiary, could be sufficient to trigger a wave of cancellations. It’s a scenario that regulators in the United States and Europe realized was inconsistent with the principle of “too big to fail.”

What if Scotland had voted to secede? Bank of England had contingency plans to provide public reassurance and billions of pounds in emergency liquidity if needed. The main objective would have been to reassure depositors that their banks were still going concerns in spite of the political changes.

A credit union was liquidated tonight. State regulators closed County & Municipal Employees Credit Union of Edinburg, Texas. Member accounts were transferred to Navy Army Community Credit Union. The failed credit union had 7,000 members. Monday is a holiday, so full member services will be available on Tuesday.

Thursday, October 9, 2014

Blue LED Draws Nobel Recognition

The Nobel Prize in physics was announced this week and the winners were the inventors of the blue LED, or light-emitting diode. Blue LEDs are the backbone of the white light of current-generation light bulbs, not to mention most video displays of the past 8 years. In its story, Scientific American fundamentally overlooks the importance of indoor lighting and other forms of lighting that use LEDs, and it describes white LED technology incorrectly, but otherwise has a good summary of LED technology and the prize award:

Wednesday, October 8, 2014

Easier Job Searching

If you are a job seeker who has recognized job skills, perhaps the most relevant job market statistic is the one that tells you how many job openings there are in front of you. For the United States as a whole, that is best measured by the ratio of unemployed workers to job openings. Most workers will care more about local market conditions than the total for the country, but the national measures should fall near the middle of the local measures. For the first time since the beginning of 2008, the ratio of workers to openings fell below 2 in August, a good sign for job seekers.

The theoretically ideal number is 1, but 2 is pretty good — at least when compared to 5 or 6, the range we saw in 2010 and 2009. With a ratio of 5, an average job seeker may have to apply to thousands of job openings (for which he or she is fully qualified) to be reasonably assured of being offered at least one job. With a ratio of 2, a few tens of applications is likely to suffice, so that well-qualified job seekers are less likely to remain unemployed for years at a time.

Of course, these are averages, and there are still many well-qualified unemployed workers who have been passed over for more than a year. Meanwhile, the job market remains terrible for new graduates and for those whose skills do not quite match the skills that are in demand. Employers will have little interest in taking chances on this second tier of workers until the pool of fully qualified and experienced workers dries up. The unemployment rate, around 6 percent, is enough to say that that degree of job market recovery is still more than a year away.

Tuesday, October 7, 2014

HP: the New Gateway?

One day ago as I looked at the initial reports of Hewlett-Packard’s decision to split into two companies, I was missing important details. As the day went along, it became clear that I had missed the gist of what was going on. Hewlett-Packard is ditching the PC business and apparently the printer business too.

As it is spelled out in the plan at Hewlett-Packard, businesses virtually don’t buy traditional PCs or printers anymore. People have been saying the PC is dead for three years now, and of course that is an exaggeration, yet there must be something to it if HP, at one time the largest PC brand in the world, now says its PCs are no longer suitable for its business customers. The spinoff “Compaq” company focused on laptops and printers, apparently to be called “HP Inc.” in the official plan, does not expect to sell to businesses in any significant volume. Instead, it will offer its computers, printers, and related hardware exclusively to consumers.

Consumers? This is a horse of a different color. Consumers, of course, do buy business-style computer hardware, but when they do, they tend to buy the same things they are familiar with from the office. If the HP brand is fading from the office, visible only on the oldest and most out-of-date equipment there, consumers will look elsewhere when they want office equipment at home. The best way to gauge how well this will work is to look at the history of Gateway after it gave up on the business market and tried to sell exclusively to consumers. In about three years it went from major brand to non-player to being bought out and its manufacturing shut down.

HP has decided to head down the same path. This is not as crazy as it might sound. If there is no profit potential left in the PC business and printing too is on its way out, the logical thing to do is to liquidate the HP brand reputation before it is too late to matter. And if the business customers have already lost interest, then you would turn to whatever customers are left. This is what economic theory suggests, but in the practical world, there are at least two catches. First, this must be done without tipping off the suckers, the consumers who are the new intended customers. If people start tweeting “HP is the new Gateway,” you’re done. Second, this enterprise might end up with no profit at all if it cannot be pulled off smoothly and gently with a minimum of expensive upheaval. The $2 billion in expected startup expenses for the new company are already enough to give one pause.

The bottom line: Gateway Inc. never completely went away, but still sells laptops to its loyal customers. This is where HP as a computer and printer brand is heading. If one of the market leaders is this convinced that PCs and printers are legacy technology, not just saying so but putting its future on the line, you might want to think twice before investing in new equipment in this category. What do you really need a new computer or printer for?

Monday, October 6, 2014

Deconstructing the Hewlett-Packard Split

It is hard to explain the Hewlett-Packard split to anyone outside of the computer business. The huge but struggling computer conglomerate now says it will devolve into two companies, one focused on enterprise services and the other on laptops. This is essentially the split that the company considered last year and rejected then because it didn’t make any sense. Now they are proceeding with a plan revised so that it makes sense to the board, though we don’t yet know what those revisions are. Here’s what makes this split so inherently confusing:

  • We don’t know the names or any other identifying details of the two new companies. At this point, they are both known as “Hewlett-Packard” or “HP.” If there were any practicality in this plan, one of the new companies would be known as “Hewlett” and the other as “Packard,” but that is too simple and obvious for it to actually happen. For the purposes of discussion, it may help to assign names arbitrarily from HP’s history. Think of the laptop company as “Compaq,” the laptop company that Hewlett-Packard merged with many years ago, and the enterprise services company as “Autonomy,” the enterprise services company that HP acquired more recently. The way the announcement was worded, it appears more likely that “Autonomy” will keep the Hewlett-Packard name, though that detail actually may not have been decided yet.
  • Both of the new companies will be computer companies selling almost entirely to large businesses. (For an important update, see “HP: the New Gateway?”) It is not as if there are two distinct businesses that will be separating with each other, as in the case of eBay and PayPal. It is more of an arbitrary split.
  • Both of the new companies are backward-looking in their business strategy. Sometimes you get a company that wants to separate its hot new product line from its stodgy old product line, but there is none of that at HP. “Compaq” is oriented toward the 1990s idea of the business office, complete with personal computers and, yes, plenty of ink for printing those mountains of paper documents that the personal computers will generate. “Autonomy” is focused on the corporate sector that so dominated the economy before the “downsizing” era of the 1980s, but that has been declining in its share of economic activity ever since.
  • Both new companies face financial uncertainty. “Compaq” barely breaks even on the computers it sells and loses money on the printers, but hopes to cover its overhead by selling lots of high-priced ink. That’s a business model that worked a lot better ten years ago than it did last year, and it may not have a long future as businesses continue to reduce the mass of paper documents they generate. “Autonomy” makes most of its gains on sweetheart deals it negotiates with a short list of major corporations. Every time the corporate sector catches a cold, “Autonomy” will sneeze.
  • The management of the new companies is an open question. The current Hewlett-Packard often looks as if there is no one in charge, so it is hard to imagine where the management for two new companies will come from. In reality, of course, Hewlett-Packard has plenty of people on board who are more than capable of running the two new companies, assuming they can break free from the board and executive leadership of the current Hewlett-Packard.
  • Maybe there is no plan. When Plan A failed and Plan B isn’t working, eventually you get to the “try something” stage, and this move has some of that feeling about it. HP’s closest competitor, Dell, already tried going private, and now that that’s done, it doesn’t exactly look like a brilliant move worth imitating. HP doesn’t have the free cash flow for a major acquisition, and it already tried restructuring five different ways. If you look at the “Bold Moves” chapter in Corporate Leadership for Dummies, a spinoff or split is the next option on the list.

Fortunately, the bottom line is not nearly so complicated. If you own an HP printer, by the time you need your next supply of ink next year, you’ll be getting the ink from a new company, and I suppose there is a slight chance that you’ll need to buy a new printer to go with the ink. Check your favorite online supplier for details when that time comes.

Saturday, October 4, 2014

Building for Failure, and Eating the Same Way

In the David Wolfe book Longevity Now I came upon this line:

Eating poorly is similar to building a house or office complex with inferior materials that wear out in twenty years instead of two hundred years.

I like this quote because this is exactly what we do — not so much that we eat poorly, but that we have such a preponderance of inferior building materials and construction techniques. Of course, these are not the choices you would make if you were building a house for yourself to live in. Then you would spend the extra $200 and do the extra two weeks of work to build a 200-year house instead of a 20-year house. If the builder is anyone other than the intended occupant, though, there is an inescapable tendency to save a dollar here and thirty seconds there, resulting in a building that looks good and passes its inspections, but that begins to fail almost immediately. If you’ve heard of “builder grade light bulbs,” you know the mindset I’m talking about: save four cents now, more work next year for someone else. It is a rare new house that does not need some kind of repair within its first ten years, and over 40 years, it is common for the cost of repairs to exceed the original cost of construction. It doesn’t make good economic sense when you can build a house to last with what looks like the same materials and the same amount of work, but the people choosing the materials and slapping them together know they won’t be around to see them eventually fail. If you need a building and can take the time, there is something to be gained from being personally involved in the construction.

Much of the same logic applies to food. If you never stop to ask what the factories are selling you, you may never connect the food to the consequences of eating it. Food factories, of course, know that most consumers don’t even read ingredients, so their main objective is to make a product that looks like food and put it in a pretty package. With attention to detail and a basic curiosity about the growing body of knowledge on food and its consequences, you can do much better than that without necessarily having to pay much more.

Friday, October 3, 2014

This Week in Bank Failures

After a doozie of a data leak this week, this time from a bank and directly affecting about half of the people in the United States, all the talk is about data security — a fitting topic for Cyber Security Awareness Month. You might have noticed that the larger data leaks don’t happen just anywhere. The tendency is for the more serious data breaches to come from government, brick-and-mortar retail chains, and financial services companies. It is not that the criminals are going where the transactions are. The biggest cluster of transactions can be found at online retailers and within the transaction network, for example at the major credit card clearinghouses, yet these companies have not had their share of data leaks. Partly, perhaps, it is because these companies see their transactions as essentially their whole business, and go to extraordinary lengths to protect them. But I believe there is something else that ties many of the data leaks together, and that is the fear of up-to-date technology. Government agencies, banks, insurance companies, retail chains, and restaurant chains have a basic reluctance about technology. They tend to fear that if they install brand-new technology, it will break something. They may also fear the effort of keeping up to date.

These are not unfounded fears. Consider Apple’s newest operating system, iOS 8, released two weeks ago, as the latest example. It was patched twice in the first week. The patches fixed serious problems — among other issues, a few older phones couldn’t get a cellular connection at all after upgrading to iOS 8.0 or 8.0.1. The few users who did upgrade to 8.0.1 had to upgrade again barely one day later, so the effort of the first upgrade was wasted. Millions of users still wonder how final the current version, 8.0.2, really is, and may wait until December or January (and perhaps version 8.1.1) before they upgrade. It’s a perfectly reasonable approach, and in the technology sector, these users are simply understood as “late adopters,” customers who really have to be impressed and reassured before they move to new technology.

Banks face the same issues, but unlike cell phone users who might hold off for a few months, banks think nothing of waiting years — 5, 10, even 15 years — before installing an upgrade. Consider that large banks, insurance companies, and the Internal Revenue Service are basically the only organizations that still run mission-critical applications on mainframe computers. Mainframes, also known as “big iron,” are the balky, expensive, and decidedly energy-inefficient room-sized computers based on technology that dates from the 1970s and early 1980s. They are used not because they are good at anything, but just out of organizational inertia. Or consider the security problems posed by ATMs, automatic teller machines. The majority of them, as the year started, ran on the obsolete operating system Windows XP. As we saw, a reluctance to keep things up to date led to enormous added costs and risks across the banking sector worldwide. This is the technology milieu in which we entrust our banking lives. Within a large bank, it may take a year-long study and five levels of management approval just to install a software patch in order to fix a bug in a server configuration. When an obsolete network component has to be replaced, the replacement may not be the latest and greatest, but the oldest version available — installing seven-year-old technology, for example, to replace ten-year-old technology. The situation is only a little better in the larger insurance companies and many retail and restaurant chains, where the worry is about upgrading so many locations while keeping everything in sync. In organizations that are so afraid of new technology, keeping up with the ever-changing demands of data security is an unenviable task. I have met a few of the people who do this work within banks, but I frankly don’t know how they do it within the draconian limitations of the hierarchical management of a bank.

You might read in the news that the entire banking sector is facing a cyberattack, but that is not really true. I believe the largest banks are targeted by criminal organizations specifically because of their out-of-date technology, and the same might be true of retail chains that take the same go-slow approach. When many of an organization’s servers run operating systems and other key components from five and ten years ago, the many known design flaws in these obsolete versions give criminals an opening to get in. In other words, large banks’ fear of breaking something by employing “new” technology from the past five years is an impediment when it comes to keeping customer data secure, and these large banks end up breaking something in a different way. The large banks shouldn’t have to look far to find out how they could be doing better. A great many banks, probably most banks but especially the medium-sized banks with roughly 10 to 50 branches and also the “new” large banks that grew past 50 branches within the last ten years or so, are doing better at keeping up with technology and keeping their data — and their customers’ data — safe.

There was a credit union liquidation this week. At the end of September, the NCUA liquidated Republic Hose Employees Federal Credit Union. It had nearly 500 members but less than $1 million in assets. It primarily served employees of two factories in Youngstown, Ohio. The NCUA is contacting members about their accounts.