Tuesday, September 30, 2014

The Ballad of eBay and PayPal

EBay and PayPal are preparing to split next year. It is all too easy to see this story in metaphorical terms — a corporate couple of the online auction era, their glory days behind them, no longer able to make the sacrifices required to stay together. The story has all the hallmarks of those hyperemotional breakup songs of pop music: foolish personal mistakes and communication failures covering over deeper problems and a much more profound mutual failure. It could just as easily be a soap opera scene. “You don’t understand me anymore!” PayPal wails. “You just don’t care what happens to me, do you?” “Well, look,” eBay responds in a huff, “my life isn’t exactly the same as it was before either! So what have you done for me lately?”

Metaphor aside, the situation is a big mess. No business that depends on Christmas shoppers for its survival wants to have this kind of distraction hovering over it during the fourth quarter. Workers will be wondering about the future while trying to struggle through the holiday rush. Of course, the fourth quarter begins tomorrow, and that might well be the reason the announcement was made today, to get it out of the way before the respective businesses and their seasonal workers have to start dealing with the millions of eager online shoppers and their inevitable transaction problems. The carefully written corporate statement put the blame on the rapid pace of change in online commerce, an oblique reference to Apple Pay (which hasn’t even launched yet) along with other competitors such as Square. But competitive pressure is not reason enough to dump such a big distraction on the two companies the day before the holiday quarter gets underway. Consider also the way the announcement hinted broadly at more big changes in the works, especially at eBay, not yet decided in enough detail to mention. Obviously there was internal dissension severe enough that the action couldn’t hold off (or be kept quiet) until January. It had to come out now. I won’t dig through all the scuttlebutt, which you can find easily enough elsewhere. It is enough to say that eBay had become a strategic impediment to PayPal, and perhaps vice versa.

Just the language that we use to discuss eBay and PayPal shows that they don’t really belong together. EBay bought PayPal 12 years ago when PayPal was a much smaller company. Now PayPal is bigger than eBay — and not just bigger, but in the world’s estimation, more interesting, more intriguing, with more potential. At the same time that PayPal has grown, eBay has faded from the public eye. There is a great deal of discussion and speculation tonight about what PayPal might be able to do as an independent company, freed from the restrictions of eBay. Everyone, except for one bitcoin blogger I found, seems to agree that the split will be good for PayPal. Logically, there should also be a discussion about what might happen to eBay, and whether it can survive financially on its own. But it is only eBay, so who really cares? Whether you agree or disagree with the popular perception of the two companies’ merits, the fact remains that even stockholders and directors can’t manage to think of eBay and PayPal as one company. They don’t share a name, management, or business purpose. They don’t go together that well even after 12 years of trying. They aren’t in the same business, so it isn’t possible for them to work that closely together.

This starts to sound like the dysfunctional relationship from the metaphor I started out with. EBay may be the older and wiser one of the couple, but it has also become complacent in a way that threatens both of them to a future of decline and irrelevance. For all I know, it could be too late to save either eBay or PayPal. But if they are to be saved, it will be by shaking things up — and getting them out of each other’s way.

Monday, September 29, 2014

Cargo Clears the Northwest Passage

I spoke too soon when I said it wouldn’t be a year for cargo in the Northwest Passage. A load of nickel, on the Nunavik, emerged from the Prince of Wales Strait on Saturday on its way to China. Ice was nearby for most of the passage, but the relatively calm weather of the Arctic this year was an advantage. Winds had pushed the ice off to one side or the other, so that it was easy to steer around. There were only a few moments when the ship had to push through ice of any substance.

One ship does not make a trend, but even this one cargo load is big enough to matter when you look at the financial rewards of delivering sooner.

Depending on the weather, the Northwest Passage could remain relatively open through the month of October.

Sunday, September 28, 2014

Bigger Christmas-Season Hiring

The Christmas shopping season is barely a month away, and retailers are planning much more seasonal hiring than last year. This is no surprise if you recall the national economic conversation at this time last year. The talk had little to do with Christmas and much to do with House Republicans wanting to shut the U.S. government down for a year. There was a shutdown for a few weeks, and the threat of a shutdown lingered for five more months, putting a damper on the economy that spanned the holiday season. No such shenanigans are expected this year, so retailers are expecting consumers to spend a little more freely and are staffing accordingly. One consequence of last year’s hesitation was that many shoppers put off purchases until mid-December, then ordered online, leaving delivery companies flat-footed. Most Christmas presents were delivered on time but some were a few days late. UPS was hit the hardest, with millions of Christmas Day and later deliveries. A recurrence on Valentine’s Day proved that it was not just a matter of Christmas, but that delivery services really were not up to capacity. UPS is not particularly fond of the idea of seasonal workers but expects to hire twice as many as last year. FedEx also plans more October hiring to prepare for the year-end rush. Amazon’s plans are harder to read after new distribution centers were added this year, but some centers will be doubling their staff for the fourth quarter, and this hiring started two weeks ago.

Here are seasonal hiring plans already announced by a random pick of U.S. retail chains:

  • Walmart, Target, Kohl’s: 60,000–70,000 each
  • Toys R Us: 45,000; promising full training for its temporary sales staff
  • GameStop: nearly 25,000 (including distribution center workers and refurbishment technicians)
  • Best Buy: high-profile hiring with front-window posters at many stores, including permanent positions

Saturday, September 27, 2014

The Independence Question in Catalonia

After the independence vote in Scotland, there is new activity in independence movements elsewhere, including some in regions that are better prepared than Scotland is to be independent countries. One example is Texas, an oil country like Scotland, though one that is already a functioning banking center. An independent Texas might seem less likely than an independent Scotland, though. Unlike Scotland, Texas barely has a national identity, and it faces both legal and cultural challenges in breaking away from the United States. Texas secessionists also face more than the usual political challenges that face any secession movement. Still, there is a substantial contingent of voters to support secession in any U.S. state.

The one region where secession may be seen as purely a political problem is Catalonia. Conquered by Spain ages ago but never really part of it, more prosperous than Spain and lately suffering financially as it is dragged into Spain’s financial and real estate morass, with a strong national identity that is more anti-Spanish than Spanish, Catalonia is part of Spain only as a historical accident. And now, inspired by the vote in Scotland, Catalonia has scheduled a referendum on independence.

It is a vote that Madrid has already vowed to block, and the central government has already filed court papers to do that. It is not entirely clear that Spain has the power to block the vote, though, and the anti-democratic effort will certainly result in a backlash against Spain’s corrupt and already unpopular government, not just in Catalonia, but across Spain.

Where there were questions about how Scotland might function independently, Catalonia is ready to be independent today, with a strong national identity, a functioning banking system, and a reasonably complete institutional framework. If there are obstacles, Catalonia can afford to be patient. It is hard to imagine how an economically stressed Spain can keep its grip on its largest subject region indefinitely.

Friday, September 26, 2014

This Week in Bank Failures

It was plain to see in the financial news between 2009 and 2012 that there was a list of nations that investors expected to default on their debts. The initial list started with Greece and Spain, to be followed by Ireland, Portugal, Italy, then the United States. The list was so well-known it was abbreviated in headlines as PIIGS, with the United States an implied but unstated postlude. Cyprus was a late addition because of its exposure to Greece. There were moments during this period when it seemed as if Pimco’s founder and investment officer Bill Gross was the man keeping the list. He bragged about the way his funds cashed out of the respective sovereign bonds at just the right time, but what he didn’t say is that the funds managed at Pimco are large enough that they could single-handedly cause a panic in a country’s bonds. It must also be said that is is possible that Gross’s involvement in the European sovereign debt crisis was more hype than substance — analysts at Pimco might merely have been accurately tracking the trillions gambled on Wall Street against the countries on the default list. But it is hard to dispute Pimco’s involvement in the Cyprus default at least, as a Pimco report used by the central bank showed the country to be insolvent in an economic analysis later revealed to be bogus. It was that report that may have inspired the bank run that forced Cyprus to seek a European bailout, and the errors in the report led to a much larger bailout than was plausibly needed. In short, without Pimco, there would not have been a sovereign debt crisis in Cyprus.

Whether Pimco was leading or following the assault on sovereign debt in Europe, it was a strategy that paid off handsomely for its bond funds, up to a point — a point that was reached roughly when the Ireland collapse failed to appear on cue. Gross’s returns have been lackluster in the last couple of years, and there have been massive outflows from Pimco’s funds, causing concern not just at Pimco but around the financial sector. The company’s top executive mysteriously left around the beginning of this year, just this week explaining that he had realized he was working too hard at Pimco.

And now, this morning, in news that stunned Wall Street, Gross too is out — not quite fired by the company he founded, but invited to leave over “fundamental” (if cryptic) differences in business strategy. There are reports that Gross had been looking for a new job since last week. The shakeup obviously raises far more questions than it answers, and Wall Street analysts still don’t know what to make of it. The movement of funds out of Pimco is likely to accelerate in the next few days, and most analysts don’t expect much of that money to follow Gross to his new post at Janus on Monday. There could be unfamiliar turbulence in the markets next week as fund managers sell some assets and buy others in a series of hard-to-predict adjustments.

Another shakeup: BNP Paribas today named a new chairman, Jean Lemierre, to replace Baudouin Prot, who is resigning. The resignation is seen as a reaction to the bank’s recent U.S. guilty plea for money laundering and the associated $9 billion penalty.

Charged: Five at Deutsche Bank who made false statements in a legal proceeding. The bank made statements exaggerating a customer’s financial distress, possibly contributing to the customer’s bankruptcy in 2002, then made false statements about its actions with respect to that customer in a subsequent court hearing.

Settlement: U.S. Bank will pay $48 million to credit card holders who paid for credit protection services that the bank didn’t deliver. The bank will also pay $9 million in penalties.

Thursday, September 25, 2014

U.S. Driving Distance Steady as Habits Change

The U.S. Department of Transportation keeps track of how much driving people do, and the national totals have stayed roughly the same for a decade after a near-steady upward trend of half a century. The driving distance for July was up 1.5 percent over July 2013, though the upward movement is only 0.6 percent if you compare the year to date to the year before. In either case, it is not that people individually are driving more. The increase in driving distance is less than the rate of employment growth or the rate of population growth, so what we’re seeing is the slow change in driving habits as people find more ways to drive less.

Time pressure is one factor affecting driving distance and everything that consumers do. People skip shopping trips, restaurant meals, and sales visits and work fewer days in the office just to save time. Congested roads discourage driving in some hours of the day, and stop-and-go traffic reduces distance for everyone involved. Highway congestion is an especially noticeable trend as employment increases above its pre-recession peak in the Northeast.

Tuesday, September 23, 2014

Blu-Ray Reaches Mainstream

I’m convinced that the Blu-ray movie format has gone mainstream. One indication is the Yes Songs From Tsongas concert movie reissue, out today in the United States in three primary physical formats.

  • Blu-ray, street price $15
  • 2 DVD set, street price $22
  • Music soundtrack on 3 audio CDs, street price $23

You’ll notice that you’ll pay less to get the best edition, and that is mainly because the Blu-ray format allows the entire movie plus extra content to be placed on one disk, at a lower manufacturing cost than the multi-disk sets the older formats require. It makes some sense to buy the Blu-ray edition even if it is your first Blu-ray purchase and you have to pay another $60 for a Blu-ray player. It wouldn’t take many movie purchases like this to defray the cost of the new hardware.

It’s this kind of financial logic that cements the position of a new format. The early adopters are people who will pay a premium price for an improved entertainment experience. The mass audience comes along when the new format will save them a buck or two.

Monday, September 22, 2014

My Radio Shack Moment

Radio Shack is in the middle of renegotiating deals and trade terms in the hope of avoiding bankruptcy. Analysts talk about problems with Radio Shack’s positioning, but it also faces all the problems that face the entire retail sector right now. One of those is an increasing recognition by consumers of the transportation costs of shopping. U.S. retailers mostly plan on shoppers driving to their stores, but driving is more expensive than it was a generation ago, and this is a bigger problem for some retailers than for others. It is a particular problem for Radio Shack’s suburban locations.

This hit home for me a month ago when my lawn mower failed. It was late enough in the summer mowing season that buying a new lawn mower wouldn’t make sense. I would have to finish the lawn with the trimmer, which was sitting unused in the garage. Unfortunately, the garage door wouldn’t open. I needed a new battery for the garage door remote control.

In the past I would have driven to Radio Shack and paid whatever price they were asking for a replacement battery. But on this occasion I could afford to be patient. The batteries I needed were also available online, and the cost to have a pack of five delivered to me was about the same as the cost of fuel to drive to Radio Shack. When I thought about the half hour or longer that a trip to Radio Shack would take, I placed my order online.

Radio Shack has so many locations on the theory that this will be convenient for its customers who need electronics, but in my case, getting the product delivered to my home was even more convenient — and though I also saved money by not going out to the store, it isn’t really because of Radio Shack’s premium prices. Even without knowing Radio Shack’s in-store prices, the shopping trip was more expensive just because of the cost of driving.

Many shoppers still neglect the cost of driving when they make comparisons, so this will be a growing disadvantage for local retailers as more shoppers take the cost of driving into account.

Radio Shack specializes in items that are easy to identify and easy to ship, so it faces this difficulty more than most retailers. Its stores in malls and city centers may fare better, if the location means that people are in the area anyway and don’t have to pay for a ten-minute drive to visit the store. But my guess is that the retail chain will be better off without most of the suburban and small-town shopping-center locations — and that’s a big change for a retailer that spent the last two decades trying to be everywhere.

Sunday, September 21, 2014

North of the Northern Sea Route

This was one of the worst summers ever for Arctic sea ice, and the worst ever seen if you focus on the Asian side of the Arctic Ocean. Not only is the Northern Sea Route open for shipping between Europe and East Asia, but for the first time, cargo ships could reasonably cross the Arctic Ocean north of all the Asian islands. That shipping route has been more or less open (icebreaker escort recommended, just in case) since the beginning of August and could stay open through October. About 400 or maybe 500 cargo ships are expected to cross the Arctic Ocean this summer, the most ever.

With every year that goes by there is less reason to hope that the ice will ever make a comeback. In all, three fourths of the Arctic sea ice volume at its April peak melted away this summer, similar to the last seven years. If you think of the way weather naturally varies from one year to the next, a complete Arctic melt-out is almost within the range of normal weather fluctuations. Arctic ice melt is enhanced by a mild winter, a warm or stormy spring, a persistent straight-line wind pattern in almost any direction, and the list goes on and on. From normal weather variation alone we can expect an Arctic melt-out within the next 30 years, if the warming trend doesn’t catch up with it sooner than that. This summer provides a hint of what that will be like. All you have to do is imagine that this summer’s extraordinary melt on the Asian side of the ocean spread across to Greenland and Canada. Or, imagine the summer breezes arriving one month early. If three months of summer weather melt about 75 percent of the ice, four months would melt about 100 percent. That’s how close to the edge the Arctic is at this point.

According to the ice statistics, it was a near-normal melt in the Canadian Arctic, but it was enough to open the Northwest Passage for explorer and science ships. That’s another sign of how much the Arctic has changed. A Northwest Passage opening, previously something that happened once every few decades, has become something you can almost plan on in any September you choose. It wasn’t a cargo-ship year in the Northwest Passage, but that may come soon enough — the last remnants of the Canadian ice shelves melted away this summer after drifting south during the spring.

Saturday, September 20, 2014

The Instant Antidepressant

The most common class of antidepressant, SSRIs, don’t work the way scientists previously thought. A brain-scan study of 22 healthy individuals who had no history of depression, anxiety, or SSRI use showed that the drugs rewire the brain almost instantly. A single dose produced a lasting change in brain structure that was easily measured when researchers checked after three hours. This seems to contradict clinical evidence that suggests the drug effects become evident only after dozens of doses taken over a period of weeks. More perplexing, the brain scans mainly showed the SSRIs caused a reduction in brain energy and activity in almost every area of the brain, which is not the way antidepressants were thought to work.

This is only a very preliminary look at the way SSRIs work, but one scenario that has to be considered is that SSRIs have most of their beneficial effect in the first dose, with subsequent doses adding only the slightest additional drug effect. This might be seen as a worst-case scenario for drug manufacturers. Their revenue from SSRIs could fall by 98 percent if doctors conclude they can prescribe just one tablet for each patient.

The research is summarized at Time:

Friday, September 19, 2014

This Week in Bank Failures

Among the major players feeling politically bruised after the Scotland referendum are two of the largest banks in Scotland, Royal Bank of Scotland (RBS) and Lloyds Bank. During the lead-up to the referendum, both banks told the world that they weren’t really Scottish and would be pulling operations out of Scotland if the result of the referendum was a Yes vote for independence for Scotland. It was perhaps not the most tactful thing to say to their Scottish customers. Now after the No vote, as the two banks brace themselves for the inevitable backlash along with further political adjustments that London has not worked out yet, neither bank has been willing to commit to continuing any of its operations in Scotland. This wishy-washy behavior is not living up to the image of stability that people usually expect from banks. Indeed, Scottish consumers and businesses now have a growing list of reasons to doubt the sincerity of the two banks, ranging from their dubious balance sheets to the now very real chance that they might leave Scotland altogether. But if customers cannot trust the banks, that gives the banks all the more reason not to trust the customers. It’s a vicious circle that in the end might force the banks to close in Scotland, regardless of what their other analysis might eventually conclude.

One of the reasons the Scotland independence question was rejected was the lack of a banking system in Scotland. Strike out the London banks that operate in Scotland and there is essentially nothing left. With no real banking system to back it up, the Scotland independence concept lacked credibility among voters, particularly among retirees. The government of Scotland also needs a bank it can rely on for its own operations. It is a situation that seems to call for one major home-grown Scottish bank, though it is an open question how such a bank can be formed and funded.

In the United States, a Royal Bank of Scotland subsidiary is preparing for its IPO. Citizens Bank (until recently, RBS Citizens Bank) hopes to raise $4 billion in the IPO next week, allowing RBS to eventually sell off its U.S. operations entirely for $14 billion. It’s money the parent bank needs to shore up its balance sheet.

Home Depot estimates that 56 million credit card numbers used by customers for in-store purchases in the United States and Canada were leaked by sophisticated malware installed on the store’s internal network. That makes the scale of the data loss comparable to that of the December incident at Target. Home Depot had the same software flaw that Target had, of sending unencrypted transaction data around its internal network, as if merely having an internal network was security enough. In some ways Home Depot’s response might be considered worse than that of Target, as Home Depot continued this high-risk practice even after seeing the damage that it had caused at Target. I imagine there must be other retail chains that are continuing to do the exact same thing, putting their customers’ cards similarly at risk. In a few more months we will find out who some of these other retailers are when their own data leaks, which for all we know are already underway, are disclosed. It is a sign of how close to the edge the transaction-processing industry is that these problems are considered too expensive to fix until after actual harm has been done.

A Momentous No Vote in Scotland

It was a lopsided defeat for Scottish independence in yesterday’s referendum, 55-45 against, but that doesn’t mean nothing happened. The voting and debates highlighted problems that were previously overlooked or underestimated. The United Kingdom is clearly too large to be so centrally managed. Parliament will try to discover which of its powers are causing the most problems and return those powers to regions and localities. There is likewise too much centralized control of British commercial life. Even shoppers in London were shocked at the way major retailers blithely threatened price increases in Scotland depending on the referendum vote. If retailers can raise prices and close stores at will for purely political reasons, no one can feel very secure. The saber-rattling by commercial interests in the Scottish vote might have been necessary to ensure a No vote, but it will surely lead shoppers across the United Kingdom and especially in Scotland to look at the places where they shop in a different light.

Scottish nationalists are assuming they will get another chance at a vote within the next 50 years, and there is much they can try to do in the meantime to build up Scotland’s institutional framework so that the idea of independence can be more credible next time. The biggest problem if you try to imagine Scotland as a country is the almost complete absence of a banking system, and polls indicated this worried retirees and millionaires especially. The banking system Scotland thought it had is just a branch of the City of London, a dependency that did not become clear until a couple of weeks ago. Now that everyone in Scotland knows that Royal Bank of Scotland is English at heart, there may be support for creating a bank that is actually Scottish. Separatist movements in other countries were watching Scotland and I am sure they are taking a new look at their respective regional institutions today.

Tourism and nationalism are opposing forces by nature, and that was evident again in the Scotland vote count. Yes votes were harder to come by in areas that are especially dependent on tourism. Nationalists need national boundaries, of course, but to tourism workers, it would be better if there were no barriers to travel anywhere. One of the challenges for nationalists globally is to create national boundaries that don’t create such an obstacle for tourists, so that nationalism and tourism are not so much at odds.

Wednesday, September 17, 2014

Artificial Sweeteners May Cause Diabetes

It’s well known that “zero calorie” artificial sweeteners cause weight gain. As it turns out, they may also cause diabetes, and the same study that brings us that information also may begin to explain the weight gain link. Compared to the usual superficial diet studies, this is an unusually thorough study, looking at both rodents and humans and at multiple pathways of cause and effect, and it is summarized here at NBC News:

The bottom line is that in both mice and humans, and in both habitual and new users, all artificial sweeteners studied had the same effect on gut bacteria, and it wasn’t a favorable effect. Just one week of artificial sweeteners created the familiar biomarkers for diabetes, according to the researchers. People are already moving away from diet sodas in large numbers because of the way they cause weight gain, and the diabetes link identified in the new study is another reason to avoid diet soda and artificial sweeteners. In light of these new findings, diet experts are saying the best beverage to use as a starting point is water.

Monday, September 15, 2014

The Independence Vote in a Risk-Averse Scotland

My hunch is that Scotland’s independence movement has slightly more support than the public opinion polls suggest and will carry this week’s vote. Part of this support will come from the undecided voters, most of whom, I believe, will see the Yes vote as the less risky option. Undecided voters often, in the end, decide not to take chances, and polls so far show undecided voters breaking mainly for the Yes camp.

This way of understanding the question of independence is natural enough for me given my point of view, looking at the situation from the former British colony of Pennsylvania. History has much to say about British colonies but says surprisingly little about lands that, having won their independence from London, had second thoughts a few years later and wanted to invite the English to come back. To be sure, there is still a political faction in Pennsylvania that regrets the split from England, but they realize they are a fringe group and know better than to press the point. Of course, Scottish voters are also aware of this history — that, defying the economic logic about economies of scale, former colonies almost invariably do better as independent countries.

What has changed the independence question so much in the past month is that the political discussion has revealed that the major parties and political institutions in London view Scotland essentially as a colony, and have for the past 30 years or so. As seen from London, Scotland is a place to extract oil and a place to deploy nuclear missiles. If it is also a place where wool, whiskey, and party supporters come from, so much the better. Scotland, of course, sees itself as much more than this and would like to set the record straight. To be sure, the immediate financial costs of Scottish independence will be substantial. However, if Scotland thinks it will do better as an independent country, history is on its side.

Sunday, September 14, 2014

Macworld Magazine Shuts Down

There aren’t many computer magazines left in print, and so it wasn’t entirely a surprise that Macworld shut down on Wednesday (though the web site will carry on). The timing was ironic, coming just after a major product announcement from Apple and just before the biggest product release in the company’s history, but the Apple calendar also said that there probably wouldn’t be an equally big event for a magazine to cover until this time next year. Affiliated publication PC World stopped printing last year. Magazines in general continue to decline, but aren’t about to go away. The decline in circulation among major print magazines is about 1 percent per year and the decline in advertising pages, not too much faster, around 2 percent per year. There are still around 85 magazines with U.S. circulation over 1 million copies. As far as I can tell, Macworld’s circulation never quite reached that level in its 30 year history, though for a few years it came close.

Saturday, September 13, 2014

IPhone 6 Is Biggest Release Ever

After a day and a morning of advance orders, indications are that the iPhone 6 is the hottest electronics device release ever, easily surpassing the early volume of the iPhone 5S. The larger, more expensive iPhone 6 Plus is also outselling the iPhone 5S, though it is a distant second to the iPhone 6. The web server difficulties and backlog of orders are other indications of the scale of iPhone orders. Most of yesterday’s preorders will ship by release day, one week from yesterday, but some configurations are delayed into October or November. Later orders will be delayed longer as backlogs pile up. Most of the longer delays are with the Plus model, with apparently a thinner inventory of some components, and it looks like Apple may continue to face shortages of the iPhone 6 Plus until it gets past the Christmas season. Apple is thought to have planned for 70 million units of the two models combined before the end of the year, and now it looks like that quantity may have to be increased if possible.

Friday, September 12, 2014

This Week in Bank Failures

Russia’s economy is on a slippery slope as the country pours more of its resources into border wars and takes a go-it-alone approach to its economy. The government has run out of funds it can use to prop up the affected sectors, so an abrupt contraction is likely to hit in the coming months. Already a relatively isolated economy, Russia can rely on inflation to keep its economy relatively in balance as it declines. This is an effect that is already being seen in the currency markets, with Russia’s currency losing 1 percent of its value just this week. Russian inflation will mean that past foreign investments are no longer worth much. It is a scenario a little worse than investors had made contingency plans for earlier this year, and banks with a large exposure in Russia, particularly banks in Austria, will be facing a financial squeeze. Russia provides only 3 percent of Austria’s foreign trade, so Austria should be able to make the necessary adjustments to weather any financial crisis in Russia.

Scotland is expected to vote next week to secede from the United Kingdom. The Yes vote, should it occur, will be followed by an extended nation-building exercise that will include the need to rebuild the region’s banking system. Two international banks with operations nominally based in Scotland, Royal Bank of Scotland (RBS) and Lloyds Bank, have signaled their intention to move out after the independence vote in Scotland, putting more pressure on the banking sector. Though they are the two largest banks in Scotland, both are already in fact run from London, so it wouldn’t be as big a change as it sounds. Besides the needs for retail banking and transaction clearing, Scotland will need to create its own currency and central bank, details that remain to be worked out in the 18 months or perhaps much longer between the independence vote and the date that the new nation becomes effective.

Changes are inevitable after the death this week of Emilio Botin, the patriarch of Santander, but we probably won’t see any immediate shift in strategy. Santander is the largest bank in Spain and the euro zone, and a banking giant in the United Kingdom, Poland, United States, Brazil, Argentina, and Chile.

Wednesday, September 10, 2014

Why Apple Pay Is a Slow Starter

Apple Pay, unveiled yesterday, will be slow to ramp up — but that’s a good thing.

On the surface, Apple Pay looks the same as half a dozen initiatives that are out there already. The promise is that you’ll be able to make credit card payments using a mobile phone. What makes Apple Pay different is that there are two added layers of security, so that retail stores will feel that they’re reducing their risks, more than taking on an unknown new risk in the name of convenience.

Apple Pay will be a slow starter partly because it requires purchasers to have an iPhone 6 (or 6 Plus), and those don’t exist yet. The iPhone 6 is needed for its NFC antenna and the fingerprint sensor. The new iPhone models won’t be available for another week, and when they are out there, only a small fraction of shoppers will have them. Maybe it won’t be such a small fraction. In a CNBC survey I saw yesterday, 59 percent of viewers said they expected to buy an iPhone 6, the other 41 percent saying they wouldn’t or they were not sure. That’s an awfully high advance approval for any new product, and I would be quite surprised if the iPhone 6’s market share is anywhere near that high among shoppers in general. It isn’t clear that CNBC’s respondents realized the iPhone 6 would be slightly more expensive than the iPhone 5 was a year ago, and that is just one of many reasons why the actual iPhone 6 sales may be less than the survey says. Realistically, it will take months for iPhone 6 market penetration to creep up toward 10 percent of shoppers. Once you have the iPhone 6, it is still an hour of work to enable the Apple Pay app, and that process depends on bank approvals, so there is a bit of a lag at that stage also. Besides the limited number of shoppers, the list of participating banks and merchants for Apple Pay is also tiny compared to the whole world of credit card transactions, and the whole system is strictly limited to the United States for now.

But once shoppers reach the point of activating Apple Pay, I think they will prefer it for its security advantages. Why would you give a merchant your credit card number when you don’t have to?

The slow ramp-up allows any glitches along the way to get sorted out on a smaller scale. That’s a strategy Apple is known for, and it is not unknown in transaction processing either.

There isn’t anything utterly new about Apple Pay, so expect it to be widely imitated as soon as it proves successful, if not sooner. I expect this to lead to better security for online transactions more quickly than we see the system live up to the hype of making credit cards obsolete.

Tuesday, September 9, 2014

Atlantic City’s Trump Taj Mahal Casino in Bankruptcy

I wrote about Atlantic City casino closings a week ago, and now we know of one more. In Press of Atlantic City:

There were several coordinated bankruptcy filings, but the gist of it is that the Trump Taj Mahal casino has run out of cash and will close before the end of the year. The casino had issued a going-concern warning last month, indicating that there were reasons to doubt its ability to continue operating.

The biggest question in the casino closings is whether street-level restaurants and bars in the closed casino buildings can continue to operate. They may need revised city licenses and court approvals to stay open. It makes sense to keep these businesses open as long as safety, security, and utility issues can be worked out. You have to wonder what will ultimately happen to the massive empty hotel buildings, but it will probably be years before we have those answers.

Electrolux Makes U.S. Move

Electrolux will have a much bigger presence in the United States after its purchase of General Electric’s U.S. appliance unit. Though one of the world’s largest appliance manufacturers, Electrolux is known in the United States mainly as the maker of elite vacuum cleaners and high-efficiency refrigerators and freezers. Adding the wide range of GE appliances will give Electrolux a much broader presence in the U.S. market, possibly eventually making it the leading manufacturer of home appliances.

Monday, September 8, 2014

Ray Rice’s Replay Moment

Some people are surprised by the NFL’s change of opinion when it saw new video of an off-season fight involving Baltimore Ravens player Ray Rice. The new disciplinary action that followed against Rice makes perfect sense, though, when you think of the NFL’s relationship to video. This is a league that is used to changing its mind when its sees something from a different angle. That happens in almost every NFL game. And if the league had seen an NFL player conduct himself in a game as Rice did in the security video the NFL reviewed today, the player probably would have been banned from the league for life. Double standards are hard to defend, so Rice got roughly the same punishment he would have received had he attacked another NFL player in the same way.

There is another side to this, having to do with workplace safety. A person who has a fit of out-of-control violence in the subdued atmosphere of a casino certainly cannot be trusted to behave correctly in the unpredictable rough-and-tumble of American football. A similar attack by such a person on game day could result in a career-ending injury to a player or other NFL employee, just as Rice’s victim was lucky not to be more seriously injured. Such an incident would reflect badly on the team, the league, and the game’s broadcasters even if there were relatively little harm done. Knowing what they know now, why would the NFL or the Baltimore Ravens just stand by and wait for a second incident to happen?

Scotland to Vote Yes on Independence, Against Culture of Corruption

Based on the latest poll, Scotland voters appear ready to vote Yes on next week’s secession question. The Yes movement, as of last weekend anyway, is not the naive nationalism that was feared at the start of the year, nor is it based on any hope of economic improvement. Instead, the main emotion right now seems to be a gut-level revulsion at the culture of corruption in London. Scots have some reason to hope they can escape the weight of this corruption by having their own government not so closely tied to London.

When you look at it, this is a problem that affects everyone in the United Kingdom. The whole country subsidizes the excesses of London in various ways, and the political establishment sees protecting this pattern as its main continuing goal. Right now, London is preparing a proposal of a sort of limited constitutional convention for Scotland. Politically, you can think of the convention as a booby prize that Scotland will get for voting No on secession. It is a weak gesture and will likely lend more momentum to the Yes movement. The limited convention seems to frame the ballot question as a question of real reform versus token reform. Even those who are not sure they support reform may vote for the real over the phony.

Instead, the major parties and Parliament may want to consider having a real constitutional convention, one given the power to overturn some of London’s corrupt institutions. For the power brokers in London, that would probably be too big a risk to take. Yet institutions that cling to power generation after generation are hardly consistent with the tradition of democracy that U.K. voters are so proud of. Eventually something will have to give, and a Yes vote in Scotland may be just the first step in an overdue correction in British politics.

Saturday, September 6, 2014

Breakfast Cereal Drops 15 Percent and No One Notices

Breakfast cereal, after years of ups and downs at America’s breakfast table, has abruptly fallen off 15 percent since April 2013. The big cereal companies did not seem to want to recognize the trend until last month, when it was five straight quarters of declines, but now that they see it, they still don’t seem to know what’s going on.

The move away from breakfast cereal has to be seen in the context of a much broader move away from low-quality food that has seen 15-year declines in beer, soda, hot dogs, lunch meat, and Twinkies and more recently has affected pork, beef, McDonald’s, and pizza. It has also taken its toll, in the last few years of steep price increases, on milk, and this begins to explain why breakfast cereal is falling out of favor. If you don’t have milk in the house, the twentieth-century breakfast of milk and cereal is hard to do.

There is much more to it than that. Corn and wheat, along with sugar the primary ingredients in boxed cereal, have been getting beaten up in popular culture in recent years. Corn finds its way into almost everything you eat and drink, as Americans have learned from one documentary film after another. Virtually all American corn is contaminated with genes from genetically modified strains, genes which actually generate pesticide chemicals right up until the time the corn is cooked. This means it is basically impossible to eat corn without getting pesticide residues in your gut, a problem that is linked to a range of symptoms, the most common of which is skin inflammation in various forms. If you ever got blisters or itchy skin after eating corn, it will not surprise you at all that people besides you are eating fewer corn flakes than before. As for wheat, I am sure you have heard the term “wheat belly” by now. In several recent best-selling books we have learned how modern, post-1970 strains of wheat have bizarrely modified proteins that are the cause, many people believe, of gluten sensitivity. Even if you are not one of the many people sensitive to gluten, these stray proteins tend to accumulate in the skin over a period of years where they can cause skin rashes and the buildup of layers of fat — forming the “wheat belly” you hear about. When three fourths of Americans want to lose weight the idea of a wheat belly can change the way they think about breakfast cereal. These illnesses caused by genetically modified corn and modern optimized strains of wheat might have been considered speculative ten years ago but are solidly supported science now, and word is getting out to the public.

The funny thing about this trend is that I am not sure very many people are aware they are eating less breakfast cereal. I did not notice I was eating less boxed cereal until I discovered this trend. Then I stopped to think about it. I am eating more cooked oats for breakfast this year, but that means I must be eating less of the corn- and wheat-based cereals that used to be my go-to breakfast. I checked and I have six boxes of wheat- and corn-based cereals in my pantry, along with two boxes of granola. It may take a few months to finish them, and then I suppose I will buy more, but I will probably want to limit myself to just one box at that point. I obviously am not eating boxed cereal as quickly as I expected myself to. When a habit starts to fade, you can sometimes reduce your consumption of a product by 50 percent before you notice that anything has changed. For example, if you eat boxed cereal once every six days instead of once every three days, that is a minor lifestyle change. For the factories that crank out the products, though, every percent along the way matters, with cuts in overtime and then in staffing.

Food habits, of course, are known to change unconsciously. If a food changes and it doesn’t make you feel as good as it used to, you’re no longer as drawn to it, even if you don’t know why. It’s entirely possible that something has changed in the chemical residues we consume in corn and wheat that repels us without our noticing it.

Cereal companies don’t know anything about chemical residues, of course. They’ve done studies and found that the fastest-growing breakfast food is Greek yogurt, so they are looking for ways to make boxed cereal seem more like Greek yogurt. This will mean more cereal brands that are gluten-free (just like Greek yogurt) and have protein boosted by additives such as concentrated soy protein (a bit of a puzzle, since grains have plenty of protein to begin with). I don’t think these innovations will do anything to stop the loss of customers, though. After all, if you aren’t hungry for cereal, you aren’t likely to be wandering the cereal aisle of the supermarket reading the feature claims on every box you see. But at least it gives the cereal companies the feeling that they are doing something.

The cereal habit is also affected, like everything in consumer culture today, by consumer time pressure. Milk and cereal is actually, if you stop and think about it, one of the most inconvenient convenience foods you can imagine. It is not that easy to set yourself up with milk, a box of cereal, a bowl, and a spoon. The milk especially is an obstacle. If there is no milk in the house, the whole process doesn’t work — and you’re not likely to make a special trip to buy milk just so you can eat a convenience food. The fact that there are so many pieces in the milk and cereal habit is not a favorable thing for the cereal companies. Once the pattern is broken, it is difficult for a person or household to put it back together — so a consumer lost to the cereal companies is, in most cases, a consumer lost forever.

The way that so many consumers are eating less cereal without being aware of the change is the strongest indication that this trend will continue. When people know they are doing something and know the reasons for their decisions, you can argue with them and possibly change their minds. When people don’t realize they are doing something and don’t know why, persuasion has no impact. I believe most milk-and-cereal consumers are, like me, barely noticing the breakfast they are eating. Breakfast cereals already don’t have the mind share that their market share would suggest. In people’s minds breakfast cereal could make the jump directly from daily habit to nostalgic novelty, with the obligatory ten years going by unnoticed in between.

Friday, September 5, 2014

This Week in Bank Failures

The European Central Bank (ECB) cut rates and took other steps to expand the euro money supply.

A G20 working group has agreed on the broad outline of a plan intended to make sure that bondholders take on the financial burden of future large multinational bank failures. As part of the compromise, many types of bonds would be allowed to be counted as capital, and the too-big-to-fail principle would be kept alive for the time being.

A data breach including credit card numbers apparently took place at Home Depot retail stores, probably affecting all U.S. locations, but details have been hard to come by so far. Importantly, it hasn’t been confirmed that the leak came from inside Home Depot or that the credit card numbers come from Home Depot purchase transactions.

Bank regulators in Turkey took partial control of Asya Katilim Bankasi AS under a provision that allows them to remove officers and take various other steps short of liquidation. Trading in the bank’s shares was suspended last month. Also last month, the government canceled all of its contracts with the bank. Asya says its problems are more political than financial, and that it will be able to keep operating without any difficulty. The bank is preparing a lawsuit against what it describes as harassment by regulators.

The overnight lending market that Libor is based on is continuing to decline, and the Fed says it is looking for an alternative, a way to form a base rate that does not depend on frequent loans between banks.

The upcoming closing of the Export-Import Bank is already hurting overseas sales by U.S. manufacturers, and until September 30, there is still a chance of a late action from Congress to reauthorize it. However, any such action would first require House Republican factions to come to an agreement on a strategy, and so far there isn’t any sign of a move to bridge that gap.

Bulgaria’s failed Corpbank is now not expected to reopen until December, putting at risk an estimated 80,000 jobs at businesses whose accounts are frozen. Auditors have found documents for only one third of the bank’s loan portfolio, and it is believed that most of the remaining loans are fraudulent in some way. Delays at Corpbank are partly due to political uncertainty after the banking crisis in June led the government to resign and cut into an already weak national budget. There are regulatory concerns too, including the need for plans to be reviewed by the IMF. The central bank has asked the IMF to send a working group to the country to speed up the review process.

A credit union failed tonight. State regulators in Iowa with court approval closed Louden Depot Community Credit Union. The failed credit union had been operating for 60 years and had 800 members, mostly residents of Jefferson County in Iowa. The NCUA transferred member accounts and most assets to Community 1st Credit Union of Ottumwa.

Thursday, September 4, 2014

Failed Leaders and the “What Was He Thinking?” Problem

A former governor of Virginia, Bob McDonnell, was convicted of 11 counts of corruption today. The strangest thing about the trial was that it happened at all. McDonnell was offered a plea bargain where he could have admitted guilt for just one count and had all the other counts dropped. He had a chance to see the evidence against him before he made the decision to go to trial. When you review the evidence, it is hard to understand how McDonnell imagined he would win acquittal. If I understand this detail correctly, the trial included a slide show of the improper checks from a wealthy donor that paid for one thing after another at the governor’s daughter’s wedding, which took place during the term of office. Just seeing a summary of it, one political observer told me that politicians generally get away with taking bribes of this kind, but not when they are documented in this level of detail. So what was the governor thinking when he took the bribes, considering that the cost of the wedding was a drop in the bucket among the many improper payments listed at trial, and what was he thinking later when he thought he could get away with it all? Unfortunately, the trial itself and the look back at the governor’s term in office revealed a series of occasions where you have to believe the governor was not in full command of his faculties. His thinking was clouded not merely by all the distractions of office and a criminal trial, but, you have to believe, also because his brain wasn’t functioning well.

As we learn more about brain function, there are reasons to wonder about the negative effects of the way so much of the world is run by tired, angry old men who as a class eat badly, drink and take a wide range of drugs, are often dehydrated, and barely exercise. This is the opposite of what you would ask for if you wanted a leadership class that had clear thinking supported by strong brain function.

It is an issue that first came to the attention of many in the public with the scandals surrounding NBA team owner Donald Sterling, whose mental functioning and ability to distinguish right from wrong declined so obviously that he had to be removed as a general partner from the team he owned. In the CNN interview he did, Sterling’s diminished mental capacity was so evident that people who saw the interview told me it was considered a black mark on Anderson Cooper’s career that the interview was even broadcast. It seemed a little too close to taking advantage of a feeble man who had obviously lost his mind. Few will argue with the need to remove Sterling from his previous post. But consider the state of that business before that corrective action took place. For some period of time, probably several years, a billion-dollar business organization was being run by a man who didn’t have the mental capacity to run any business. And I believe this is not an isolated incident, but reflects something that happens every day in large organizations all over the world. More than a few governmental bodies, charities, and business empires are run by people who go for years without showing the ability to make a good decision. They can keep up the charade, it seems, as long as they still remember how to cover their tracks so that no one can tell how badly they are doing in their day-to-day work. While I have focused on the problems of aging in leaders, that is just because so many of the most powerful leaders are more than 60 or 80 years old. The inflammatory diseases that can diminish mental function disproportionately affect older people but can affect anyone, while mental burnout and drug addiction may present similar risks for a leader at any age.

Directors, voters, and others should not give a free pass to any leader just because of a past record of accomplishment. We need to demand continuing competence and look for contrary patterns such as anger and blame, among other early signs of ineffective thinking. We may need better ways of determining how clearly people are thinking. Leadership demands clear thinking to make fine distinctions. The world is in such a perilous state in part because so many of our leaders are failing us, and in too many cases, I am afraid, it is because they have lost the ability to think clearly.

Wednesday, September 3, 2014

Optical Media

I tried to find good information on sales volumes for optical media, especially the DVD-Rs and CD-Rs that people might use to make backup copies of computer files. I couldn’t find it. I don’t even know if total unit volumes are going up or down. However, the lack of solid market-level revenue information is a strong indication that, at least, revenue in this product niche is years past its peak, which may have occurred between 2006 and 2008. But prices have fallen drastically, so revenue would decline even if unit volumes or data volumes held steady.

Here, then, is a grab bag of anecdotal evidence about where optical storage is heading.

  • Two of the biggest chains selling DVD-Rs and CD-Rs, Staples and Best Buy, are giving these products less than half the shelf space of five years ago and have cut back on brand selection. This is in stores that have cut back on more product categories than not.
  • In general, DVD-R and CD-R are still easy formats to find. DVD+R is still around. Rewritable (RW) formats are specialized items now — you won’t necessarily find them in a store. BD (Blu-ray, with a higher storage capacity than DVD) use is growing but hasn’t caught on in a big way. Various multi-layer recordable DVD formats were talked about but never caught on.
  • Many people are finding cloud storage to be simpler than offline storage.
  • Many people are using backup systems based on hard disks.
  • Hard disk drives have become more reliable, so that many users don’t make backups at all anymore.
  • USB flash drives are less expensive and now have a much higher capacity than DVD-R, but are not as durable or reliable, and are easily misplaced.
  • Online file transfers by email and FTP can handle large data volumes more readily than before. When larger file deliveries must be sent by mail, sending a USB flash drive is more common than sending a stack of DVD-Rs. People also mail hard disk drives but the risk of loss or damage in transit is much higher.
  • Speeds of typical DVD drives haven’t increased, but hard disk speeds continue to increase.
  • Computer users generally have more and larger files to keep backups of.
  • Large corporations generally “lock down” desktop computers to prevent any use of optical drives (or flash drives, for that matter).
  • People may want to store sensitive files (the talk this week is about nude photos, but the same logic applies to product designs, contracts, etc.) offline to reduce the risk of data falling into the hands of curiosity-seekers and competitors online.
  • “Cold” data storage such as DVD-R is the most forgiving digital archive option: it is easier to recover data in the more distant future or in the event of catastrophic equipment failure.

Tuesday, September 2, 2014

Revel Closes Quietly as Atlantic City Gambling Declines

The latest Atlantic City casino closing, a few hours ago, went quietly. If what I see on Twitter can be taken as a guide, there were more news reporters than gamblers in attendance in the last two hours at Revel, but it was not a crowd even if you were to gather everyone around the last roulette table. The quiet closing was intentional, I am sure; it would have cost more to close with great fanfare at the stroke of midnight. Maintenance workers cut down the metal “Revel” lettering from the outside at least 12 hours earlier, so the casino already looked closed on its last afternoon.

Revel is one of three casinos to close in Atlantic City this month. It makes good sense that casinos would close in September, at the end of the busy summer season, but it shows how bad things have become that these casinos did not wait for summer’s last hurrah, perhaps around the end of September. One casino closed on Labor Day itself, barely past the peak of summer’s last holiday weekend. The last one is holding out for just two more weekends. If business is this bad, surely at least one more casino will have to close, perhaps next year.

This is not what Atlantic City expected. When the recession hit in 2006, planners and investors assumed it would be a lull of a few years, followed by a new period of onward and upward. Instead, the city’s gambling revenue has fallen to half of what it was in 2006 and is still declining. Revel in particular was an expensive mistake, built during the recession to take advantage of the boom that investors assumed would follow.

This points to an aspect of the business cycle that is a frequent point of confusion. It is a cliché and an an axiom in economics that what goes up must come down. It might seem that the reverse also should be true, but that would not be a safe assumption. When consumers change their habits in an economic downturn, some part of that change is permanent. We have seen this elsewhere lately, in the decline of consumer electronics, TV cable, desktop computers, and mail. In these areas of spending, consumers cut back, and when they found how easy this was to do, they cut back more. I wonder how many former Atlantic City gamblers just don’t have the time to get to the casino anymore and try to pick up some of the same festival feeling in a a fifteen-minute stroll through the local farmer’s market.

There is something else about Revel that may have led it to close while nine other casinos remain open. Its design is mostly 19th-century, with just a few futuristic splashes thrown in. The architects went light on the modern touches, though, apparently afraid they would scare off the high-stakes gamblers if they went too far in that direction. Yet the result looks and feels like an anachronism, a place meant more for a Hollywood version of Mark Twain than for a fun-loving person of the 2010s. When you see the place, you almost want to say, “Can you believe people used to spend hours gambling away their money in places like this?” And of course, that’s the wrong reaction from the point of view of a business that wants customers to spend their money today.