Connecting the Extreme Weather Events

If you look at a weather map from this week, it looks like the flooding in Missouri and England and the melting at the North Pole are all connected. On the map, the warm moist air originates in the El Niño-influenced eastern tropical Pacific. It moves north, and colder air in the Rocky Mountains pushes it east. The warm air mass crosses the Caribbean and the North Atlantic Ocean, somehow holding together all the way to the North Pole.

Of course, a meteorologist would explain it differently, perhaps in terms of a counterclockwise flow around a cold air mass, but any way you look at it, it adds up to unusual weather patterns in far-flung places. In my own local area we have seen record high temperatures in the past week. The flood events in the United States and England certainly qualify as disasters, but it is the Arctic melt event just days after the winter solstice that is the most ominous effect. The Greenland ice sheet is protected from rapid summer melting by the heat taken up in the melting sea ice nearby. For that to happen, new sea ice has to form at this time of year. Missing two weeks of refreeze won’t have much impact, but if the Arctic Ocean sees five or six weeks of melt conditions one winter, that puts the world well on our way to a rapid Greenland melt-out.

This Week in Bank Failures

After an eight-year run, the rate of U.S. bank failures has faded to a near-normal level. There were eight bank failures in 2015, and a similar number is expected next year. This does not mean the banking sector has returned to vibrant health. As a whole, banking remains overstaffed by about 20 percent, and the high overhead combined with an overhang of troubled loans from a decade ago still weighs on hundreds of banks. Regulators this month warned of a new wave of bank speculation in commercial real estate similar to the one a decade ago that led to most of the bank failures since. Artificially low interest rates, which the Fed plans to keep at crisis levels into 2017, also limit banks’ earning power. However, investor confidence has improved enough and the number of deeply troubled banks has declined enough that troubled banks will more often be rescued by private investors than by deposit insurance.

U.K. rules restricting bonuses fall short of European Union requirements by exempting hundreds of hedge funds, fund managers, brokers, and other institutions. The businesses that London sought to exclude from bonus-size restrictions are large by any ordinary understanding but were exempted for being “small” by City of London standards.

Higher One skimmed off $31 million in financial aid intended for college students between 2012 and 2014 through hidden fees on its financial aid debit cards. In a settlement with regulators, it has agreed to refund the improper fees and pay $4 million in penalties.

In a separate debit card settlement, The Bancorp Bank will pay $1 million in restitution and $3 million in penalties after it ignored the terms of private-label debit cards it issued. Despite a name dripping with modern irony, The Bancorp Bank is an old-style corporate institution with little connection to the management agility or information technology of the modern banking industry. In the settlement with regulators, it has agreed to implement modern accounting systems that will enable it to comply with its own contracts.

Hyatt this week disclosed a payment transaction data leak potentially affecting all customers of the hotel chain. The malware was initially discovered November 30 but was not disclosed until December 23. Hyatt has been able to learn very little so far about the nature and extent of the data leak.

As the quarter ends, U.S. credit card issuers have made only modest progress in issuing the chip-enabled credit cards that were supposed to have been released one quarter ago. Probably in one more quarter the credit card industry will be able to replace most current active credit cards with the new card style.

The Do-or-Die Christmas, and Its Traffic Accidents

This month as I’ve driven around on my Christmas-season errands, I’ve come upon far more accident scenes than I would normally expect. I haven’t inquired about the accidents but I have heard that two of the accidents I passed were fatal. It seems I can’t drive 20 miles in any direction without seeing police cars attending to an accident scene. In the last two days some of this could be attributed to the unfamiliar traffic mix of commuters, shoppers, and travelers all sharing the same road, but that doesn’t come close to explaining the high rate of accidents when compared to past holiday seasons. I was nearly in an accident myself last weekend when the car I was in narrowly missed a metal cabinet or similar object that skidded along the roadway for fifty yards after falling off a truck. Besides the actual accidents, I have seen far more than the usual number of drivers rushing through intersections without regard for traffic laws or other vehicles. Second-hand reports from friends in England and Australia say that accidents and near-misses during this holiday season are not limited to the United States.

An abrupt increase in accident rates occurs when people are taking uncharacteristic risks, and that seems to be the story of this Christmas shopping season. It’s a measure of consumer time pressure, but also of inflexibility as people aren’t willing to scale back their plans to fit their capabilities. Economic literature describes the way people become willing to take greater financial risks, signing up for Ponzi schemes for example, in periods of declining opportunity, especially recessions. It would seem that this phenomenon also applies to the driving risks people are taking in the current Christmas shopping season. I must emphasize that the high-risk driving decisions come from only a small fraction of drivers at any particular place, perhaps around 1 percent, but this is enough to change the flow of traffic as a whole.

The dynamic of declining opportunity can be misleading. People mostly don’t perceive that opportunities are declining but rather that opportunities are harder to find. This creates more of a do-or-die attitude about each opportunity, even something as fleeting as a Christmas celebration. The feeling is something along the lines of, “This Christmas has to be a success because there is no alternative.” It is the do-or-die approach that leads to the high-risk decisions that create traffic accidents and other unintended consequences. Hollywood celebrates the do-or-die idea in war and asteroid movies. The current situation is not nearly so dire as the ones depicted in the movies, but there must be something about the current situation that makes it seem comparable to the Hollywood disaster stories to a significant number of Christmas shoppers. It will be important to try to identify the cultural causes and to see whether this feeling becomes a trend. If you are out on the roads with Christmas shoppers, please be alert to the drivers who are in an especially frantic mood. Be safe, and have a merry Christmas.

Chipotle’s Sick Customers in 4 CNBC Headlines

Here’s a summary of the food-preparation problem at Chipotle taken from the last week of CNBC headlines on the restaurant chain.

1. Management is intransigent and in denial about the problem. Wednesday, December 16: Chipotle execs: There is no E coli in Chipotle today
2. The public has reason to worry. Thursday, December 17: Chipotle metric [YouGov BrandIndex “buzz” score] drops to lowest level ever
3. Foodborne illness originating in the restaurant continues. Yesterday: CDC investigating different E. coli strain at Chipotle
4. More than half of customers say they are now eating somewhere else. Today: Poll: Are you scared of eating at Chipotle?

A Busy Shopping Weekend

This year Black Friday did not live up to the hype, but even when it does the traditional busiest shopping day of the year is the Saturday before Christmas. This year the retail sector was looking for a big weekend before Christmas to make up for a generally lackluster December, and from what I saw yesterday in my local area, shoppers did not disappoint. From 9 a.m. until well after dark it was easily the heaviest weekend traffic of the year. The stores I ventured into had mostly long lines, if not steadily all day long.

There are good reasons why the Saturday before Christmas remains such a big deal even as Christmas shopping in general has shifted above Black Friday on the calendar. On any given Thursday or Friday, many workers get paid. Earlier paychecks can be spent at any time, but for someone getting ready for Christmas, the best time to spend the last paycheck before Christmas is the last Saturday before Christmas. That yesterday saw such heavy traffic shows how many Christmas shoppers need that last paycheck to fund their Christmas celebrations.

There is also the procrastination effect. The last weekend before Christmas is the time when gift shopping can’t plausibly be put off any longer. Add both effects to the normal Saturday shopping and you tend to get the busiest shopping day of the year. 

The consumer mood was boosted this Christmas by the absence of a federal government shutdown threat for the first time in years, as Congressional Republicans could not agree on a shutdown strategy. The Fed rate hike last week could have added to the feeling of confidence, even if it will take another year for consumers to see the boost in income from interest on their savings accounts. That shoppers are out in force this weekend says that there isn’t so much concern about the prospects for the economy over the next few months.

El Niño Drags Down Oil Prices

It may be the warmest December ever in the eastern United States. When I look out the window it is sunny and almost warm. There is no need to turn on the furnace on a day like this, and across the region, heating oil sales are postponed by a month as we expect November-like weather for the rest of December. It is not just Pennsylvania that is unusually warm. With El Niño conditions, the contiguous United States had the warmest September–November on record, and the year is expected to end up as the warmest ever recorded for the world as a whole. The low demand for fuel for heating has an effect on world oil prices. After two years of drastic decline, oil prices are now nearing the recession minimums of seven years ago. A decline in manufacturing and a slow trend toward electric power for transportation could keep oil prices low for years.

Oil prices go up in the long run as an effect of population growth, but that is a trend that could change after the climate summit in Paris. The final climate agreement, while not spelling out specifics, points toward a change in population policies and may eventually reduce and eliminate government initiatives aimed at promoting population growth. Global population will continue to grow for generations, but any reduction in growth rates will tend to slow the increase in oil prices.

A Small Step Forward in Paris Climate Agreement

It is hard to get 200 nations to agree on anything, so the Paris climate agreement is a minimalist consensus document. It is a loose framework that points to just enough progress to keep the island nations on board — particularly nations that may be fully submerged as a result of climate change. It adopts both the unrealistic goal of keeping global temperature rise below 2 kelvins (compared to pre-industrial levels) and the impossible goal of keeping it below 1.5 kelvins. What it does not include is any practical way of reaching those goals.

No one should expect that the 2 kelvin goal can be reached within the next century. That would require, for example, that almost all of the fuel-burning vehicles and appliances being sold this year be scrapped years before they are ready to be retired and replaced with technology not based on fuel, and hardly anyone expects that to happen. To be clear about this, the Paris agreement does not reach nearly far enough to stop Greenland from melting or to keep global sea level rise below 8 meters over the coming centuries. Under the Paris agreement, the industrial world has not yet reached the midpoint of carbon emissions. Carbon emissions that have already occurred are thought to be probably enough to create a 2 kelvin warming effect, so implementing the Paris agreement is probably not enough by itself to keep global temperature increase below 4 kelvins.

The Paris agreement is nevertheless progress, a step in the right direction. These are some of the changes that might come about over the next 20 years or so as the Paris agreement is implemented:

• The elimination of subsidies for fossil fuels and fuel-burning vehicles
• Normalization of retirement funding so that official policy does not call for population increase to fund retirement programs
• Reductions in subsidies for meat and milk
• Improvements in buildings so that less fuel is used for heating
• Phasing out of energy-inefficient legacy technology such as fluorescent lighting

Details of implementation are not in the agreement itself, but these details and others will emerge as nations try to meet their separate emissions goals.

This Week in Bank Failures

High-leverage and high-yield funds may have to change strategy or shut down as a U.S. interest rate increase appears imminent. Third Avenue Focused Credit Fund has suspended redemptions and says it will liquidate. The fund has almost $1 billion in assets, down from $2.75 billion last year. Liquidation of a high-yield bond fund typically takes about a year. A Stone Lion high-yield fund that is half as large also suspended redemptions today. It isn’t immediately clear whether the Stone Lion fund will have to liquidate, but that is a common fate of a fund that cannot meet its cash requirements. The fund represents a third of Stone Lion’s total assets.

Redemptions leading to a loss of solvency is a recurring problem with bond funds, which as a rule keep very little liquidity and can go from normal operations to insolvency in just two or three trading sessions when investor sentiment turns. This is a risk that is not widely recognized because it a risk of bond funds themselves, not of the underlying bonds. Given the risk, conservative individual investors should never invest in bond funds, and as investors decide to get out before it’s too late, more bond fund redemptions and liquidations are almost surely on the way.

U.S. interest rates have not increased in nearly a decade, and there are questions about how well the financial sector is positioned to survive normal interest rates when they return around 2019. Interest rate increases put more pressure on distressed business of all kinds, and lenders will inevitably take losses on some of their loans to marginal businesses.

Firefox Is a Browser Again

Mozilla says it is dropping Firefox OS, its HTML-based mobile phone platform. It’s a surprising retreat from the software-development foundation, which over the past six years or so has put everything it had into the mobile phone project while leaving its popular web browser to try to pick up what new features it could by porting them from the phone project. Firefox OS shipped in its initial version two years ago, and in the process of creating it, with the Firefox web browser largely neglected, Mozilla saw its browser market share fall by more than half. During this period major browser bugs went unaddressed for as many as five versions while important browser features were taken away because it was thought they would make the desktop browser too incompatible with the mobile platform. Mozilla thought it had to take this course because of the enthusiasm of its developers for the mobile phone project.

Perhaps that enthusiasm has waned now that Firefox OS, facing an already crowded market for mobile platforms, has failed to gain any traction in its first two years of release. In any case, the leaders at Mozilla are trying to position the Firefox web browser as their marquee product again. This year saw the Firefox browser ported to the iOS platform, if only for those with the latest iOS version. It shows that Firefox has no intention of disappearing from mobile even if it is no longer trying to own the mobile platform.

The renewed focus on the long-neglected web browser may allow some of its more troubling deficiencies to be corrected. Firefox is still seen as the most standards-compliant browser and it will have a ready audience if it can focus on being secure, user-friendly, and productive again.

Looking back, it is hard to say the Firefox OS project was a mistake even though it ultimately failed. The mobile-first approach at Mozilla helped usher in the current era of mobile-compatible web design, a change that would not have happened so smoothly without Firefox leading the way. It is now not so easy to remember that just a few years ago, few people thought web sites could be mobile-friendly and standards-compatible at the same time. Now that is what everyone expects to see in a web site. That’s a substantial shift in the web, and the world will reap the benefits from it for years to come.

A Gloomy Report from Barnes & Noble

It is hard not to have a gloomy feeling about the large corporate bookstore after seeing the earnings report for the revamped Barnes & Noble for the quarter ending October 31. Shrinking down Barnes & Noble was expensive anyway, with more than $10 million in one-time expenses and surely a similar degree of distraction occurring during the quarter. Now that the restructuring is complete, it reveals a retail giant utterly dependent on the holiday shopping season. The holiday season is split between quarters, with around 15 percent of holiday gift purchases occurring during the quarter. Even with this advantage, excluding special items, the bookseller reported an operating loss of $10 million.

Barnes & Noble has for years reported losses in the spring and summer quarters. Now it seems the fall quarter is unprofitable too. The latest quarterly loss comes after operating losses of $67 million over the two preceding quarters. It may be unrealistic to expect a profit from Barnes & Noble during any of the first ten months of the year, but if it loses $5 million per month in the off-season, it needs an above-average holiday season to make up the losses. Obviously, it isn’t quite a business model if you need above-average results every time. Statistically, a below-average season must come sooner or later.

There are reasons to doubt the current pace of holiday shopping in general. There was a palpable drop-off in Black Friday traffic and other indications of a generally lackluster season in-store. With store closings and a technically obsolete e-book platform, Barnes & Noble can’t match the results of last year’s holiday quarter. It will be doing well if sells enough calendars, board games, and other high-markup items to show an operating income of $50 million for the current quarter and a loss of $20 million for the year. That would leave the bookseller looking for ways to close stores faster and cut costs in other ways. And if the current quarter’s results are below average?

This Week in Bank Failures

New Fed rules prohibit emergency lending like the AIG and Bear Stearns bailouts in 2008. The rules prevent the Fed from making emergency loans to select companies. In a crisis, the Fed can still offer “broad-based” credit to solvent borrowers, but it must charge a penalty rate on such loans. Under these rules, in a repeat of the banking crisis of 2007–2009, most of the same banks would have survived, but with little or no value accruing to the prior stockholders.

Cost-cutting: Morgan Stanley has begun laying off senior managers in its fixed-income business in London. The moves are said to be a prelude to 25 percent staffing cuts in the fixed-income business, most to take place next week. The company has not commented on its plans. Separately, Barclays is said to plan to reduce staffing by 20 percent early next year in its investment banking operations, in addition to cuts already announced.

Target has agreed to pay banks $39 million to cover part of the cost of replacing cards compromised by the retailer’s massive in-store data leak in November and December 2013. At least 40 million cards were compromised in the data leak, so in total, Target has reimbursed card issuers and shoppers less than $5 per card.

The U.S. Export-Import Bank is back in business after a charter renewal was approved as part of a transportation funding bill that passed Congress last Friday. The bank was effectively shut down when Congress voted to let its charter lapse in June.

The NCUA liquidated Greater Abyssinia Federal Credit Union, which had 425 members, mainly members of the Greater Abyssinia Baptist Church in Cleveland, Ohio. The NCUA decided it wouldn’t be able to restore the credit union to financial viability. The credit union had less than a million dollars in assets.

Pin-Drop Week at Retail

Since 2007 I have gotten used to seeing the retail crowds vanish after Black Friday and Cyber Monday, but I never saw a pattern quite like this year. I’m told there were more people shopping in stores on Thanksgiving. The Black Friday traffic I saw was muted, particularly in the afternoon and evening. I did not hear any stories of shopping all night for Black Friday — perhaps that was just a novelty that most people wouldn’t elect to do a second time. On the other hand, I heard of two malls that filled their primary parking on the morning of Black Friday. If Black Friday was slow, the next afternoon was busier than previous years. Then came Sunday, and its retail traffic was slower than an average Sunday. Cyber Monday seemed a little busier in stores than an average Monday.

And then nothing. You could hear a pin drop in stores on Tuesday. After shopping I went to a restaurant at the peak of dinner hour. This was a place that seats 400, but on this occasion they were fortunate to have a family of five in the dining room — otherwise it would have been effectively empty.

Of course, there is a paycheck effect and a fatigue factor that tend to reduce shopping after Cyber Monday. Shoppers who spent their entire paycheck over the extended Thanksgiving weekend might wait for the next paycheck before they go shopping again. Anyone tired out from hours of shopping or traveling might not be ready to shop again until next Sunday. Nevertheless, it seems that Black Friday may be counterproductive from the retail sector’s point of view if there are no shoppers at all the following week. And this year, looking at the sharpest drop-off I’ve ever seen, I can’t help wondering if shoppers got what they wanted a little more quickly this time around.