Friday, January 29, 2016

This Week in Bank Failures

The United Kingdom will hold a referendum on leaving the European Union, though the voting date has not been decided. While an EU exit would boost the U.K. economy in other areas, London would lose its place as an important European banking center, though it would remain an important global banking center. An EU exit could also put the United Kingdom in a stronger position the next time a euro zone crisis erupts. The potential for a United Kingdom exit is a hotly debated topic with substantial opinions from multiple countries in favor and opposed.

In Portugal, authorities say they can now proceed with the sale of Novo Banco and the liquidation of assets of the failed Banco Espírito Santo in spite of a series of legal challenges surrounding the split of assets between the two banks. The remaining issues will take years to decide in court, but realistically, the sales cannot wait until every single legal question is answered.

Monday, January 25, 2016

Proportion and Snow Removal

I don’t imagine that the big weekend storm qualified as a blizzard based on the conditions I saw in my town, but we did get two feet of snow. It ended before dawn Sunday but the cleanup has taken more than one day. People who have gone out today tell me the roads are narrow and icy. Some side streets are plowed so narrowly there isn’t room for two cars to pass. Some icy patches are the length of a tractor-trailer. Roads will improve as temperatures rise above freezing every day this week, but that’s happening for the first time just now. For those who have that option, the easy thing is to stay home until more melting occurs. More than a few workers between Virginia and Connecticut are working at home today.

The difficulty in clearing two feet of snow is surprising to some people. It’s just snow, right? What could be so difficult about it? This reaction is an indication of how poorly humans are equipped with a sense of proportion. Intuition suggests to many people that clearing two feet of snow should be about twice as hard as clearing two inches of snow. It’s a case where intuition misleads.

It’s easy to see how far off this kind of intuition can be when you consider that part of snow removal is simply transportation, or carrying the snow from point to point, even if those points are just ten steps apart. The work of transporting snow is proportional to the weight of snow that has to be carried between two points. But wait. With more snow, some of it has to be carried farther. A snow pile is not a point, but is a heap that spreads out in proportion to the amount of snow added.

When you try to create a physical model of snow removal and look at it mathematically, it is easy to see that some parts of the work are proportional to the snow depth, some are proportional to the square of the snow depth, and some are fixed (for example, you might retrieve the same shovel from storage regardless of snow depth). Put it all together, and two feet of snow might be about ten times as much work as two inches of snow.

That kind of physical model assumes you are working efficiently, but efficiency comes more easily with work that is familiar. Around here a two-foot snowfall occurs about once every eight years. It will never be routine work. Any miscalculation from the unfamiliarity of the work adds to the effort.

It shouldn’t be too surprising, then, if it takes days to get roads in good order after a two-foot snowfall or if corners are cut along the way. It helps that the snow came late in the season. If the cleanup is a bit messy, it’s a temporary problem. All but the larger snow piles will melt away within a few weeks.

Friday, January 22, 2016

This Week in Bank Failures

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

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

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

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

Blizzard Watch, But No Snow Shovels

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

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

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

Wednesday, January 20, 2016

Hottest Year on Record; Oil Plummets

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

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

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

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

Monday, January 18, 2016

Oil Prices Stay Low

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

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

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

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

Friday, January 15, 2016

This Week in Bank Failures

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

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

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

Wednesday, January 13, 2016

The Tropics Attacking the Arctic

There is a subtropical storm in the Atlantic Ocean. While the formation of a northern-hemisphere subtropical storm in January is odd enough, the forecast track is odd in its own right. Tropical systems can’t meaningfully be predicted a week in advance, but the National Hurricane Center forecast track (below) suggests that the storm is likely to pass east of Greenland. If that comes to pass, there is a fair chance of the storm reaching the Arctic Circle with wind, waves, and relatively warm air — “the tropics attacking the sea ice,” as one observer put it. It is rare enough that such an event happens in summer. For it to appear in the forecast in January, the coldest month in the Northern Hemisphere, suggests that the balance of power has shifted.

The Arctic could never win a fight with the tropics anyway, for the simple fact that the tropics are ten times as large. The Arctic can hold on well only by avoiding any direct confrontation with the tropics. But if a tropical-influenced event — Subtropical Storm Alex formed just outside the tropics with the aid of tropical air — can reach out and poke the Arctic in January, then where is the place for the Arctic to hide?

It used to be that the jet stream would protect the Arctic from tropical incursions, but this week, the jet stream is too busy pouring cold air into mid-continent regions to help out over the open ocean.

The Arctic has already seen a major ice-melting event this month, and the remnants of Alex could be a second. It is early enough in winter for the ice to recover effectively, but only if there aren’t two more similar storms over the next two months. In other words, the health of the Arctic sea ice is tenuous enough that it depends on random chance. Random chance being what it is, it is just a matter of time before the tropics and the Arctic have a fight that the Arctic can’t run away from.

Update, January 14: Alex reached hurricane status and has the unmistakable signature of a hurricane on the satellite picture. The forecast suggests it could remain a hurricane for a day, giving it a stronger chance of holding together into the Arctic. The forecast track has not changed much.

Monday, January 11, 2016

The Detour Through Another Country

Canada was cut in half yesterday when a bridge on the Trans-Canada Highway broke. It was the newest and, for those crossing Canada, the most essential bridge on the highway. Cables on the Nipigon River Bridge at Nipigon, Ontario, shortened more than intended in cold weather, lifting one end of the bridge deck above the road surface. The 400-meter, 2-lane bridge was immediately closed to vehicular traffic, though pedestrians could still cross. The bridge reopened at 9 a.m. after weights and, I assume, a construction plate made the bridge passable again, but only one lane is open, only standard-weight vehicles can cross, and backups are expected.

The Nipigon River Bridge is not so easy, from an American perspective, to put in its correct geographical context. The first step is to remember that Michigan consists of two peninsulas. The Lower Peninsula, the one that most people automatically think of, separates two of the Great Lakes, Lakes Michigan and Huron. Logically, there must be an Upper Peninsula, but where is it? It sounds like a trick question to most Americans at this point. The Upper Peninsula is easily found, though, extending westward from the northern tip of the Lower Peninsula. It also falls between two of the Great Lakes — Lake Michigan to the southeast and Lake Superior, the largest lake in North America, to the north. Upper Peninsula residents are occasionally so tired of being forgotten that some of them petition for statehood, but with a population so much smaller than any U.S. state, this idea has a hard time being heard, let alone being taken seriously.

Before I proceed, a quick apology to Canadians for taking such a long way around in explaining how eastern and western Canada are connected. I promise I am most of the way there.

The Upper Peninsula is possibly the most-forgotten region of the United States, and to its north is the largest lake in North America. The definition of a lake implies that there must be land on every side, so of course there is land north of the lake. Most of the land area of Ontario is found between Lake Superior and Hudson Bay. However, this is an area more forgotten in Ontario than the Upper Peninsula is in Michigan. Most of the northern shore of Lake Superior is organized into a district (think of it as a county) that is the size of Ohio in land area, but with a population matching that of Dayton, Ohio. In all of northern and northwestern Ontario there are only six highways worth noting, so road maps of Ontario may relegate this vast area to a tiny inset in one of the corners of the map if they include it at all. The inset effect can lead people not to realize how large this area is. If you drive around the north end of Lake Superior from Sault Ste. Marie, which is where road maps of Ontario traditionally end (and is a name that Americans may recognize as the northern terminus of Interstate 75) to the next city, Thunder Bay, it is an 8-hour, 700-kilometer drive during which I believe you will pass through only three towns with a population over 1,000.

All this geographical context is necessary to understand the magnitude of the problem caused by the broken bridge. Ordinarily when a bridge is out, you ask where the detour is. Here, there is no detour. The short stretch of highway extending west from Nipigon is one of the few places in North America where there is no alternate route. To be more precise, the only sensible detour to suggest is U.S. Highway 2, through Michigan, Wisconsin, and Minnesota, south of Lake Superior. If you had already arrived at the Nipigon River Bridge, that would be a very long way around. The local municipality declared a state of emergency when the bridge closed and set up shelters for stranded travelers. The bridge reopened this morning, but with only one lane open, the highway cannot carry its usual volume of daytime traffic. Possibly for the rest of the winter, most travelers driving between eastern and western Canada will have to drive through the United States.

The Trans-Canada Highway is symbolically important in showing that a country as far-flung as Canada is can function as a single country. The symbolic value is reason enough to give a high priority to the engineering work needed to restore the highway to normal functioning.

Saturday, January 9, 2016

Campbell’s Breaks Silence on GMOs

Genetic modifications of food ingredients have always been a secret in U.S. food, but Campbell’s Soup Co. is breaking the silence, preparing to label genetically modified ingredients (GMOs) on its products and calling for a mandatory uniform approach to GMO labeling. Most likely the GMO labeling would be part of the text of the ingredient list, already a mandatory part of a processed food product. For example, corn starch made from GMO corn might appear in the ingredient list as CORN STARCH (GMO). With mandatory GMO labeling, consumers would have a way to avoid the risks of GMOs without insisting on organic ingredients.

Friday, January 8, 2016

This Week in Bank Failures

New EU standards for banks, followed loosely and informally for the last three years, formally went into effect at the start of this year. The new rules focus on two life-and-death issues for banks: capitalization and resolution. The need for the new rules became obvious in the December rescue of four of the larger banks in Italy, in a plan that favored the banks’ largest creditors. The government pushed to complete the deal in 2015, and faced widespread criticism for doing so, because the favorable treatment of large bondholders would not have been allowed under the new EU rules. In theory, the new rules prevent, within the EU, any repeat of the large-scale bank bailouts of the past decade that put sovereign financial integrity at risk.

The NCUA liquidated two credit unions in December, for a total of 11 in 2015: Bethex Federal Credit Union of Bronx, New York, with 6,000 members, member accounts and assets transferred to USAlliance Federal Credit Union; First Hawaiian Homes Federal Credit Union, with 4,000 members, member accounts and assets transferred to Molokai Community Federal Credit Union.

In the bankruptcy case of Sentinel Management Group, an appeals court has ruled that BNY Mellon is an unsecured creditor. The court ruled that the bank knew there were problems at Sentinel when it issued loans to the fund management company prior to its 2007 bankruptcy. The bank should have seen that funds from the loans it was making were likely to be diverted, but looked the other way, so it cannot gain the benefits of being a secured creditor in the bankruptcy proceeding. The bank provided nearly half of the funding for a criminal enterprise that ultimately sent Sentinel’s CEO to jail.

Wilmington Trust Corporation faces indictments after a TARP investigation. The bank repaid its 2008 TARP loan with money from a 2009 stock offering. In the stock offering and in filings with the SEC the bank exaggerated the quality of many of its loans. The bank and four executives are being charged with making false statements in a securities filing.

Weather Effect in December Jobs

I wrote yesterday about some of the more direct effects of mild winter weather on economic trends, and this morning we see the indirect effects in the jobs numbers for December. The net job creation was 292,000, much better than the expected 200,000 or 212,000, depending on who you asked. Layoffs were particularly low in December. Most of the discrepancy, it appears, consists of construction jobs that went forward in December because the weather permitted it. I have seen this firsthand in my local area, where road work that ordinarily would have shut down for the winter around December 5 carried on through December and continues even now. The weather effect was broad enough to make today’s headline macroeconomic number 40 percent higher than expected.

Thursday, January 7, 2016

Snow-Shoveling Time, and No Snow to Shovel

Here in southern Pennsylvania for the first time that I can recall, we’re looking at a fair possibility of a winter with no snow events. The first four weeks of December were too warm for snow, and weather forecasters expect February and March to be 5 degrees Fahrenheit above normal. The best chance for snow, then, is right now. Instead, we expect a heavy rain event this weekend followed by a return to dry weather. It is too soon to predict the weather for the second half of the month in the same level of detail, but the snow will certainly be less than the snowfall of a normal winter if there is any snow at all.

To be sure, some will lament the absence of snow. The mild weather has been a problem for retail, with Macy’s reporting only a fraction of the usual winter clothing sales. Some shoppers were fooled by the October-like weather in December and completely forgot to do any Christmas shopping. Still, for anyone with a house or a car to take care of, it is undeniably less work this way. As long as there is no snow to shovel, I am using the hours freed up to clear vines and downed tree branches from my lawn. This is work that ordinarily would wait until March, and with no snowstorms, there aren’t so many downed branches this winter. The point is, I am getting ahead in my work. At the same time, households and businesses will find it easier to make ends meet financially while they pay a third less to heat their buildings. With only a small fraction of the usual snow removal expenses, the state government may eventually be able to pass a budget.

This might not seem such an exciting story, but economic trends are built on just such random large-scale events. The weather pattern is affecting not just Pennsylvania but a whole corner of the country. Recent economic forecasts have predicted a slight recession for the United States in 2016, but with the financial benefits of a benign winter, that becomes unlikely. If I am getting a head start on my early spring lawn work, perhaps I will also find the time to add to my work skills and solve new problems. In a similar way, students facing fewer snow days have the chance to learn more and become more productive.

On an individual level, if you have extra time because of the weather, use that time to solve some of your own persistent problems, and that will put you in a better place going forward. This mild winter weather is not a trend, more a chance event, so make the most of it.

Wednesday, January 6, 2016

Keep a Resolution Alive With Online Research

The tradition of new year’s resolutions survives because we like the idea of getting a fresh start. But new year’s resolutions are hard, as John Oliver recently pointed out. It’s completely understandable if you get to the end of the day and want to give up on a resolution. In fact, that’s perfectly fine as long as the next day you look for a new angle and try again.

The main reason resolutions are so hard is that we have convinced ourselves that we already know what we need to do. In practical terms, there is always something we need to know that we don’t know, something that’s a necessary part of what we’re trying to do. Fortunately, it’s easier than ever to find the answers you need.

To take perhaps the most cliched example possible, you might resolve to get in shape by working out several times a week. Traditionally, this resolution falls by the wayside when you get to a day when you don’t feel like working out. You can use your sorry unmotivated ass as the excuse for your failed resolution, or you can look up how to work out when you don’t feel like it. Everyone has days when they don’t feel like working out, so what do they do? If you search YouTube, you can find more than 100 answers, including these:

Usually rescuing a resolution is as simple as doing what other people have done when they faced the same challenge. You may be able to find the answer you need with a few minutes of searching.

Friday, January 1, 2016

Using the Collective Amnesia of the New Year

In one sense, the new year is just an arbitrary day on the calendar. If you want to make a change, the best time to do it is the moment you think of it. Waiting for the new year makes your change some number of days too late. In another sense, though, there is something going on with the new year. We collectively forget the past more easily as the new year gets started. You can use this to more easily make a change in your personal habits. The change made right around the beginning of the year is more likely to stick as you forget what your prior habit was. In a similar way, the new year is a tool used by those who want to change the emotional associations of a brand or company. Start talking about something new in the new year, and people begin to forget what the conversation was in the year just ended.

The rebranding team at Volkswagen, for example, can take this moment to shift the conversation away from the company’s diesel problems by starting to talk about its electric car initiative, or something else completely unrelated to emissions testing. Political candidates who looked weak and confused last year can take this moment to present themselves in a different style that they can hope comes across as more authoritative. If it works, last year’s gaffes will be quickly forgiven. Start looking for it, and you can find examples everywhere of people and organizations using the new-year amnesia to make needed changes.