Tuesday, April 28, 2015

Scale of the Nepal Earthquake

With the story slipping from the front pages, I worry that the scale of the Nepal earthquake is lost on many people. The global news media puts the greatest emphasis on a story like this when it is new, but the extent of the disaster still can’t be measured with confidence days later. The most careful initial reports put the death toll around 400. This number has since risen to about 5,000, making it the worst thing ever to happen in Nepal. Nepal, meanwhile, is not so small. It can look small outlined on a map between China and India, the two most populated countries in the world, but only 40 countries in the world have a larger population than Nepal. The earthquake shook the whole country and caused severe damage in the heart of the country. TV cameras, when they arrive, can show rubble but can’t show the one to two million people who lack shelter. The sense of scale can’t come from any single place. Fatalities occurred as far away as Bangladesh and the world’s biggest mountain was badly damaged. These are perhaps not the most meaningful measures of the damage in Nepal but they help to provide a sense of scale.

Saturday, April 25, 2015

The Post-Comcast Internet

It is something to celebrate: the Internet survived the proposed U.S. cable merger. Comcast hadn’t faced even a single procedural defeat when it ran up the white flag. But Comcast found it didn’t own as much of Congress as it thought it did, so that the prospect of a Justice Department brief was enough of a setback to send it running away.

This is a victory not just for the Internet users and TV viewers who are customers of the companies involved. The proposed cable monopoly would have controlled more than 5 percent of all the electronic communication in the world. It would have wielded more power than countries like Russia or France, more than companies like Google and Amazon, in shaping the global agenda. After all, it would be in a position to block Russia or Amazon at the click of a mouse. If it had also succeeded in its campaign to overturn the principles of net neutrality, it would have been in a position to decide not just what video content people could watch, but whose voices would be heard and whose would be squelched. That is a worry we can now sweep away, at least for the moment. There is an opening now to create the post-Comcast Internet. Let’s hope people can use this window of freedom to solve some of the world’s problems.

Friday, April 24, 2015

This Week in Bank Failures

Deutsche Bank agreed yesterday to pay $2.5 billion in fines for its actions in manipulating base rates. The investigation of interest rate manipulation began with Libor, and the bank will plead guilty in London to Libor rate manipulation, but the settlement covers other base rates the bank may have manipulated worldwide. Text messages released by regulators show bank employees negotiating with traders both inside and outside the bank over what rates to report in place of the bank’s actual rates. In the settlement with the United States, New York State, and the United Kingdom, the largest fines will go to the Commodities Futures Trading Commission and the U.S. Justice Department.

The bank is also obliged to fire and ban specific employees. The employees will likely be barred from working for any bank in the two countries. Many of the employees were still working for the bank in New York, London, and elsewhere as of yesterday morning, and this side of the settlement assures that the bank will not be able to see the penalties as merely part of the cost of doing business.

U.K. regulators emphasized that the size of the fines was influenced by the false statements the bank made to regulators in the two countries over a period of years as the investigation was going on. It is the largest combined penalty to come out of the Libor case so far, and much larger than the bank had planned for.

Cutbacks will have to follow, and the costs of the fines must have changed the shape of restructuring plans the bank was already working on. The bank will sell off Postbank in Germany and scale back its other operations, it announced tonight. Observers expect the bank will phase out most of its branch network over a period of years while scaling back its securities operations by a similar amount to avoid going into too much debt. It is winding down operations in several countries, perhaps a dozen. The only major area the bank is looking to expand is transaction processing.

HSBC is considering moving its headquarters out of the United Kingdom to a country in continental Europe where regulators are more lenient about offenses such as fraud, market manipulation, and deceptive marketing practices. The destination is not yet chosen, but the wording of the proposal points to Luxembourg, though some analysts say Hong Kong is more likely in the end in spite of the initial focus on Europe. However, statements from officials in Hong Kong suggest the bank would have to reduce its size to be headquartered there again. The mere fact that the board of directors has formally proposed such a move is a measure of the existential risk posed by the bank’s recent raft of operational failures.

Deposit flight resumed in earnest this week in Greece amid reports that the ECB will let some of the country’s large banks fail if the central government is late in payments on its bonds. Some banks in Greece have large holdings of government bonds, and the ECB might be obliged to account for those assets differently in the event of a default. If banks were then considered insolvent they would become ineligible for ECB assistance. Tonight, a short-term debt deal looks unlikely, with European leaders insisting the country present plans for a complete overhaul of its national economy before any funds are released. The new government in Greece is working on such a plan but cannot realistically have it ready to present before fall.

Novo Banco in Portugal is at risk because of a lawsuit by Goldman Sachs that seeks to hold the bank responsible for $1 billion in debts incurred by its predecessor, Banco EspĂ­rito Santo. Novo Banco might have to be liquidated or reconstituted again if Goldman Sachs prevails.

Citizens Bank is operating more smoothly after being spun off by RBS, its quarterly earnings report shows.

State regulators in Ohio put Montgomery County Credit Union into conservatorship yesterday because of management problems at the 6,000-member credit union. The credit union remains open and will be managed for a time by the NCUA with an eye toward financial stability and restoring sound operations.

Wednesday, April 22, 2015

Quasi-Experts and the Corporate Sector

I like to watch IBM as the best simple measure of how well the whole corporate sector is doing. Most of the revenue at IBM comes from its work enabling corporations to do business with each other, so as the corporate sector fades, IBM is forced to adjust. In its latest report IBM’s revenue is down for the 12th quarter in a row and down more than 10 percent year over year. Most of this latest decline is likely the result of currency fluctuations but some must represent the long-term trend. Looking at more stocks, the whole corporate services category is languishing, though there are exceptions, such as Cisco and SAP, holding their own in the face of the broader trend.

I am beginning to think that the rise of the quasi-expert is leading in a roundabout way to a change in the role of the corporation, and more immediately, a change in the nature of the large projects that companies like IBM excel in. A quasi-expert is someone who knows just enough about a subject to get useful answers from a search engine, discussion board, or reference book. As these technologies improve quasi-experts are suddenly everywhere, taking work away from the real experts that have studied a field for ten years or longer. In information technology, the last few years have seen a drastic decline in the kind of large-scale project failures we used to read about several times a month. Are the quasi-experts saving projects from failure by quietly correcting the mistakes that happened along the way? I think that must be part of what is happening.

When quasi-experts improve the work results of companies like IBM, this is not necessarily good for revenue. A project saved from going $100 million over budget is $100 million in revenue lost to someone. The high-margin revenue that comes from being hired to pick up the pieces of a failed project is harder to come by these days. The same trend could continue. With so many quasi-experts around, what do you need IBM for? To ask the question another way, what do you need the corporate structure for?

To see how far quasi-experts can go, you only need to look at the mobile applications that businesses left and right are encouraging us all to use. There are no true experts in mobile application development; the field is too new for that. Every app you see was created by people who were “faking it,” if you want to call it that, looking things up at every step of the way. If this approach can create so many high-quality apps (along with, I must hasten to add, a greater number of low-quality ones), it can also create all the other pieces that tie the world together. It is not hard to imagine where this could be heading. After a quarter century of people solving problems of every kind just by looking things up, the role of the large corporation in connecting the world has to be called into question.

Tuesday, April 21, 2015

What the Mindfulness Study Says About the Source of Depression

A two-year clinical study of mindfulness as a treatment of depression found it to be slightly more effective than prescription drugs in preventing a recurrence of depression. This was a major study with 500 participants, and its conclusions are as credible as those that support any treatment for depression. Stories at The Telegraph and Guardian, respectively:

Mindfulness training might have been better than drugs in this study, but it was still a hit-or-miss proposition, working well barely half the time. Mindfulness might be preferred over drugs because of its lower cost and lower incidence of side effects, which for antidepressant drugs can include drastic weight gain and, less commonly, suicide. It is encouraging that mindfulness worked, but what is more interesting is the reason it worked. Apparently its success comes by making people more able to shift their focus away from depressing thoughts.

With less time spent on negative evaluations, worries, and self-doubt, patients were less likely to fall into depression. It could be that the origin of depression is often as simple as a persistent focus on negative thoughts. To the extent that this is so, it offers hope for a wider range of treatment and prevention built on other focus-shifting techniques. Maybe an approach can be found that cures depression most of the time. In an area where trial and error is the best science has to offer, that would be revolutionary.

Monday, April 20, 2015

Is the Euro This Weak?

Over the weekend, while looking for word of Greece’s fate, I found stories on Finland instead. Finland held elections and a “nationalist” party that finished in second place reportedly has a secret plan with respect to Greece and the euro. According to the plan as reported, by vetoing the bridge loan that Greece is currently seeking, combined with other political maneuvers, Finland could force Greece off of the euro. This would lead to a cascading effect, with Spain, Italy, and Cyprus following soon after. Some analysts would include Portugal and Ireland in that list. By the time the euro exits had become a parade, Finland too could abandon the euro. With the loss of five or ten countries, the euro would again be primarily a project of the Germans and the French, barely clinging to its status as an international currency. The whole joint venture might fall apart.

The euro is politically weak enough that this story sounds almost plausible. Yet the monetary union is weak indeed if its future can be vetoed by one political party in one country in a corner of the euro zone. The whole of Europe has a lot to lose if the euro goes away, particularly if you stop to think of the fees everyone would again be paying to banks. A single day of currency conversion fees in a post-euro Europe would be more expensive than the entire bridge loan Greece is currently shopping for. Financially, then, walking away from the euro doesn’t add up, and it seems likely enough that someone will eventually come up with a solution that holds the euro zone together.

Friday, April 17, 2015

This Week in Bank Failures

Greece is still seeking bridge financing from its current bondholders after being turned down by the IMF and others. The prospect of a default by Greece rattled stock markets in Europe and the United States today. Greece probably needs about $10 billion for about one year, and credit market spreads suggest that traders increasingly see that level of financing as unlikely.

Add another headache to HSBC’s long list of problems: a data leak affecting apparently about half of its U.S. legacy mortgage customers. The data leak included Social Security numbers along with account numbers and email addresses, so it is the kind of data loss that provides a foundation for fraud by criminal enterprises that purchase the leaked data. HSBC is running off its U.S. mortgage business, and this might make it look like a soft target to data thieves, based on the assumption that businesses can be reluctant to make new investments in data security for legacy operations.

Fallout continues from the long pattern of embezzlement that brought down Brazilian oil company Petrobras, with the indictment and resignation of a political party’s national treasurer. Investigators in Brazil believe that much of the stolen money was laundered through HSBC in Europe and are seeking bank records to try to identify other high officials who might have been involved. Separately, a Petrobras supplier, Grupo Schahin, has filed for bankruptcy protection and suspended offshore oil operations after being affected by the Petrobras investigation, falling oil prices, and the loss of overseas financing.

Giant banks in North America and Europe are reporting improved profits from the first quarter of 2015, based mainly on gains in currency and bond trading.

During the height of the financial crisis, BNY Mellon served as custodian for £1.5 trillion in assets for U.K. customers, and it was failing to properly account for them, raising the risk that customers could lose much of this money if the bank were to fail. The bank has agreed to pay a £126 million fine to the U.K.’s Financial Conduct Authority (FCA) and broadly improve its internal controls.

Deutsche Bank is paying yet another money laundering fine. What makes this one significant is not the size of the fine, $8 million, nor the extent of the wrongdoing, but the venue, Dubai, a place not known for vigorous investigations of banks. The fine covers not just the money-laundering activities themselves but also a multi-year cover-up by the bank, which initially ignored inquiries, then made false statements and provided fabricated reports to mislead regulators. Analysts note that bank executives failed to get involved, leaving the overseas branch to handle the problem itself even after it was clear that something criminal had gone on there. It is hardly an isolated case and seems to show that the international banks of the world have become too large to manage effectively.

Wednesday, April 15, 2015

Two Reversals


CNNMoney reacts to news that for one month, for the first time ever, U.S. consumers spent more in restaurants than at supermarkets. Their reaction is puzzling:

It's noteworthy that consumers are willing to indulge a little bit by going out to eat ... but it also suggests that the cold weather is being used too often as an excuse for weak overall spending. Wouldn't people be more likely to stay home if the frigid temperatures were really that bad?

Of course, obviously, people forced to stay home because of weather are not buying food anywhere, but are eating whatever they have at home. And if the weather improves and they can just barely get out? Then there are, on average, about ten restaurants closer than the nearest grocery. If snow and ice make the roads too dangerous for driving, would you rather walk four blocks to the nearest restaurant or thirty blocks to the nearest supermarket?

Another point to consider when looking at this comparison is the price disparity between groceries and restaurant entrees. If people are spending nearly equal amounts at restaurants and groceries, that still means they are getting four times as much food at groceries than at restaurants.


In the energy sector, Bloomberg notes, “Fossil Fuels Just Lost the Race Against Renewables.” The subtitle, “This is the beginning of the end,” might be a bit of an exaggeration, but the essential point is sound: fossil fuels are now legacy technology in the energy business.

The shift occurred in 2013, when the world added 143 gigawatts of renewable electricity capacity, compared with 141 gigawatts in new plants that burn fossil fuels, according to an analysis presented Tuesday at the Bloomberg New Energy Finance annual summit in New York. The shift will continue to accelerate, and by 2030 more than four times as much renewable capacity will be added.

The Bloomberg analysis exaggerates the potential for nuclear power, an industry already facing the limits of available uranium. Still, solar alone could eclipse fossil fuels in incremental generating capacity around five years from now.

The shift in energy generation has more to do with the declining cost of newer technologies than with the various problems of fossil fuels:

The price of wind and solar power continues to plummet, and is now on par or cheaper than grid electricity in many areas of the world.

It is easy to look at the installation numbers and think that this transition is well on its way. In fact, new energy installations each year are small compared to already installed capacity, so the transition is not so sudden as you might imagine. It could take a century or two if you extrapolate current trends. The rate of the last five years is not nearly fast enough to ultimately meet the 2-degrees-Celsius guidelines for avoiding the most expensive consequences of carbon-based global warming. Still, it is fast enough to conclude that in a commercial sense, fossil fuels are losing the race and will only decline in importance from here.

Tuesday, April 14, 2015

In Atlantic City, Bankrupt Casinos Try to Get Ready for Summer

Maybe Atlantic City just had too many casinos, yet that is a problem that may linger with casinos preparing to reopen. The financial fortunes of the city and its remaining casinos have improved since the wave of casino closings last year. This makes sense with customers not spread so thin. Strangely, the Trump Taj Mahal remains open in bankruptcy, and it has managed so far to block a plan to convert the neighboring Showboat casino into a college campus. The college plan probably has enough political support to go forward in the end. For its part, the Trump Taj Mahal may manage to limp through the summer season (presumably under a new name) before closing for good in October.

At Revel, a new owner who bought the casino for 4 percent of its construction price is racing against time to get electricity restored to the complex so that it can be cleaned up and ready to reopen for the summer. The new owner plans to expand the casino with a second tower, the one part of the original design that was never built, at a cost of $500 million or more. In an already overbuilt Atlantic City, the drive to expand will surely lead to more closings in the near future.

Monday, April 13, 2015

China Trade Decline Points to Changing Role of Manufacturing

A surprising 15 percent decline in exports from China and a similar decline in imports has analysts rethinking the conventional thinking that says manufacturing can only increase. The broader trends are still relatively rosy, with 7 percent annual growth in output expected, but that pace of growth cannot hold up in the long run if manufacturing is no longer booming.

Manufactured goods continue to occupy a prominent place in everyday life, but manufacturing can retreat in other ways, as products become more durable, versatile, mobile, and efficient. For example, if phones last for four years instead of just one, while at the same time becoming 20 percent smaller, that translates to an 80 percent decline in manufacturing for that category. The textiles category is declining with clothing increasingly seen as a durable good. With improved portability, a single machine can be put to work in more places. Increased recycling reduces the demand for new base materials such as paper and aluminum, while better repair techniques delay replacements for cars, printers, and other machines. None of these trends take away from the prominence of manufactured products, but they reduce the amount of manufacturing work.

The conventional view is that the rapid expansion of the global middle class during the first half of this century will lead to a corresponding increase in manufacturing, but if that were the case, activity in the largest manufacturing country should only be going up. A pair of metrics that say there is a 15 percent decline tell us there must be a flaw in this view.

Friday, April 10, 2015

This Week in Bank Failures

HSBC confirms it faces a formal criminal investigation in France. The bank anticipates a laundry list of criminal charges for its role in tax fraud schemes, and says it is innocent of any charges that might be forthcoming.

The bankrupt parent company of the failed Doral Bank in Puerto Rico has received court approval to sell its insurance unit in an auction.

Thursday, April 9, 2015

Why a Long Driving Commute Still Doesn’t Make Sense

Do lower gasoline prices mean you should buy a house farther out in the suburbs and commute a long distance to work? This is a suggestion that some analysts have made, but there are several reasons why it may be a bad idea.

First there is the mismatch in timing. A house is meant to stand for 75 years at least. Gasoline prices may change by 10 percent from one week to the next. When purchasing a house, you have to consider the cost of transportation between the house and all the other places you will go over the life of the house. It makes no sense to look at the price of gasoline for just this week or this year. When you look at the transportation costs associated with a house, you have to guess what the costs will be for as far into the future as you dare to imagine.

Home buyers might assume they can sell the house and buy another one if gasoline prices go up again and their plans change. This is true in a sense, but the selling price of a remote house will decline accordingly when fuel prices increase, so that the price you sell the house for may be less than you still owe on the mortgage. By the same logic, it can take years to sell a house in an area that has lost its luster. Historically, this is part of the reason why there were so many banks that failed around the outside edges of metropolitan areas around 2009. High gasoline prices between 2005 and 2008 left an overhang of abandoned houses and failed shopping centers, and the banks were left owning many of these buildings with no one to sell them to. It was a disaster for dozens of banks, but for homeowners moving out of these areas, it meant losing all the money they had put in over years of housing payments and having to start over. Who would go into a situation like that on purpose?

The other obvious problem with setting yourself up for a long driving commute is the lifestyle it leads to. The commute itself takes time and may be a source of daily stress. Studies show that workers with long driving commutes sleep fewer hours on weeknights (because they get up before 6 a.m.) and as a result are more prone to the diseases of inflammation, such as diabetes and cancer. In lifestyle terms, it makes little sense to buy an impressive house that you barely see because you are home and awake for only two or three hours every evening. A suburban house might benefit other family members, but family relationships are strained by the wage earner’s absence.

Long commutes make more sense for those who already have a place to live and are scanning a difficult job market for the best jobs they can find to dig out of their respective financial holes. Working at a job that is almost an hour away by car is typically better than not working at all. However, for those who have a stable job and can choose where to live, it doesn’t make sense to look for the most remote place they think they can afford. Fortunately, there hasn’t been a big rush of people moving to the outer suburbs in these last 13 months of reduced gasoline prices, and I don’t expect it will become a major trend in the months that remain before gasoline prices go up again.

Tuesday, April 7, 2015

Tesla Motors Sells 10,000

Tesla Motors defied the skeptics again with its first 10,000-car quarter, and at the rate it is going, it is only about a year away from being a major player in cars. Tesla has a lot going for it as it tries to double its volume again, and I’m not talking about abstractions such as confidence or momentum. It has designs that won’t need more than incremental adjustments. It has enormous manufacturing capacity, at least in terms of factory floor space and assembly robots. Skeptics point to the competition that will come along in electric cars as soon as Tesla demonstrates success on a large scale, but Tesla has a ten-year head start and a better engineering process than you can find in Detroit. It will take years for other manufacturers just getting started with electric cars to achieve the same degree of refinement.

Monday, April 6, 2015

In Indiana, an Insurrection Defeated

It didn’t take long for Indiana to patch up its right-to-bigotry law, and my guess is that this correction will ultimately stand. The interesting thing is that Indiana’s lawmakers did not make any pretense of repealing the “right to bigotry” itself. That part of the law still stands. The only purpose of the amendment was to separate the “right to bigotry” from the conduct of business, so that anyone doing business with the public can no longer use the law as a license to discriminate, and the culture-war faction can no longer openly use businesses as battlefields against their perceived enemies in American culture.

This is a big deal in a state where businesses were already starting to advertise their enemies lists — and no surprise, it was “non-Christians” who were set to suffer the most at the hands of Indiana businesses. The unfairness of this startled people, but it was the way this seemed to undermine the social contract that was most worrisome. Part of the social contract, in the United States and in most of the civilized world, is that if you conduct yourself more or less peacefully, you are free to participate in the commercial life of the community. You can, for example, go into a store and buy food. The Indiana law seemed to take that away. Could you buy pizza in Indiana if you were gay, or Muslim, or foreign? Suddenly, no one was sure. The new amendment reassures everyone that the state of Indiana is not trying to repeal the social contract, at least not openly and directly. The “right to bigotry” remains on the books in spite of the latest change, and with that, people are viewing the state government and politicians of Indiana as somewhat un-American, and rightly so. However, with the social contract reaffirmed, the crisis in Indiana is over, and now we will see a more familiar protest based on the ideals of fairness and civil rights. The protest is far from over, but it will be a little quieter than the national battle we saw last week. That was the fury of a country scorned and having to stand up to quell an insurrection.

Friday, April 3, 2015

This Week in Bank Failures

China has decided to postpone deadlines for new bank technology rules intended to protect banks from Internet spying. Even with the delay, the new rules will represent a difficult adjustment for banks in China. In the long run banks will benefit from the changes, which will reduce operating costs by reducing both the complexity of banking technology and the frequency of security incidents.

Royal Bank of Canada is selling RBC Suriname to Trinidad & Tobago-based Republic Bank. Reportedly the selling price is near the book value of the subsidiary. RBC has been slowly pulling back from its presence in the Caribbean.

The ECB quietly expanded its credit limit for banks in Greece by €1 billion, while warning the largest banks there against any increase in their domestic credit exposure.

Thursday, April 2, 2015

Waiting for Lawn Mowers

The mowing season traditionally gets started with the first weekend in April where I live, with spring weather creating the first burst of grass growth. Cooler weather may delay that by a week this year, and that’s a lucky thing, with retailers having hardly anything to sell. I looked for a new lawn mower at the web sites of home improvement stores like Home Depot and Lowes and department stores like Kmart. The online catalogs boasted dozens of models, but none that I looked at were actually available for purchase. The retailers had virtually nothing in the stores, their sites said, and even less for sale online. Warehouses nationally were depleted of most models. There was no estimate of a new supply coming in. I eventually found a unit available for sale at Walmart with a wait of one week, though there too other models were out of stock and not immediately available for order. If all goes well, I will have my new lawn mower next week. Walmart is not one of my go-to sources for anything, and it was my first purchase there since their exclusive arrangement on music CDs by Journey and Foreigner a few years ago.

It seems likely enough that lawn mowers are delayed in part by the high-profile problems at West Coast ports. I wonder too if there are problems resulting from retailers erroneously classifying lawn care as a summer activity. Lawns might be more visible in summer, but grass grows twice as fast in spring, so that half of the year’s lawn growth may occur in April and May. Whatever the reason, retailers are caught short with the season getting started. A delay of a few weeks in getting a lawn mower is no more than an inconvenience, but the fact that the supply chain hasn’t been able to keep up is a sign of how close to breaking large parts of the economy are even when things look like they’re going smoothly.