VIDEO: ECB Is `Only Game in Town’ to Help Europe Crisis

  

May 30 (Bloomberg) — Luke Spajic, head of European credit portfolio management at Pacific Investment Management Co., talks about the role of the European Central Bank in stemming the sovereign debt crisis, Greece’s euro prospects and his investment strategy. He speaks with Caroline Hyde on Bloomberg Television’s “The Pulse.” (Source: Bloomberg)

VIDEO: Argentines Suffer as Leaders Eschew Free Market Model

  

In Argentina the Apple computer stores are almost empty. Imported Parma hams, and French cheeses, are not being allowed into the country. Even vital materials for Argentina’s automobile and pharmaceutical industries are unavailable.

It’s all part of government crackdown on foreign imports to the country to stimulate local industry and protect the trade balance.

Al Jazeera’s Lucia Newman reports from Buenos Aires.

Be Fully Loaded for Retirement

  

If you’re thinking about retirement, make sure you’ve got a plan to get out of debt. The best case scenario would be to retire without any debt and to keep it that way. If you’re still working and you have debt, then try to work it down to nothing if you can. Once you retire, getting out of debt is a daunting task. Believe me when I tell you that unexpected costs come up and you end up spending more than you had hoped to spend. “I worked my whole life for this” seems to justify a lot of expenses in early retirement.

If you do find you’re struggling to get out of debt and you’re already retired, then make a plan. I like the idea of relieving as much stress as possible. Think about paying down your debt in chunks over five years. Don’t beat yourself up trying to do it all at once. Smooth, measured decisions are much better than hacking and swinging aimlessly. It’s OK if five years isn’t enough. Make it 10 years. But do make a plan and stick to it.

Paying 4% in interest costs when you’re earning about 0% in your savings accounts makes debt all the more painful. Yes, I like the idea of refinancing your home at a lower rate. But I like the idea of your owning your house outright even better. After seeing the banking debacle of 2008, who wants to partner with a bank? I know I don’t, and I plan on owning my house outright by 2022.

Don’t Miss the Boat this Summer

  

You will have plenty to see and do in Newport, RI this summer.

Fresh Breeze for Newport
By DEBORAH MARCHINI| Friday, May 18, 2012| Barron’s Online
The America’s Cup World Series, promising lots of thrills, chills, and spills in fast, small boats, is coming this summer to the Rhode Island resort famous for sailing — and huge showplace “cottages” put up by the Gilded Age elite.

Where salty breezes blow, money often follows. Europeans have the French Riviera. Asians have Bali. The American equivalent may well be Newport.

As far back as the 1800s, this Rhode Island coastal town was a favored summer resort for prosperous Southerners trying to flee the heat. Later came still-wealthier members of New York society; the cream of Mrs. Astor’s 400 whiled away July in the era before air conditioning. One could call it the Hamptons of the Gilded Age, except that the wealth on display in Newport makes today’s Hamptons look downright democratic.

New England’s Riviera has more than warm breezes going for it. The bluffs make a magnificent showcase for impressive houses. The Atlantic delivers up fresh seafood daily. And thanks to an accident of geography, the region is full of sheltered harbors that lead to wide open bays, eventually flowing all the way to the Atlantic. Which is why, if you enter the phrase “sailing capital of the world” into a search engine, Newport is the first thing to pop up.

Well, Newport and its sailors are about to get a lot of attention. The region will soon be the site of a series of special races designed to make competitive sailing, once the exclusive province of the fabulously wealthy, into a spectator sport for the masses. As Keith Stokes of the Rhode Island Economic Development Corp. describes it, “It looks as much like Nascar as sailing. A lot of spills, a lot of thrills, a lot of excitement.”

A few Newport dowagers must be nervously knotting their pearls. Not Nascar, but the Formula One of sailing, the America’s Cup, is what one normally associates with Newport. The America’s Cup famously pits the best designers and seafarers the world over against each other, and is run every three to four years in the home port of the ship that last won the trophy. For much of the 1930s through to 1983, the cup resided in Newport, until Australia took the title. In 2010, Larry Ellison and his BMW Oracle Racing Team won it back for the U.S.; Oracle will defend the cup in September 2013 at the Golden Gate Yacht Club in San Francisco Bay.

To generate new interest in the sport, the America’s Cup Event Authority has cooked up a World Series of sailing, using smaller versions of double-hulled racing boats called catamarans, in 16 regattas world-wide. And the last of these, running June 26 through July 1, will take place between Newport and its sister island, Conanicut, better known for the village of Jamestown. Unlike other regattas, this one features shorter races — lasting 20 to 40 minutes — that are visible from dry land, namely the bleachers and skyboxes at Fort Adams, where a major spectator setup is under construction (AmericasCup.com). The facility will make heavy use of technology — including video feeds from helicopters and boats, and graphics showing who’s ahead and by how much. Paul Harden, executive director of America’s Cup Rhode Island, compares the result with “going to a football game, and watching a lot of the plays on the JumboTron.”

If Newport had a spectator sport before sailing, it was social climbing, with the winners — and losers — chronicled in the society pages of the New York Times and elsewhere, followed as avidly as today’s celebrities. The monuments to this sport take the form of “cottages” built by the supremely wealthy for the sole purpose of entertaining one another during the six-week summer season, and showing off in the bargain.

Precisely what was a “cottage”? The grandest, with 70 rooms, is the Breakers, summer home of Cornelius Vanderbilt II. Cornelius wasn’t taking any chances. Because the original Breakers burned to the ground in 1892, no wood was used in the structural elements of its replacement — just stone, brick, and steel. Rooms were constructed in Paris, from paneling to pilasters, and shipped to Newport. Silverware had to be stored in a vault 10 feet deep. Bathroom taps ran both rain and salt water, warm or cold. The inspiration for the Breakers was to outshine the cottage built by brother William and his wife Alva out of 500,000 cubic feet of marble, creatively christened Marble House.

Trudy Coxe, chief executive of the Preservation Society of Newport County, is dedicated to keeping all the cottages in good repair and open to the public. A typical summer entertainment budget, she says, was $300,000 in today’s dollars, and the season required genteel women to bring from Paris perhaps a dozen custom dresses, including designs by Charles Frederick Worth, the Karl Lagerfeld of his day. “It was competitive,” says Coxe, “not only what Newport ‘outsiders’ you had at your parties, but the theme of the parties — Harry Houdini, Mother Goose — and the party favors: maybe silver buckets of sand with gems hidden inside.” She adds, “Can you imagine the gossip?”

Fortunately, you don’t have to. Self-guided audio tours will tell you, in the residents’ own words, the secrets used by Alva Vanderbilt to prep her daughter Consuelo for marriage to royalty. Modern royalty may arrange a private tour, as Tyra Banks and some Harvard classmates recently did. For the truly flush, some of the cottages can be rented for private functions (NewportMansions.org).

Of course, all things must come to an end. The advent of the income tax in 1913 made the cottages of Newport expensive to keep up, even for a Vanderbilt, and when the market crashed in 1929, the glory faded. Still, wealth continued to migrate to Newport, even if in more modest waves, and even in our Nascar Age.

Rough Point, for example, was the oceanfront home of tobacco heiress Doris Duke, and is now a museum in its own right. Before her death in 1993, Duke filled it with antique furniture, art, and Ming porcelain that would be impossible to acquire today. The Newport Restoration Foundation (NewportRestoration.org) oversees Rough Point and some 80 other historic buildings Duke was active in preserving, and it arranges tours. The museum’s exhibits mirror Duke’s interests; currently the focus is on her love of international travel. Although, as director of collections Bruce MacLeish notes, while the art may be authentic, “Not all the Louis Vuitton luggage is the real thing. Some are knockoffs, probably bought by the butler.”

Duke kept a low profile compared with Newport’s earlier residents. Today, many do the same. You’d have to follow a paper trail as long as Bellevue Ave. to confirm what everyone seems to know; Oracle co-founder and CEO Ellison owns Beechwood, former home of the formidable Mrs. Astor. It’s locally reported he is planning to convert the first level into a museum for his art collection, the upper floors into a residence.

Those who want even more privacy decamp to Jamestown, on the mile-wide island between Newport and the mainland. Musician James Taylor rented last year on the eastern shore, facing Newport. Homes in exclusive areas like Shoreby Hill or the Dumplings go for $7,000 to $10,000 and more for the week of the America’s Cup World Series, and provide views of the races. There is little in the way of lodging in Jamestown, which helps it retain its exclusive and reclusive aura. Dan Shapiro of Island Realty (islandrealtyri.com) seems to speak for the locals when he says, “People drive over the bridge to Newport, and they just totally miss this, and it’s so wonderful that they do.”

Of course, probably the best way to visit Jamestown or Newport is to bring your own boat. Picturesque, quiet marinas abound (portbook.net). And then there’s Newport Harbor’s newest boutique hotel for boat owners, Forty 1° North (41north.com). Rooms priced from $550 to $1,500 per night in the summer are decorated in a style perhaps best described as “militant green.” Paper is frowned on; newspapers and room-service menus are all summoned up on the room’s iPad and iPod.

If you’re more salty dog than eco-friendly hipster, go directly to the marina and adjoining bar. The docks have handled yachts up to 250 feet. Folks there will swab the decks while you see the sights, then serve you dinner onboard from the Grill — where the crisp truffled fries are de rigueur.

Left your boat in Bermuda? Seascope Yacht Charters (seascopenewport.com) is among several outfits that will take you sailing — on a fully restored, America’s Cup yacht from days of old. For those who want to stay in a Newport “cottage,” the Chanler at Cliff Walk offers rooms done up like period-piece stage sets; the “beach butler” will drive you to the waterfront and set you up with chairs and lunch. In season, such luxury will run you $649 to $1,599 a night. The complimentary transportation to town saves tussling over parking.

Downtown is worth a trip. Rhode Island has become a dining destination, where local fish and seafood often wind up on local plates the same day. That was a big draw for Chef Jake Rojas, a California transplant who opened Newport’s Tallulah on Thames. The menu changes depending on sources and seasons; on a recent visit, local butternut squash was the basis for a delicate velouté, a classic French sauce, and the fluke flopped in from Block Island Sound. The purveyor of every entrée was listed on the menu.

One island over, Jamestown Fish has folks hooked. Chef Matt MacCartney survived three stints working for Top Chef’s top judge, Tom Colicchio, including at Craft and Gramercy Tavern, and came to Jamestown partly to be closer to his food source. “We have commercial fishermen on the island we’ve become friendly with,” he says. The linguine with clam sauce is this writer’s all-time favorite anywhere, while a seafood stew similarly draws raves.

Other ways to play high society include a game of tennis on grass courts at the International Tennis Hall of Fame (tennisfame.com); the Newport International Polo Series (nptpolo.com); Tall Ships to be seen in early July; and, finally, for the musically inclined, the classical Newport Music Festival (newportmusic.org) or a swing through the Newport Jazz Festival (newportjazzfest.net).

Or one could simply attend “A Weekend of Coaching,” Aug. 16-19, sponsored by the Preservation Society. Unknown to most, Coaching was a 19th-century sport, that largely involved dressing up and joining your friends in a horse-and-buggy convoy. The point of which, so fittingly for Newport, was to see and be seen.

JP Morgan Proves Case against more Bank Regulation

  

Emboldened by JP Morgan’s $2 $3billion trading loss, proponents of the Volcker rule (provision in Dodd-Frank to restrict banks from making speculative investments) are calling for even tougher financial regulation. Treasury Secretary Geithner said of Morgan’s loss: “this failure of risk management is a powerful case for reform.” And in a letter to regulators, Senators Carl Levin and Jeff Merkley wrote:

The massive failed bet by JPMorgan Chase provides a stark reminder why we desperately need your agencies to implement the Volcker Rule—a modern Glass-Steagall firewall that separates our core banking system from high-risk, hedge fund-style proprietary trading. We again urge you to remove ill-advised loopholes and implement a strong Volcker Rule without further delay.

Proprietary trading positions led to billions of dollars in losses during the financial crisis and threatened the collapse of many key institutions. Taxpayers had to bail out these big banks to prevent the economy from further collapsing into depression. Even without the bailouts several banks had damaged themselves so badly that they remained crippled, leaving far too many American businesses and families without the credit they need to prosper.

With this type of revisionist history, Senators Levin and Merkley want voters to believe that a Volcker Rule could have prevented the financial crisis, but nothing could be further from the truth.

The big institutions that failed during the financial crisis were not depository institutions. They were investment banks (Lehman and Bear Stearns)—the very institutions that Glass-Steagall helped create—and AIG, an insurance company. After Lehman failed and Bank of America bought Merrill Lynch, it was the repeal of Glass-Steagall that allowed Morgan Stanley and Goldman Sachs to convert to commercial banks to ensure their survival. The commercial banks that did fail during the crisis failed because they made bad loans, not because of “hedge fund-style proprietary trading.”  

Which brings me to the JPMorgan loss. JPMorgan is the nation’s largest bank, with over $2.3 trillion in assets. A $2–3 billion trading loss is equal to .08% of the company’s assets. JPMorgan loses $2 billion on bad loans almost every quarter. In 2010, the company lost more than $23 billion on bad loans. I don’t recall hearing from Senators Levin and Merkley then.

I am not trying to excuse JPMorgan for its bad trades. And I think that if the federal government is going to provide deposit insurance to the banking system, there should be capital requirements and limits on trading.

But financial regulation is no panacea. Glass-Steagall wouldn’t have prevented the most recent financial crisis, and it failed to prevent others. The better approach to strengthening the U.S. financial system is not more but less financial regulation. Why not drastically scale back or even eliminate federal deposit insurance?

Deposit insurance eliminates market discipline from the banking system. Because depositors know their money is guaranteed by the full-faith-and-credit pledge of the U.S. Government, the deposit market doesn’t distinguish between risky banks and conservative banks. All FDIC insured institutions can borrow from depositors at about the same interest rate.  

If depositors’ money was at risk, they would favor banks with the strongest balance sheets and eschew banks like JPMorgan that engage in speculative trading. It is instructive to note that, prior to the creation of the Federal Deposit Insurance Corporation in 1933, banks held much more capital (see chart) and invested customer deposits much more conservatively. Without the safety net of the federal government, the market takes on the role of bank regulator.

Wouldn’t you rather entrust the safety and soundness of the financial system to the collective wisdom of millions of depositors (the market) than to a small team of bank regulators—many with aspirations of joining the very industry they are tasked with regulating?

Don’t Make this Mistake

  

In this low-yield market, it’s easy to be thrown off your game. You know money markets are paying nothing, and your dollars are rotting away via inflation. So when you read or hear about annuities guaranteeing 6% or 8%, it’s hard not to listen up.

Well, that’s a mistake. Do not buy variable annuities and the promises they make. Once you venture down this road, you’re likely to end up with an expensive product you shouldn’t own. It’s hard to resist the bells and whistles like inflation protection. But that and other add-ons tack on costs well beyond what you may have bargained for prior to making the phone call to your broker.

Here’s a rule of thumb: If it sounds too good to be true, then it is. There are ways to invest successfully in this market for yield without buying an annuity. You’d be smart to do your homework before getting stuck with one of these.

The Commodities Whale

  

In a recent IMF working paper, author Shaun K. Roache provides readers with some valuable insight on China’s role in world commodity markets. It is no secret that China is a whale in the commodities space, but Mr. Roache helps readers understand just how much of an outlier China’s commodities consumption is when compared to the historical record.  The title of the paper is China’s Impact on World Commodity Markets.

2.1. Long-term structural trends

China is a large consumer of a broad range of primary commodities. As a percent of global production, China’s consumption during 2010 accounted for about 20 percent of non-renewable energy resources, 23 percent of major agricultural crops, and 40 percent of base metals. These market shares have increased sharply since 2000, mainly reflecting China’s rapid economic growth. History has shown that as countries become richer, their commodity consumption rises at an increasing rate before eventually stabilizing at much higher levels. This is often described as the S-curve.

But this cannot explain all of the increase in China’s commodity consumption. China’s commodity intensity of demand has been growing particularly fast and is now unusually high. Intensity is sometimes measured by commodity consumption per capita and this is shown, alongside real GDP per capita, for China and five other G-20 economies since 1980 for energy and 1960 for metals in Figure 2. Moving along the line in a northeast/ east direction traces the evolution of commodity intensity forward through time, from the first year in the sample to 2009. Based on this small sample of countries, China’s energy consumption is shown to be relatively high given its stage of economic development. For example, China consumes about 35 percent more than Korea and twice the level of Brazil at comparable income levels. The difference is even larger for base metals, where China consumes significantly more than Korea and Brazil at the same income.

China’s unusually fast growing commodity intensity likely reflects the rapid expansion in the tradable export sector and large-scale fixed asset investment—particularly since 2000 (Yu, 2011). Both activities are commodity intensive. For example, Ye (2008) estimates that just over ½ of China’s copper usage is accounted for by infrastructure investment and construction, with ⅓ accounted for by consumer and industrial goods. It is beyond the scope of this paper to assess the root causes of China’s structure of economic growth and the high commodity intensity that results, but previous studies have highlighted the role of structural factors and domestic policy distortions (IMF, 2011a).

Stocks for the Long-Run

  

Jeremy Siegel, the famous Wharton School finance professor coined the phrase “stocks for the long-run” with his identically titled 1994 best seller, Stocks for the Long Run: The Definitive Guide to Financial Market Returns and Long-term Investment Strategies. In the book, professor Siegel looks back at up to two centuries of financial market history to support his claim that stocks are the most profitable long-term investments. And indeed his conclusion has been true.

But the good professor failed to adequately warn investors that the long run can be a really long time. Check out my stock market charts on Spain, Italy, and Greece.

Spanish stock prices are no higher than they were 13 years ago. That is a long time to forego capital gains, but in comparison to the performance of Italian and Greek stocks, the Spanish stock market looks like a winner. Italian stock prices are no higher than they were in 1986—that’s 26 years without a capital gain. And Greek stocks don’t look much better. The MSCI Greece index has done a round-trip over the last two decades. How do you think an Italian investor who retired in the late 1980s would have fared with a portfolio invested entirely in stocks?

Siegel may be right about the long run profitability of stocks, but the famous British economist John Maynard Keynes warned us long ago that “In the long run, we are all dead.”

Diversification and balance (as in bonds) remain vital to your short and long run investment success.