WEBVTT - P&L: Making America Great Again Will Need a Weaker Dollar 0:00:04.760 --> 0:00:07.720 Welcome to the Bloomberg P and L Podcast. I'm Pim 0:00:07.800 --> 0:00:11.080 Fox along with my co host Lisa Abramowitz. Each day 0:00:11.119 --> 0:00:14.360 we bring you the most important, noteworthy, and useful interviews 0:00:14.400 --> 0:00:16.280 for you and your money, whether you're at the grocery 0:00:16.320 --> 0:00:19.360 store or the trading floor. Find the Bloomberg P L 0:00:19.480 --> 0:00:27.920 Podcast on iTunes, SoundCloud and at Bloomberg dot com. I 0:00:27.960 --> 0:00:31.800 want to turn back to the currency market since since uh, frankly, 0:00:31.880 --> 0:00:33.960 that's where a lot of the action has been and 0:00:34.040 --> 0:00:36.960 that seems to be driving a lot of flows around 0:00:37.080 --> 0:00:39.440 the world. I want to bring in Doug Borthwick, who 0:00:39.479 --> 0:00:42.040 is Managing director and head of f X at Chapter 0:00:42.159 --> 0:00:45.200 Lane and Company. UM. I want to start with China. 0:00:45.440 --> 0:00:47.720 I know the dollar has been the big story because 0:00:47.760 --> 0:00:50.760 of how strong it has gotten, but China seems to 0:00:50.800 --> 0:00:55.000 be one of the big wild cards of how quickly 0:00:55.120 --> 0:00:59.800 will it allow the un to depreciate? Um, Doug, what's 0:00:59.840 --> 0:01:03.640 your a forecast for next year? And then? Well, I 0:01:03.640 --> 0:01:06.000 think that China has been the whipping why this year, 0:01:06.040 --> 0:01:09.840 but maybe not necessarily, maybe it shouldn't have been. I 0:01:09.880 --> 0:01:12.840 think that certainly this year dollar China has moved up 0:01:12.840 --> 0:01:15.680 by seven percent, So China in effect, is divided by 0:01:15.720 --> 0:01:19.000 seven percent, but somewhere like you know, Switzerland's divided by 0:01:19.000 --> 0:01:21.960 three and no one's pointing fingers there. Over the last 0:01:22.040 --> 0:01:26.839 five years, the yen has depreciated by and China only nine. 0:01:28.200 --> 0:01:31.760 And yet China is pointed to and people say, you 0:01:31.840 --> 0:01:34.160 know that this is a currency that's being allowed to 0:01:34.160 --> 0:01:36.959 to weaken considerably, whereas the Japanese are being given the 0:01:37.000 --> 0:01:39.480 okay by G twenty to allow their currency to weken by. 0:01:40.760 --> 0:01:42.840 There seems to be sort of a double standard when 0:01:42.840 --> 0:01:45.639 it comes down to what currencies are doing around the world. 0:01:46.080 --> 0:01:49.480 And now dollar China trades nowadays based off of where 0:01:49.560 --> 0:01:52.680 the dollar is trading in general, because China obviously trades 0:01:52.720 --> 0:01:55.000 off of a basket. So if you see a stronger 0:01:55.080 --> 0:01:57.480 dollar globally in the dollar strengthens versus the euro, and 0:01:57.480 --> 0:02:00.240 the dollar strengthens versus the yen, it expected to strength 0:02:00.240 --> 0:02:04.600 and considerably against China. Now, our review certainly is that 0:02:04.960 --> 0:02:07.960 the dollar going forward into the next year will probably 0:02:08.000 --> 0:02:10.440 be plateauing around the levels we're seeing here. As the 0:02:10.480 --> 0:02:15.480 excitement and fraudness over the new administration sort of shart 0:02:15.560 --> 0:02:17.760 starts to turn over with the reality of what happens 0:02:17.760 --> 0:02:20.239 in Washington, how you expect to see the dollar to 0:02:20.280 --> 0:02:23.080 start to weaken versus the yen and also versus the euro. 0:02:23.880 --> 0:02:25.840 If that is to happen, then you'll see the dollars 0:02:25.840 --> 0:02:28.000 start to weaken against China, and you'll see a sort 0:02:28.000 --> 0:02:29.960 of a move back. There's one thing that we are 0:02:30.000 --> 0:02:33.680 concerned about, and that is extreme dollar strength is negative 0:02:33.720 --> 0:02:36.119 for the world in a number of different ways. One 0:02:36.160 --> 0:02:41.160 extreme dollar strength, they will probably not help President elect 0:02:41.240 --> 0:02:44.240 Trump when it comes down to his policies of exporting 0:02:44.240 --> 0:02:48.720 more US goods and employing more US you know, uh workers. 0:02:49.320 --> 0:02:52.920 Another thing the strong dollar does in Asia specifically, as 0:02:53.000 --> 0:02:55.360 it means that you know, the dollar rises versus Korea, 0:02:55.520 --> 0:03:00.520 versus Taiwan, versus Thailand, Indonesia, all emerging mark its currencies 0:03:00.560 --> 0:03:03.280 start to weaken considerably. When that happens, they have trouble 0:03:03.320 --> 0:03:06.799 and paying back their US dollar denominated debts. And when 0:03:06.800 --> 0:03:09.840 that happens, you get another emerging markets crisis. So we 0:03:09.880 --> 0:03:12.800 believe strongly that that while a strong dollar may have 0:03:12.880 --> 0:03:15.840 been in the US interest in terms of making America 0:03:15.919 --> 0:03:18.560 great again, a weaker dollar may actually be more important. 0:03:19.480 --> 0:03:21.320 Dog Borthark, I just want to push back a little 0:03:21.320 --> 0:03:24.000 bit on your sort of description of China as a 0:03:24.000 --> 0:03:28.600 whipping boy for currency manipulation, bringing in Japan and Switzerland. 0:03:28.600 --> 0:03:32.160 I mean, the Chinese have the highest trade surplus with 0:03:32.360 --> 0:03:36.400 the United States, the Netherlands, India, Vietnam, United Kingdom, Singapore. 0:03:36.440 --> 0:03:40.040 There's no, uh, there's no switzerlanda on that list. I 0:03:40.040 --> 0:03:42.040 mean the reason isn't it political? I mean, you're a 0:03:42.040 --> 0:03:44.080 currency trader. A lot of this has to do with 0:03:44.120 --> 0:03:48.040 just plain politics. I think plain politics is a huge 0:03:48.120 --> 0:03:50.760 part of all this. And one thing we have seen 0:03:51.160 --> 0:03:53.320 over the last five years in terms of where's the 0:03:53.400 --> 0:03:55.920 sphere of influence moving, it's certainly moving away from the 0:03:56.000 --> 0:03:59.760 US and towards China, especially on a trade basis. I say, 0:04:00.000 --> 0:04:02.040 five years ago, or well, let's say ten years ago, 0:04:02.080 --> 0:04:03.920 the US was the number one or number two trading 0:04:03.920 --> 0:04:06.400 partner pretty much for every country around the world, and 0:04:06.560 --> 0:04:09.480 China's now taken that spot. And that's something that's I 0:04:09.480 --> 0:04:12.360 think of considerable interest, not just when it comes down 0:04:12.400 --> 0:04:14.760 to currencies, but also when it comes down to matters 0:04:14.800 --> 0:04:17.159 at the U N matters when it comes down to 0:04:17.160 --> 0:04:20.680 talking about trade in that China now has much bigger 0:04:20.720 --> 0:04:23.560 say at the table because you normally vote with your 0:04:23.640 --> 0:04:27.000 largest trading partner and not necessarily with um, you know, 0:04:27.200 --> 0:04:29.000 the night the guy sitting next to you. But this 0:04:29.040 --> 0:04:31.720 has been going on since I mean, this has been 0:04:31.760 --> 0:04:34.640 going on since since two thousand thirteen. Right, China was 0:04:34.640 --> 0:04:38.279 the largest trading nation in the world as of then. 0:04:38.440 --> 0:04:41.200 We're talking about like almost two trillion dollars, more than 0:04:41.200 --> 0:04:43.440 two trillion dollars worth of stuff, and that doesn't even 0:04:43.440 --> 0:04:47.640 include foreign investments. That's right. Well, you know, I guess 0:04:47.839 --> 0:04:50.280 I'm trying to think about it from a trader's perspective. 0:04:50.320 --> 0:04:53.239 I mean, the political sphere right now is is pretty foggy. 0:04:53.279 --> 0:04:55.120 It's hard to get a clear sense of what exactly 0:04:55.160 --> 0:04:56.680 is going to happen in the next three months, let 0:04:56.720 --> 0:04:59.920 alone year. Um. But certainly we are getting a clear 0:05:00.080 --> 0:05:01.880 sense from the Federal Reserve that they are going to 0:05:02.000 --> 0:05:04.440 hike rate at a faster pace than people have been 0:05:04.440 --> 0:05:07.440 expecting back in September. Do you think that if the 0:05:07.480 --> 0:05:10.120 Fed does go through with three rate hikes next year, 0:05:10.480 --> 0:05:13.839 that will lead the dollar higher than sort of this 0:05:13.960 --> 0:05:16.279 level that we're at right now. I think the level 0:05:16.279 --> 0:05:18.840 that we're right now is looking at that information of 0:05:18.880 --> 0:05:22.000 the three rate hikes and is pondering it. I think 0:05:22.040 --> 0:05:25.080 that three rate hikes would be rather aggressive, given that 0:05:25.120 --> 0:05:27.400 we've had two rate hikes in the last two years, 0:05:27.400 --> 0:05:29.400 so saying that they will have three next year seems 0:05:29.480 --> 0:05:31.919 rather bullish. But then again, the FEDS always pushed this 0:05:31.960 --> 0:05:34.160 sort of very bullish game of the U s economy 0:05:34.560 --> 0:05:38.120 and then ended up sort of changing their opinions as 0:05:38.160 --> 0:05:41.360 time goes on. I think that what's what's really interesting 0:05:41.440 --> 0:05:44.479 is you've seen the US tenure moved from this one 0:05:44.680 --> 0:05:47.279 forty in mid two thousand and sixteen not to what 0:05:47.360 --> 0:05:51.320 two fifty five today. That's a huge move in ten years. 0:05:51.760 --> 0:05:53.080 And I think that you know, there's a lot of 0:05:53.120 --> 0:05:55.960 interest rate rises that are maybe priced into this this curve. 0:05:56.480 --> 0:05:58.039 But if the US wants to do a number of 0:05:58.040 --> 0:06:00.240 things that is, issued debts so they can get into 0:06:00.240 --> 0:06:03.400 infrastructure spending, they'd probably rather a lower interest rate than 0:06:03.440 --> 0:06:06.440 a higher interest rate. And also, if the FED was 0:06:06.480 --> 0:06:08.680 to be as aggressive as people are expecting, or the 0:06:08.720 --> 0:06:11.279 FED is certainly said, I think you would see a 0:06:11.279 --> 0:06:14.680 stronger dollar at least a stable around these levels. But 0:06:14.720 --> 0:06:16.200 I think that there's one thing we've seen in the 0:06:16.279 --> 0:06:18.320 US economy, and that is that it tends to disappoint 0:06:18.360 --> 0:06:21.120 relatives at bad expectations. I want to thank you very 0:06:21.160 --> 0:06:23.800 much for joining us Douglas Boorthwick as managing director ahead 0:06:23.839 --> 0:06:38.200 of FFX at Chapter Lane and Company. Well, there might 0:06:38.200 --> 0:06:40.560 not be that much going on in in sort of 0:06:40.560 --> 0:06:43.440 the corporate news world, but there is quite a bit 0:06:43.480 --> 0:06:46.359 going on in the legal world. I'm looking in this 0:06:46.480 --> 0:06:52.320 instance at the lawsuit the charge of UH the federal prosecutors. 0:06:53.000 --> 0:06:55.880 Basically the co founder of the bankrupt hedge fund Platinum. 0:06:55.880 --> 0:07:01.200 Platinum Partners. UH was charged with what federal prosecutors said 0:07:01.240 --> 0:07:04.400 was a one billion dollar fraud resembling a Ponzi scheme. 0:07:04.400 --> 0:07:07.080 I want to bring in Zeke Fox, a Bloomberg News reporter, 0:07:07.600 --> 0:07:11.040 to elaborate on what exactly this case is all about. 0:07:11.120 --> 0:07:17.000 Zeke High Um. Yes, So, Platinum Partners is a hedge 0:07:17.040 --> 0:07:20.120 fund that manages, or at least claim to manage, more 0:07:20.160 --> 0:07:24.680 than a billion dollars, and up until last year, it 0:07:24.720 --> 0:07:26.480 looked like it was one of the most successful hedge 0:07:26.480 --> 0:07:30.560 funds in the world. It had reported games on average 0:07:30.600 --> 0:07:33.480 since two thousand and three, with no down years and 0:07:33.520 --> 0:07:36.640 only actually a few down months. Um. Now it all 0:07:36.640 --> 0:07:41.080 started to come unraveled this summer when one of its 0:07:41.280 --> 0:07:46.080 managers was arrested for allegedly bribing a union official to 0:07:46.200 --> 0:07:49.440 invest and people start to think, if this fund is 0:07:49.440 --> 0:07:51.120 so good, why do they have to bribe people to 0:07:51.200 --> 0:07:55.040 invest in it? And now apparently we have the answer. Uh. 0:07:55.280 --> 0:07:59.440 The other managers of the fund got arrested or charged 0:07:59.600 --> 0:08:02.640 today by a grand jury, and prosecutors are saying that 0:08:02.840 --> 0:08:06.080 the fund wasn't really doing as well as it claimed. Well, 0:08:06.160 --> 0:08:08.560 how much money was potentially lost as a result of 0:08:08.600 --> 0:08:11.440 this uh ponzi leg scheme? That or at least that's 0:08:11.440 --> 0:08:15.400 how it's described by prosecutors. So in investors, you know, 0:08:15.800 --> 0:08:20.600 they're still getting uh their statements saying that they have 0:08:20.840 --> 0:08:23.360 you know, a total of one point four billion dollars 0:08:23.400 --> 0:08:27.240 in there. Now. After the first arrest this summer, the 0:08:27.320 --> 0:08:32.480 hedge fund closed, said it was entered bankruptcy protection and 0:08:32.480 --> 0:08:35.079 said it was going to liquidate its position slowly and 0:08:35.160 --> 0:08:38.280 distribute the money to investors. So just because it's bankrupt 0:08:38.280 --> 0:08:40.559 doesn't mean it went to zero. Um, but we really 0:08:40.600 --> 0:08:43.280 have no idea what investors will get back, and this 0:08:43.559 --> 0:08:46.360 arrest is certainly today is certainly not a good sign. 0:08:46.960 --> 0:08:52.920 Zeke aren't there controls in place to prevent funds from 0:08:52.960 --> 0:08:57.200 misrepresenting the information that they give out about their performance 0:08:57.280 --> 0:09:01.160 as well as the amount of money that they manage. Yes. 0:09:01.280 --> 0:09:04.600 So the way they were able to perhaps flip through 0:09:04.640 --> 0:09:08.400 the cracks is that their fund, unlike most funds, was 0:09:08.440 --> 0:09:11.319 made up of very ill liquid, hard to value investment, 0:09:11.840 --> 0:09:14.640 you know, like oil wells or just things that weren't traded, 0:09:15.040 --> 0:09:18.480 so they would get in California I believe, is the 0:09:18.559 --> 0:09:21.800 specific instance correct. Yes, So they had one of their 0:09:21.800 --> 0:09:24.719 biggest assets was the string of oil wells in California. 0:09:25.200 --> 0:09:28.120 They were claiming it's worth hundreds of millions of dollars UM. 0:09:28.120 --> 0:09:30.520 And I actually when it investigated this earlier this year 0:09:30.520 --> 0:09:35.559 and found that they basically never produced any oil um. 0:09:35.559 --> 0:09:38.400 But because this is a private company, it's not something 0:09:38.440 --> 0:09:42.400 that the SEC is really checking out UM, and the 0:09:42.480 --> 0:09:45.280 auditors when they audit the books are sort of relying 0:09:45.320 --> 0:09:48.079 on all these third party reports that say, oh, the 0:09:48.120 --> 0:09:50.360 oil well has a lot of potential or things like that. 0:09:50.400 --> 0:09:53.240 So it's just a little harder to uh see that 0:09:53.360 --> 0:09:57.120 they weren't getting the returns that that they claimed. And 0:09:57.120 --> 0:09:58.960 I'm sure they're going to try and argue that these 0:09:58.960 --> 0:10:02.760 things really are valuable, and that the prosecutors are wrong, 0:10:02.880 --> 0:10:06.160 that that they are worthless, and that the fund is 0:10:06.160 --> 0:10:08.600 a fraud. Who are who? As of the clients are 0:10:08.640 --> 0:10:11.360 the types of clients that could be on the hook 0:10:11.400 --> 0:10:14.040 for some potential losses if these things, if the assets 0:10:14.040 --> 0:10:18.480 are not as valuable as the hedge fund managers say. Well. 0:10:18.480 --> 0:10:22.240 The first is the New York City Prison Guards Union. 0:10:22.679 --> 0:10:26.760 That's the pension fund that its manager allegedly took a 0:10:26.840 --> 0:10:29.440 bribe to put tens of millions of dollars into this 0:10:29.520 --> 0:10:34.640 hedge fund, Norman Seabrook. That's right, um, and he was 0:10:35.040 --> 0:10:38.880 arrested as well. Most of the other investors are wealthy individuals. 0:10:39.360 --> 0:10:43.520 The managers of fund were very well known among the 0:10:43.559 --> 0:10:47.040 New York's Orthodox Jewish community, and many of the investors 0:10:47.040 --> 0:10:49.080 are people that knew from their charity work or just 0:10:49.160 --> 0:10:53.160 other prominent Orthodox Jews. They didn't attract a lot of 0:10:53.200 --> 0:10:59.480 investment from other big pension funds. I think because the 0:10:59.520 --> 0:11:02.160 pension on consultants I showed it to said that there 0:11:02.160 --> 0:11:05.000 are already so many red flags with this funds that 0:11:05.040 --> 0:11:07.360 would be hard to get a big institution to invest 0:11:07.720 --> 0:11:10.160 what kinds of red flags. I mean, other than the 0:11:10.200 --> 0:11:14.640 fact that that they invested in only highly liquid assets 0:11:14.640 --> 0:11:18.920 that were hard to check out. It's hard to know 0:11:18.920 --> 0:11:23.559 where to start. So I first, uh, I've been investing 0:11:23.559 --> 0:11:26.280 in these guys for a few years. They invest in 0:11:26.320 --> 0:11:29.160 all sorts of random things, and often the things go poorly, 0:11:29.800 --> 0:11:33.000 even though they're always saying they make money. UM. An 0:11:33.000 --> 0:11:38.040 example is this is a few years ago, they invested 0:11:38.080 --> 0:11:40.360 in this sort of they found this what they thought 0:11:40.360 --> 0:11:47.400 was a loophole in variable annuity contracts. They essentially got 0:11:47.400 --> 0:11:52.120 hospice patients to sign up for veriable annuities using the 0:11:52.200 --> 0:11:55.079 hedge funds money. And it was the idea was that 0:11:55.240 --> 0:11:57.760 there was like a sign up bonus and if the 0:11:57.800 --> 0:12:00.840 patients died quickly, they could earn a sign up bonus 0:12:01.720 --> 0:12:04.240 for the hedge fund. They ended up getting in trouble 0:12:04.240 --> 0:12:07.400 with the sec for this UM it was not a 0:12:07.440 --> 0:12:10.320 loophole as they thought. So there's like a million little 0:12:10.360 --> 0:12:13.400 stories like this, and I think some people start the 0:12:13.480 --> 0:12:15.840 question is if they're always trying to operating in these 0:12:15.880 --> 0:12:18.360 gray areas, are they really going to be honest with 0:12:18.440 --> 0:12:21.640 their own investors too? Right? Zeke Fox, I remember that story. 0:12:21.640 --> 0:12:23.800 It was a great story. Zeke Fox and Bloomberg News, 0:12:23.800 --> 0:12:37.600 thank you so much for joining us. All right, let's 0:12:37.640 --> 0:12:41.480 solve the issue of the US dollar and its strength. 0:12:41.559 --> 0:12:43.040 I want to bring in Joel Stern. He is the 0:12:43.080 --> 0:12:47.000 chairman and the chief executive of Stern Value Management. Joel Stern, 0:12:47.080 --> 0:12:49.200 always a pleasure give us your take on the strength 0:12:49.200 --> 0:12:51.000 of the U. S dollar, what's causing it and what 0:12:51.000 --> 0:12:53.920 do you believe will happen next. The US dollar is 0:12:53.960 --> 0:12:58.360 strong because everybody is going to be doing lots more 0:12:58.440 --> 0:13:02.719 business in US. Listen, around the world, people are expecting 0:13:02.880 --> 0:13:06.600 much higher rates of return to be earned on capital employees. 0:13:06.960 --> 0:13:09.680 That's very important. UH. There are two reasons for that. 0:13:10.280 --> 0:13:13.920 Number one is getting rid of onerous regulations. What that 0:13:13.960 --> 0:13:17.200 does is it not only improves the existing returns, but 0:13:17.360 --> 0:13:21.040 it reduces the risk about making future investment as well. 0:13:21.520 --> 0:13:25.000 And the second has to do with the UH cutting 0:13:25.040 --> 0:13:29.840 of the maginal statutory tax rate from say, if you 0:13:29.920 --> 0:13:33.880 include city and state trading partners in Europe alone, twenty 0:13:33.960 --> 0:13:38.800 three percent. If you take about of our major trading partners, 0:13:39.120 --> 0:13:43.600 it actually averages close. In other words, if why would 0:13:43.600 --> 0:13:46.720 you not take your business overseas? If you could have 0:13:46.760 --> 0:13:49.920 a lower tax rate by fully half. It just doesn't 0:13:49.960 --> 0:13:52.440 make any In other words, what I'm saying to you is, 0:13:52.760 --> 0:13:55.360 I don't think that Donald Trump has to be rate 0:13:55.400 --> 0:13:58.960 companies for doing something that is simply the result of 0:13:59.040 --> 0:14:02.920 normal gravitation, sation, old forces in the economy, people going 0:14:02.920 --> 0:14:05.360 overseas for a good reason. If he takes care of 0:14:05.360 --> 0:14:08.040 these two things, I believe it will be only a 0:14:08.040 --> 0:14:11.000 trickle leaving the country. And I believe lots of what 0:14:11.080 --> 0:14:14.320 left the country will actually start to come back because 0:14:14.320 --> 0:14:16.960 there were reasons why companies wanted to do business in 0:14:17.000 --> 0:14:19.840 the United States in the first place. Well, we're taking 0:14:19.880 --> 0:14:22.080 away the impediments. That's what it comes down to. So 0:14:22.280 --> 0:14:25.800 joel Um, based on what you're saying, the dollar to 0:14:25.880 --> 0:14:28.720 the dollar rally, how much of what you're talking about, 0:14:28.720 --> 0:14:31.800 which is tax reform and making the tax policies in 0:14:31.840 --> 0:14:34.720 the US more business friendly for companies that have already 0:14:34.760 --> 0:14:37.440 taken their business overseas to bring them back. How much 0:14:37.840 --> 0:14:41.480 of that bringing back of business and tax reform gotten 0:14:41.520 --> 0:14:45.680 priced into the dollar versus how much has the dollar 0:14:45.800 --> 0:14:48.480 risen on the expectation that this will happen, but could 0:14:48.520 --> 0:14:51.680 get dampened if it doesn't happen fast enough. Well, fast 0:14:51.800 --> 0:14:55.480 enough is not someone of me. There's a legislative process here. 0:14:55.760 --> 0:14:59.680 You can't just a president. Although a recent current president 0:15:00.080 --> 0:15:03.160 decided through executive order to do various things. But Donald 0:15:03.160 --> 0:15:05.920 Trump has said he doesn't like that idea. He wants 0:15:05.960 --> 0:15:08.760 to reduce the executive power and turn much of that 0:15:08.840 --> 0:15:11.400 back to the legislature. What so we need to simply 0:15:11.400 --> 0:15:14.200 get this thing done and done quickly. What will happen 0:15:14.280 --> 0:15:15.760 is that the President will give a State of the 0:15:15.800 --> 0:15:19.720 Union address UH after his inauguration, and that will tell 0:15:19.800 --> 0:15:22.440 us a great deal because by that time, UH, he 0:15:22.520 --> 0:15:25.840 will be able to get some notion as to whether 0:15:25.920 --> 0:15:28.640 or not the Republican leadership in the in the House 0:15:29.080 --> 0:15:31.040 is going to go along with him. Because this is 0:15:31.040 --> 0:15:33.040 the Ways and Means Committee, this is not the United 0:15:33.080 --> 0:15:35.280 States Senate. He has to deal with the Congress. So 0:15:35.680 --> 0:15:38.760 having a strong liaison with the Congress will tell us 0:15:38.760 --> 0:15:41.440 a great deal about that. The liaison to the Congress. 0:15:41.760 --> 0:15:43.720 That's what we have to get onto the news programs 0:15:43.720 --> 0:15:46.440 on Sunday. You get the liaison on there will learn 0:15:46.480 --> 0:15:48.680 a lot a lot more. But the important thing now 0:15:49.320 --> 0:15:52.800 is that there is a complete change in attitude keep 0:15:52.800 --> 0:15:55.840 in mind that when Hillary Clinton was running for president, 0:15:55.880 --> 0:15:58.560 whether it was caused by Sanders or not, she said, 0:15:58.800 --> 0:16:03.000 I'm going to increase eat regulations, I'm going to increase taxation. 0:16:03.240 --> 0:16:05.880 Can you believe that? Now? What? By the way, the 0:16:05.880 --> 0:16:08.560 test is going to be simple. My teacher Milton Friedman 0:16:08.640 --> 0:16:11.440 used to say, it would be nice if monetary policy 0:16:11.520 --> 0:16:15.680 was expensive and Kansian policy tight, or the reverse, so 0:16:15.880 --> 0:16:18.080 we could test the two theories. We're gonna be able 0:16:18.120 --> 0:16:21.400 to test the political theory on on this whole subject 0:16:21.680 --> 0:16:24.200 by whether or not. And of course it's happening already. 0:16:24.360 --> 0:16:27.560 The stock market takes the present value of the future 0:16:27.600 --> 0:16:31.000 performance and why the market is so strong the markets 0:16:31.000 --> 0:16:33.640 I'll believing that there's going to be a very substantial 0:16:33.680 --> 0:16:37.720 improvement in operating performance of companies. And what I'm saying is, 0:16:37.760 --> 0:16:39.840 even if it doesn't happen in the current year, that's 0:16:39.880 --> 0:16:42.360 the year two thousand seventeen. If it doesn't happen, that 0:16:42.440 --> 0:16:45.480 it won't matter, because it's whether it happens in eighteen 0:16:45.560 --> 0:16:48.080 or nineteen and twent so forth. It's the present value 0:16:48.080 --> 0:16:50.240 of that that is already in the price of the shares. 0:16:50.760 --> 0:16:53.680 Let me just mention Joelstern. Some news from Bloomberg that 0:16:53.760 --> 0:16:56.720 the President elect Donald Trump is considering nominating x U 0:16:56.800 --> 0:16:59.800 S Attorney Debra Wang Yang to run the Securities and 0:17:00.120 --> 0:17:04.480 Change Commission. She would be the second consecutive former federal 0:17:04.480 --> 0:17:10.440 prosecutor to lead UH this regulatory body. Joel Stern, interest rates, 0:17:10.560 --> 0:17:15.440 rising interest rates, and inflation or expectations of inflation. Give 0:17:15.520 --> 0:17:18.479 us your thoughts, then it's a great question. Everybody has 0:17:18.480 --> 0:17:20.680 been talking about the rise in interest rates as being 0:17:20.720 --> 0:17:24.920 caused by an increase in inflationary expectations. In my view, 0:17:25.280 --> 0:17:29.120 that is absolutely false, and the evidence is the decline 0:17:29.160 --> 0:17:32.520 in the gold price. The gold price is a function 0:17:33.040 --> 0:17:35.399 of the reciproc it's it's it's a function of the 0:17:35.440 --> 0:17:39.960 real US interest rate on governmental securities. What's happened is 0:17:39.960 --> 0:17:43.600 that the increase and interest rates, real interest rates, has 0:17:43.640 --> 0:17:46.160 caused the gold price to go down. If interest rates 0:17:46.160 --> 0:17:48.320 went up and the gold price went up at the 0:17:48.359 --> 0:17:52.080 same time, then I would say, oh, here comes inflation. 0:17:52.480 --> 0:17:54.760 But it interest rates rise because of a rise in 0:17:54.840 --> 0:17:57.320 what are called real interest rates. And what's the reason 0:17:57.400 --> 0:18:00.320 for that? Because the rates of return on cap in 0:18:00.320 --> 0:18:02.920 the United States are going to be much much higher 0:18:02.960 --> 0:18:05.480 than they are now, and the signal to the rest 0:18:05.520 --> 0:18:08.919 of the world is the real industrate. I would prepare 0:18:08.960 --> 0:18:11.800 that real infustrates would be five percent, because then it 0:18:11.840 --> 0:18:14.520 would be saying, Wow, we're going to go back to 0:18:14.560 --> 0:18:18.879 the time when the average industrial cooperation in America earned 0:18:18.880 --> 0:18:22.680 a return of between twelve and on its capital employed. 0:18:22.960 --> 0:18:25.320 I would like to see that again. If that happens, 0:18:25.560 --> 0:18:30.040 we'll see the doubt Jones industrial average probably up around 0:18:30.359 --> 0:18:32.640 Let me just mention that the price of gold has 0:18:32.720 --> 0:18:37.560 dropped about fifteen per cent since the November election. That's right, 0:18:37.680 --> 0:18:39.359 you know, as you talk to Joel, I'm thinking to 0:18:39.400 --> 0:18:43.359 myself usually when people talk about higher real rates, it 0:18:43.440 --> 0:18:46.120 might be helpful for the economy once we get there, 0:18:46.119 --> 0:18:49.120 but the but the path there is pretty rocky. I mean, 0:18:49.280 --> 0:18:52.080 what do you think, what's your outlook for for bonds 0:18:52.080 --> 0:18:54.720 in the first half of next year. I think investors 0:18:54.720 --> 0:18:57.640 in bonds, Lisa are going to be in big trouble. Uh. 0:18:57.680 --> 0:18:59.480 In fact, you know, the pin comes of the world 0:18:59.520 --> 0:19:02.639 have been moved the shorter and shorter materities because they 0:19:02.680 --> 0:19:04.560 don't want to get whacked on those long term bond 0:19:04.640 --> 0:19:07.360 rates changing. If long term interest rates go up as 0:19:07.359 --> 0:19:10.560 they have. Incidentally, the thirty year bond right now is 0:19:10.640 --> 0:19:13.800 around three fifteen. Do you know that when Trump was 0:19:14.359 --> 0:19:17.640 elected at the beginning of November, I think that rate 0:19:17.680 --> 0:19:21.320 was somewhere around two forty And so this is a 0:19:21.400 --> 0:19:24.480 huge increase and that's why the gold price has come 0:19:24.520 --> 0:19:27.280 but very sharply down. But again, the gold price coming 0:19:27.320 --> 0:19:29.960 down means that it's a rise in real interest rates 0:19:30.240 --> 0:19:33.320 and not inflationary expectations. Can I just make one other comment. 0:19:34.440 --> 0:19:36.920 I was listening to you before I found your discussing 0:19:37.040 --> 0:19:40.960 fascinating about the real estate prices in Washington. Keep in mind, 0:19:41.320 --> 0:19:43.960 one of the major reasons why the prices go up 0:19:44.560 --> 0:19:49.320 is because the people who were in office company. That's fair. 0:19:50.080 --> 0:19:51.960 Thank you so much for joining us to all Stern 0:19:52.119 --> 0:19:55.960 Chairman and CEO of Stern Value Management talking about why 0:19:56.160 --> 0:19:59.879 the increase in rates is not necessarily because of INFLA 0:20:00.359 --> 0:20:14.639 and why the dollar could get stronger ahead. Apple is 0:20:14.720 --> 0:20:19.440 preparing for a tax battle, particularly one in the European Union. 0:20:19.440 --> 0:20:24.720 It has officially appealed the European Union's August decision UH 0:20:24.920 --> 0:20:29.600 to claw back thirteen point six billion dollars and unpaid 0:20:29.640 --> 0:20:34.240 taxes from the iPhone maker. Over taxes that they did 0:20:34.240 --> 0:20:36.160 not have to pay in Ireland. I want to bring 0:20:36.160 --> 0:20:38.280 in somebody who can speak much better about this than 0:20:38.320 --> 0:20:41.000 I can. Matt Larsen, litigation analyst and Bloomberg Intelligence back, 0:20:41.040 --> 0:20:43.040 can you just sort of give us an overview of 0:20:43.080 --> 0:20:46.880 what this case really is about? Yeah, certainly so. Back 0:20:46.920 --> 0:20:52.080 in the European Commission requested Ireland uh submit how taxes 0:20:52.080 --> 0:20:55.679 were calculated on a number of companies that either claimed 0:20:55.720 --> 0:20:59.240 residents or non taxable residents in Ireland. Ireland has a 0:20:59.320 --> 0:21:03.480 very low corporate tax rate and a lot of multinational 0:21:03.520 --> 0:21:07.000 corporations make use of the favorable tax laws in Ireland 0:21:07.119 --> 0:21:11.000 to get pretty good deals on how the company transfers 0:21:11.040 --> 0:21:15.959 things to various subsidiaries and reduces their overall tax liability. UM. 0:21:16.000 --> 0:21:20.119 Among those companies was Ireland, and in March of the 0:21:20.119 --> 0:21:25.800 European Commission instituted a formal investigation of Ireland's tax arrangements 0:21:25.840 --> 0:21:28.120 with Apple That took a couple of years and will 0:21:28.160 --> 0:21:32.560 fast forward to when the European Commission basically found that 0:21:32.640 --> 0:21:37.960 Ireland had undercollected uh fourteen I'm sorry, thirteen billion euros 0:21:38.800 --> 0:21:44.000 of taxes. So these are thirteen billion on essentially Uh, 0:21:44.520 --> 0:21:51.760 internal revenues, transfer prices, intellectual property licensing revenue that went untaxed. Uh, 0:21:52.400 --> 0:21:56.080 kind of that that Apple was was transferring between subsidiaries 0:21:56.080 --> 0:21:59.320 in Ireland. Right, So is it just this third team 0:21:59.320 --> 0:22:02.880 point six billion dollars or thirteen euros thirteen billion euros 0:22:02.920 --> 0:22:06.080 that's on the line here, or does this appeal sort 0:22:06.119 --> 0:22:09.720 of set a precedent for an even larger amount of money. 0:22:09.800 --> 0:22:11.800 Are a large amount of back taxes that Apple would 0:22:11.840 --> 0:22:15.080 potentially have to pay? Yeah, So the investigation, the investigation 0:22:15.080 --> 0:22:17.360 that's going on now just looks at these thirteen point 0:22:17.440 --> 0:22:20.399 six but there's there's a bigger story here. There's there's 0:22:20.400 --> 0:22:24.040 a lot more dollars at stake in terms of how, um, 0:22:24.119 --> 0:22:27.719 how the Irish Revenue Service is going to revisit its taxation, 0:22:27.880 --> 0:22:30.520 how the European Commission is cracking down on these deals. 0:22:30.520 --> 0:22:34.280 So there's potentially a much larger universe of revenue, and 0:22:34.320 --> 0:22:36.560 not just for Apple, but for other tech companies in 0:22:36.560 --> 0:22:40.440