Latest / Bloomberg Intelligence / P&L: Making America Great Again Will Need a Weaker Dollar

Transcript

P&L: Making America Great Again Will Need a Weaker Dollar · Bloomberg Intelligence

• 0:04
  Speaker 1: Welcome to the Bloomberg P and L Podcast. I'm Pim
• 0:07
  Speaker 1: Fox along with my co host Lisa Abramowitz. Each day
• 0:11
  Speaker 1: we bring you the most important, noteworthy, and useful interviews
• 0:14
  Speaker 1: for you and your money, whether you're at the grocery
• 0:16
  Speaker 1: store or the trading floor. Find the Bloomberg P L
• 0:19
  Speaker 1: Podcast on iTunes, SoundCloud and at Bloomberg dot com. I
• 0:27
  Speaker 1: want to turn back to the currency market since since uh, frankly,
• 0:31
  Speaker 1: that's where a lot of the action has been and
• 0:34
  Speaker 1: that seems to be driving a lot of flows around
• 0:37
  Speaker 1: the world. I want to bring in Doug Borthwick, who
• 0:39
  Speaker 1: is Managing director and head of f X at Chapter
• 0:42
  Speaker 1: Lane and Company. UM. I want to start with China.
• 0:45
  Speaker 1: I know the dollar has been the big story because
• 0:47
  Speaker 1: of how strong it has gotten, but China seems to
• 0:50
  Speaker 1: be one of the big wild cards of how quickly
• 0:55
  Speaker 1: will it allow the un to depreciate? Um, Doug, what's
• 0:59
  Speaker 1: your a forecast for next year? And then? Well, I
• 1:03
  Speaker 1: think that China has been the whipping why this year,
• 1:06
  Speaker 1: but maybe not necessarily, maybe it shouldn't have been. I
• 1:09
  Speaker 1: think that certainly this year dollar China has moved up
• 1:12
  Speaker 1: by seven percent, So China in effect, is divided by
• 1:15
  Speaker 1: seven percent, but somewhere like you know, Switzerland's divided by
• 1:19
  Speaker 1: three and no one's pointing fingers there. Over the last
• 1:22
  Speaker 1: five years, the yen has depreciated by and China only nine.
• 1:28
  Speaker 1: And yet China is pointed to and people say, you
• 1:31
  Speaker 1: know that this is a currency that's being allowed to
• 1:34
  Speaker 1: to weaken considerably, whereas the Japanese are being given the
• 1:37
  Speaker 1: okay by G twenty to allow their currency to weken by.
• 1:40
  Speaker 1: There seems to be sort of a double standard when
• 1:42
  Speaker 1: it comes down to what currencies are doing around the world.
• 1:46
  Speaker 1: And now dollar China trades nowadays based off of where
• 1:49
  Speaker 1: the dollar is trading in general, because China obviously trades
• 1:52
  Speaker 1: off of a basket. So if you see a stronger
• 1:55
  Speaker 1: dollar globally in the dollar strengthens versus the euro, and
• 1:57
  Speaker 1: the dollar strengthens versus the yen, it expected to strength
• 2:00
  Speaker 1: and considerably against China. Now, our review certainly is that
• 2:04
  Speaker 1: the dollar going forward into the next year will probably
• 2:08
  Speaker 1: be plateauing around the levels we're seeing here. As the
• 2:10
  Speaker 1: excitement and fraudness over the new administration sort of shart
• 2:15
  Speaker 1: starts to turn over with the reality of what happens
• 2:17
  Speaker 1: in Washington, how you expect to see the dollar to
• 2:20
  Speaker 1: start to weaken versus the yen and also versus the euro.
• 2:23
  Speaker 1: If that is to happen, then you'll see the dollars
• 2:25
  Speaker 1: start to weaken against China, and you'll see a sort
• 2:28
  Speaker 1: of a move back. There's one thing that we are
• 2:30
  Speaker 1: concerned about, and that is extreme dollar strength is negative
• 2:33
  Speaker 1: for the world in a number of different ways. One
• 2:36
  Speaker 1: extreme dollar strength, they will probably not help President elect
• 2:41
  Speaker 1: Trump when it comes down to his policies of exporting
• 2:44
  Speaker 1: more US goods and employing more US you know, uh workers.
• 2:49
  Speaker 1: Another thing the strong dollar does in Asia specifically, as
• 2:53
  Speaker 1: it means that you know, the dollar rises versus Korea,
• 2:55
  Speaker 1: versus Taiwan, versus Thailand, Indonesia, all emerging mark its currencies
• 3:00
  Speaker 1: start to weaken considerably. When that happens, they have trouble
• 3:03
  Speaker 1: and paying back their US dollar denominated debts. And when
• 3:06
  Speaker 1: that happens, you get another emerging markets crisis. So we
• 3:09
  Speaker 1: believe strongly that that while a strong dollar may have
• 3:12
  Speaker 1: been in the US interest in terms of making America
• 3:15
  Speaker 1: great again, a weaker dollar may actually be more important.
• 3:19
  Speaker 1: Dog Borthark, I just want to push back a little
• 3:21
  Speaker 1: bit on your sort of description of China as a
• 3:24
  Speaker 1: whipping boy for currency manipulation, bringing in Japan and Switzerland.
• 3:28
  Speaker 1: I mean, the Chinese have the highest trade surplus with
• 3:32
  Speaker 1: the United States, the Netherlands, India, Vietnam, United Kingdom, Singapore.
• 3:36
  Speaker 1: There's no, uh, there's no switzerlanda on that list. I
• 3:40
  Speaker 1: mean the reason isn't it political? I mean, you're a
• 3:42
  Speaker 1: currency trader. A lot of this has to do with
• 3:44
  Speaker 1: just plain politics. I think plain politics is a huge
• 3:48
  Speaker 1: part of all this. And one thing we have seen
• 3:51
  Speaker 1: over the last five years in terms of where's the
• 3:53
  Speaker 1: sphere of influence moving, it's certainly moving away from the
• 3:56
  Speaker 1: US and towards China, especially on a trade basis. I say,
• 4:00
  Speaker 1: five years ago, or well, let's say ten years ago,
• 4:02
  Speaker 1: the US was the number one or number two trading
• 4:03
  Speaker 1: partner pretty much for every country around the world, and
• 4:06
  Speaker 1: China's now taken that spot. And that's something that's I
• 4:09
  Speaker 1: think of considerable interest, not just when it comes down
• 4:12
  Speaker 1: to currencies, but also when it comes down to matters
• 4:14
  Speaker 1: at the U N matters when it comes down to
• 4:17
  Speaker 1: talking about trade in that China now has much bigger
• 4:20
  Speaker 1: say at the table because you normally vote with your
• 4:23
  Speaker 1: largest trading partner and not necessarily with um, you know,
• 4:27
  Speaker 1: the night the guy sitting next to you. But this
• 4:29
  Speaker 1: has been going on since I mean, this has been
• 4:31
  Speaker 1: going on since since two thousand thirteen. Right, China was
• 4:34
  Speaker 1: the largest trading nation in the world as of then.
• 4:38
  Speaker 1: We're talking about like almost two trillion dollars, more than
• 4:41
  Speaker 1: two trillion dollars worth of stuff, and that doesn't even
• 4:43
  Speaker 1: include foreign investments. That's right. Well, you know, I guess
• 4:47
  Speaker 1: I'm trying to think about it from a trader's perspective.
• 4:50
  Speaker 1: I mean, the political sphere right now is is pretty foggy.
• 4:53
  Speaker 1: It's hard to get a clear sense of what exactly
• 4:55
  Speaker 1: is going to happen in the next three months, let
• 4:56
  Speaker 1: alone year. Um. But certainly we are getting a clear
• 5:00
  Speaker 1: sense from the Federal Reserve that they are going to
• 5:02
  Speaker 1: hike rate at a faster pace than people have been
• 5:04
  Speaker 1: expecting back in September. Do you think that if the
• 5:07
  Speaker 1: Fed does go through with three rate hikes next year,
• 5:10
  Speaker 1: that will lead the dollar higher than sort of this
• 5:13
  Speaker 1: level that we're at right now. I think the level
• 5:16
  Speaker 1: that we're right now is looking at that information of
• 5:18
  Speaker 1: the three rate hikes and is pondering it. I think
• 5:22
  Speaker 1: that three rate hikes would be rather aggressive, given that
• 5:25
  Speaker 1: we've had two rate hikes in the last two years,
• 5:27
  Speaker 1: so saying that they will have three next year seems
• 5:29
  Speaker 1: rather bullish. But then again, the FEDS always pushed this
• 5:31
  Speaker 1: sort of very bullish game of the U s economy
• 5:34
  Speaker 1: and then ended up sort of changing their opinions as
• 5:38
  Speaker 1: time goes on. I think that what's what's really interesting
• 5:41
  Speaker 1: is you've seen the US tenure moved from this one
• 5:44
  Speaker 1: forty in mid two thousand and sixteen not to what
• 5:47
  Speaker 1: two fifty five today. That's a huge move in ten years.
• 5:51
  Speaker 1: And I think that you know, there's a lot of
• 5:53
  Speaker 1: interest rate rises that are maybe priced into this this curve.
• 5:56
  Speaker 1: But if the US wants to do a number of
• 5:58
  Speaker 1: things that is, issued debts so they can get into
• 6:00
  Speaker 1: infrastructure spending, they'd probably rather a lower interest rate than
• 6:03
  Speaker 1: a higher interest rate. And also, if the FED was
• 6:06
  Speaker 1: to be as aggressive as people are expecting, or the
• 6:08
  Speaker 1: FED is certainly said, I think you would see a
• 6:11
  Speaker 1: stronger dollar at least a stable around these levels. But
• 6:14
  Speaker 1: I think that there's one thing we've seen in the
• 6:16
  Speaker 1: US economy, and that is that it tends to disappoint
• 6:18
  Speaker 1: relatives at bad expectations. I want to thank you very
• 6:21
  Speaker 1: much for joining us Douglas Boorthwick as managing director ahead
• 6:23
  Speaker 1: of FFX at Chapter Lane and Company. Well, there might
• 6:38
  Speaker 1: not be that much going on in in sort of
• 6:40
  Speaker 1: the corporate news world, but there is quite a bit
• 6:43
  Speaker 1: going on in the legal world. I'm looking in this
• 6:46
  Speaker 1: instance at the lawsuit the charge of UH the federal prosecutors.
• 6:53
  Speaker 1: Basically the co founder of the bankrupt hedge fund Platinum.
• 6:55
  Speaker 1: Platinum Partners. UH was charged with what federal prosecutors said
• 7:01
  Speaker 1: was a one billion dollar fraud resembling a Ponzi scheme.
• 7:04
  Speaker 1: I want to bring in Zeke Fox, a Bloomberg News reporter,
• 7:07
  Speaker 1: to elaborate on what exactly this case is all about.
• 7:11
  Speaker 1: Zeke High Um. Yes, So, Platinum Partners is a hedge
• 7:17
  Speaker 1: fund that manages, or at least claim to manage, more
• 7:20
  Speaker 1: than a billion dollars, and up until last year, it
• 7:24
  Speaker 1: looked like it was one of the most successful hedge
• 7:26
  Speaker 1: funds in the world. It had reported games on average
• 7:30
  Speaker 1: since two thousand and three, with no down years and
• 7:33
  Speaker 1: only actually a few down months. Um. Now it all
• 7:36
  Speaker 1: started to come unraveled this summer when one of its
• 7:41
  Speaker 1: managers was arrested for allegedly bribing a union official to
• 7:46
  Speaker 1: invest and people start to think, if this fund is
• 7:49
  Speaker 1: so good, why do they have to bribe people to
• 7:51
  Speaker 1: invest in it? And now apparently we have the answer. Uh.
• 7:55
  Speaker 1: The other managers of the fund got arrested or charged
• 7:59
  Speaker 1: today by a grand jury, and prosecutors are saying that
• 8:02
  Speaker 1: the fund wasn't really doing as well as it claimed. Well,
• 8:06
  Speaker 1: how much money was potentially lost as a result of
• 8:08
  Speaker 1: this uh ponzi leg scheme? That or at least that's
• 8:11
  Speaker 1: how it's described by prosecutors. So in investors, you know,
• 8:15
  Speaker 1: they're still getting uh their statements saying that they have
• 8:20
  Speaker 1: you know, a total of one point four billion dollars
• 8:23
  Speaker 1: in there. Now. After the first arrest this summer, the
• 8:27
  Speaker 1: hedge fund closed, said it was entered bankruptcy protection and
• 8:32
  Speaker 1: said it was going to liquidate its position slowly and
• 8:35
  Speaker 1: distribute the money to investors. So just because it's bankrupt
• 8:38
  Speaker 1: doesn't mean it went to zero. Um, but we really
• 8:40
  Speaker 1: have no idea what investors will get back, and this
• 8:43
  Speaker 1: arrest is certainly today is certainly not a good sign.
• 8:46
  Speaker 1: Zeke aren't there controls in place to prevent funds from
• 8:52
  Speaker 1: misrepresenting the information that they give out about their performance
• 8:57
  Speaker 1: as well as the amount of money that they manage. Yes.
• 9:01
  Speaker 1: So the way they were able to perhaps flip through
• 9:04
  Speaker 1: the cracks is that their fund, unlike most funds, was
• 9:08
  Speaker 1: made up of very ill liquid, hard to value investment,
• 9:11
  Speaker 1: you know, like oil wells or just things that weren't traded,
• 9:15
  Speaker 1: so they would get in California I believe, is the
• 9:18
  Speaker 1: specific instance correct. Yes, So they had one of their
• 9:21
  Speaker 1: biggest assets was the string of oil wells in California.
• 9:25
  Speaker 1: They were claiming it's worth hundreds of millions of dollars UM.
• 9:28
  Speaker 1: And I actually when it investigated this earlier this year
• 9:30
  Speaker 1: and found that they basically never produced any oil um.
• 9:35
  Speaker 1: But because this is a private company, it's not something
• 9:38
  Speaker 1: that the SEC is really checking out UM, and the
• 9:42
  Speaker 1: auditors when they audit the books are sort of relying
• 9:45
  Speaker 1: on all these third party reports that say, oh, the
• 9:48
  Speaker 1: oil well has a lot of potential or things like that.
• 9:50
  Speaker 1: So it's just a little harder to uh see that
• 9:53
  Speaker 1: they weren't getting the returns that that they claimed. And
• 9:57
  Speaker 1: I'm sure they're going to try and argue that these
• 9:58
  Speaker 1: things really are valuable, and that the prosecutors are wrong,
• 10:02
  Speaker 1: that that they are worthless, and that the fund is
• 10:06
  Speaker 1: a fraud. Who are who? As of the clients are
• 10:08
  Speaker 1: the types of clients that could be on the hook
• 10:11
  Speaker 1: for some potential losses if these things, if the assets
• 10:14
  Speaker 1: are not as valuable as the hedge fund managers say. Well.
• 10:18
  Speaker 1: The first is the New York City Prison Guards Union.
• 10:22
  Speaker 1: That's the pension fund that its manager allegedly took a
• 10:26
  Speaker 1: bribe to put tens of millions of dollars into this
• 10:29
  Speaker 1: hedge fund, Norman Seabrook. That's right, um, and he was
• 10:35
  Speaker 1: arrested as well. Most of the other investors are wealthy individuals.
• 10:39
  Speaker 1: The managers of fund were very well known among the
• 10:43
  Speaker 1: New York's Orthodox Jewish community, and many of the investors
• 10:47
  Speaker 1: are people that knew from their charity work or just
• 10:49
  Speaker 1: other prominent Orthodox Jews. They didn't attract a lot of
• 10:53
  Speaker 1: investment from other big pension funds. I think because the
• 10:59
  Speaker 1: pension on consultants I showed it to said that there
• 11:02
  Speaker 1: are already so many red flags with this funds that
• 11:05
  Speaker 1: would be hard to get a big institution to invest
• 11:07
  Speaker 1: what kinds of red flags. I mean, other than the
• 11:10
  Speaker 1: fact that that they invested in only highly liquid assets
• 11:14
  Speaker 1: that were hard to check out. It's hard to know
• 11:18
  Speaker 1: where to start. So I first, uh, I've been investing
• 11:23
  Speaker 1: in these guys for a few years. They invest in
• 11:26
  Speaker 1: all sorts of random things, and often the things go poorly,
• 11:29
  Speaker 1: even though they're always saying they make money. UM. An
• 11:33
  Speaker 1: example is this is a few years ago, they invested
• 11:38
  Speaker 1: in this sort of they found this what they thought
• 11:40
  Speaker 1: was a loophole in variable annuity contracts. They essentially got
• 11:47
  Speaker 1: hospice patients to sign up for veriable annuities using the
• 11:52
  Speaker 1: hedge funds money. And it was the idea was that
• 11:55
  Speaker 1: there was like a sign up bonus and if the
• 11:57
  Speaker 1: patients died quickly, they could earn a sign up bonus
• 12:01
  Speaker 1: for the hedge fund. They ended up getting in trouble
• 12:04
  Speaker 1: with the sec for this UM it was not a
• 12:07
  Speaker 1: loophole as they thought. So there's like a million little
• 12:10
  Speaker 1: stories like this, and I think some people start the
• 12:13
  Speaker 1: question is if they're always trying to operating in these
• 12:15
  Speaker 1: gray areas, are they really going to be honest with
• 12:18
  Speaker 1: their own investors too? Right? Zeke Fox, I remember that story.
• 12:21
  Speaker 1: It was a great story. Zeke Fox and Bloomberg News,
• 12:23
  Speaker 1: thank you so much for joining us. All right, let's
• 12:37
  Speaker 1: solve the issue of the US dollar and its strength.
• 12:41
  Speaker 1: I want to bring in Joel Stern. He is the
• 12:43
  Speaker 1: chairman and the chief executive of Stern Value Management. Joel Stern,
• 12:47
  Speaker 1: always a pleasure give us your take on the strength
• 12:49
  Speaker 1: of the U. S dollar, what's causing it and what
• 12:51
  Speaker 1: do you believe will happen next. The US dollar is
• 12:53
  Speaker 1: strong because everybody is going to be doing lots more
• 12:58
  Speaker 1: business in US. Listen, around the world, people are expecting
• 13:02
  Speaker 1: much higher rates of return to be earned on capital employees.
• 13:06
  Speaker 1: That's very important. UH. There are two reasons for that.
• 13:10
  Speaker 1: Number one is getting rid of onerous regulations. What that
• 13:13
  Speaker 1: does is it not only improves the existing returns, but
• 13:17
  Speaker 1: it reduces the risk about making future investment as well.
• 13:21
  Speaker 1: And the second has to do with the UH cutting
• 13:25
  Speaker 1: of the maginal statutory tax rate from say, if you
• 13:29
  Speaker 1: include city and state trading partners in Europe alone, twenty
• 13:33
  Speaker 1: three percent. If you take about of our major trading partners,
• 13:39
  Speaker 1: it actually averages close. In other words, if why would
• 13:43
  Speaker 1: you not take your business overseas? If you could have
• 13:46
  Speaker 1: a lower tax rate by fully half. It just doesn't
• 13:49
  Speaker 1: make any In other words, what I'm saying to you is,
• 13:52
  Speaker 1: I don't think that Donald Trump has to be rate
• 13:55
  Speaker 1: companies for doing something that is simply the result of
• 13:59
  Speaker 1: normal gravitation, sation, old forces in the economy, people going
• 14:02
  Speaker 1: overseas for a good reason. If he takes care of
• 14:05
  Speaker 1: these two things, I believe it will be only a
• 14:08
  Speaker 1: trickle leaving the country. And I believe lots of what
• 14:11
  Speaker 1: left the country will actually start to come back because
• 14:14
  Speaker 1: there were reasons why companies wanted to do business in
• 14:17
  Speaker 1: the United States in the first place. Well, we're taking
• 14:19
  Speaker 1: away the impediments. That's what it comes down to. So
• 14:22
  Speaker 1: joel Um, based on what you're saying, the dollar to
• 14:25
  Speaker 1: the dollar rally, how much of what you're talking about,
• 14:28
  Speaker 1: which is tax reform and making the tax policies in
• 14:31
  Speaker 1: the US more business friendly for companies that have already
• 14:34
  Speaker 1: taken their business overseas to bring them back. How much
• 14:37
  Speaker 1: of that bringing back of business and tax reform gotten
• 14:41
  Speaker 1: priced into the dollar versus how much has the dollar
• 14:45
  Speaker 1: risen on the expectation that this will happen, but could
• 14:48
  Speaker 1: get dampened if it doesn't happen fast enough. Well, fast
• 14:51
  Speaker 1: enough is not someone of me. There's a legislative process here.
• 14:55
  Speaker 1: You can't just a president. Although a recent current president
• 15:00
  Speaker 1: decided through executive order to do various things. But Donald
• 15:03
  Speaker 1: Trump has said he doesn't like that idea. He wants
• 15:05
  Speaker 1: to reduce the executive power and turn much of that
• 15:08
  Speaker 1: back to the legislature. What so we need to simply
• 15:11
  Speaker 1: get this thing done and done quickly. What will happen
• 15:14
  Speaker 1: is that the President will give a State of the
• 15:15
  Speaker 1: Union address UH after his inauguration, and that will tell
• 15:19
  Speaker 1: us a great deal because by that time, UH, he
• 15:22
  Speaker 1: will be able to get some notion as to whether
• 15:25
  Speaker 1: or not the Republican leadership in the in the House
• 15:29
  Speaker 1: is going to go along with him. Because this is
• 15:31
  Speaker 1: the Ways and Means Committee, this is not the United
• 15:33
  Speaker 1: States Senate. He has to deal with the Congress. So
• 15:35
  Speaker 1: having a strong liaison with the Congress will tell us
• 15:38
  Speaker 1: a great deal about that. The liaison to the Congress.
• 15:41
  Speaker 1: That's what we have to get onto the news programs
• 15:43
  Speaker 1: on Sunday. You get the liaison on there will learn
• 15:46
  Speaker 1: a lot a lot more. But the important thing now
• 15:49
  Speaker 1: is that there is a complete change in attitude keep
• 15:52
  Speaker 1: in mind that when Hillary Clinton was running for president,
• 15:55
  Speaker 1: whether it was caused by Sanders or not, she said,
• 15:58
  Speaker 1: I'm going to increase eat regulations, I'm going to increase taxation.
• 16:03
  Speaker 1: Can you believe that? Now? What? By the way, the
• 16:05
  Speaker 1: test is going to be simple. My teacher Milton Friedman
• 16:08
  Speaker 1: used to say, it would be nice if monetary policy
• 16:11
  Speaker 1: was expensive and Kansian policy tight, or the reverse, so
• 16:15
  Speaker 1: we could test the two theories. We're gonna be able
• 16:18
  Speaker 1: to test the political theory on on this whole subject
• 16:21
  Speaker 1: by whether or not. And of course it's happening already.
• 16:24
  Speaker 1: The stock market takes the present value of the future
• 16:27
  Speaker 1: performance and why the market is so strong the markets
• 16:31
  Speaker 1: I'll believing that there's going to be a very substantial
• 16:33
  Speaker 1: improvement in operating performance of companies. And what I'm saying is,
• 16:37
  Speaker 1: even if it doesn't happen in the current year, that's
• 16:39
  Speaker 1: the year two thousand seventeen. If it doesn't happen, that
• 16:42
  Speaker 1: it won't matter, because it's whether it happens in eighteen
• 16:45
  Speaker 1: or nineteen and twent so forth. It's the present value
• 16:48
  Speaker 1: of that that is already in the price of the shares.
• 16:50
  Speaker 1: Let me just mention Joelstern. Some news from Bloomberg that
• 16:53
  Speaker 1: the President elect Donald Trump is considering nominating x U
• 16:56
  Speaker 1: S Attorney Debra Wang Yang to run the Securities and
• 17:00
  Speaker 1: Change Commission. She would be the second consecutive former federal
• 17:04
  Speaker 1: prosecutor to lead UH this regulatory body. Joel Stern, interest rates,
• 17:10
  Speaker 1: rising interest rates, and inflation or expectations of inflation. Give
• 17:15
  Speaker 1: us your thoughts, then it's a great question. Everybody has
• 17:18
  Speaker 1: been talking about the rise in interest rates as being
• 17:20
  Speaker 1: caused by an increase in inflationary expectations. In my view,
• 17:25
  Speaker 1: that is absolutely false, and the evidence is the decline
• 17:29
  Speaker 1: in the gold price. The gold price is a function
• 17:33
  Speaker 1: of the reciproc it's it's it's a function of the
• 17:35
  Speaker 1: real US interest rate on governmental securities. What's happened is
• 17:39
  Speaker 1: that the increase and interest rates, real interest rates, has
• 17:43
  Speaker 1: caused the gold price to go down. If interest rates
• 17:46
  Speaker 1: went up and the gold price went up at the
• 17:48
  Speaker 1: same time, then I would say, oh, here comes inflation.
• 17:52
  Speaker 1: But it interest rates rise because of a rise in
• 17:54
  Speaker 1: what are called real interest rates. And what's the reason
• 17:57
  Speaker 1: for that? Because the rates of return on cap in
• 18:00
  Speaker 1: the United States are going to be much much higher
• 18:02
  Speaker 1: than they are now, and the signal to the rest
• 18:05
  Speaker 1: of the world is the real industrate. I would prepare
• 18:08
  Speaker 1: that real infustrates would be five percent, because then it
• 18:11
  Speaker 1: would be saying, Wow, we're going to go back to
• 18:14
  Speaker 1: the time when the average industrial cooperation in America earned
• 18:18
  Speaker 1: a return of between twelve and on its capital employed.
• 18:22
  Speaker 1: I would like to see that again. If that happens,
• 18:25
  Speaker 1: we'll see the doubt Jones industrial average probably up around
• 18:30
  Speaker 1: Let me just mention that the price of gold has
• 18:32
  Speaker 1: dropped about fifteen per cent since the November election. That's right,
• 18:37
  Speaker 1: you know, as you talk to Joel, I'm thinking to
• 18:39
  Speaker 1: myself usually when people talk about higher real rates, it
• 18:43
  Speaker 1: might be helpful for the economy once we get there,
• 18:46
  Speaker 1: but the but the path there is pretty rocky. I mean,
• 18:49
  Speaker 1: what do you think, what's your outlook for for bonds
• 18:52
  Speaker 1: in the first half of next year. I think investors
• 18:54
  Speaker 1: in bonds, Lisa are going to be in big trouble. Uh.
• 18:57
  Speaker 1: In fact, you know, the pin comes of the world
• 18:59
  Speaker 1: have been moved the shorter and shorter materities because they
• 19:02
  Speaker 1: don't want to get whacked on those long term bond
• 19:04
  Speaker 1: rates changing. If long term interest rates go up as
• 19:07
  Speaker 1: they have. Incidentally, the thirty year bond right now is
• 19:10
  Speaker 1: around three fifteen. Do you know that when Trump was
• 19:14
  Speaker 1: elected at the beginning of November, I think that rate
• 19:17
  Speaker 1: was somewhere around two forty And so this is a
• 19:21
  Speaker 1: huge increase and that's why the gold price has come
• 19:24
  Speaker 1: but very sharply down. But again, the gold price coming
• 19:27
  Speaker 1: down means that it's a rise in real interest rates
• 19:30
  Speaker 1: and not inflationary expectations. Can I just make one other comment.
• 19:34
  Speaker 1: I was listening to you before I found your discussing
• 19:37
  Speaker 1: fascinating about the real estate prices in Washington. Keep in mind,
• 19:41
  Speaker 1: one of the major reasons why the prices go up
• 19:44
  Speaker 1: is because the people who were in office company. That's fair.
• 19:50
  Speaker 1: Thank you so much for joining us to all Stern
• 19:52
  Speaker 1: Chairman and CEO of Stern Value Management talking about why
• 19:56
  Speaker 1: the increase in rates is not necessarily because of INFLA
• 20:00
  Speaker 1: and why the dollar could get stronger ahead. Apple is
• 20:14
  Speaker 1: preparing for a tax battle, particularly one in the European Union.
• 20:19
  Speaker 1: It has officially appealed the European Union's August decision UH
• 20:24
  Speaker 1: to claw back thirteen point six billion dollars and unpaid
• 20:29
  Speaker 1: taxes from the iPhone maker. Over taxes that they did
• 20:34
  Speaker 1: not have to pay in Ireland. I want to bring
• 20:36
  Speaker 1: in somebody who can speak much better about this than
• 20:38
  Speaker 1: I can. Matt Larsen, litigation analyst and Bloomberg Intelligence back,
• 20:41
  Speaker 1: can you just sort of give us an overview of
• 20:43
  Speaker 1: what this case really is about? Yeah, certainly so. Back
• 20:46
  Speaker 1: in the European Commission requested Ireland uh submit how taxes
• 20:52
  Speaker 1: were calculated on a number of companies that either claimed
• 20:55
  Speaker 1: residents or non taxable residents in Ireland. Ireland has a
• 20:59
  Speaker 1: very low corporate tax rate and a lot of multinational
• 21:03
  Speaker 1: corporations make use of the favorable tax laws in Ireland
• 21:07
  Speaker 1: to get pretty good deals on how the company transfers
• 21:11
  Speaker 1: things to various subsidiaries and reduces their overall tax liability. UM.
• 21:16
  Speaker 1: Among those companies was Ireland, and in March of the
• 21:20
  Speaker 1: European Commission instituted a formal investigation of Ireland's tax arrangements
• 21:25
  Speaker 1: with Apple That took a couple of years and will
• 21:28
  Speaker 1: fast forward to when the European Commission basically found that
• 21:32
  Speaker 1: Ireland had undercollected uh fourteen I'm sorry, thirteen billion euros
• 21:38
  Speaker 1: of taxes. So these are thirteen billion on essentially Uh,
• 21:44
  Speaker 1: internal revenues, transfer prices, intellectual property licensing revenue that went untaxed. Uh,
• 21:52
  Speaker 1: kind of that that Apple was was transferring between subsidiaries
• 21:56
  Speaker 1: in Ireland. Right, So is it just this third team
• 21:59
  Speaker 1: point six billion dollars or thirteen euros thirteen billion euros
• 22:02
  Speaker 1: that's on the line here, or does this appeal sort
• 22:06
  Speaker 1: of set a precedent for an even larger amount of money.
• 22:09
  Speaker 1: Are a large amount of back taxes that Apple would
• 22:11
  Speaker 1: potentially have to pay? Yeah, So the investigation, the investigation
• 22:15
  Speaker 1: that's going on now just looks at these thirteen point
• 22:17
  Speaker 1: six but there's there's a bigger story here. There's there's
• 22:20
  Speaker 1: a lot more dollars at stake in terms of how, um,
• 22:24
  Speaker 1: how the Irish Revenue Service is going to revisit its taxation,
• 22:27
  Speaker 1: how the European Commission is cracking down on these deals.
• 22:30
  Speaker 1: So there's potentially a much larger universe of revenue, and
• 22:34
  Speaker 1: not just for Apple, but for other tech companies in
• 22:36
  Speaker 1: Ireland as well. I mentioned it the onset that in UM,
• 22:40
  Speaker 1: the European Commission was looking into a number of different companies. Uh.
• 22:43
  Speaker 1: They just published a public version of the opinion in
• 22:47
  Speaker 1: the Apple decision. UM and they used nine comps. They
• 22:51
  Speaker 1: didn't list to the companies were, but they took a
• 22:53
  Speaker 1: look at practices across nine different companies, and UM alluded
• 22:57
  Speaker 1: to the fact that there wasn't a uniform way that
• 22:59
  Speaker 1: taxes were calculated in any one of those scenarios. So
• 23:02
  Speaker 1: it signals that there could be a much bigger issue
• 23:05
  Speaker 1: of taxation in Ireland that's gonna be revisited UM And
• 23:09
  Speaker 1: obviously Apple's future tax liabilities in question here depending on
• 23:12
  Speaker 1: what happens with the with the current litigation. Matt, how
• 23:15
  Speaker 1: about the European Union investigate the tax policies of other
• 23:19
  Speaker 1: European Union countries because I was looking at the ire
• 23:23
  Speaker 1: the Irish tax, uh, world corporate tax Let's just do
• 23:27
  Speaker 1: the comparison, right, corporate tax rate in the United States
• 23:30
  Speaker 1: thirty five. Ireland's taxation rate for corporations twelve and a
• 23:34
  Speaker 1: half percent, but they only charge six and a quarter
• 23:38
  Speaker 1: percent for revenue that's tied to a company's patent or
• 23:40
  Speaker 1: intellectual property. And dig this. Even if you lose money
• 23:45
  Speaker 1: as a startup, there's a twenty five percent tax credit
• 23:49
  Speaker 1: which is applied against the corporate tax rate of twelve
• 23:51
  Speaker 1: and a half percent. And they get like more than
• 23:53
  Speaker 1: ten percent of the total the country's revenue comes from taxes.
• 23:57
  Speaker 1: Apple's got two hundred and thirty eight billion dollars in cash.
• 24:00
  Speaker 1: This is a check, Yeah, yeah, it really is. It's
• 24:03
  Speaker 1: a it's a fraction of their um, you know, a
• 24:06
  Speaker 1: fraction of their liability if you if you look at
• 24:08
  Speaker 1: the the EPs estimates, even if you know this is
• 24:11
  Speaker 1: gonna be litigated for a while, it's going to take
• 24:13
  Speaker 1: a couple of years to play out. But um, it's
• 24:15
  Speaker 1: really just kind of a marginal difference on um on
• 24:18
  Speaker 1: Apple's balance sheet. Uh yeah, the stock is up to stop.
• 24:22
  Speaker 1: Stock is up a buck and a quarter right now,
• 24:23
  Speaker 1: it's a hundred and seventeen four. Yeah, you know it's
• 24:26
  Speaker 1: no one's getting phased by this. Yeah, it's it's a
• 24:28
  Speaker 1: minor dent. It's some headline risk. It's negative news for
• 24:31
  Speaker 1: the company. Obviously, you don't want to be involved in
• 24:34
  Speaker 1: any proceeding that seems to instin risk for Ireland. Maybe yeah,
• 24:37
  Speaker 1: yeah there. You know. It was funny that the decision
• 24:39
  Speaker 1: was supposed to be released before elections in Ireland, and
• 24:43
  Speaker 1: some speculated that they pushed the decision back so that
• 24:45
  Speaker 1: they didn't upset Irish voters and influenced politics, influencing business
• 24:49
  Speaker 1: and taxes. Matt Larson, litigation analyst of Bloomberg Intelligence, giving
• 24:55
  Speaker 1: us some details about Ireland and taxes. Thanks for listening
• 25:04
  Speaker 1: to the Bloomberg pien L podcast. You can subscribe and
• 25:07
  Speaker 1: listen to interviews at iTunes, SoundCloud, or whatever podcast platform
• 25:12
  Speaker 1: you prefer. I'm Pim Fox. I'm out there on Twitter
• 25:15
  Speaker 1: at pim Fox. I'm out there on Twitter at Lisa Abramo.
• 25:19
  Speaker 1: It's one before the podcast. You can always catch us
• 25:22
  Speaker 1: worldwide on Bloomberg Radio