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

the world. I want to bring in Doug Borthwick, who is Managing director and head of f X at Chapter Lane and Company. UM. I want to start with China. I know the dollar has been the big story because of how strong it has gotten, but China seems to be one of the big wild cards of how quickly will it allow the un to depreciate? Um, Doug, what's your a forecast for next year? And then? Well, I think that China has been the whipping why this year,

but maybe not necessarily, maybe it shouldn't have been. I think that certainly this year dollar China has moved up by seven percent, So China in effect, is divided by seven percent, but somewhere like you know, Switzerland's divided by three and no one's pointing fingers there. Over the last five years, the yen has depreciated by and China only nine.

And yet China is pointed to and people say, you know that this is a currency that's being allowed to to weaken considerably, whereas the Japanese are being given the okay by G twenty to allow their currency to weken by. There seems to be sort of a double standard when it comes down to what currencies are doing around the world. And now dollar China trades nowadays based off of where the dollar is trading in general, because China obviously trades

off of a basket. So if you see a stronger dollar globally in the dollar strengthens versus the euro, and the dollar strengthens versus the yen, it expected to strength and considerably against China. Now, our review certainly is that the dollar going forward into the next year will probably

be plateauing around the levels we're seeing here. As the excitement and fraudness over the new administration sort of shart starts to turn over with the reality of what happens in Washington, how you expect to see the dollar to start to weaken versus the yen and also versus the euro. If that is to happen, then you'll see the dollars start to weaken against China, and you'll see a sort of a move back. There's one thing that we are concerned about, and that is extreme dollar strength is negative

for the world in a number of different ways. One extreme dollar strength, they will probably not help President elect Trump when it comes down to his policies of exporting more US goods and employing more US you know, uh workers. Another thing the strong dollar does in Asia specifically, as it means that you know, the dollar rises versus Korea, versus Taiwan, versus Thailand, Indonesia, all emerging mark its currencies start to weaken considerably. When that happens, they have trouble

and paying back their US dollar denominated debts. And when that happens, you get another emerging markets crisis. So we believe strongly that that while a strong dollar may have been in the US interest in terms of making America great again, a weaker dollar may actually be more important. Dog Borthark, I just want to push back a little bit on your sort of description of China as a whipping boy for currency manipulation, bringing in Japan and Switzerland.

I mean, the Chinese have the highest trade surplus with the United States, the Netherlands, India, Vietnam, United Kingdom, Singapore. There's no, uh, there's no switzerlanda on that list. I mean the reason isn't it political? I mean, you're a currency trader. A lot of this has to do with just plain politics. I think plain politics is a huge

part of all this. And one thing we have seen over the last five years in terms of where's the sphere of influence moving, it's certainly moving away from the US and towards China, especially on a trade basis. I say, five years ago, or well, let's say ten years ago, the US was the number one or number two trading partner pretty much for every country around the world, and

China's now taken that spot. And that's something that's I think of considerable interest, not just when it comes down to currencies, but also when it comes down to matters at the U N matters when it comes down to talking about trade in that China now has much bigger say at the table because you normally vote with your largest trading partner and not necessarily with um, you know, the night the guy sitting next to you. But this has been going on since I mean, this has been

going on since since two thousand thirteen. Right, China was the largest trading nation in the world as of then. We're talking about like almost two trillion dollars, more than two trillion dollars worth of stuff, and that doesn't even include foreign investments. That's right. Well, you know, I guess I'm trying to think about it from a trader's perspective. I mean, the political sphere right now is is pretty foggy.

It's hard to get a clear sense of what exactly is going to happen in the next three months, let alone year. Um. But certainly we are getting a clear sense from the Federal Reserve that they are going to hike rate at a faster pace than people have been expecting back in September. Do you think that if the Fed does go through with three rate hikes next year, that will lead the dollar higher than sort of this

level that we're at right now. I think the level that we're right now is looking at that information of the three rate hikes and is pondering it. I think that three rate hikes would be rather aggressive, given that we've had two rate hikes in the last two years, so saying that they will have three next year seems rather bullish. But then again, the FEDS always pushed this sort of very bullish game of the U s economy and then ended up sort of changing their opinions as

time goes on. I think that what's what's really interesting is you've seen the US tenure moved from this one forty in mid two thousand and sixteen not to what two fifty five today. That's a huge move in ten years. And I think that you know, there's a lot of interest rate rises that are maybe priced into this this curve. But if the US wants to do a number of things that is, issued debts so they can get into infrastructure spending, they'd probably rather a lower interest rate than

a higher interest rate. And also, if the FED was to be as aggressive as people are expecting, or the FED is certainly said, I think you would see a stronger dollar at least a stable around these levels. But I think that there's one thing we've seen in the US economy, and that is that it tends to disappoint relatives at bad expectations. I want to thank you very much for joining us Douglas Boorthwick as managing director ahead

of FFX at Chapter Lane and Company. Well, there might not be that much going on in in sort of the corporate news world, but there is quite a bit going on in the legal world. I'm looking in this instance at the lawsuit the charge of UH the federal prosecutors. Basically the co founder of the bankrupt hedge fund Platinum. Platinum Partners. UH was charged with what federal prosecutors said was a one billion dollar fraud resembling a Ponzi scheme.

I want to bring in Zeke Fox, a Bloomberg News reporter, to elaborate on what exactly this case is all about. Zeke High Um. Yes, So, Platinum Partners is a hedge fund that manages, or at least claim to manage, more than a billion dollars, and up until last year, it looked like it was one of the most successful hedge funds in the world. It had reported games on average since two thousand and three, with no down years and

only actually a few down months. Um. Now it all started to come unraveled this summer when one of its managers was arrested for allegedly bribing a union official to invest and people start to think, if this fund is so good, why do they have to bribe people to invest in it? And now apparently we have the answer. Uh. The other managers of the fund got arrested or charged today by a grand jury, and prosecutors are saying that

the fund wasn't really doing as well as it claimed. Well, how much money was potentially lost as a result of this uh ponzi leg scheme? That or at least that's how it's described by prosecutors. So in investors, you know, they're still getting uh their statements saying that they have you know, a total of one point four billion dollars

in there. Now. After the first arrest this summer, the hedge fund closed, said it was entered bankruptcy protection and said it was going to liquidate its position slowly and distribute the money to investors. So just because it's bankrupt doesn't mean it went to zero. Um, but we really have no idea what investors will get back, and this arrest is certainly today is certainly not a good sign.

Zeke aren't there controls in place to prevent funds from misrepresenting the information that they give out about their performance as well as the amount of money that they manage. Yes. So the way they were able to perhaps flip through the cracks is that their fund, unlike most funds, was made up of very ill liquid, hard to value investment, you know, like oil wells or just things that weren't traded, so they would get in California I believe, is the

specific instance correct. Yes, So they had one of their biggest assets was the string of oil wells in California. They were claiming it's worth hundreds of millions of dollars UM. And I actually when it investigated this earlier this year and found that they basically never produced any oil um.

But because this is a private company, it's not something that the SEC is really checking out UM, and the auditors when they audit the books are sort of relying on all these third party reports that say, oh, the oil well has a lot of potential or things like that. So it's just a little harder to uh see that

they weren't getting the returns that that they claimed. And I'm sure they're going to try and argue that these things really are valuable, and that the prosecutors are wrong, that that they are worthless, and that the fund is a fraud. Who are who? As of the clients are the types of clients that could be on the hook for some potential losses if these things, if the assets are not as valuable as the hedge fund managers say. Well. The first is the New York City Prison Guards Union.

That's the pension fund that its manager allegedly took a bribe to put tens of millions of dollars into this hedge fund, Norman Seabrook. That's right, um, and he was arrested as well. Most of the other investors are wealthy individuals. The managers of fund were very well known among the New York's Orthodox Jewish community, and many of the investors are people that knew from their charity work or just other prominent Orthodox Jews. They didn't attract a lot of

investment from other big pension funds. I think because the pension on consultants I showed it to said that there are already so many red flags with this funds that would be hard to get a big institution to invest what kinds of red flags. I mean, other than the fact that that they invested in only highly liquid assets that were hard to check out. It's hard to know where to start. So I first, uh, I've been investing

in these guys for a few years. They invest in all sorts of random things, and often the things go poorly, even though they're always saying they make money. UM. An example is this is a few years ago, they invested in this sort of they found this what they thought was a loophole in variable annuity contracts. They essentially got hospice patients to sign up for veriable annuities using the

hedge funds money. And it was the idea was that there was like a sign up bonus and if the patients died quickly, they could earn a sign up bonus for the hedge fund. They ended up getting in trouble with the sec for this UM it was not a loophole as they thought. So there's like a million little stories like this, and I think some people start the question is if they're always trying to operating in these gray areas, are they really going to be honest with

their own investors too? Right? Zeke Fox, I remember that story. It was a great story. Zeke Fox and Bloomberg News, thank you so much for joining us. All right, let's solve the issue of the US dollar and its strength. I want to bring in Joel Stern. He is the chairman and the chief executive of Stern Value Management. Joel Stern, always a pleasure give us your take on the strength of the U. S dollar, what's causing it and what

do you believe will happen next. The US dollar is strong because everybody is going to be doing lots more business in US. Listen, around the world, people are expecting much higher rates of return to be earned on capital employees. That's very important. UH. There are two reasons for that. Number one is getting rid of onerous regulations. What that does is it not only improves the existing returns, but it reduces the risk about making future investment as well.

And the second has to do with the UH cutting of the maginal statutory tax rate from say, if you include city and state trading partners in Europe alone, twenty three percent. If you take about of our major trading partners, it actually averages close. In other words, if why would you not take your business overseas? If you could have

a lower tax rate by fully half. It just doesn't make any In other words, what I'm saying to you is, I don't think that Donald Trump has to be rate companies for doing something that is simply the result of normal gravitation, sation, old forces in the economy, people going overseas for a good reason. If he takes care of these two things, I believe it will be only a

trickle leaving the country. And I believe lots of what left the country will actually start to come back because there were reasons why companies wanted to do business in the United States in the first place. Well, we're taking

away the impediments. That's what it comes down to. So joel Um, based on what you're saying, the dollar to the dollar rally, how much of what you're talking about, which is tax reform and making the tax policies in the US more business friendly for companies that have already

taken their business overseas to bring them back. How much of that bringing back of business and tax reform gotten priced into the dollar versus how much has the dollar risen on the expectation that this will happen, but could get dampened if it doesn't happen fast enough. Well, fast enough is not someone of me. There's a legislative process here. You can't just a president. Although a recent current president decided through executive order to do various things. But Donald

Trump has said he doesn't like that idea. He wants to reduce the executive power and turn much of that back to the legislature. What so we need to simply get this thing done and done quickly. What will happen is that the President will give a State of the Union address UH after his inauguration, and that will tell us a great deal because by that time, UH, he will be able to get some notion as to whether or not the Republican leadership in the in the House

is going to go along with him. Because this is the Ways and Means Committee, this is not the United States Senate. He has to deal with the Congress. So having a strong liaison with the Congress will tell us a great deal about that. The liaison to the Congress. That's what we have to get onto the news programs on Sunday. You get the liaison on there will learn

a lot a lot more. But the important thing now is that there is a complete change in attitude keep in mind that when Hillary Clinton was running for president, whether it was caused by Sanders or not, she said, I'm going to increase eat regulations, I'm going to increase taxation. Can you believe that? Now? What? By the way, the test is going to be simple. My teacher Milton Friedman used to say, it would be nice if monetary policy was expensive and Kansian policy tight, or the reverse, so

we could test the two theories. We're gonna be able to test the political theory on on this whole subject by whether or not. And of course it's happening already. The stock market takes the present value of the future performance and why the market is so strong the markets I'll believing that there's going to be a very substantial improvement in operating performance of companies. And what I'm saying is, even if it doesn't happen in the current year, that's

the year two thousand seventeen. If it doesn't happen, that it won't matter, because it's whether it happens in eighteen or nineteen and twent so forth. It's the present value of that that is already in the price of the shares. Let me just mention Joelstern. Some news from Bloomberg that the President elect Donald Trump is considering nominating x U S Attorney Debra Wang Yang to run the Securities and Change Commission. She would be the second consecutive former federal

prosecutor to lead UH this regulatory body. Joel Stern, interest rates, rising interest rates, and inflation or expectations of inflation. Give us your thoughts, then it's a great question. Everybody has been talking about the rise in interest rates as being caused by an increase in inflationary expectations. In my view, that is absolutely false, and the evidence is the decline in the gold price. The gold price is a function of the reciproc it's it's it's a function of the

real US interest rate on governmental securities. What's happened is that the increase and interest rates, real interest rates, has caused the gold price to go down. If interest rates went up and the gold price went up at the same time, then I would say, oh, here comes inflation. But it interest rates rise because of a rise in what are called real interest rates. And what's the reason

for that? Because the rates of return on cap in the United States are going to be much much higher than they are now, and the signal to the rest of the world is the real industrate. I would prepare that real infustrates would be five percent, because then it would be saying, Wow, we're going to go back to the time when the average industrial cooperation in America earned a return of between twelve and on its capital employed.

I would like to see that again. If that happens, we'll see the doubt Jones industrial average probably up around Let me just mention that the price of gold has dropped about fifteen per cent since the November election. That's right, you know, as you talk to Joel, I'm thinking to myself usually when people talk about higher real rates, it might be helpful for the economy once we get there, but the but the path there is pretty rocky. I mean, what do you think, what's your outlook for for bonds

in the first half of next year. I think investors in bonds, Lisa are going to be in big trouble. Uh. In fact, you know, the pin comes of the world have been moved the shorter and shorter materities because they don't want to get whacked on those long term bond rates changing. If long term interest rates go up as they have. Incidentally, the thirty year bond right now is

around three fifteen. Do you know that when Trump was elected at the beginning of November, I think that rate was somewhere around two forty And so this is a huge increase and that's why the gold price has come but very sharply down. But again, the gold price coming down means that it's a rise in real interest rates and not inflationary expectations. Can I just make one other comment. I was listening to you before I found your discussing

fascinating about the real estate prices in Washington. Keep in mind, one of the major reasons why the prices go up is because the people who were in office company. That's fair. Thank you so much for joining us to all Stern Chairman and CEO of Stern Value Management talking about why the increase in rates is not necessarily because of INFLA and why the dollar could get stronger ahead. Apple is preparing for a tax battle, particularly one in the European Union.

It has officially appealed the European Union's August decision UH to claw back thirteen point six billion dollars and unpaid taxes from the iPhone maker. Over taxes that they did not have to pay in Ireland. I want to bring in somebody who can speak much better about this than I can. Matt Larsen, litigation analyst and Bloomberg Intelligence back, can you just sort of give us an overview of

what this case really is about? Yeah, certainly so. Back in the European Commission requested Ireland uh submit how taxes were calculated on a number of companies that either claimed residents or non taxable residents in Ireland. Ireland has a very low corporate tax rate and a lot of multinational corporations make use of the favorable tax laws in Ireland to get pretty good deals on how the company transfers

things to various subsidiaries and reduces their overall tax liability. UM. Among those companies was Ireland, and in March of the European Commission instituted a formal investigation of Ireland's tax arrangements with Apple That took a couple of years and will fast forward to when the European Commission basically found that Ireland had undercollected uh fourteen I'm sorry, thirteen billion euros of taxes. So these are thirteen billion on essentially Uh,

internal revenues, transfer prices, intellectual property licensing revenue that went untaxed. Uh, kind of that that Apple was was transferring between subsidiaries in Ireland. Right, So is it just this third team point six billion dollars or thirteen euros thirteen billion euros that's on the line here, or does this appeal sort of set a precedent for an even larger amount of money. Are a large amount of back taxes that Apple would

potentially have to pay? Yeah, So the investigation, the investigation that's going on now just looks at these thirteen point six but there's there's a bigger story here. There's there's a lot more dollars at stake in terms of how, um, how the Irish Revenue Service is going to revisit its taxation, how the European Commission is cracking down on these deals. So there's potentially a much larger universe of revenue, and not just for Apple, but for other tech companies in

Ireland as well. I mentioned it the onset that in UM, the European Commission was looking into a number of different companies. Uh. They just published a public version of the opinion in the Apple decision. UM and they used nine comps. They didn't list to the companies were, but they took a look at practices across nine different companies, and UM alluded to the fact that there wasn't a uniform way that

taxes were calculated in any one of those scenarios. So it signals that there could be a much bigger issue of taxation in Ireland that's gonna be revisited UM And obviously Apple's future tax liabilities in question here depending on

what happens with the with the current litigation. Matt, how about the European Union investigate the tax policies of other European Union countries because I was looking at the ire the Irish tax, uh, world corporate tax Let's just do the comparison, right, corporate tax rate in the United States thirty five. Ireland's taxation rate for corporations twelve and a half percent, but they only charge six and a quarter percent for revenue that's tied to a company's patent or

intellectual property. And dig this. Even if you lose money as a startup, there's a twenty five percent tax credit which is applied against the corporate tax rate of twelve and a half percent. And they get like more than ten percent of the total the country's revenue comes from taxes. Apple's got two hundred and thirty eight billion dollars in cash.

This is a check, Yeah, yeah, it really is. It's a it's a fraction of their um, you know, a fraction of their liability if you if you look at the the EPs estimates, even if you know this is gonna be litigated for a while, it's going to take a couple of years to play out. But um, it's really just kind of a marginal difference on um on Apple's balance sheet. Uh yeah, the stock is up to stop. Stock is up a buck and a quarter right now, it's a hundred and seventeen four. Yeah, you know it's

no one's getting phased by this. Yeah, it's it's a minor dent. It's some headline risk. It's negative news for the company. Obviously, you don't want to be involved in any proceeding that seems to instin risk for Ireland. Maybe yeah, yeah there. You know. It was funny that the decision was supposed to be released before elections in Ireland, and some speculated that they pushed the decision back so that they didn't upset Irish voters and influenced politics, influencing business

and taxes. Matt Larson, litigation analyst of Bloomberg Intelligence, giving us some details about Ireland and taxes. Thanks for listening to the Bloomberg pien L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio