Month: February 2017

Despite Turkey's Erdogan complaining that "the term 'islamic terror' upsets muslims", it appears President Trump is doubling down on it as Reuters reports the administration wants to revamp and rename a U.S. government program designed to counter all violent ideologies so that it focuses solely on Islamist extremism.

With somewhat ironic timing,  after Turkish President Recep Tayyip Erdogan says in joint press conference with German Chancellor Angela Merkel, that the term "Islamist terror" upsets Muslims, Reuters reports that five people briefed on the matter confirm that:

The program, "Countering Violent Extremism," or CVE, would be changed to "Countering Islamic Extremism" or "Countering Radical Islamic Extremism," the sources said, and would no longer target groups such as white supremacists who have also carried out bombings and shootings in the United States.

Such a change would reflect Trump's election campaign rhetoric and criticism of former President Barack Obama for being weak in the fight against Islamic State and for refusing to use the phrase "radical Islam" in describing it. Islamic State has claimed responsibility for attacks on civilians in several countries.

The CVE program aims to deter groups or potential lone attackers through community partnerships and educational programs or counter-messaging campaigns in cooperation with companies such as Google and Facebook.

Some proponents of the program fear that rebranding it could make it more difficult for the government to work with Muslims already hesitant to trust the new administration, particularly after Trump issued an executive order last Friday temporarily blocking travel to the United States from seven predominantly Muslim countries.

Still, the CVE program, which focuses on U.S. residents and is separate from a military effort to fight extremism online, has been criticized even by some supporters as ineffective.

 

Some Republicans in Congress have long assailed the program as politically correct and ineffective, asserting that singling out and using the term "radical Islam" as the trigger for many violent attacks would help focus deterrence efforts.

 

Others counter that branding the problem as "radical Islam" would only serve to alienate more than three million Americans who practice Islam peacefully.

 

Hoda Hawa, director of policy for the Muslim Public Affairs Council, said she was told last week by people within DHS that there was a push to refocus the CVE effort from tackling all violent ideology to only Islamist extremism.

 

"That is concerning for us because they are targeting a faith group and casting it under a net of suspicion," she said.

As Reuters concludes, in a meeting last Thursday attended by senior staff for DHS Secretary John Kelly, government employees were asked to defend why they chose certain community organizations as recipients of CVE program grants, said the source, who requested anonymity because of the sensitive nature of the discussions.

Although CVE funding has been appropriated by Congress and the grant recipients were notified in the final days of the Obama administration, the money still may not go out the door, the source said, adding that Kelly is reviewing the matter.

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Robo-advisors are a new class of financial advisor that manage clients money based on predetermined characteristics. Clients fill out surveys and based on those responses portfolios are automatically created. Robo-advisors began to garner attention as early as 2008. By 2017 the assets under robo-advisor management grew to an estimated $600 billion. Current Robo-advisor offerings range from industry veterans like Vanguard to startups such as Wealthfront. This new investment management model claims to offer sophisticated investment allocations at lower fees than traditional managers.

This new industry has dedicated hundreds of millions of dollars to marketing the benefits of robo-advisors. Despite this massive effort, the jury is still out on whether robo-advisors will just be a fad. Here are five different reasons why robo-advisors may not be for you.

1. Financial Management Depends on Individuals Not Algorithms

Every type of wealth management business uses the same marketing playbook. They want you to believe that investing is rocket science. They would like us all to think that the financial markets are too complex and that the individual can never compete against hedge funds, investment managers and proprietary algorithms.

This could not be farther from the truth. Investing requires only two things, patience and good decision making. Patience is important because it allows you to only invest in the most attractive opportunities. You don’t always need to be invested in the market.

An investment management firm, where I previously worked,  had a slide that it regularly shared with clients. The slide highlighted the differences between the S&P 500 returns of a buy and hold strategy vs missing the best 20 trading days of the 20-year period. The buy and hold strategy returned 9.2% annually while missing the best 20 trading days returned 3.0% annually.

If you looked closely at the slide though there was a small asterisk above the 3.0% annual return amount. The footnote connected with the asterisk highlighted that if you had missed the 20 worst days of the period your returns would have increased to 17.2% annually. Clearly there is some value in being patient and having cash available for opportunistic investing opportunities.

This is not to say that we encourage people to actively try to time the markets. Day trading and market timing is a losing strategy. Investing has more to do with patience and finding high probability opportunities.

Warren Buffet has repeatedly said that “An investor should act as though he had a lifetime decision card with just twenty punches on it”. The Oracle from Omaha knows that patience and selective investing is the true key to building wealth. Delegating responsibilities to robo-advisors will never let individuals full exploit these principals. Here is a Harvard research paper that proves that individuals can beat the market.

2. Robo-Advisors Offer No Real Protection from Human Emotion

In January 2016 Wealthfront posted a blog article about “The Biology of Good Investing”. This interesting post discusses the typical pitfalls of human psychology. The article does a good job at discussing various findings before ultimately concluding that people would be better off investing in an automated robo-advisor service. A common theme among robo-advisors is to subtly (or not so subtly) claim that investment performance will be better in their system because they help calm human emotions.

Unfortunately for robo-advisors their service does not add anything to help calm human emotions. An investor in Wealthfront or Betterment can withdraw their funds at any time. There are no restrictions on selling assets for cash withdrawal in an account with a robo-advisor. When the markets are falling rapidly it seems unlikely that someone with a robo-advisor account would react less emotionally than a normal investor.

In fact, it might be more helpful to have a human advisor to help talk through the best investment decision. People who delegate all of their investment decisions to a computer are not prepared to weather the storm of market volatility. The lack of information that robo-advising fosters will also help contribute to an overtly emotional reaction from the investor when markets turn south.

3. Robo-Advisors Rely on Inherently Flawed Modern Portfolio Theory

Robo-advisors use modern portfolio theory as a basis for most of their algorithms. Modern portfolio theory as developed by Markowitz attempts to maximize a portfolio’s return based on the riskiness of the assets contained therein. The way that this theory measures risk is through the volatility of an asset’s price.  However, volatility is not risk!

The riskiness of an asset has to be evaluated on a structural basis rather than a probabilistic analysis. The riskiness of a company has to do with the amount of debt it holds, what types of products it sells, the moral character of its leaders, the management ability of its leaders and its financial results. The modern portfolio theory makes several important assumptions about the market having Gaussian or bell curve-like results. The unfortunate reality however is that the market does NOT have Gaussian returns. It is commonly understood that markets have non-normal returns, the proverbial fat tail.

Modern Portfolio Theory also utilizes the efficient frontier model. This model shows what the ideal asset allocation is at any particular period of time.  Unfortunately, this model is only backward looking – it will tell you today what the ideal asset allocation would have been for the year 2016. The model is not predictive of the future.

This report from JPMorgan discusses the non-normality of markets in great detail. Modern portfolio theory fails to describe system wide events like crashes or liquidity crisis. How can you base your investing strategy on a theory that doesn’t explain the most difficult events in an investor’s experience? Famous and successful options trader Nassim Taleb described his view on modern portfolio theory in his book The Black Swan, 

“After the stock market crash (in 1987), they rewarded two theoreticians, Harry Markowitz and William Sharpe, who built beautifully Platonic models on a Gaussian base, contributing to what is called Modern Portfolio Theory. Simply, if you remove their Gaussian assumptions and treat prices as scalable, you are left with hot air. The Nobel Committee could have tested the Sharpe and Markowitz models – they work like quack remedies sold on the Internet – but nobody in Stockholm seems to have thought about it.”

4. Robo-advising is an Unsustainable Business Model

Perhaps the most important criticism of the robo-advisor industry is that it isn’t sustainable. Some large wealth management companies have successfully entered the robo-advising industry. Unfortunately, there are a large number of startups that also offer robo-advisory and receive a large percentage of the media’s attention. Low cost investing options are important but when an individual is paying only 0.25% how good can the service really be?

Wealthfront currently has $4.65 billion under management. At a rate of 0.25% of assets this means that Wealthfront is bringing in around $11.6M of advisory fees. The wealth management industry has traditionally been a high paying field for both investment and technology professionals. If the average Goldman Sachs employee makes around $300k then Wealthfront would be able to hire the equivalent of about 39 professionals. This also incorrectly assu

If I had my assets with Wealthfront or any other robo-advisor with a similar model I would be very concerned. Only 39 professionals are not many people to be writing the algorithms and creating the sophisticated technology systems needed to invest an individual’s hard earned money. What happens when growth slows?

5. Robo-Advisors are Low Cost… But ETFs Are Lower

ETFs are still the lowest cost alternative for individual investors. Let’s take a look at the portfolio recommendation that Warren Buffet made for his wife’s assets. In the 2013 letter to investors Warren Buffet said,

“My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long- term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers”.

For equity exposure, you could choose Vanguard’s S&P 500 ETF VOO with an expense ratio of 0.05%. This is a very reasonable cost for the instant diversification and exposure to the S&P 500 that the ETF provides. For bond exposure, an investor can purchase Vanguard’s short-term bond ETF “BSV” which has an expense ratio of 0.09%.

Using Buffet’s formula this would produce a combined expense ratio of 0.063%, far lower than the heavily marketed robo-advisor alternatives.

Conclusion

 

The benefits of robo-advising seem very questionable to us. The advice that individuals receive is based upon flawed financial theories and the startup companies behind them are of questionable viability.   Investors are better off taking responsibility for educating themselves about investing and for investing their hard-earned cash.  Investing in low cost ETF’s are a much better choice than delegating your future to unproven algorithms.

 

Article originally published at Boom Bust Market

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Yesterday a Delaware maximum security prison, the James T. Vaughn Correctional Center (JTVCC) in Smyrna, Delaware, went on lock down when an unknown number of inmates seized control of a building and took 4 prison guards hostage.  Now, after a nearly 24-hour standoff with inmates, the prison has once again been secured after a raid on the building by State Police, but only after 1 prison guard lost his life and another was hospitalized.

BREAKING: 1 DOC worker dead, 1 rescued after Delaware prison hostage situation ends https://t.co/dnllwgiij3

— Eyewitness News (@ABC7NY) February 2, 2017

BREAKING: One Delaware prison officer dead, one hospitalized after hostage situation.

— Reuters U.S. News (@ReutersUS) February 2, 2017

 

In a series of calls with Delaware Online yesterday, inmates made a list of demands, including educational and rehabilitation programs, and expressed concern that the new Trump administration would cause conditions inside the prison to “change for the worse.”

“I’m just doing what I’m being told to. I’m just trying to help, ma’am,” the man told a News Journal reporter. “They just need somebody to hear their demands.” The man would not give his name because he said he was instructed not to.

 

The demands came in the form of a manifesto or decree and mostly called for prison reforms.

 

“Improper sentencing orders. Status sheets being wrong. Oppression towards the inmates,” the voice continued.

 

Prisoners funneled a second call to The News Journal through a woman who said her son was in Vaughn Correctional and was being held hostage.

 

“We’re trying to explain the reasons for doing what we’re doing,” one of the voices on the call said. “Donald Trump. Everything that he did. All the things that he’s doing now. We know that the institution is going to change for the worse. We know the institution is going to change for the worse. We got demands that you need to pay attention to, that you need to listen to and you need to let them know. Education, we want education first and foremost. We want a rehabilitation program that works for everybody. We want the money to be allocated so we can know exactly what is going on in the prison, the budget.”

Here is a recording of the calls from inmates:

 

According to the commissioner of the Delaware Department of Corrections, as of this morning 82 inmates and 2 prison guards were still holed up immediately prior to a raid by State Police that finally ended the standoff.

Perry Phelps, the new  commissioner of the Delaware Department of Correction, who was confirmed just two weeks ago, said at an evening press conference that the radio call activated the Department of Correction Emergency Response team because staffers were taken hostage.

 

Phelps then said that earlier reports of five staffers being held were incorrect. Only four staffers were taken hostage. One officer who was injured was released at 2:25 p.m.; at 5:25 p.m. eight inmates were released; and just before 8 p.m., another staff member and 19 inmates were released. On Thursday at about 12:30 a.m., 14 more inmates were released.

 

Eighty-two inmates remain in Building C, according to the Department of Correction.

 

And here is a timeline of events from the Deputy Director of the Delaware Department of Corrections.

 

* * *

For those who missed it, here is our initial reporting on the hostage situation from yesterday.

Developing:  Department of Correction Response Teams and the Delaware State Police are currently responding to a hostage situation at the James T. Vaughn Correctional Center (JTVCC) in Smyrna, Delaware.  According to initial reports from Delaware Online, inmates of the correctional facility have taken over a building and are thought to be holding multiple officers hostage.

Rep. William Carson, a member of the House Corrections Committee, said he had been told it was an “apparent hostage situation.”

 

“The inmates have taken over a building,” he said.

Geoffrey Klopp, president of the Correctional Officers Association of Delaware, also confirmed to Delaware State News that “3-5” prison guards have been taken hostage and that inmates have secured control of a building.

JTVCC houses about 2,500 prisoners and, as a Level 5 facility, includes some of the state’s most violent criminals.

Here is a live feed of the scene from Fox 29:

 

The JTVCC released the following statement earlier today:

DOC have officially confirmed that it’s a hostage situation at Vaughn Correctional Center. #netde http://pic.twitter.com/jArSxOESh9

— Brittany Horn (@brittanyhorn) February 1, 2017

 

The incident was first reported at 10:55 a.m. when Citizens’ Hose Company received a call and proceeded to the facility at 1181 Paddock Road. Clayton and Cheswold run logs also showed their companies responded.

Shortly after, observers reported a helicopter circling the prison and around 1 p.m., six ambulances from various companies arrived within 10 minutes.

The prison was placed on lockdown along with all other Level V DOC facilities statewide.

#Breaking All Delaware prisons on lockdown – Hostage situation at Vaughn Correctional Center in Smyrna https://t.co/735qxRYfw1 http://pic.twitter.com/xsSMjVQ1WF

— NBC10 Philadelphia (@NBCPhiladelphia) February 1, 2017

View from #Chopper3 outside Vaughn Correctional Center in Smyrna, DE, where officials confirm an active hostage situation is ongoing. http://pic.twitter.com/nT04aiZsIo

— Joe Holden (@JoeHoldenCBS3) February 1, 2017

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The British government published its long-awaited White Paper on Brexit, which formally lays out its strategy for the U.K.’s exit from the European Union. The 77-page document was presented in the House of Commons on Thursday by David Davis, the minister in charge of Brexit, and was also published online. The publication comes after pressure from MPs across the House of Commons, and was released just one day after British House of Commons lawmakers voted in favor of a bill, which if passed fully through parliament, would allow Theresa May to begin the Brexit.

The White Paper lays out the government’s 12 “principles” including migration control and “taking control of our own laws”. Brexit Secretary David Davis said the UK’s “best days are still to come”, outside the EU. Alternatively, Sir Keir Starmer, Labour’s shadow Brexit secretary, told the Commons there was “nothing” in the white paper to resolve the position of UK nationals living in other EU countries. And he said the paper failed to guarantee MPs a “meaningful” vote on the deal eventually obtained by Mrs May, rather than a simple choice to take it or leave it.

In the paper, the government delineates its goals for its negotiations with the EU, as announced by Prime Minister Theresa May last month. These include withdrawing from the EU single market and customs union and negotiating a new free trade agreement.

It also says reaching an early deal on the rights of EU nationals in the UK and British expats in Europe has “not proven possible”, saying the government wants to secure an agreement with European countries “at the earliest opportunity” during the formal talks. And it says the government will “keep our positions closely held and will need at times to be careful about the commentary we make public”, with MPs offered a vote on the final deal.

Some highlights from the paper courtesy of The Telegraph:

On Immigration

We are considering very carefully the options that are open to us to gain control of the numbers of people coming to the UK from the EU. Implementing any new immigration arrangements for EU nationals and the support they receive will be complex and Parliament will have an important role in considering these matters further.

 

There may be a phased process of implementation to prepare for the new arrangements. This would give businesses and individuals enough time to plan and prepare for those new arrangements.

European Court of Justice

The CJEU is amongst the most powerful of supranational courts due to the principles of primacy and direct effect in EU law.

 

We will bring an end to the jurisdiction of the CJEU in the UK. We will of course continue to honour our international commitments and follow international law.

Repatriated laws

As the powers to make these rules are repatriated to the UK from the EU, we have an opportunity to determine the level best placed to make new laws and policies on these issues, ensuring power sits closer to the people of the UK than ever before.

 

We have already committed that no decisions currently taken by the devolved administrations will be removed from them and we will use the opportunity of bringing decision making back to the UK to ensure that more decisions are devolved.

EU nationals in Britain

The Government would have liked to resolve this issue ahead of the formal negotiations. And although many EU Member States favour such an agreement, this has not proven possible. The UK remains ready to give people the certainty they want and reach a reciprocal deal with our European partners at the earliest opportunity. It is the right and fair thing to do.

Irish Border

We recognise that for the people of Northern Ireland and Ireland, the ability to move freely across the border is an essential part of daily life. When the UK leaves the EU we aim to have as seamless and frictionless a border as possible between Northern Ireland and Ireland, so that we can continue to see the trade and everyday movements we have seen up to now.

Single Market

We do not seek to adopt a model already enjoyed by other countries. The UK already has zero tariffs on goods and a common regulatory framework with the EU Single Market. This position is unprecedented in previous trade negotiations. Unlike other trade negotiations, this is not about bringing two divergent systems together.

 

It is about finding the best way for the benefit of the common systems and frameworks, that currently enable UK and EU businesses to trade with and operate in each others’ markets, to continue when we leave the EU through a new comprehensive, bold and ambitious free trade agreement.

 

That agreement may take in elements of current Single Market arrangements in certain areas as it makes no sense to start again from scratch when the UK and the remaining Member States have adhered to the same rules for so many years. Such an arrangement would be on a fully reciprocal basis and in our mutual interests.

Customs Union

It is in the interests of both the UK and the EU to have a mutually beneficial customs arrangement to ensure goods trade between the UK and EU can continue as much as possible as it does now. This will form a key part of our ambition for a new strategic partnership with the EU.

EU Budget

Once we have left the EU, decisions on how taxpayers’ money will be spent will be made in the UK. As we will no longer be members of the Single Market, we will not be required to make vast contributions to the EU budget. There may be European programmes in which we might want to participate. If so, it is reasonable that we should make an appropriate contribution. But this will be a decision for the UK as we negotiate the new arrangements.

Labour has called calling for a “meaningful vote” that could send the prime minister back to the negotiating table if the deal is deemed unsatisfactory by MPs.

Formal negotiations can begin once the UK has given notice of Brexit under Article 50 of the Lisbon Treaty, which Mrs May has promised to do by the end of March. On Wednesday evening MPs voted to allow the PM to do this as they backed the European Union Bill by 498 votes to 114.

As BBC adds, MPs will discuss the bill in more detail next week when it reaches the committee stage in the Commons, and Labour has vowed to force through amendments. Hundreds of amendments have already been tabled for debate between Monday and Wednesday, with objectives set out in the government’s strategy expected to attract more. A total of 47 Labour rebels voted against the bill.

Shadow cabinet members Rachael Maskell and Dawn Butler quit the party’s front bench shortly before Wednesday evening’s vote, and in total, 13 Labour frontbenchers voted against their own party position which was to support the bill. Speaking on BBC Radio 4’s Today programme, shadow chancellor John McDonnell said other parties had also been divided on the issue, with two of the Liberal Democrats’ nine MPs abstaining despite orders to oppose the bill.

Mr McDonnell said a decision on whether frontbench rebels could remain in their jobs would be taken “in due course”, and that the atmosphere in his party was “one of mutual respect”, with determination to oppose a “reckless Brexit”.

He said Labour “may look divided” but would unite after the government triggers official negotiations under Article 50 of the Lisbon Treaty while “the Tory Party will split apart”.

* * *

The Brexit bill was published last week, after the Supreme Court decided MPs and peers must have a say before Article 50 could be triggered. It rejected the government’s argument that Mrs May had sufficient powers to trigger Brexit without consulting Parliament. Iain Watson, BBC political correspondent, said a “sizeable” Labour rebellion could grow further if amendments were not passed.

The SNP, Plaid Cymru and the Liberal Democrats all opposed the government’s bill, alongside Tory Ken Clarke. The SNP’s foreign affairs spokesman at Westminster, Alex Salmond, said there would be “detailed questions” about the bill during its next stage. He said “the calibre of the government will be judged by how they respond to the amendments”. Mr Clarke, the only Conservative MP to defy his party by voting against the bill, said the result was “historic”, but the “mood could change” when the “real action” of negotiations with the EU starts.

Exit talks with the EU are expected to last up to two years, with the UK predicted to leave the 28-member organization in 2019.

Full White Paper below (link)

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After the worst January in 30 years (since Reagan in 1987), the US Dollar is starting February in the same way – plunging. 

 

Now at its lowest level since Nov 11th, the greenback has almost entirely erased the post-election gains…

Still we are sure stocks know what they are doing.

 

And as the dollar fades so precious metals are bid and Gold is back above $1225 for the first time since just after the election…

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After years of declines, the 11 weeks since President Trump was elected have seen something ‘different’ happen in continuing jobless claims.

 

Despite payrolls and ADP exuberance, the number of people continuing to receive unemployment benefits has risen at the fastest rate since 2008 post-election.

 

Probably just a coincidence.

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Despite slowing US productivity growth QoQ in Q4 (from +3.5% in Q3 to +1.3% in Q4), overall productivity in 2016 grew at 1% – the best annual growth since 2013.

 

However, that silver-lining is akin to being the tallest midget as over the longer-term, US productivity growth has never been this low for this long.

h/t @jsblokland

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While Ray Dalio may be getting second thoughts about the impact of Trump’s policies on the US and global economy, for Third Point’s Dan Loeb there are no such concerns, yet. In his latest letter, Loeb is betting President Trump will be good for investments thanks to his planned mix of tax cuts, reduced regulation and infrastructure spending. 

“This environment is undoubtedly better for active investing – just as active investing was considered to be on its deathbed,” Loeb wrote in a letter to clients of his $15 billion Third Point. Repeating a claim made by other pundits hoping that 2017 will finally be a banner year for active investors, Loeb thinks a shift from government monetary stimulus to measures that will increase personal and corporate spending will create lower correlations between various types of securities and greater dispersion of results within them, such as stocks, Loeb said and added that higher interest rates will also create better investing opportunities.

The focus on the letter was, predictably, Trump’s victory and the investment consequences as a result:

The U.S. Presidential election was the most significant event of the year and the most important paradigm shift since the financial crisis. We did not anticipate Trump’s win although his election served to crystalize trends that had been taking place for some time but had been largely ignored. Starting the morning after the election, we took immediate steps to reorganize the portfolio around investments that we believe will benefit from Trump’s stated policy objectives.

This is how Loeb sees the resulting transition for active managers:

Trump’s election has accelerated the end of QE. The baton is now passing from the Fed to the Treasury, which will provide fiscal stimulus via comprehensive tax reform and infrastructure spending. We expect a significant reduction of corporate and individual taxes, the elimination of the interest rate deduction, and the removal of the deductibility of state and local income taxes from federal returns. To stimulate investment, we see an  immediate deduction for capital spending and a dramatic pullback in government bureaucracy, red tape, and regulation. Most controversial and complex is the proposal to help pay for these measures with a Border Adjusted Tax (“BAT”). According to its proponents, the BAT would encourage greater investment in the United States and harmonize our tax policies with the Value Added Tax levied by many of our trading partners. Finally, a significant infrastructure plan would also stimulate the economy, create jobs, and increase the labor participation rate, which dropped drastically in the Obama era. The infrastructure plan would be paid for in part by an ~8% tax on repatriated funds held offshore by United States corporations.

 

In the immediate term, we believe we will see an acceleration of economic growth at home. Electing a President who is seen as pro?business (ignoring his protectionist views on global trade) has awakened animal spirits, already demonstrated by the record spikes in both business and consumer confidence since the election. This economic growth will come at the same time as inflation is starting to inflect upwards and the domestic economy is close to full employment, notwithstanding the low labor force participation rate.

Loeb wrote that like Druckenmiller and Icahn, he made changes to Third Point’s investment holdings immediately after Trump’s election win, shifting to stocks and away from corporate and structured credit. Third Point now has similar-sized holdings in the healthcare, technology, industrial and financial sectors. A big change, as first pointed out by Reuters, is Loeb’s change in financial company holdngs: the sector now represents 11.8% of the fund, up from 4.4% on Nov. 8, according to the letter. Loeb’s focus is now on banks and brokers and includes exposure to Japan.

“The pendulum in monetary policy has begun to shift away from the past decade of extraordinary easing just as the pendulum in fiscal policy has begun to shift away from austerity and its limiting factors,” Loeb wrote. “The U.S. elections served as a marker for these policy shifts which, in our view, are bullish for rate?sensitive financials.” 

Loeb also urged caution on investment during the Trump presidency, noting hedges on Third Point’s portfolio, but said that even volatility could be a benefit.

Our bullishness is not without some caution, however. We recognize that trade wars and/or escalating inflation could result in a policy mistake that could then result in a sharp sell?off. Our hedges are structured to guard against negative impact from those events.

“While America may or may not be made great again, there is no question that the rules are literally being rewritten,” Loeb wrote. “We do not plan to trade the tweets but we expect an increasing number of real and, even better, fake dislocations to create some extremely rewarding investing opportunities.”

Third Point’s main hedge fund lost 1.1% in the fourth quarter, wrapping up a year that Loeb said was “disappointing”. The fund gained only 6.1% in 2016, below its 15.7% average annual return since 1996 and less than an approximately 12 percent gain for the S&P 500 Index, with dividends. However, in a good start to 2017, Third Point’s master offshore fund rose 2.6% in January.

Full Third Point Q4 letter below:

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Submitted by Alice Salles via TheAntiMedia.org,

Following President Donald Trump’s ban on travelers from seven predominantly Muslim countries, the Iranian government announced it would stop using the U.S. dollar “as its currency of choice in its financial and foreign exchange reports,” the local Financial Tribune reported.

Iran governor Valiollah Seif’s central bank announced the decision in a television interview on January 29. The change will take effect on March 21, and it will impact all official financial and foreign exchange reports.

“Iran’s difficulties [in dealing] with the dollar,” Seif said, “were in place from the time of the primary sanctions and this trend is continuing,” but when it comes to other currencies, he added, “we face no limitations.”

In a piece published by Forbes, Dominic Dudley contends that this move is significant “in the light of the recent ‘Muslim ban‘” announced by Trump. Iran nationals were added to the order issued by the current U.S. administration, which prompted the Iranian government to vow to stop issuing visas to U.S. citizens.

Dudley notes that since 1975, “no Americans have been killed in terrorist attacks in the US by the citizens of the countries included in the ban,” while countries such as Saudi Arabia — “home of 15 of the 19 terrorists involved in the 9/11 attacks” — were left out of the list of prohibited countries.

Despite the country’s decision to halt the use of the U.S. dollar as its base currency for exchange with other nations, Iran’s top export is oil. In the global markets, oil is mainly purchased and sold in U.S. dollars. This fiscal year, Iran is expected to earn  $41 billion from oil sales, with countries like the United Arab Emirates (UAE) and China as their top clients. It’s still uncertain how the country will manage to switch currencies without relying on the American currency. The shift, Dudley notes, “will add a degree of currency risk and volatility and is likely to complicate matters for the authorities.”

This matters because predominantly Muslim countries left out of the “Muslim ban” include Saudi Arabia, one of the world’s top oil exporters.

In the 1970s, the Arab nation struck a deal with U.S. President Richard Nixon establishing an alliance that would maintain the dollar as the standard oil exchange currency in exchange for military support from America. The use of the dollar as a standard currency for oil exchange was accepted by Saudi Arabia and the remaining block of Organization of the Petroleum Exporting Countries (OPEC), which include Iran and 11 other Middle Eastern, African, and South American countries.

OPEC countries account for 42 percent of global oil production, holding 73 percent of the world’s oil reserves. Due to its influence, the use of the U.S. dollar as its standard currency helps to keep demand for the U.S. dollar high, giving the currency the support it requires to remain “the world’s reserve currency” and preventing the effects of inflation from hitting the U.S. consumer.

Iran’s decision to exit this deal might impact the U.S. economy and threaten the dollar, prompting the U.S. government to take stern measures to combat Iran’s actions. After all, Iran holds 13 percent of OPEC’s oil reserves.

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