a bubble.’
‘We’re coming up to the midterms. If anything happens, even the slightest thing, they’re going to overreact. They’re going to do something, or say something, that’ll haul the sector back. The Fed especially. You look at the way Strickland talks.’
Ron Strickland was chairman of the Federal Reserve, appointed by the previous administration explicitly to do what Alan Greenspan and Ben Bernanke hadn’t done, burst the bubbles that inevitably develop in the financial system before they get too big to bust. When Knowles took office he affirmed that was exactly what he wanted Strickland to keep doing.
‘That’s his job. That’s what this administration is focused on. They’ll sacrifice twenty-five, fifty basis points of growth if they think they have to. They won’t say that, but that’s what they’ll do.’
‘Why now?’ said Grey.
‘I’m not sure it’s going to be right now. I’m only saying, this is the kind of time when it might happen. Midterms coming up. Maybe there’s a feeling things have been going good a little too long and we’re getting to that point where you need to be watchful. The Democrats are saying this administration isn’t committed to regulation. There’s just a bunch of things that might make them damp down somewhat. Not do anything dramatic – just show they’re in control.’
Grey considered it. The rationale was way too vague, too wishful, to back with any of the fund’s capital.
‘I’m not saying we short the whole sector,’ said Malevsky. ‘It’s going to be a wobble, not a crash. But when it wobbles, there’ll be some that really drop.’
‘Really?’ said Evangelou skeptically. ‘Do you have any in mind?’
Malevsky glanced around the table, then looked back at Grey.
Grey understood. ‘Okay,’ he said.
BEING A TRADER for two decades had taught Ed Grey a bunch of lessons. One of them was that it’s easy to be right at the wrong time. You could have the greatest trade in the world, and if you did it at the wrong time you’d lose a shitload of money. The fact that six months or a year later the market moved in the direction you predicted was zero consolation. Everyone had done it, himself included. The trick was not to do it too often.
Was a correction coming? Probably. Markets always get a little twitchy after prolonged periods of rising value and some participants decide to sell and take their profits, if for no other reason than everyone knows the party has to end some time. More and more people were talking about it, and at some point that kind of talk becomes self-fulfilling. But that wasn’t stopping anyone yet. It was the typical schizophrenic behavior of the market, where investors rationally know that the good times can’t last forever and yet keep acting as if they can.
The question was: when, how long and how deep was the inevitable dip going to be?
If market fears and desire for a little profit-taking were the only reasons for the correction, it would be shallow and short-lived, as Tony Evangelou expected, with a rapid return to growth. In that case, the risk-reward for trying to pick the timing of a minor correction didn’t add up.
Was there any reason for it to be deeper? There was a general sense in the financial community that regulation was falling behind again. The new rules that had been introduced under Obama in the years after the crisis had been around long enough now for smart people to start finding ways around them. Everyone knew there were novel financial products and practices that could potentially – in certain circumstances – create the same kind of risks that had brought down Lehman Brothers at the height of the last financial crisis. But those circumstances didn’t exist and no one believed anything like that level of risk had actually developed. No one believed the world was back to anything like the corrupted, hollow shell of a financial system that had been in place in 2008.
Globally there were
‘We’re coming up to the midterms. If anything happens, even the slightest thing, they’re going to overreact. They’re going to do something, or say something, that’ll haul the sector back. The Fed especially. You look at the way Strickland talks.’
Ron Strickland was chairman of the Federal Reserve, appointed by the previous administration explicitly to do what Alan Greenspan and Ben Bernanke hadn’t done, burst the bubbles that inevitably develop in the financial system before they get too big to bust. When Knowles took office he affirmed that was exactly what he wanted Strickland to keep doing.
‘That’s his job. That’s what this administration is focused on. They’ll sacrifice twenty-five, fifty basis points of growth if they think they have to. They won’t say that, but that’s what they’ll do.’
‘Why now?’ said Grey.
‘I’m not sure it’s going to be right now. I’m only saying, this is the kind of time when it might happen. Midterms coming up. Maybe there’s a feeling things have been going good a little too long and we’re getting to that point where you need to be watchful. The Democrats are saying this administration isn’t committed to regulation. There’s just a bunch of things that might make them damp down somewhat. Not do anything dramatic – just show they’re in control.’
Grey considered it. The rationale was way too vague, too wishful, to back with any of the fund’s capital.
‘I’m not saying we short the whole sector,’ said Malevsky. ‘It’s going to be a wobble, not a crash. But when it wobbles, there’ll be some that really drop.’
‘Really?’ said Evangelou skeptically. ‘Do you have any in mind?’
Malevsky glanced around the table, then looked back at Grey.
Grey understood. ‘Okay,’ he said.
BEING A TRADER for two decades had taught Ed Grey a bunch of lessons. One of them was that it’s easy to be right at the wrong time. You could have the greatest trade in the world, and if you did it at the wrong time you’d lose a shitload of money. The fact that six months or a year later the market moved in the direction you predicted was zero consolation. Everyone had done it, himself included. The trick was not to do it too often.
Was a correction coming? Probably. Markets always get a little twitchy after prolonged periods of rising value and some participants decide to sell and take their profits, if for no other reason than everyone knows the party has to end some time. More and more people were talking about it, and at some point that kind of talk becomes self-fulfilling. But that wasn’t stopping anyone yet. It was the typical schizophrenic behavior of the market, where investors rationally know that the good times can’t last forever and yet keep acting as if they can.
The question was: when, how long and how deep was the inevitable dip going to be?
If market fears and desire for a little profit-taking were the only reasons for the correction, it would be shallow and short-lived, as Tony Evangelou expected, with a rapid return to growth. In that case, the risk-reward for trying to pick the timing of a minor correction didn’t add up.
Was there any reason for it to be deeper? There was a general sense in the financial community that regulation was falling behind again. The new rules that had been introduced under Obama in the years after the crisis had been around long enough now for smart people to start finding ways around them. Everyone knew there were novel financial products and practices that could potentially – in certain circumstances – create the same kind of risks that had brought down Lehman Brothers at the height of the last financial crisis. But those circumstances didn’t exist and no one believed anything like that level of risk had actually developed. No one believed the world was back to anything like the corrupted, hollow shell of a financial system that had been in place in 2008.
Globally there were
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