Trigger Point by Matthew Glass Page A

the usual tensions. An implicit deal had been struck in the worst days of the financial crisis: China would increase consumption and reduce savings as a way of rebalancing the world’s trade flows, and in return it would receive a greater say in global financial governance and institutions such as the IMF and G20. The deal had been breached by both sides. The old G7 powers still retained enough votes to get pretty much whatever they liked in the IMF, and the G22, as it was now, was an empty talkfest that left the western powers to do their deals in informal meetings in Washington, London and Tokyo. China continued to maintain an artificially undervalued currency, paying lip service to its obligations with occasional tiny revaluations, and sequestered its citizens’ savings in state banks instead of encouraging domestic consumption. The disturbances in China in 2014 had only entrenched the problems – making it easier for the Chinese regime to argue that it couldn’t make any of the necessary changes and for the west to argue that China wasn’t ready for a larger international role. Essentially, then, nothing had changed but for the added resentment on each side towards the other for having, as each side saw it, reneged on their side of the deal. Red River had some big, long-term bets placed on the way the dollar, euro and yuan would move in relation to one another, and Ed Grey was confident that eventually those bets would pay out. In the meantime, growth continued, stretching the global imbalances even more, and it was in no one’s immediate interest to do anything about it.
    Everything suggested that there could be a market correction but it was going to be shallow and short. It was possible, as Malevsky said, that the administration would want to show how tough it was in the next couple of months, and talk out of the Fed might make the correction a little deeper, if it happened at all. Even so, the risk-reward profile just wasn’t there for Red River to take a position.
    And yet there was something more than this that Malevsky was thinking of, Grey understood. Something he knew.
    HE PULLED HIM into his office and asked Evangelou to come in as well.
    ‘So who are they, Boris?’ he said. ‘Who are these banks?’
    ‘I’ve got four in mind.’
    ‘How have you identified them?’ demanded Evangelou.
    ‘Basic analysis. Leverage, capital ratios, loan books … I’m not saying these banks are going to fail. I’m just saying they’re the most vulnerable. When Strickland feels he needs to start talking the market down, they’re the ones that are going to drop.’
    ‘How much?’ said Grey.
    ‘I’m guessing ten, fifteen per cent. Maybe twenty.’
    ‘Why isn’t everyone else shorting them?’ said Evangelou.
    ‘Because no one thinks they’re the ones that are going to hurt. And no one’s prepared yet to bet on a correction. But there will be one. Strickland will overreact and haul things back.’
    Grey thought about it. It was the perennial paradox in the markets. If no one else was doing something, why should you? On the other hand, if you only did what everyone else did, you never made any money.
    ‘Ed, this is all hunch,’ said Evangelou.
    Grey agreed. There was nothing behind this, it seemed, but some simple analysis and Malevsky’s insistence that the Fed chairman would be too heavy-handed in his statements, which was pure speculation. But he was interested in seeing what Malevsky was made of as a trader. It might be worth putting twenty or thirty million into short positions to find out.
    To sell short, a DIV ‘borrowed’ stocks for an agreed period from banks that were holding them on behalf of passive shareholders like pension funds or university endowments. That cost a fee, usually measured in thousandths of a per cent of the stock’s value, for each day you borrowed them. When you got hold of the stock, you sold it for its current price and hoped you could buy it back cheaper before you had to