Thomas Hoover - The samurai strategy

Then I glanced out at the blue morning sky, empty except for a single swooping sparrow, and had a strange premonition, one of those mystical moments when everything sparkles with crystalline clarity. I had this feeling I can't explain. Still in a reverie I carefully set down my orange-juice glass, walked upstairs to the "office," and dialed one of the computers into Reuters's Wall Street service. How were the securities markets taking the news? It was already ten-thirty, time enough for some initial response.

Dear God. For a second or so I just stared at the numbers in disbelief. What was happening? Noda hadn't gone near the stock market.

I quickly switched on the TV and located CNN, which was already carrying a special report live from the floor of the New York Stock Exchange. There stood a badly shaken Lou Dobbs, minus his tie. Minus, in fact, his jacket. The scene around him was pandemonium.

"… and the Dow Jones Average…"-he glanced down at a monitor-"… has dropped six hundred and eighty points in the last twenty minutes…" At that moment somebody jostled against the cameraman, giving us a momentary view of the ocean of paper buy-and-sell slips littering the floor. "A hundred and ninety million shares have already changed hands in the first half hour of trading this morning…"

My God, I thought, the market is in free-fall. Was Meltdown Monday in '87 just the warm-up?

"As yet unconfirmed rumors concerning a slow foreign response to today's Treasury auction…"-although he was weighing his words carefully to give the appearance of calm, the hasty makeup on his forehead was already beginning to bubble with perspiration- "… seem to be responsible for what most analysts are describing as an entirely inappropriate overreaction in securities prices here this morning…"

What else could he say? It was as though everybody's gnawing, primal fear had just been confirmed. There really was a hairy beast lurking in the bedroom closet, waiting to jump out and eat us in our sleep. The market was running to mommy: safe and soothing cash.

Next he made the tactical error of buttonholing a couple of floor traders and specialists for comments. They didn't bother to mince words. Their one, terrified question: Had Japan finally decided to let the U.S. and its towering debt just twist slowly in the wind? If that happened, U.S. capital would simply dry up, sucked in by Treasury's massive money-sponge: interest rates would soar, murdering the U.S. economy. The Great Depression of the nineties.

As I watched, a bulletin started running across the bottom of the screen: bids on the new issue of thirty-year bonds had now dropped an amount equivalent to raising their return almost two full interest points. I zeroed in as the text continued. Worse news. The "coverage ratio," which measures how many more bidders there are than necessary, had plummeted from 2.7 to 1.3. And still dropping. More and more potential buyers were running for cover.

Lou, who was now surrounded by traders in blue jackets and couldn't see his own monitor, was assuring his viewers that experienced market analysts were all saying the slowdown in Treasury action did not accurately reflect worldwide demand, that deutsche marks and pounds sterling undoubtedly were already winging westward to take advantage of the new higher rates.

Sweating there in his melting pancake, the poor guy had no inkling the patient was slipping into a coma just as he'd forecast full recovery.

Well, I thought, there's always prayer. Anything's possible. But… as Henderson used to say, if frogs had wings, they wouldn't bump their ass.

I got up to go downstairs and pour another cup of coffee. Coming back, I decided to forget about the stock market for a moment and just focus on Treasury, so I clicked on my Telerate service and scrolled through the financial quotes.

Friends, by that time there was no, repeat no, market out there for Treasury paper. Now that the Japanese dealers appeared to be dumping everything, European banks had hit the sidelines, waiting to see what transpired. Would rates continue to move up? Would Treasury be forced to withdraw the issue? Should everybody be bailing out now before bond prices went through the deck and demolished years of interest earnings? Looming over it all was that standing terror of the bond markets: no liquidity.

Back to Cable News Network. An officer from one of the dealer banks (which bid on big chunks of Treasury paper, then retail it) had rushed over to CNN's midtown studios and was explaining to us all it was clearly nothing more than some minor trans-Pacific communications snarl. The problem, obviously, was simple: Japanese securities firms here just hadn't received authorization from their head offices in Tokyo, where it was after business hours. A clarification would be forthcoming any minute now.

Well, if you've ever been turned down for a mortgage and you fantasized a day when you'd see that high-and-mighty clerk behind the desk have to ask you for a loan, I hope you caught that one. This paper-shuffler whose secretary had a secretary had agreed a week earlier to take on three billion dollars of Treasury's new debt issues-paper he now couldn't give away, let alone resell-and he was practically on his knees begging America to save his bank.

What the hell was going on? My mild-mannered friend Matsuo Noda had inadvertently (I assumed) kicked off a major financial panic.

I clicked the dial over to Financial News Network, FNN, which had momentarily interrupted its heavy midday fare of California snake-oil-and-options hucksters. Now a decidedly pale investment banker, this one an unindicted employee of Drexel Burnham, was declaring it was all merely a little "tempest in a teapot." His precise words. The Japanese securities houses wouldn't dare pull out their funds and kill the market, he explained. It was absurd. If they did that, their investors would lose a fortune, since any big sell-off would automatically drive down the value of their own massive portfolio. Ergo, Japan's funds had no choice but to stay invested. No problem.

My friend, I thought, where have America's bankers been? Out repossessing some widow's Chevy? As a matter of fact the Japanese outfits here don't give a flying fig what happens to our debt market. If you'd been doing your job, you'd know that Matsuo Noda had already sold Treasury futures far in excess of Japan's portfolio back when values were still high. Now he can go out and pick up all the notes and bonds he wants, cost approximately nothing, and turn around and deliver them at yesterday's full price. The man must feel like a riverboat cardsharp who's lucked into a saloon full of Huck Finns on payday. Don't you realize he's just cleaned you out, right down to the fillings in your teeth? And now he's got his team on the bus ready to roll.

Over to CBS, a Special Report underway. It featured a stream of well-meaning and incoherent Treasury officials, none of whom had the slightest inkling what to say. Then Jack O'Donnell came on from the Senate pressroom, breathing fire. The administration's "light at the end of the deficit tunnel" had turned out to be a freight train heading our way, just as he'd predicted. America's debt chickens were coming home to roost. He was demanding that the Speaker call a joint session of Congress this very day and by God do something.

Right, Jack. What? Looks like our pal Matsuo Noda is about to have the U.S. of A. exactly where he wants us. By the balls.

I guess I must have been operating solely on instinct by then, because a phone number popped into my head that I hadn't recalled in years. Sam Kline, my old broker at Merrill Lynch. I hadn't talked to Sam in ages, but his number used to come to my fingers whenever the market started acting up. Maybe he was sort of a father figure. Truth is, I'd first learned what little I know about the market watching that giant ticker ML had up at one end of the office just above Sam's desk-and long gone in this age of computers. I remembered how heavy trades-over ten thousand shares-were marked with stars, always fun to watch.