Walter Williams - The Rift

“People have predicted that for years.”

“Everyone knew it would happen sooner or later,” Charlie said. “The question is when. Carpe Diem says it’s going to happen now. And because this last boom has lasted so long, I think the recession’s going to be a big one.”

He raised a stub-fingered hand and ticked off the points on his fingers. “Unemployment is down and wages are up, which means a season of inflation unless the Fed acts to cool the economy. Consumer price rises were only point-one percent in April, but that comes off a big rise over the holidays. The visible trade deficit went up over the holiday season, like always, but it hasn’t dropped much in the months since.”

“The Dow is up,” Dearborne offered.

Charlie flashed his grin again. “Those blokes are always the last to know,” he said. “Here’s the two factors that Carpe Diem thought were significant.”

He ticked off numbers on his fingers again. “There’s a debt bomb about to go off in Europe. Public debt is out of control in the old East Bloc- well, that’s normal- and it’s normal for Belgium and Italy, too. But in Germany? Public debt is over sixty-five percent of GDP. Britain’s at over fifty percent. And even the Dutch, for God’s sake, have been on a spending spree.” Charlie dropped his hands, leaned forward, gave Dearborne a look from his baby blues. “It can’t last, and when the European economy slows, the effects are going to be worldwide.”

“Secondly,” Charlie said, “Carpe Diem noticed a lot of action on certain commodities-copper and other strategic minerals, because China is sucking up titanic amounts of raw materials as they modernize. And there’s a lot of volatility on foodstuffs, because those floods in Iowa are making people nervous. But what Carpe Diem is really interested in is this weird speculative trend on certain fringy areas of the commodities market. Coffee- why speculate in coffee when there’s stable supply and demand? Also natural gas, foodstuffs, certain petroleum products. Which means the money is moving out of the market’s center, as it were, possibly because people are getting uneasy about it.”

Dearborne looked worried. “You’re not suggesting that we speculate in these commodities ourselves, are you?”

“No way, guv,” Charlie said.

He knew Dearborne liked it when he called him “guv.”

“If I studied the way those commodities were moving,” Charlie said, “I reckon I could make you some money, but it wouldn’t be worth the aggravation. Those trades are powered by insecurity and ignorance, which means that you can’t predict them, and if you can’t predict what’s going to happen, that’s not investment, that’s gambling.” Charlie flashed his brilliant capped teeth again. “That’s why we’ve got tools like Carpe Diem- to help reduce the risk.”

Dearborne was reassured. “Does Carpe Diem have any other points to make?”

“The Chinese have the world’s largest supply of foreign currency reserves, but they’re going to have to sell in order to pay for their economic expansion. So will the Taiwanese, because their economies are linked to the Chinese. I expect that the Japanese will begin to sell as well, to finance the amount of debt they’ve acquired as a result of the bailouts they’ve indulged in.”

“Dollar down.” Dearborne nodded, absorbing this lesson.

“Which would normally be good for exports, except that due to the other problems I’ve mentioned, the world won’t be able to afford so very many of our exports in the next few years.”

Leather creaked as Dearborne leaned back in his chair. The gleam in his eyes burned with a new intensity. “So what are you planning to do?”

“I’m positioned nicely in T-bonds, which I expect to rise soon and make us a packet. But that’s the short run.”

“Long-term?”

“Well.” Charlie grinned. “There’s that risk I was telling you about.”

“Ahh,” Dearborne said.

“Once the rest of the world catches up to Carpe Diem- and that won’t be long, perhaps even hours- I expect the markets are going to take a tumble. Which is fine as far as we’re concerned- we can make some nice profits right then. But the best course, the way interest rates are running right now, is to sell the market short, and not lose our nerve.”

Dearborne looked thoughtful. If he was sure the market was going to fall, it would be cheaper to let Charlie, right now, sell a fistful of short positions that reflected that belief.

Dearborne’s face turned sulky as a new factor entered his thoughts. “Vega,” he said, remembering the jargon for once.

“Vega’s the fly in the ointment, all right,” Charlie said. “When the market starts to slide, volatility’s going to go up. Which will mean an increased chance for profit, but it also means the administrators at the various exchanges are going to get nervous and start calling on us to meet our margins.”

Margin calls were the bane of the trader’s life, particularly if he traded on the Mercantile Exchange in Chicago, which had a system called SPAN that continually calculated margins and could call for margins right in the middle of the trading day, meaning that the trader would have to find money for the margin call right then, instead of having overnight to make the arrangements.

“How many short futures are we talking about?”

“Well, guv …” Charlie took a deep, theatrical breath. “For the plan that Carpe Diem and I suspect will maximize our profit, we’ll need a fund of between forty and fifty million.”

Involuntarily, and without Charlie’s theatricality, Dearborne echoed Charlie’s intake of breath. “Jesus God,” he said.

Charlie threw up his hands. “Understand that there are ways of making this less risky,” he said. “Every time the market moves, I’m going to be hedging our position. Every minute, practically. And in a volatile market, I’m going to be able to make a lot of short trades that should keep our cash flow positive.”

“Jesus God,” Dearborne said again. He gave a glance at his bowling trophies, as if for reassurance. “What if the Fed acts?” he said. “What if the Federal Reserve decides to lower interest rates?”

“I don’t think it’ll happen,” Charlie said. “The chairman’s too bloody conservative. But just in case, I’ll hedge by shorting Eurodollar puts. If the Fed cuts interest rates, then Eurodollars will rise and I’ll make a packet when the puts fall in price.”

“Mmm,” Dearborne said as he steepled his fingertips and sought communion with his trophies.

“Vince,” Charlie said as he leaned forward and sought Dearborne’s uneasy eyes with his own eyes of brilliant blue. “I’ve been a good lad these two years- I’ve been risk-averse- haven’t yet steered you wrong.”

“True,” Dearborne admitted. But the acquisitive glimmer in his eyes was dull, uncertain.

“You know what Carpe Diem means in Latin, Vince?” Charlie asked. “Seize the Day. This day must be seized, and soon. Because if we seize it now, I can give you profits that would make those twenty-four millions look like your kids’ milk money.”

Dearborne bit his lip, fiddled with something on his desk. Looked anywhere but at Charlie. Move, you bastard! Charlie thought. You think I spent all those hours playing golf just for the fun of it?

Slowly, a calculating gleam returned to Dearborne’s gaze.

“Well,” he said, “I’ll make some calls.”

*

Before Charlie even left Dearborne’s floor at the Tennessee Planters amp; Trust, he used his cellphone to call Deborah, his assistant at Tennessee Planters Securities, and had her begin to place his trades. Then, from the old Otis elevator as it creaked its way to the ground floor, he called Megan Clifton, who ran the “back room”- the settlements office- at TPS.