Chapter 10: That Word!

June 13, 1984, Chicago, Illinois

"I see you unloaded HA," Murray Matheson said on Wednesday morning.

"I received a private offer for the block, and after discussing it with Joel Steinem, I felt $1.9 mil was a nice profit after five months. It still has some short-term upside, maybe another five eighths, but there's no point in being greedy. Long term, it'll increase, but not enough to hold on to it."

"What did you do with the proceeds?"

"Parked in the Nikkei 225 for the moment. There really aren't any outstanding opportunities. I hate to say it, but at this point, you have to grind out the currency management fees and play the arbitrage game and pick up a point here and a point there."

"More like a quarter point here and a quarter point there," Murray said. "So much money is in Treasury instruments right now."

"Which, of course, is Volcker's intent, as it keeps that money locked up and not flowing into the economy, which he swears is overheating."

"Think he's right?"

"Only because Congress won't turn off the fucking printing press!" I declared. "The 'cuts' that have been announced have mostly been reductions in future increases, which are not spending cuts, no matter how you slice it. Well, unless you've been captured by the DC environment. Reagan promised to abolish the Department of Education, but it has had budget increases every year since he took office. So, Volcker is right, but he wouldn't have to do it if the money supply wasn't expanding faster than the economy can absorb the increases."

"I don't disagree. Too damned much money is being spent on stuff the Feds have no business spending it on. What's your projected annual return?"

"24.4% as of this morning, against an expected loss for the Dow and gains of around 5% for the S&P."

"And Noel's?"

"I only have the end of May numbers, but at that point, he was at projected returns of 24.2%."

"You're backloaded, though, right?"

"A lot depends on the price of gold when the December contracts are executed. The trend is in my favor, but I'm using Scenario 1, not Scenario 2, to project my gains."

"So you'll beat 25% if your team's projections on gold and silver prices are accurate?"

"I should. The bigger problem will be next year."

"What makes you say that?"

"If the markets rebound, beating the markets by double is going to be impossible, or close to it. The Data Analytics models are projecting a rebound of as much as 35% for the year if rates are cut as much as Pete expects. What are the chances any of us could earn 70%?"

"That would be twenty points over the best year Noel has ever had."

"If the projections for next year are accurate, and you factor in the management fees and our share of the profits, we have to hit about 40% to beat the street to the advantage of our clients. Well, the diverse funds do; your money management fund is a different animal. That said, 1% in fees on $500 mil in the currency accounts is still serious money."

"It is, but the truly serious money comes from the speculative trading accounts. Speaking of those accounts, I saw the latest projection on JPY strengthening. How confident are you?"

"I am not uncertain. The Data Analytics team's numbers are within a few percent of what Scott and Pete think. A low early next year, then long-term strengthening. Granted, we're too far out to make any definitive statements, but you saw our rough projections — a peak of about 250 JPY to USD, then a steady decline to around 140 over the next three years. One of the models projected below 100 ten years out, but none of us trusts that model at this point."

"Based on?"

"Our analysis of the Jurgensen Report from the Williamsburg Summit. A rising US trade deficit is going to force Reagan's hand. If Mondale wins, it's a no-brainer that the US will actively intervene to devalue the dollar."

"Keep working on those models. If you're right, and the Treasury is going to intervene against USD, we need to be properly positioned."

"My plan, as of the moment, is to buy December JPY futures contracts on March 1st, then buy regularly every month with six-month terms."

"Hedged?" Murray asked.

"No. I don't want to give up any of my gains for insurance."

"Why that timing?"

"It's weakening now against the dollar, and I'm waiting for the projected bottom. If I see even a twitch from the Fed, from Treasury, or changes in the trade deficit, I'll pull the trigger sooner."

"What about other currencies?" Murray asked.

"Yes, but not as severe as JPY. We're working on those models as well. The thing is, while devaluation can fix the trade imbalance with Europe, none of us sees US companies penetrating the Japanese market to change the deficit. It'll fail as policy, but we'll make some serious coin."

"What is it you said? Our job is to disabuse the politicians of their magical thinking?"

"Yep."

"Are you going to buy any actual currency?" Murray asked.

"Not my schtick, but you should start accumulating JPY between now and March. That is the implication of this morning's report."

"Do me a favor and expressly state that in tomorrow's report. You're here, right?"

"Yes. Violet and I leave for Meigs at 1:30pm."

"I bet she's a lot of fun!" Mr. Matheson said.

"I wouldn't know," I replied.

"Kane, you're doing it wrong if you aren't hitting that!"

"You've seen several of the girls I hang out with; I get plenty of action."

He shook his head, "You can never get too much action! Anyway, go find me another big win like the JPY prediction!"

"We're on it!"

I left his office and returned to mine, then called Tony, Scott, Pete, Bianca, and Steve into the office. I relayed what Murray Matheson had said, along with his request for an express 'buy' recommendation in our Thursday analyst report.

"We need more time with Scott to work on the model," Bianca said.

"Scott," I said, "please make the time."

"I will," he said. "I still question how we can account for political action that moves the currency markets."

"I don't think we can," Steve observed. "That's why computers will never replace you! I can't model some masked assholes shooting up an OPEC meeting or blowing up a Marine barracks. Granted, you don't know either, but you can imagine various scenarios that can't be reduced to formulas, no matter how hard we work."

"Which is the reason we include prose with our charts," I said. "And why we expressly call out the risks. It's on the traders to take the proper hedges against those events. The computer can crunch the numbers really fast, but that's it."

"Human intuition is different," Bianca observed, "and it'll take a huge advance in technology to even consider trying to do that. If Artificial Intelligence actually happens, like in science fiction, then we have a whole new ballgame. I don't see that happening anytime soon."

"And if humans program those computers, there will be Artificial Stupidity, too!" Tony declared, causing all of us to laugh,

"True!" I agreed. "Remember, I'm leaving around 1:30pm tomorrow for Los Angeles, and I'll be out on Friday as well. Tony is in charge as usual while I'm away."

They left, and I returned to work. The rest of the day was typical — lunch and the gym with Bianca and Violet, and afternoon research and analysis. Violet and I left the office at 5:00pm, and she drove us to her house. After dinner, I headed to class, then headed home, where Natasha was waiting for me.

June 14, 1984, Aboard the Gulfstream en route to John Wayne Airport

Violet and I had privacy on the jet, as the configuration was such that there was a door separating the galley/lavatory from the main cabin and one separating the galley from the cockpit. With the door to the main cabin closed, the pilots wouldn't be able to observe us, giving us the freedom to sit close together on the couch once we were airborne.

For maximum safety, we sat in two of the six chairs for taxi and takeoff, then moved to the couch once the pilots had reduced our climb rate.

"I need to tell you something," I said once we'd moved.

"You're a Russian spy?" Violet asked with a goofy smile.

"Not even close!" I chuckled. "I've been struggling with my old perceptions of you."

"Obviously, and you told me that before."

"I honestly think, at this point, there's only one way to get past it once and for all."

Violet laughed softly, "An interesting approach to seduction!"

"If anyone is seducing someone, it's YOU, Miss Clemmons!"

"Perhaps," Violet said with a smile, clearly agreeing with what I'd said.

"My one remaining concern is what at work I'd call 'terms and conditions'. I need you to tell me what you want, what you need, and then listen to what I want and what I need, and together find a way forward."