WU GUOZENG WAITED for Steve Haskell to sit down. Haskell had brought one of his senior aides as interpreter and note-taker. Wu had an interpreter with him as well, although his English was just about as good as Haskell’s. Between stints at the Chinese mission to the UN, four years in roles at the Washington embassy, and five years as the Chinese ambassador to the US, Wu had spent upwards of a dozen years in the States. This was his second year in the job as vice-foreign minister with responsibility for North America, and he was widely tipped as a potential future foreign minister for the People’s Republic.
Haskell’s diplomatic credentials were a little slimmer. He was a longtime Republican Party donor and, as Tom Knowles’ appointee, had taken up his post as ambassador in Beijing just a year previously. But he had a thorough working knowledge of China and could even hold his own in Mandarin, and his appointment was widely considered to be an astute one. First as a partner with the international law firm Spearman Maybury and then with the investment bank UDB Philips, he had run offices in Hong Kong and Shanghai and otherwise been involved in China for over thirty years, and his network in the Chinese business community and amongst government financial officials was unrivalled.
Wu had a long face and thinning hair with a combover. Haskell had once been red-headed but now had a bare cranium. There wasn’t enough left for a combover should he have even wanted one. The two men had met regularly since Haskell arrived at the US embassy and generally they got on pretty well. Wu had a good sense of humour and was fairly open and pragmatic. He had been around American diplomats and politicians for so long that he was realistic about what could be achieved and how best to go about it. Steve Haskell liked to think he was fairly pragmatic as well.
He knew, however, that this wasn’t going to be an amicable conversation. He imagined there must have been much discussion in the Chinese government compound in Beijing, the Zhongnanhai, over the two days since the president’s announcement of Jungle Peace. Whatever Wu privately felt, Haskell knew that the Chinese vice-minister had a message to deliver, and it was one that would have come from a lot higher up in the hierarchy than his vice-ministerial department. Haskell just wasn’t sure how hard the message was going to be.
The president’s announcement had received generally positive coverage in the American press, and the US blogosphere was largely supportive. Most Americans seemed to see the action as a disinterested mission by the US to liberate a long-suffering part of the world from a resident evil. Steve Haskell himself saw the mission in this light, but he was well aware of Chinese sensibilities on the matter. He could hardly fail to be – not from the noise being made in China, but from the silence. The Chinese media was virtually ignoring the issue and very little in the way of blogosphere comment was being allowed past the government censorship operation on the net. The Security Council vote had received only perfunctory mention and the president’s announcement had passed without notice. Haskell had been around China long enough to know what that meant. When the regime felt that it had been attacked and could turn injury to its advantage, it whipped up a fury. He had been in Shanghai in the late nineties and had seen the government-sponsored demonstrations after the accidental bombing of the Chinese embassy in Belgrade. Chanting crowds had thundered past the Spearman Maybury building and he and his staff had been trapped for two days, having to spend a night in the office. But everyone knew the anger was largely manufactured and the staged demonstrations were under close government control. When there was public anger in China, you knew where you stood. Silence was something else. Silence was more ambiguous, threatening. When the Chinese government clamped down on news reporting from abroad, it usually meant it was seriously scared of losing face. That was when it was at its most dangerous.
Wu spoke in Mandarin. He had a note for the United States government from the government of the People’s Republic. He handed Haskell a sealed envelope.
‘This note refers to the recent commencement of hostilities by American forces in Uganda,’ said Wu. ‘My government wishes to ensure that we have clarity between our two governments on our expectations in this issue.’
Haskell’s aide translated the words, although Haskell’s Mandarin was pretty sharp. He responded in English. Normally he was comfortable conversing in Mandarin, but for certain conversations he wanted to be sure he was entirely in control of the nuances in his speech.
‘I’m certain that clarity is critical and whatever we can do to achieve that will be a good thing.’
Wu nodded. ‘My government, as you know, does not oppose your mission. If we oppose your mission we would have voted against resolution 2682.’
‘And the US government is grateful that you didn’t.’
‘We will, however, oppose anything that goes beyond the provisions of the resolution.’
‘We would not anticipate taking any action that goes beyond the resolution,’ replied Haskell.
‘The resolution refers only to Uganda.’
‘And to other countries who may invite member states to assist them in bringing the actions of the LRA to an end.’
‘That is correct,’ said Wu. ‘I am not aware of any other states who have issued such an invitation.’
‘Nor am I,’ said Haskell. He smiled.
Wu frowned. ‘Ambassador, we will oppose any intervention in other states.’
‘We have no intention of intervening in other states.’
‘This will be a very delicate situation.’
Haskell didn’t respond immediately. His aide had translated the word that Wu had chosen,
xianruo
, as ‘delicate’, but Haskell’s Mandarin was good enough that he knew the word also had a strong connotation of fragility. And the tone in which the vice-minister said it left no doubt that it concealed a host of further, more worrisome meanings.
Haskell had been briefed by State. Border demarcation between Uganda, Sudan and Congo in the jungle-clad region in question was blurred, to say the least, and there were a number of areas of dispute between the countries. Steve Haskell couldn’t imagine a US Apache pilot worrying too much over the niceties when in pursuit of enemy combatants on the ground. International law over hot pursuit could be interpreted to allow incursion into other states. It could also be interpreted to forbid it.
Facing an insurgency that roamed across the borders of three states, it wasn’t too hard to imagine incidents that the Chinese government could use to protest against the mission if it chose to do so.
‘I will read this note now, Vice-Minister, if I may, in case I need to ask you for any clarification.’
‘Please,’ said Wu.
Haskell opened the envelope. It was a brief note, containing little more than what the Vice-Minister had already said. It gave no greater insight into the Chinese government’s intentions.
Haskell put the note away. ‘We will of course provide a response as soon as my government has had time to consider this note.’
Wu nodded.
‘However, I trust that your government will interpret our actions in the spirit of our mission. The Lord’s Resistance Army is a truly evil group and I personally believe that removing it is something that we all should be interested in seeing done. The United States has no interest in this mission but to do that, and to do it as quickly as possible with least cost in the lives of our soldiers and the lives of civilians on the ground.’
Wu gazed at him impassively. Haskell knew the vice-minister wouldn’t respond to that. This was a minuted conversation and he wasn’t being tasked by his superiors with giving a moral evaluation of Jungle Peace.
‘I just want you and your government to understand that,’ said Haskell.
Wu smiled briefly. ‘We look forward to receiving a reply from your government.’
IN THE CAR, Haskell read over the note again, then handed it to his aide.
‘It’s interesting they chose Wu to deliver the message,’ he said.
The aide nodded, reading the note.
Haskell had expected to be called in to see the Chinese foreign minister. It was a good sign, he thought, that the Chinese government seemed to be keeping it one level lower down.
‘What do you think?’ said Haskell. ‘I don’t think they’re going to make too much noise about it.’
‘Doesn’t look like it.’
‘The media silence says to me: we’re embarrassed by this. Something happens that they don’t like, they’re still going to be embarrassed by it. Even more so. I think the message here is, don’t make us say anything on this. Don’t put us in a situation where we have to say something, where we have to remind people what’s going on. You have a resolution, and we can live with it, but don’t go outside the terms of that resolution because then you’re going to force us to make a protest, and we don’t want to do that. It won’t be good for either of us.’
‘And that would happen if the government of Sudan started making complaints that we were in their space. They’d demand Chinese backing in public and the Chinese would feel they’d have to give it.’
‘Exactly,’ said Haskell. ‘So the message is: stay out of Sudan.’
‘On the other hand,’ said his aide, ‘this could be a genuine warning. If we do something they interpret as wrong they might use it as a pretext to get aggressive. They could see this note as setting a line in the sand. At the extreme, they might even want us to overstep it. They might want a pretext to show how tough they are.’
Haskell frowned. It was possible. ‘I wonder where the army stands on this.’
His aide shrugged. She handed back the note. ‘I’m just playing devil’s advocate. If they were setting up a pretext, this wouldn’t have been a private warning. It’d be on the front page of the
Renmin Ribao
and every media outlet in the world would get a press release. It only works as a pretext if everyone knows the line in the sand has been drawn. If it’s done in private, it doesn’t help them.’
‘I guess that’s true.’
‘On balance, Ambassador, I think you’re right. They’re saying, do what you have to do in Uganda, get in and out as quick as you can, and while you’re there, stay out of Sudan so we don’t need to do anything.’
Haskell read over the note again. Then he folded it and put it back in its envelope. ‘Yeah,’ he said. ‘I think that’s what they’re saying.’
THE MEETING ROOM was a small, glassed-in oblong on one side of the thirty-fourth floor of a tower in midtown Manhattan. Twenty-three people were crammed inside around a table that had been designed for ten, chairs layered two deep. In the middle of it all sat Ed Grey.
Grey was fifty-one, a big, handsome man with slicked-back hair who was the principal partner of Red River Investments. The term hedge fund had gone out of fashion, discredited by the global financial crisis and made unattractive by regulation, and Red River was technically a DIV, or Diversified Investment Vehicle, but its activities were pretty much the same. Grey had come out of one of the few operations in the hedge fund world that had bet on the collapse of the subprime market and earned staggering returns for its temerity – or perspicuity – when the financial world was imploding in the heady summer of 2008. Grey himself had established his reputation with a series of audacious bets on oil and gas prices during the downturn and had garnered enough of a client following to go out on his own and set up Red River in 2012. He named the company after the ranch in Colorado that he had bought with a fraction of the earnings of those years. The vast bulk of his profits went into the fund, together with an initial subscription of $2 billion from external investors. Six years later, he had upwards of $16 billion of client funds under management, leveraged up to close to $60 billion through bank financing.
The people around him ranged in age from mid twenties to late thirties, mostly men, a couple of women. Casual dress was the order, chinos, even one or two in jeans. There were other people in Red River – the chief operations officer, finance officer, compliance officer, a couple of marketing people, various administrative people – but these twenty-two were the heart and brain of the firm. Six of them were portfolio managers, the traders who were allocated capital from the fund and structured the deals that made Red River’s money. The others were market analysts and quantitative analysts working for the portfolio managers, scouring the markets, developing ideas, doing research and running quantitative models that would enable the portfolio managers to make their trading decisions.
Ed Grey himself directly managed a portfolio of around thirty per cent of the firm’s capital, mostly in commodities and developing markets, as well as acting as the CEO and chief investment officer. His most senior portfolio manager, Tony Evangelou, was a big-hitting equities trader who focused on US and European markets, and managed around a quarter of the fund. The rest of the capital was more or less evenly divided among the other managers who had expertise in bonds and foreign exchange.
Communication across the group was essential. Grey and Evangelou were focused on finding the big, event-driven opportunities that could earn forty, fifty, sixty per cent returns as one-off bets. The other managers largely worked steady, low-risk trades that earned a reliable eight to ten per cent a year and gave the DIV a baseline return. But any one of the managers might come across a one-off opportunity for extraordinary returns or be seeing trends in his or her market that might be relevant to any of the others. As a multistrategy, global DIV, the portfolio manager group had to be able to form a view of the way key economic trends around the world were heading, and structure their trades accordingly. They sat at the same desk and were always exchanging information, but Grey liked to get them together in the meeting room as well, sometimes daily. Most times he got the analysts in with them also. Discussion was open. Anyone could put forward an idea and anyone could challenge it.
Today, he had Uganda on his mind.
Tony Evangelou thought it was nothing. ‘No one cares, Ed. No one sees it making a difference to anything.’
‘It’s a big yawn from where I sit,’ said Maria Lomax, who traded foreign exchange. ‘No one’s seeing a scenario where it matters.’
The other portfolio managers agreed.
‘Then we challenge that,’ said Grey. When the market uniformly expected trends to go in one direction, the trick was to find the reason the market might be wrong, quantify the probability and structure a trade that gave a huge payout if you were right and that imposed no loss – or even made you some money – if you weren’t.
But there was no trade to be done if the probability was zero.
‘What makes the market care?’ said Evangelou. ‘Nothing. It’s too small, Ed. It’s not a bite on a rat’s ass.’
‘Say the military lose some guys in there.’
Evangelou shrugged.
‘Say we get sucked in.’
‘It’s not Iraq. What’s the spend? It’s chickenfeed.’
‘You want to check that?’ said Ed to one of the analysts.
The analyst nodded. Through research into Defense Department spending at various levels of foreign-deployed force, he would be able to create a set of scenarios for military spending that he could run through his models. A significant rise in military spend would raise the budget deficit, which would affect the dollar, interest rates, bond prices and likely a bunch of other asset classes as well.
‘What about Uganda?’ said Adil Menon, one of the portfolio managers. ‘Maybe Kenya. Let’s think about opportunity. We have no exposure at all to those markets. It’s no-lose. If this intervention gets rid of the LRA, there’ll be some kind of economic payoff. If it fails, they’re no worse off than they are today.’
Grey knew nothing about the Central African region and had never invested there. Adil, who mostly traded currency, was keen to develop a specialism in fourth-wave countries, as the least developed of the emerging markets were known.
‘You want to get out there?’ he said.
Adil nodded.
‘Maybe we put a couple of hundred million into Uganda if we can find some opportunities,’ said Ed. He liked the idea. He had made a heap of money in Ghana at one stage after having read a couple of articles about the country in
The Economist
and getting out there to investigate.
‘Liquid opportunities,’ said Evangelou. ‘Don’t get us stuck in some shitty trades we can’t get out of, Adil.’
Menon smiled. That was Evangelou’s mantra, liquidity, having a market that was deep enough with a sufficient number of counterparties so you could get out of a large position when you wanted to. You never wanted to be the last guy holding the parcel with no one to pass it to. Evangelou hated developing markets, especially fourth wave, because liquidity was always an issue.
‘So apart from local effects in the region, this Uganda thing is a storm in a teacup, huh?’ said Grey.
There were nods around the table.
Grey thought so himself, but he was going to continue to challenge that view as the situation developed. Markets across the world had been on a slow but steady bull run for almost three years and event-driven opportunities for outsize returns were few. He didn’t think this was one of them, but he was going to keep watching. The conflict looked so trivial that if it blew up into something big and began to have a material impact, the opportunity for those who spotted the effect early was going to be substantial.
‘Anything else?’ he said.
There was silence for a moment.
‘I have an idea.’
Ed looked along the table and two rows back to see who had spoken. Boris Malevsky was a new joiner Ed and Tony had hired out of Morgan Stanley to work as an analyst on Evangelou’s team. He was the child of Russian immigrants and had a slight accent courtesy of the first eleven years of his life in Moscow. Boris was curly-headed, overweight, sweaty and, in the fortnight since he had joined Red River, rarely clean-shaven. Grey liked him. There was something about Malevsky that made Grey think he might have what it takes to be a trader, a mix of intellect, rebelliousness and contrarianism that you always find in truly great portfolio managers who are capable of backing themselves against the market to win the kind of iconic bets that he himself had won over the years. On the other hand, you often found those same qualities in truly terrible fund managers who were capable of losing more money than most people knew existed. The difference between the two was another set of qualities: the stomach to hold a position, the discipline to execute your strategy, and most importantly, the humility to accept that you were wrong when the market had turned against you and the flexibility to act on that realization quick enough to save yourself from a trap door that was opening under your feet. Ed Grey had no idea if Malevsky had those qualities, but he wanted to find out.
‘What is it?’ he said.
‘We short US banks.’
There were smirks around the table. Ed Grey wondered if Malevsky was saying that just to show how contrarian he could be. The line between a contrarian and an idiot was a thin one.
‘What’s that got to do with Uganda?’ said Evangelou.
‘Nothing. I didn’t say it did.’
‘Then what the fuck are you talking about?’
‘I’m saying we should short some banks,’ said Boris, with a slight Slavic slur just detectable in his accent.
‘Boris, right now banks are on a one-way ride.’
‘And we’re long all the way.’
‘Because they’re on a one-way ride.’
‘And if there’s a correction?’
‘They’re still on a one-way ride. If there’s a correction, it’s limited. At Red River we look at a six month to one year horizon and our investors know that. If banks correct, over that time horizon they’ll come back and they’ll still keep going up.’
‘I agree,’ said Malevsky. ‘But shouldn’t we make some money in the correction?’
Grey watched him with interest. ‘How do you know there’s going to be a correction?’
‘You think this Uganda thing’s going to do it?’ said Maria Lomax. ‘You know some banks with exposure to Uganda?’
‘It’s going to be good for them,’ said Evangelou. ‘Adil’s right.’
‘It’s got nothing to do with Uganda,’ said Malevsky.
‘Boris, why the correction?’ asked Grey.
‘This administration is scared of a bubble. It’s scared of anything that looks like a bubble.’
‘We haven’t got a bubble,’ said Evangelou impatiently.
‘No, but we’re in a bull market that’s run eleven consecutive quarters. You look at any public statement that’s ever come from Knowles, from the Fed, from the Treasury. This administration will not allow the banks to drive a bubble.’
Evangelou rolled his eyes. ‘We haven’t
got
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.