In the turmoil on Friday, Morgan Stanley lost about thirty million dollars. However, after posting the margin for the trade, Morgan Stanley's long position remained unchanged, still a major force in the market.
In the turbulent month of October, Morgan Stanley's proprietary trading department implemented hedging measures in both the stock and futures markets, managing to recover some losses.
Goldman Sachs, on the other hand, made about ten million dollars in the main contracts for November and December. Unlike Morgan Stanley, Goldman Sachs was not the top player in the short market; other financial companies even had larger positions, including Zhongshi's personal wealth.
Apart from these visible large positions, countless market participants were competing in the main contracts for November and December. Many of these transactions were completed by algorithms, typically belonging to quantitative hedge funds that engaged in hedging or arbitrage in the futures market, forming a significant force.
Besides these institutions and major players, there were also many small retail investors. However, without substantial capital, they could only rely on their quick reactions to try to gain a share in the volatile futures market.
On October 18th, U.S. Treasury Secretary James Baker announced on a national television program that if Germany did not consider lowering interest rates to stimulate the economy, the United States would consider further devaluing the dollar.
This statement immediately caused a huge stir!
At that time, Germany was still divided into East Germany and West Germany, not yet unified.
In the 1985 Plaza Accord, countries agreed to allow the Deutsche Mark to appreciate to achieve the goal of devaluing the dollar. Unlike the yen, the Deutsche Mark actively appreciated and raised interest rates to stimulate domestic consumption, thereby balancing the impact of the appreciation on exports.
Because Germany raised interest rates before the Mark appreciated, its exports not only did not decrease but also increased profits and improved the quality of exports, making the Plaza Accord have little effect on the Mark.
There are multiple explanations for why the German economy continued to grow strongly under the Plaza Accord. One explanation is that after the Plaza Accord, Germany actively upgraded its industries, making its products more refined and turning them into high-value-added products, thus gaining pricing power and avoiding significant impact.
Another view is that the European Union was about to be born, and the vast European market was sufficient to absorb the impact of capital inflows. Germany also liberalized the exchange rate between the Mark and the dollar, abandoned GDP growth, and strictly controlled inflation through interest rate increases, minimizing the impact on the economy.
Most importantly, Germany's exports were supported by its strong manufacturing sector, known for its advanced technology, high quality, and strong competitiveness, even earning the title of "the factory of the world's factories."
The U.S. Treasury Secretary was clearly very dissatisfied with the appreciation of the Mark, but with Germany's economic base in Europe, he had limited influence and could only try to devalue the dollar through market rhetoric.
Although it was just a hint, the impact on the market was disastrous!
With the recovery of the U.S. economy and the prosperity of the U.S. capital markets, countless international funds flowed into the United States, especially petrodollars from Middle Eastern countries, overseas capital from Japanese conglomerates, and some large European financial groups. Most of these funds were invested in various aspects of the U.S. economy, with a significant portion going into the capital markets.
If the dollar continued to devalue, it would mean a significant reduction in the wealth represented by these funds, which these capital holders could not tolerate.
For example, if a Middle Eastern country invested one billion dollars in the U.S. capital market, buying a ten-year Treasury bond, it would be an ideal investment with almost no risk and a steady return. If the dollar's value remained stable, this would be a good investment. However, if the dollar devalued, the one billion dollars would be worth only 3.5 billion Deutsche Marks, or even less, after the devaluation. Even though the yield on long-term German government bonds was lower than that of U.S. bonds, investors would still prefer to invest in the Deutsche Mark.
Moreover, countless international funds had invested in the U.S. capital markets, expecting that the devaluation of the dollar would lead to U.S. economic growth and a booming stock market. However, they all encountered a common problem: what to do with their money if the dollar devalued?
Although the Treasury Secretary only mentioned a possibility, the first reaction of profit-seeking capital was to flee the U.S.!
After the U.S. economy transformed and upgraded, it successfully shifted to an information industry-based economy. In this situation, people saw the U.S. leading the world economy once again.
Under these circumstances, the U.S. capital markets flourished, and with the recovery of manufacturing, the entire U.S. economy was moving in a positive direction. International funds saw this and poured into the U.S. capital markets.
However, with just one statement from Secretary Baker, these funds were about to hastily withdraw.
Profit-seeking is the nature of capital!
Zhongshi, who had slept all day, saw this news late at night. He was wearing a bathrobe and sneered at the CNBC screen, thinking, "What was bound to happen has finally come!"
Before he could finish laughing, the phone rang urgently. Lu Hu, standing beside him, looked puzzled at Zhongshi, who ignored the phone. Zhongshi had been sneering at the screen, looking smug and even a bit sinister.
"Mr. Zhong, have you seen the news?" When Lu Hu picked up the phone, he heard Liao Chengde's anxious voice on the other end.
"What's going on?" Lu Hu scratched his head and pointed to the phone, indicating that it was Liao Chengde. He shook his head, dismissing his confusion, and was about to leave.
"Brother Hu, have you prepared the Hong Kong stock account as I asked?" Zhongshi stopped Lu Hu and asked casually. He had asked Lu Hu to prepare the Hong Kong stock account some time ago, and he believed it should be ready by now.
"Little Zhong, everything is ready, just waiting for your order." In private, they called each other by their first names, but in public, Lu Hu called Zhongshi "Mr. Zhong."
"Good, you don't need to accompany me tomorrow. Just watch the market! Remember, only watch, don't act. The time is not right yet!" Zhongshi instructed calmly, then shouted into the phone, "Old Liao, you and Little Hua come to my house now, and remember to be quick!"
Liao Chengde responded on the other end and hung up. Zhongshi could faintly hear Liao Xiaohua's heavy breathing, indicating that he was also waiting by the phone.
"Okay!" Lu Hu nodded without asking why.
Liao Chengde's residence was not close to Zhongshi's property in Shouson Bay, but after fifteen minutes, the Liao family's Mercedes-Benz pulled up to Zhongshi's mansion. Liao Xiaohua, without waiting for the car to stop, hurriedly opened the door and jumped out, running toward the main hall and shouting, "Mr. Zhong, what do you think of the U.S. Treasury Secretary's statement?"
Liao Chengde, following behind, was almost as anxious, taking quick steps and sweating profusely, clearly having rushed over.
"Xiaohua, what do you think?" Zhongshi asked after the Liao family sat down and caught their breath. Since Liao Chengde did not understand English, he must have been told by Liao Xiaohua, making this a test for Liao Xiaohua.
"I think it's a good opportunity, especially with Baker's blatant threat. The market might fall tomorrow!" Liao Xiaohua took a deep breath, calmed himself, and explained his judgment.
Liao Chengde looked puzzled and could not evaluate Liao Xiaohua's judgment, but he had great faith in Zhongshi, almost to the point of superstition.
"Good, Xiaohua, your judgment is accurate," Zhongshi praised. He had underestimated Liao Xiaohua's sensitivity to the market.
"Dad, I was right, wasn't I? See, Mr. Zhong praised me!" Liao Xiaohua looked smug, his lips curling in a challenging glance at Liao Chengde, as if venting his dissatisfaction.
Liao Chengde's face turned stern, and he glared back, as if warning his son not to get too cocky.
"However, Xiaohua, your judgment is not bold enough!" Zhongshi's tone changed, and he bluntly criticized Liao Xiaohua.
Liao Xiaohua's smug expression froze, and he lowered his head, deep in thought, trying to figure out where he had been insufficient.
"This statement from the U.S. government will have a huge impact on the stock market, almost like an earthquake. In the coming days, we can expect major stock markets around the world to plummet. It's just a matter of the extent!" Zhongshi used the word "plummet" without hesitation, characterizing the impact of the U.S. government's statement.
"What? Plummet? How much will it plummet?" Liao Xiaohua was stunned and hesitated before asking tentatively. His previous judgment of a market drop was in line with the general environment, but the intensity and extent were far off.
"If I said that a large-scale stock market crash will occur globally, even comparable to the 1929 crash, what would you think?" Zhongshi smiled faintly, seemingly nonchalant.
"What? The 1929 crash?" Liao Xiaohua stood up, his face full of shock. He said firmly, "That's impossible! It's absolutely impossible!"