Golden Spoon Investor

Newark Liberty International Airport, Newark, New York, USA

On a clear, cloudless day, a Gulfstream IV business jet with a sleek, white fuselage was parked on one side of the expansive apron.

The interior of the jet was spacious and luxuriously decorated, with soft leather sofas and polished wooden furniture that offered both comfort and sophistication.

Seok-won and Landon sat across from each other, engaged in conversation. Through the round, windproof window, the wide-open runway and rows of passenger planes were visible in the distance.

"After deducting all fees and taxes, including borrowing costs, we confirmed a final profit of $19.18 billion," Landon said, handing over a thin folder as he explained.

Dressed neatly in a gray suit, Landon exuded professionalism.

Seok-won, comfortably leaning back in the soft seat, accepted the file, scanned the financial statements inside, and smiled with satisfaction.

"The returns are not as bad as I expected," he remarked calmly.

Landon shook his head, surprised by the subdued reaction.

"It's not just 'not bad'; it's a massive jackpot! I checked the figures several times to make sure I wasn't mistaken, but how can you remain so composed? You're truly remarkable."

For Landon, the profit was staggering—enough to make anyone leap with joy.

"This must be the difference in temperament," Landon added with a chuckle.

"I'm just as surprised as you," Seok-won replied with a faint smile.

Landon gave him a doubtful glance. "You don't seem surprised at all."

Seok-won shrugged.

"I was nervous when handling such a massive sum—over $74 billion with tenfold leverage. But when I saw the profit, all my worries vanished instantly."

Landon had been under constant stress during the process. With such high leverage, even a small drop in bond prices could have resulted in catastrophic losses, potentially bankrupting the Eldorado Fund in an instant.

"I couldn't relax for even a moment," Landon admitted, his tone more candid now. "I spent most of my days monitoring bond prices."

Though he didn't say it outright, Seok-won could imagine Landon fidgeting and checking the markets every chance he got.

"Now that the positions are closed, I feel relieved," Landon continued. "But I'm also worried if we'll ever achieve such high profits again."

Seok-won, in contrast, seemed utterly composed. "It was certainly a sweet deal, but everything that starts must eventually end. There's no need to dwell on it."

Landon looked around briefly, lowering his voice as he asked cautiously, "Do you really think the Fed will raise interest rates as you predicted?"

"Of course," Seok-won replied, picking up his whiskey glass. The ice cubes inside clinked softly as he tilted it.

"The White House won't like it, but the Fed fears inflation above all else. They'll undoubtedly act."

Hearing this, Landon's expression turned serious. He had been closely following the Fed's movements and the state of the bond market.

"We've pulled out, but others are still heavily leveraged in bonds. If rates rise, the shock will be enormous," he said.

"Indeed," Seok-won agreed. "The market has been overindulging, and the aftermath will be significant."

"Hedge funds have inflated a massive bubble in the bond market," Landon remarked.

The Eldorado Fund had contributed significantly to that bubble.

A rate hike would undoubtedly cause major disruptions, though not a complete collapse of the bond market.

"Still, unexpected crises often strike all at once," Seok-won mused silently.

Concerns over a strong yen from U.S.-Japan trade disputes and unexpected inflationary pressures were looming. Combined with excessive leverage by hedge funds, any issue in one area could cascade, triggering catastrophic chain reactions.

"The Fed's rate hike might just be the spark that ignites the storm," Seok-won thought grimly.

The impact of the rate hike would be far more destructive than Landon imagined—what some would later call the "bond massacre."

Still, since the outcome would become clear soon enough, Seok-won chose not to elaborate further.

Turning back to Landon, he asked, "Are we continuing to build short positions as planned?"

"Yes, steadily increasing contracts," Landon confirmed.

Seok-won nodded slightly and set his whiskey glass down. "Tell Andrew to establish new long positions on the yen."

Landon looked surprised. "Do you think the yen will rise?"

"Surely you've noticed the increasing trade deficit and the tension between the U.S. and Japan," Seok-won replied.

"Of course. Negotiations have been ongoing since April to address the trade imbalance," Landon said.

The U.S.-Japan trade talks had become one of the most heated topics in politics and economics.

"The main sticking point is auto imports, and that won't be resolved easily," Seok-won said.

Landon nodded in agreement. "The U.S. isn't just pushing for increased imports of American cars and parts; they're demanding specific import quotas, guaranteed by the Japanese government. That's hard to accept."

"True, but the White House isn't in a position to compromise either," Seok-won pointed out.

"You mean because of the United Auto Workers?"

"Exactly," Seok-won replied.

The United Auto Workers (UAW), with hundreds of thousands of members, was the second-largest and most influential labor union in the United States.

"The areas hardest hit by Japanese auto imports are Detroit and the northern Rust Belt regions," Seok-won explained.

"Those regions are struggling economically," Landon acknowledged.

"With next year's midterm elections approaching, the administration will need to appease the UAW and retain the Rust Belt, traditionally a Democratic stronghold. They'll have no choice but to take a hardline stance," Seok-won concluded.

Landon hesitated, then asked cautiously, "Are you suggesting they'll deliberately push for a stronger yen?"

Seok-won nodded. "Raising the yen's value increases import prices, naturally reducing the trade deficit and putting pressure on the Japanese government. It's a card they wouldn't hesitate to play."

Hearing this, Landon seemed to find the scenario plausible. Leaning forward, he asked, "How much should we bet?"

"Let's keep it modest—$8 billion. We'll need funds for bonds as well."

"Modest, you say," Landon said, looking incredulous.

"If you think about the hundreds of billions we've moved in bonds recently, $8 billion isn't that much," Seok-won replied with a chuckle.

"You've got a point," Landon admitted, shaking his head with a wry smile.

"Working with you constantly keeps my heart racing. I don't think I'll live to see old age."

"Isn't the thrill exciting?" Seok-won teased.

"Racing hearts belong in a hospital," Landon quipped.

Landon stood to leave. "Any other instructions?"

"No, that's all for now," Seok-won replied.

"Thank goodness. Any more surprises, and I think my heart might give out," Landon joked with a laugh.

"Don't overwork yourself. The fund can't run without you. Maybe I'll bring you some health supplements next time," Seok-won said playfully.

"Are you planning to overwork me after feeding me supplements?" Landon asked in mock horror.

Feigning disappointment, Seok-won sighed. "I was considering giving you an extra bonus this year, but now I'll have to think about it."

"You know I was joking!" Landon quickly protested.

Seok-won burst out laughing. "So was I."

Landon threw up his hands in surrender. "I can't win with you."

He stood to leave, then hesitated. "With such big profits, why not purchase your own jet for convenience?"

"It's tempting," Seok-won mused. "But I'll think about it after we finish this round of investments."

Landon nodded and left the business jet.

A slender stewardess approached Seok-won as if she had been waiting and asked,

"Can we take off now?"

"Let's do that," he replied with a nod.

The stewardess smiled and said, "Okay, then please fasten your seat belt."

After ensuring that everyone had fastened their seat belts, she walked back and closed the boarding gate.

Seok-won took a sip of his iced whiskey, his eyes drifting to the round window as he admired the airport scenery. Moments later, the jet engines on both sides of the fuselage roared to life with a brief vibration.

The business jet, carrying Seok-won, slowly taxied out of the apron. Following instructions from the control tower, the jet waited briefly before racing down the long runway at full power. With a powerful thrust, it lifted off the ground and climbed steadily into the sky.

After ascending for a while, the jet levelled off upon reaching cruising altitude.

The stewardess returned to the passenger cabin and addressed Seok-won,

"You may now unbuckle your seat belt. Is there anything else you need?"

"One more of the same, please," he said, raising his glass slightly.

"Certainly," she replied before leaving to prepare his drink.

Leaning back into the plush seat, Seok-won glanced around the opulent interior of the private jet. The polished wood panelling and sleek design reflected his success.

"Should I really buy one?" he wondered aloud.

Given the fortune he had amassed, owning a private jet seemed less like a luxury and more like a reasonable investment.

Feeling the scale tip in favor of the idea, he slowly sipped the last of his whiskey.

TL/n -

The relationship between interest rates and bond prices is inverse—when interest rates rise, bond prices fall, and when interest rates fall, bond prices rise. This inverse relationship is driven by the mechanics of how bonds are priced and traded.

I've already explained how it works.

***

The 1994 bond market massacre refers to a sharp and sudden selloff in global bond markets, triggered primarily by the U.S. Federal Reserve's unexpected interest rate hikes. It was one of the most significant bond market disruptions in modern history, leading to substantial losses for investors and reshaping financial markets.

In the early 1990s, the U.S. economy was recovering from a recession, and interest rates were kept low to support growth.

However, by early 1994, concerns about rising inflation emerged, prompting the Federal Reserve, led by Alan Greenspan, to tighten monetary policy.

1. Unexpected Rate Hikes:

In February 1994, the Federal Reserve raised the federal funds rate by 25 basis points (0.25%), surprising markets.

Over the year, the Fed raised rates six more times, increasing the federal funds rate from 3% to 5.5%.

2. Market Reaction:

Bond markets were caught off guard. Investors had assumed rates would stay low for an extended period.

The abrupt rate hikes caused bond prices to plummet and yield to spike, as bond prices and yields move inversely.

U.S. Treasury bonds, corporate bonds, and mortgage-backed securities all suffered steep losses.

3. Global Impact:

The selloff spread to bond markets worldwide, causing losses in Europe, Asia, and emerging markets.

Countries like Mexico, heavily reliant on foreign capital, experienced severe financial strain. This contributed to the 1994 Mexican Peso Crisis.

Consequences =>

1. Investor Losses:

Global bond markets lost an estimated $1.5 trillion in value.

Hedge funds, pension funds, and individual investors suffered heavy losses. Notable casualties included prominent firms like Orange County, California, which declared bankruptcy due to risky investments.

2. Reevaluation of Risk:

Investors became more cautious about interest rate risk and adjusted their expectations for central bank actions.

3. Policy and Market Changes:

The Fed improved its communication strategy to avoid such surprises in the future.

The incident underscored the importance of managing duration risk (the sensitivity of bonds to interest rate changes).

Lessons Learned =>

Interest Rate Sensitivity: Sudden changes in monetary policy can have far-reaching effects on bond markets.

Market Expectations Matter: Surprises can cause outsized reactions, amplifying volatility.

Diversification: The event highlighted the risks of concentrating investments in long-term bonds during periods of rising rates.