Happy Friday from the Trader’s Desk.
The title of my post comes from the TV series “Kung Fu” which features a student (Grasshopper) and a teacher (Master Po). I couldn’t help but think back to this reference throughout, and especially at the conclusion of this episode. Has the Student become the Master?
Axe behaves like a full blown addict in this episode. Some people are hooked on drugs or booze. Some on food or shopping; Axe is addicted to the thrill and control that trading, and making big moves brings to him. It’s late at night, and he can’t sleep. It’s his first night of withdrawal, and he’s aching. You can see it on his face “what did I just do?” He needs to talk to the only person who can get him through this, and that is Wendy. Wendy is his sponsor in the AA of trading.
Axe thinks he made a mistake. He has worked his entire life to build his company and be in the position to “truly be free, no limits, nothing I couldn’t do.” It is interesting that he equates freedom with trading, but also freedom as not following any rules. He believes that the amount of money and power that he has made means he is above any rules, and doesn’t have to answer to anyone. His anger is even greater since he believes this situation is unfair and one-sided. He does not accept or recognize the role he has played in ending up in this position, and is so self-absorbed he loses focus on the bigger picture – saving Axe Capital. He sees no difference between himself and his firm; “Axe” is his identity and he feels that is being taken away from him.
Wendy needs to constantly remind him of the position he put himself in. He has “lived like there were no rules.” In the real world everyone has rules of some sort or another, and if you break them and get caught, you have to pay the consequences.
I think Wendy asks a lot of Axe. She wants him to use his new limitations as a “chance to realign who you are.” The problem with that is Axe likes who he is: the outlaw, the “fuck you money” man. Axe’s eye roll at the suggestion that “letting go” is a kind of freedom tells you all you need to know.
As he hangs up the phone, you can see the gears turning in Axe’s head. Only a news alert about an underground earthquake off the coast of West Africa interrupts his thoughts. Damian Lewis’ facial expressions in this episode exposed a lot of the distress and anger that was inside Axe. Very few actors can convey those kinds of emotions with just his eyes, but we are so lucky that Damian Lewis can!
Axe can’t go cold turkey, nor does he want to. A few phone calls later and he has lined up a rouges gallery of traders and fund managers who owe him and are certainly willing to listen to an idea pitched by Axe. He may not be able to trade, but why can’t others benefit from his experience and his unique viewpoint. Axe has lined up firms who will invest based on his ideas; now to get them the finances.
Axe Capital is back in business and Taylor has invested $9B back into the market in phases. This would be the best way to get that amount of funds working again. You never want to move the market by investing too much too quickly, and you certainly wouldn’t want to tip off your competitors to your plans.
There is a final $2B that Axe has requested not be touched. Taylor, as the CIO should be able to make this call. Since Axe tells no one his secrets it’s no surprise Ari has no clue, but speculates and plants a seed in Taylor’s head: maybe that money is a hedge against Taylor, putting that money aside just in case the new CIO is not up to the job.
The set up of the new Axe Capital (all glass offices, and an open trading desk) makes it impossible for Taylor (or anyone for that matter) not to see Wags in his office. If anyone knows what Axe is up to, it will be Wags. Taylor doesn’t even need to get through the door before Wags knows this is about the $2B, and he’s on it.
While Axe is getting his apartment swept for listening and recording devices, he gets a neat little app (I’m calling it the “Axe App”) that will show him in real time exactly what is going on with the firm’s portfolio. Just because he can’t trade, doesn’t mean he can’t know what’s going on! Control freak alert!!
Wags’ mission to ask about the $2B is less a fact finding one than a cautionary one. He knows all too well what Axe plans to do: give the funds to hand-picked outside firms.
Wags is a great lieutenant, but here is he being a better friend. He knows the slightest misstep, anything that can track back to Axe, is lethal. Is it worth the risk? Wags knows Axe is crawling out of his skin sitting around, so he suggests retail therapy. “Go buy yourself something.” And in a response only Axe or Larry Ellison (Ellison has a $4B line of credit, and when asked about it said: “I’ve got a line of credit just in case I go shopping and something catches my eye”) would say: “I bought it already. Probably thrown it out!” Sign me up for the next Axelrod garage sale! Wags is the last person who would advocate restraint, but unlike his boss, he is looking to the future.
A light bulb appears above Axe’s head: what if he has Taylor move the money? All above board and legal. Wags doubts that Taylor will go along with this plan. What’s in it for them? “They get to keep their princely job!” And there you have it: Axe has given the title of CIO to Taylor, and even let them be the face of Axe Capital, but at the end of the day, it’s Axe’s firm and he will call the shots! He’ll take Wags’ concern under consideration, meaning he’ll find a way to do what he pleases. He’s the man with no rules.
Remember that earthquake off of West Africa? It caused a tsunami in Brazil, which is causing a tsunami at Axe Capital. This tsunami is rare, a Black Swan event, which coincides with Taylor investing a large sum into Brazil’s sugar and shipping industries. The way to hedge losses would be to buy sugar futures, but everyone else will be doing that as well. Taylor plans to short Brazil’s leading debt holder (with its economy in shambles, people won’t be able to work, so they won’t be able to pay off their loans, putting pressure on the holders of those loans), buying VIX calls (this natural disaster will cause volatility in the market, which will cause the VIX to move) and alternative energy plays (since oil production in Brazil will come to a halt). Naive Ben Kim asks a den of wolves if anyone is concerned about the sheep. I love ya Ben, but you’ve been at Axe Capital for 3 years now; you know the answer, even if Dollar Bill’s expression doesn’t say it all! If it’s a money maker, Taylor will do it.
I have been getting questions regarding Taylor and their “moral” decisions in this episode. I will be honest, and say that I don’t know why that question was being asked. We have seen Taylor do what needs to be done, this season and last (Sandicot & Klaxon). Yes, they will take the time to look at the facts and angles, but has always done the pragmatic thing in the end. Taylor has never really put their “moral code” out there. Why would we assume they have one that is different than Axe, Dollar Bill or anyone at Axe Capital? Did we see how playing the “moral card” towards Taylor ended for Bryan? One can disagree with the choices Taylor is making, but that is putting your own morality and judgement on to someone else. It’s also been suggested that Taylor is being corrupted. But by who? Taylor has free will, and makes their own choices. They chose to work at Axe Capital instead of going to Business School, knowing full well what they were getting into. I like that Taylor makes the tough choices, using their head instead of their heart.
Taylor is not getting what they need from the staff, and believes part of it is that they are not the motivator Axe is. They doubt their ability, and think they have to prove their worth, to the employees and to Axe. I think Taylor also needs to prove themselves to Taylor. The CIO believes this crisis needs to be handled perfectly, or they will be seen as a failure. Taylor cannot let that happen. Wendy tries to help Taylor deal with reality – you may lose money, and that’s OK. In this business, you need to understand that you will never bat 1.000 (and anyone who says they do is a sham). This is a very humbling business – you can be up 30% for the year, and lose it in one day. I know; I’ve been there. The only way to move forward is to learn from your mistakes (if there were any), have a drink or two, then get back on the horse the next day. “Perfection is the enemy of good.”
The new Axe App shows Axe Capital down 4% for the day. There is no way Axe can sit by while this happens. The wheels are coming off without him. The only place he can be right now is in the office.
Axe knows in his heart this is a bad idea, but he is an addict and his ego is the size of the Grand Canyon. All this visit will do is distract his employees, and undermine his CIO. However, he doesn’t care about anything but his fix – that feel of adrenaline from making the right calls, out maneuvering everyone and saving the day as only he can.
Axe marches into the office, not with a “yeah, my CIO has got this” swagger, but with “here I come to save the day” bluster. Taylor is looking down at this and knows it’s make or break time.
As the IT guys take all electronics out of Axe’s office, he is filled with anger. His need to do something is overwhelming, but he can’t and that makes his need even greater. It’s a vicious cycle.
The staff has no idea how to act or what to do. They know the rules, and for the most part (yes, I’m looking at you Dollar Bill), obey them. Who should they look to? Taylor? Axe? Who is the leader? It’s this reason Rudy flip-flops on if he wants Axe to know about his idea. This is a showdown that needs to happen, and I’m proud of Taylor for doing it
Axe needs to know why Taylor didn’t anticipate the tsunami as he did, and make the necessary adjustments to put the firm in a better position. If he is putting his baby in their hands, he needs them to be as good or better than he is. Taylor knows they are not as good at connecting the dots as Axe, (yet). If they are the CIO, it can’t be in name only. People need to know who to look to. Taylor makes probably the biggest, riskiest play in their career: it’s either them or Axe, it can’t be both. It’s bold, but it works.
Axe knows he has to go, but in the mature move (insert sarcasm here), he’s taking his $2B with him. It’s such a slap to Taylor, and it’s a way of telegraphing he may not trust them 100%.
Wendy meets Axe down on the street and tries to make him realize what a blunder this whole exercise has been.
“It’s hard to shut it off.”
More like impossible. Trading and being “the man” is crack for Axe. Like most addicts, he’s not thinking of the consequences, only his next fix and anyone who gets in his way be damned.
At the close of the market, the firm was down for the day, and Taylor sits in their office never wanting to forget this feeling – so that it never happens again.
Axe walks into Taylor’s office and tries to give them a pep talk. He knows they did their best, and didn’t make stupid, reactionary moves that could have put the firm more in the hole.
Axe admits he wasn’t in the office to look over their shoulder; he just can’t sit still, be out of the action. He’s the moth drawn to the flame. I think Axe is fibbing just a bit. It wasn’t until he saw the -4% on his Axe App that he decided to get in the Batmobile and try and save Gotham.
Axe tells Taylor they can have the $2B. If there is anyone he trusts with “his name and money”, it’s Taylor. How telling it is that he says “name” first. “Axe” is who he sees himself as. Robert Axelrod is in there somewhere, but “Axe” is the junkie.
Taylor knows that they are irrelevant; Axe needs whatever tool will help him keep control of his firm, his name. Taylor tells him:
“You need the game to remember who you are.”
Depending on where you put the emphasis, this statement has two means: emphasis on game, and you want the Street to remember who you are; emphasis on who you are, and that means it’s the only way Axe can remember who he is, is by being in the game.
Taylor will give the $2B to the outside funds. They will listen to different pitches, but will know the ones “hand-picked” by Axe. They will be a passive investor, which means they will not be active in the trades. (The way I would do it: pick 10 firms, but only 6 of them should be Axe’s picks, that way it will look way less suspicious. When only a handful of the investments start to have great performance, you would at least have a bit of cover.)
Why did Taylor do this? Because it was the smart play. Taylor makes choices not based on emotions, but based on what the odds are on a favorable outcome. It is one of the reasons they are a great poker player. Axe will now be a hedge for Taylor and the firm. They have given Axe another sandbox to play in, and now can run Axe Capital and been seen as its true leader. They will also get the financial benefit of Axe’s ideas (just in case there’s another crisis), without having any real involvement and will look like a genius for picking those funds. Axe can’t take any credit. Taylor now has culpable deniability as long as there is no trail back. It’s brilliant, it’s genius, it’s Axe-like. “Patience Young Grasshopper”, and now the student has become the master.
Axe will respect the move but also realize that Taylor is a little closer in the rear view mirror than he thought.
Who’s looking over their shoulder now?