Paul Tudor Jones Predicts 1987 Crash, Dow in Eighties v. Twenties, Portfolio Insurance Crisis (Derivatives)

If this video sticks, Paul Tudor Jones and his team look at correlations between the 1920s and 1980s, predicting the 1987 crash. From Trader: the Documentary in 1987.



*I wanted to add this an excerpt from a Paul Tudor Jones interview in 2000. He mentioned "there was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance". Sounds similar to the 2008 credit default swaps accident.

"Q: Can you give an example?

Paul Tudor Jones: Certainly. The one on a percentage basis that's been the most profitable for me was the crash of 1987. There was a tremendous embedded derivatives accident waiting to happen in the crash of '87 because there was something in the market that time called portfolio insurance that essentially meant that when stocks started to go down it was going to create more selling because the people who had written these derivatives would be forced to sell on every down-tick. So it was a situation where you knew that if you ever got to a point where the market started to go down that the selling would actually cascade instead of dry up because of the measure of these derivative instruments that had been written. And in the crash of '87 you had an overvalued market and you also finally had a situation where every down-tick would create more selling and I think I understood the dynamics of that. The crash was something that was imminently forecastable to somebody that understood the measure of derivatives and how large they had grown in such a relatively short period of time and the impact that it would have on a relatively unknowing and na'e market. And the same exact thing happened in 1990 in Japan." Full interview here

Related Posts