Paul Tudor Jones is a futures trader. He speculates on the future value of almost anything. It's been called an art, a science, a gambling game. It's a high-risk game for high rewards in an arena that is increasingly under scrutiny. Recent scandals have brought the Wall Street community into the glare of public and media attention, and the regulatory agencies are questioning the very existence of certain kinds of trading, stock index futures, at which Paul Jones has recently been one of the most successful players in America.
It is March 1987, the third month of one of the most dramatic rises in the history of the stock market, and Paul Jones is taking a holiday. Well, sort of a holiday.
Well, I originally decided to come here, I was going to be on vacation, get away from everything. And then, as it turned out, a number of the clients that I have are here in Europe, and most of them are here in Gstaad, as it turns out. So, I've done an enormous amount of business. I've been in Paris, I've been in Geneva. So, I kind of combine business with the pleasure. I wish it'd been more pleasure, but I still wouldn't trade for anything in the world. The most, you know, I always think of, I mean, if life ever ceased to be an educational experience, then I probably wouldn't get out of bed.
This morning, Paul got out of bed at the Palace, one of the most elegant hotels in the world.
The lifestyle in Gstaad is incredible because the people that I've met here and the people that I deal with, most of them are my clients, they pay me to allow them to enjoy this lifestyle, which is wonderful because I enjoy working.
I had a friend that I played badminton with him all the time. We were having barbecued ribs for lunch during my second semester senior year in college. And he said, 'And I've always liked backgammon, chess, those type of games.' And he said, 'If you think those are fun, if you really enjoy that type of stimulation, then he said, I'll show you a game that is the most exciting, the most challenging of all.'
Paul's company, Tudor Investment Corporation, manages other people's money. The firm has about 300 clients and has been rated top performer in its field for two consecutive years. Paul is the oldest one in the office. He's 32. His chief economist, statistician, and right-hand man, Peter Borish, is 27.
We're making history today. This is the market.
Futures trading is a young game. As firms go, Tudor is small. It has only 22 employees and manages 125 million dollars, which isn't so much on Wall Street. But the team, for the time being anyway, likes it that way. They see their firm as a small, fast boat on a large, rough sea.
What I love about it is I'm doing my work, I'm doing my analysis, and I'm being graded instantly through the harshest teacher in the world. It's the market. There's no curve. You know, I can't say that, 'Boy, I was out late last night and everybody else in the class was at a pep rally for the football game, and I only got a 70, but that was the highest in the class, so I still get an A.' It doesn't work that way in the market. It's an intellectual challenge, and that's what makes it so exciting. Every day is something new, and every day is providing new information. Every day, every hour.
Paul buys and sells futures in cotton, oil, dollars, Deutschmarks, bonds, precious metals, anything he thinks can turn a profit. Every rumor, every news item can be a warning or an opportunity. For example, this morning, the wires say OPEC is on the verge of a new agreement.
OPEC has basically come to an agreement whereby they're going to have a 7% production cut. And my whole feeling is that anytime that you try to get 13 people to agree to anything and I have a chance to take a position on it, well, wild horses couldn't keep me from betting against them succeeding in that. I'm selling the equivalent of about four tankers on the opening.
You've heard nothing else on OPEC?
I got you. Thank you, Paul. Yeah. What do you think of a JJ? This is spot the nailer?
I'd rather sell a download than sell.
Betting that the agreement won't hold, Paul is selling oil futures as fast as he can, hoping that the other traders won't see what he's up to. Speed is everything.
Is 40 bid and a half? Offer 1,000, offer 1,500 at 40, offer 1,500 at a half. Show the size. Ask him how much he sold. Give me a number. Tell him more behind it. Do it. Do it. Do it. There's more behind it. I can feel it. They're going to get it. I'm going to get it.
Iraq just said something. What does Iraq say? That's great. They have an agreement between 13 people, but two of them said they won't agree, which happen to be two of the five biggest producers in the world. That was tough to figure out, wasn't it?
Paul is on the phone to an oil trader who's saying somebody's been selling a lot of oil, but he doesn't know who.
That was my buddy at probably the second or third largest crude trading firm, and he's got some of it, man. This guy, they stole the hell out of it. And the people that he worked with don't know that it was. Which is great. That's even better. I hope they think it's some wild ass Arab who knows the whole agreement's getting ready to fall apart.
Even though Paul trades in every kind of commodity, his specialty is stock index futures, which are traded in pits at various commodity exchanges like the Chicago Mercantile Exchange, the Merc, or the New York Futures Exchange, the NYFE. These people are betting not on a company or an industry, but on the future direction of the entire economy. And this week, just before Thanksgiving 1986, the big news is not good. The Iran-Contra affair has just broken, the insider trading scandal is heating up, and the market has been going nowhere.
Okay. Is it a fast market?
In spite of the bad news, Paul and Peter are convinced that at any moment the market is going to soar. With a half an hour to go,
because not only will we be selling, so will everybody else in the street, which means I want to get Paul up. Paul. Yeah, I'm here. Do it again. And now 300, sell them. 3 minutes. 3 minutes.
Paul has bet a lot of money that the market is about to go up, but nothing is happening. If he's bet wrong, he's in trouble.
The market goes down so much faster than it goes up. It's incredible, right? It can take out 2 weeks of work in 3 hours. In fact, it took out 6 months of work in 1 day in September. We're going to get a big move one way or the other. And it's just right now trying to gauge which way that move's going to be.
Everyone right now has to be negative walking in the morning looking at the newspaper, looking at the fact that the bonds are down, and yet this thing is maintaining an enormous premium to spot. All that stuff is sitting there looking at us every morning in the headlines and yet the market won't go down. It's telling a different story than the headlines are.
What is happening again is that the market continues to build energy and every time you see these incredibly sharp downturns, all that's doing is to me all that is is a signal of the fact that people are absolutely skeptical, negative, and to a certain extent frying through here and yet the market won't break. It is screaming to me that it wants to go higher.
At times like this, what gives these two confidence is a theory that says the stock market moves in cycles, in patterns. And Paul and Peter subscribe to the Elliott Wave Theory, which says to them that what happened 49 years ago in the late 1920s is happening again now.
If the market is a reflection of people's behavior and people behave similarly in similar circumstances, then history of market prices may give us an indication of what may happen in the near future.
Well, one of the last great bull markets really was the 1920s. And we looked back and did a statistical analysis on the 1920s through today, punching in literally thousands of Dow high, low, and closes to run correlations between what happened in 1925 to 1928 to what happened to 1982 and where we were in 1986. Well, that correlation turned out to be over 90%. In fact, since I've run that correlation, the correlation has gone up from about 90.7% to close to 92.2%.
Which one is the '20s? The '20s is the blue and the red is the '80s. So, what day back in the '20s are we at right now approximately? We're like in early August 1928.
And so let's see if my memory serves me correctly and we've got another 40% of the Dow on the upside. Correct. So we're talking about, yeah, about another year, a little over a year up moving the Dow. And then it looks like there might be some storm clouds on the horizon.
To say the least. The correlations here are phenomenal. That's incredible. What are the chances of taking any two five-year period in the stock market and getting that kind of correlation? What would you guesstimate off the top of your head?
I mean it's got to be astronomical. You're talking a thousand observations. I don't know. One in a thousand? It's really pretty scary. You know, if it looks like a duck and it acts like a duck and it sounds like a duck, it's probably not a chicken. And that's what's scaring me about the activity in the stock market right now.
Some analysts disagree, but Paul Jones and Peter Borish are among those who think there's a crash coming and a big one.
You're probably talking about something with incredible fireworks, with unbelievable and unprecedented volatility, and with moves that will leave people gasping. It's going to be total rock and roll.
The market should continue to rally into the first quarter of 1988. A rough projection would be somewhere around 3200 on the Dow. And then March, April of 1988 there's weakness and at some point shortly thereafter, and if you're going to hold me to a date, let's say the end of March 1988, the market then drops sharply and retraces, you know, 50% of this bull move from 770 to 3200 in a matter of a couple months.
The last guy that buys a share of stock when the Dow is at 3000 or whatever number it is, he's buying it because of the fact he thinks it's going to 6000 because it's been reinforced in his mind over the past however number of months, years, or decades that the stocks can't go down.
In one sentence, buy low and sell high. That means buy now, riding it out till the market goes to about 3100, 3200. Don't wait for top tick. That's 1988. Severe drop, a little rebound, by 1991 the market is going to be under 500 on the Dow.
The debt gets to the bottom of every accumulation and then the repayment of debt basically drives every economic cycle that there is. And right now, we have probably explored the envelope with regard to mortgaging our future earnings. The next part of this cycle will be the repayment of what we've enjoyed now for the past four or five years. I mean, again, we're in the largest post-war business expansion cycle in history. I'm concerned. And knock on wood, if we're successful here and the play comes about and we make a lot of money, I want to go work for the Treasury or work for the State Department or work for the Fed to help out of what I consider will be dire economic consequences.
Paul spends weekends at his farm in Virginia overlooking Chesapeake Bay. It is early Sunday evening at 12:05 in New Zealand. But the only markets open at this hour are in New Zealand and soon in Hong Kong. So, he gets on the speaker phone with some brokers and starts to trade currencies. At any hour, any day of the week, someone is trading money. And the price of the dollar is never still. It jumps and falls in little ticks every half minute or so. At this hour, most of the players are Japanese, Chinese, and Australian.
1,100? Yeah. 1,100 contracts? Yeah, 60 million dollars. Can you do 60 million? Well, that's 135 million D-Mark. That's a bundle, isn't it? Yeah, you better buy. You know, that's about $67. That's about $70, yeah. Okay, well, let's do it. Hey, hold on a second. What a nice way for them to begin their morning. 1,080 contracts. I hope they never see daylight on them. Okay, that's 135 million D-Mark. Here's the deal.
Paul is betting that the dollar is about to go up. So, as quickly as possible, he wants to sell a huge bundle of Deutschmarks he bought last Friday and buy dollars.
I think they'll be bidding it up as soon as they walk in, which should be 15 minutes, and that's why I'm really going to buy them right now. I'd like to go on and do business, but none of these guys will make me a quote. They don't want the exposure. They all think that we know something.
Yeah, can you do me? Can we do it again? If you can give me 30 45, I'll deal on that. Yeah, I can't hear what you're saying, Paul. If you can give me 201 30 bid at 45, I'll deal on that for the whole amount.
Okay, well, let me see what they call.
The price of currencies is a little hard to follow, but if Paul can sell his Deutschmarks at a quote that sounds like 30 45, he figures he's getting a terrific bargain.
I want a quote in 15 pips for the whole thing. Okay, stay with me. They all think that whenever someone from the States is coming in and dealing this early in the morning, they know something. So, they're very wary about doing business because they assume that we have some knowledge that they don't know about. Whereas, an hour from now the market's been open and they've had chance to adjust all the news items that you know, and they've seen the direction of trading and the volume that's gone through, that they're not as nervous. But, by that point in time the dollar could be considerably higher than where it is now. That's why I wanted to do... No, I'm asking this one very good bank in Tokyo for the whole wad. Yeah. You know, I would like to break it up because I'll probably make it... When you take your initial position, you have no idea whether you're right or not. What's exciting is if it starts to go your way. Now, that's thrilling.
I'm asking these banks, you know, for the whole amount. I know you want it on one quote. I'd rather break it up even if you have to sacrifice a little bit because they're going to check. All right. And you know what? I'll just call you back in 10 minutes.
No, no, hang up. I'm asking them. Maybe they're going to come back.
Okay. Okay. See what they say. You can always pull it back and then we can split it up. Okay. Wait a minute. Somebody's making me a thing.
Because I mean, after a while the size means nothing. You know, it's just again, it gets back to question of whether you're making 100% rate of return on $10,000 or $100 million. It doesn't make any difference. All right? You know, if you complete 78% of your passes, it'd be nice if you're in the NFL, but if you're in college or high school or even elementary school, I'm sure the thrill is just as great. Okay, you still want to go after that size or?
Yeah, I do. What do you show on your screen?
Okay, my screen is 45/55, but Dad. Let me... You know, I had the bank call me up and they said they could do it all in one shot. So, that's 100, 1,085. Yeah. I'm going to have to get... That's exactly what talking about. I'm already... I sold some life riding. I sold some D-marks.
If the quote rises over 50-60, Paul's plan is in trouble. And with every passing minute, it keeps rising.
I should have been 50-60... Oh, no. Tell him to forget it. That's nothing, huh? No, nothing. I call you back. That was your quote. I can't hear you, Gerard. 50-70 he's out. Hold on. This is unbelievable. Did you hear this? We started off at 35-45, 45-40-50, 50-60, now 60-70. This is just pissing me off.
Paul's choices are narrowing fast, so he lowers his sights and goes for a smaller deal.
Yeah. 63-73 800 contracts on... I'll tell you what I'll do. I'll... You own 540. You own 540. Only 540.
Paul settles for half the dollars he wanted.
I'm selling D-marks. You own 540. Sometimes you'll find a cowboy who will say, 'Okay, come on. I'll play. No problem. Take your best shot.' Which is I was hoping would happen tonight. And then sometimes, and more often than not, you're better off calling up maybe three different houses and say, 'Give me a quote for 50 million a piece.' And then just going boom boom boom. And I probably should have done that. The people that I called a lot of times, again like them, they like to be macho men. They want to take the whole thing. And you know, this time in terms of execution, it was very poorly done. Trading requires an energy level, and it's very difficult to sustain it 24 hours a day, which is what this requires. So, you know, this lack of aggressiveness probably cost me a little bit.
Even at the higher price, Paul made money. He eventually sold his dollars for a profit of $100,000.
To do the job right requires, again, such an enormous amount of concentration that you've got to be able to... It's physically and emotionally mandatory that you find some time to relax, and you've got to be able to turn it off like that. There'll be times, though, when I get so incredibly excited about a trade or even a project that I'll wake up at 4:00 in the morning. There's no way in hell I'm going back to sleep. I'll sit there, and I'll trade in my dreams for 4 hours.
Well, we've got to pray for us another major calamity on Wall Street or in the White House, because if we didn't...
December 3rd, 1986. The market is about to close. Paul is on the phone from Chicago, and Peter is at the helm.
