10. In June 1987, Barron’s reported that Borish expected the crash to come in February 1988. (See Laing, “Trader with a Hot Hand.”) In the Trader documentary, filmed in 1986 and 1987, Borish had predicted that the crash would occur in March 1988. Jones’s own predictions of the aftermath of the crash were even further off the mark. In the Trader documentary, he forecasts that it will take six to eight years after the crash for the economy to recover.
11. Jack D. Schwager, Market Wizards: Interviews with Top Traders (New York: New York Institute of Finance, 1989), p. 130.
12. In 1987 Jones told Barron’s, “Prechter has become such a powerful market force because of his incredible track record that we decided to fade him. For the same reason, he’ll probably be long at the all-time top.” Laing, “Trader with a Hot Hand.”
13. The quote comes from the Trader documentary. Jones also said, “I consider myself a premier market opportunist. That means I develop an idea on the market and pursue it from a very low risk standpoint until I have repeatedly been proven wrong, or until I change my viewpoint.” See Schwager, Market Wizards, p. 129. Putting Jones’s theorizing about Elliott waves further into perspective, Jones says, “The whole concept of the investment manager sitting up there and making all these incredible intellectual decisions about which way the market’s going to go. I don’t want that guy running my money because he doesn’t have the competitive nature that’s necessary to be a winner in this game.”
14. Elaborating on how he would write a script for the market, Jones says, “I put myself in the mental position of being short the market, and I think how I would react emotionally to different events and see what it would take to get me to take my position off. And I write that down and that will be the high for the day. Because the high for the day will be the point at which the shorts capitulate. I close my eyes and imagine myself long. I say, ‘Okay, where is the point I get nervous? Where would I say, “Oh my God, I have to get out?”’ And that would be my projected low for the day. That preparation is important to try to determine great entry points to buy and to sell. You know every single high and low is going to be made in the context of these emotional extremes being hit. Execution is fifty percent of the game.” Paul Tudor Jones, interview with the author, April 23, 2009.
15. A former Tiger recalls, “Paul Tudor Jones is a trader. In 1987 we were very aware of the risks in the market, both of us. When the crash came, Jones made a lot of money. He came in to breakfast at Tiger in the summer of 1987. Talked about momentum and technicals and trading. Julian had no space in his mental map for that. We were saying, ‘Japan and U.S. are overvalued.’ Paul was saying, ‘Technically, it looks like there is a fall coming.’ He talked to us about us potentially managing a short-only book for him. We passed on it. But we shared the same sense of risk from very different origins.”
16. Sushil Wadhwani, who worked for Jones in the 1990s, emphasizes his flexibility as a trader. “You’d talk to Paul in the morning his time and he’d be long something. The next day, that market would have gone down and you would fear he had lost money, but when you spoke to him again you would find that he had changed his mind and had gone from long to short. That’s tremendous flexibility. It’s very important in this game that one doesn’t get hung up and anchored to a view.” (Drobny, Inside the House of Money, p. 171.) Equally, Louis Bacon emphasizes the distinction between commodity traders and equity traders. In one investor letter, Bacon wrote: “Those traders with a futures background are more ‘sensitive’ to market action, whereas value-based equity traders are trained to react less to the market and focus much more on their assessment of a company’s or situation’s viability.” (Riva Atlas, “Macro, Macro Man,” Institutional Investor, vol. 34, no. 7, July 2000, pp. 44–56.)
17. Speaking of the crash of 1987, Jones says: “There was a tremendous embedded derivatives accident waiting to happen in the crash of ’87 because there was something in the market at 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.” Paul Tudor Jones II, interview by Joel Ramin, January 13, 2000, available at http://chinese-school.netfirms.com/Paul-Tudor-Jones-interview.html.
18. Louis Bacon, interview with the author, July 21, 2009.
19. Jack D. Schwager, Market Wizards: Interviews with Top Traders (New York: CollinsBusiness, 1993), p. 134.
20. Louis Bacon, who was up about 40 percent in 1987, made most of his profits by going long the bond market the same way that Jones did. (Bacon interview.) Bruce Kovner recalls making more money on his bond position after the 1987 crash than he had from shorting the stock market. (Bruce Kovner, interview with the author, October 14, 2009.)
21. Discussing his Japan trade with Barron’s in May 1990, Jones said, “Under-or overvaluation is only part of the battle. The key thing is to be able to time one’s entry into a position at the precise moment when the market is about to move in your favor. Markets can stay undervalued, say, for months and years at a time. You don’t want to waste your resources in that kind of position. In fact, if you put a gun to my head and ask me to choose between fundamental and technical analysis, I would take the technicals every time.” See Jonathan R. Laing. “Past the Peak—Super Trader Paul Tudor Jones Bearish on Most Markets,” Barron’s, May 7, 1990.
22. Jones describes his view of Japan extensively in interviews with Barron’s in February and May 1990. These provide something close to Soros’s “real time experiment” during the Plaza Accord trade of 1985. See Laing, “Past the Peak—Super Trader Paul Tudor Jones Bearish on Most Markets.” Also see “Barron’s Roundtable 1990: Bargains and Bubbles—Part I—Baron, Lynch, Jones, and Rogers Pinpoint Plenty of Both,” Barron’s, February 5, 1990.
23. In an interview in 2000, Jones emphasized the importance of understanding how other players are positioned. “The secret to being successful from a trading perspective is to have an indefatigable and an undying and unquenchable thirst for information and knowledge. Because I think there are certain situations where you can absolutely understand what motivates every buyer and seller and have a pretty good picture of what’s going to happen. And it just requires an enormous amount of grunt work and dedication to finding all possible bits of information.” Paul Tudor Jones II, interview by Joel Ramin.
24. In January 1990, short-term interest rates in Japan stood at 7.25 percent and longer bonds yielded considerably more than that.
25. In the Barron’s Roundtable interview in February 1990, Jones correctly predicted that the Nikkei would rebound after falling to around 36,500, since that had been the point from which the Nikkei had broken out for the last stage of its bull rally the previous November. Jones also said that if the rebound proved weak, the market would fall again. This proved accurate.
26. In May 1990, with almost uncanny accuracy, Jones said to Barron’s, “Japan has a long way to go yet on the downside. The slide won’t resume, however, until late summer, I suspect…. I am lightly long Japan right now.” Jones also predicted that the fall would have severe consequences for Japan’s economy. The stocks in the Tokyo market were worth an enormous $4 trillion—160 percent of the annual output of Japan’s economy. A 20 percent fall in the Nikkei would wipe out $800 billion of wealth, something equivalent to 35 percent of Japan’s GDP. Jones predicted that the destruction of so much wealth would trigger “an enormous economic contraction.” Sure enough, Japan’s economy remained stagnant for much of the decade. See Laing. “Past the Peak—Super Trader Paul Tudor Jones Bearish on Most Markets.”
27. Jones remembers the clocklike arrival of hedge-selling pressure by cotton farmers at year-end, no matter what was occurring fundamentally in the ma
rket. “The farmers clung emotionally to the hope that prices would some how improve if they could just wait,” he recalls. “Of course, those hopes were usually dashed, but the phenomenon gave us something to exploit.” Laing, “Trader with a Hot Hand.”
28. Jones seems to have learned the value of visibility from Eli Tullis, the cotton trader under whom he served an apprenticeship in New Orleans. Jones recalls of Tullis, “Everyone always knew what his position was. He was very easy to tag. Eli’s attitude was, ‘The hell with it, I’m going to take them head on.’” Schwager, Market Wizards, p. 121.
29. Trader: The Documentary.
30. This description is taken from Laing, “Trader with a Hot Hand.”
31. Schwager, Market Wizards, p. 129.
32. A 1988 Wall Street Journal profile captures Jones’s trading style. “Charles Christensen, a futures analyst with Refco, says that’s what happened on February 25 in the Chicago Board of Trade’s Treasury bond futures pit, the most active futures market in the U.S. The futures were near their highs late in the day when Tudor Investment’s trader suddenly appeared on the edge of the bond pit, both arms raised above his head, gesturing frantically to sell all at once 1,000 contracts—with a face value of about $95 million. Even big brokerage firms rarely offer to sell that many at a crack. ‘The local traders looked at each other and said, “Who’s buying?”’ Mr. Christensen says. ‘The answer was, “Nobody,” so they all tried to sell ahead of him.’ But many couldn’t, they drove the price even lower, and Mr. Jones’s trader apparently bought back the contracts cheaply. The estimated profit: $3 million. ‘It’s phenomenal: The man is such a good psychological trader,’ Mr. Christensen gushed. ‘He knows exactly when the market is acting exhausted so he can move in.’” McMurray, “Quotron Man.”
33. James Elkins, interview with the author, April 23, 2008. Elkins was the president of Elkins/McSherry.
CHAPTER SEVEN: WHITE WEDNESDAY
1. Druckenmiller recalls, “When I went over there, I did expect to get fired in a year, but I didn’t really care because I thought I would get some kind of postgraduate education.” Stanley Druckenmiller, interview with the author, March 13, 2008.
2. Druckenmiller interview. Gary Gladstein recalls Druckenmiller’s arrival: “George did think that he was going to be a superstar, but no one really knew that for sure. There were a number of people previously that George had been very enthusiastic about.” Gary Gladstein, interview with the author, March 18, 2008.
3. Druckenmiller recalls, “I never learned enough about fundamental analysis, not having been to business school, not having a CFA. By necessity and also because my first boss, my mentor, used technical analysis, I had to rely quite heavily on charts.” Druckenmiller interview.
4. Jack D. Schwager, The New Market Wizards: Conversations with America’s Top Traders (New York: CollinsBusiness, 2005), p. 193.
5. Druckenmiller recalls, “I started there as an S&P trader; he didn’t know that I traded bonds and currencies and all this other stuff before I got there. Even then he was running around insulting everyone, telling everyone that his successor was coming in, which must not have been a good thing to hear for the others. I didn’t really have a defined role the first three to six months. I almost quit it…. I still had my Pittsburgh firm, and I flew to Pittsburgh one day, and when I landed I found out that George had sold my bond position out. You have to understand, I had been in charge of a portfolio my entire career basically. I had the number one mutual fund out of twenty-two hundred mutual funds and basically had one lucky period after another. And no one had ever done anything like that to me. I basically blew a gasket over the phone when I found out. He was fine about it. He was apologetic. I was, by far, the rude one, but with reason.” Druckenmiller interview.
6. This is the exchange as recalled by Soros. (George Soros, interview with the author, June 10, 2008.) Druckenmiller confirms his feelings at the time, adding the last line of the exchange reported here. “He wasn’t the boss of the trading, and I wasn’t the boss of the trading, and it was awful. I believe I was screwing up his trading and I believe he was screwing up mine. You just can’t have two cooks in the kitchen.” (Druckenmiller interview.)
7. The colleague was Robert Johnson, who moved from Bankers Trust to become a partner at Soros Fund Management in September 1992. Robert Johnson, interview with the author, July 29, 2008.
8. Performance data for Quantum here and elsewhere in the book, including in the chart given in the appendix, describe the return an investor would have received if he had reinvested distributions back into the fund. In practice, not all investors were permitted to do this because Quantum had more money than it could manage. I am grateful to Gary Gladstein, the former chief administrative officer and managing director of Soros Fund Management, for providing me with a complete set of performance data for Quantum, and to Michael Vachon, George Soros’s spokesman, for the data on Soros Fund Management.
9. Soros describes Druckenmiller’s authority from 1989: “He really ran the thing, and our relationship was good enough so we could discuss things and I could express views, but it didn’t stop him from doing his thing.” (George Soros, interview with the author, January 16, 2008.) And again: “If we had a difference of opinion, his opinion prevailed. I had the right to give him advice, so I was the coach, like a football player or tennis player.” (Soros interview, June 10, 2008.) Equally, Druckenmiller recalls, “There were many times where he would question my positions and therefore want me to reduce them, but I rarely listened. He may have just been testing me.” (Druckenmiller interview.)
10. Druckenmiller recalls, “I did not like the publicity we had at Soros. I tolerated it because I thought it was for a noble purpose. He needed it as a platform for his philanthropy. I didn’t read it as he was doing it for his ego. He was trying to meet with heads of state, and he needed a platform, which it surely gave him. So the idea of me staying in the background and him doing the publicity was fine.” Druckenmiller interview.
11. Druckenmiller recalls: “The way I figure out the economy is literally from the bottom up and from company anecdotal information, knowing that housing leads retail and retail leads capital spending. From listening to the guys on the ground. When you talk to companies and to guys who run companies, you get a whole additional perspective on the economy…. I learned a lot at Soros, but not what I thought I would learn. I did not learn what makes the yen go up or down, or what makes the stock market go up or down. Soros’s great gift was how to use leverage, and how much money to have down based on the risk/reward and your sense of conviction. His view on the yen or the euro was better than random, but not much. And yet he was still one of the great money managers ever because he knew how to bet his convictions.” Ibid.
12. Speaking about Alchemy, Druckenmiller says, “I found the first chapter basically unreadable. I found the currency chapter interesting and actually quite useful…. A budget deficit of huge proportions could actually be bullish for a currency because it drove up rates and sucked in capital. That, at the time, was very unique thinking which, to some extent, became conventional thinking in the next fifteen to twenty years.” Ibid.
13. Druckenmiller recalls, “Everybody forgets that the deutsche mark went down hard after the first two or three days. Everyone thought it would be polluted by this horrible East German money. I saw it differently.” Ibid.
14. “It was one of those situations that I could see as clear as day,” Druckenmiller said later. His $2 billion bet was equivalent to almost 100 percent of the capital in Quantum. It was even bigger than Soros’s bet at the time of the Plaza accord in 1985—though, as a proportion of the assets in Quantum, it was smaller. Schwager, The New Market Wizards, p. 203.
15. Druckenmiller recalls, “If you had a floating currency, this is one of the situations where the deutsche mark would have just been screaming against the pound. The fact that they were linked, and all that pressure able to build and build, created an explosive situation. Now
I think I only did, like, a billion and a half in August. It was a bit of a flyer; I put it on for six months. I didn’t see the immediate catalysts, but I knew there were potential tremors growing there. And sometimes that’s what you’ll do; you’ll put on a position, partly because you think it’s going to work eventually, but also because it makes you watch it.” Druckenmiller was so confident about the asymmetry of this bet that he did not regard $1.5 billion as a big position. “A billion and a half, I don’t want to talk about it cavalierly, but it was like an intellectual position for me to put on…. If it had been something where we could have lost fifteen percent, it would have been very big. But I just couldn’t see that happening.” Stanley Druckenmiller, interview with the author, June 4, 2008.
16. Craig R. Whitney, “Bundesbank Chief is at Eye of Currency Storm,” New York Times, October 8, 1992.
17. “I got the message,” Soros said later. See George Soros, Soros on Soros: Staying Ahead of the Curve (New York: John Wiley & Sons, 1995), p. 81. The date and place of this encounter with Schlesinger is not given by Soros, who refers simply to a Schlesinger speech “at a prestigious gathering.” However, it seems highly likely that the speech Soros attended was the Basel speech on September 8. Druckenmiller confirms that Soros called him with the tip on the lira’s likely devaluation around this time, shortly before the weekend during which Italy devalued. (Druckenmiller interview, March 13, 2008.)
18. Soros’s intuition was right. In his memoir, Norman Lamont, the British finance minister of the time, recounts a conversation between Eddie George, deputy governor of the Bank of England, and Hans Tietmeyer, his opposite number at the Bundesbank. Tietmeyer had noted pointedly that many Germans would welcome the end of plans to create a single currency. See Norman Lamont, In Office (London: Little, Brown, 1999), p. 227.
19. “I’m sure the lira idea came from him and not me. I’m also sure that the pound idea came from me and not him.” Druckenmiller interview, March 13, 2008.
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