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Strategies & Market Trends : Mish's Global Economic Trend Analysis -- Ignore unavailable to you. Want to Upgrade?

To: LLCF who wrote (40529)	11/3/2005 9:51:11 AM
From: Knighty Tin	Read Replies (1) \| Respond to of 116555

I wonder if I'm the only one who is reminded of "Portfolio Insurance?" That was a contributor to the 1987 crash. The brokerage firms and investment boutiques developed sophisticated models that insured portfolios against loss. Lots and lots of pension funds and other portfolios bought into them. I had several institutional brokers and numbers geeks try to talk me into them. They had big thick books about how it worked. I mentioned at the time that it was a lot like neutral hedging a portfolio with options and that the risk was the same: fast moving markets that gapped up or down. That got a big laugh: "do you really think we'll see a market where the Dow is down 100-200 points in a day? Wake up and smell the coffee, dude." Chagrined, I admitted I thought such markets were not only possible, but likely. As bearish as I was I didn't think we'd see down 500 points in one day. But we did. And the insurance didn't insure the portfolios. And nobody talks about it any more. Except at banks and mortgage companies, though they call it derivatives now.