Eugene Linden
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In Memorium: Koko the Gorilla

Koko the gorilla died on June 19. She and a female chimpanzee named Washoe (who died in 2007) played an outsized role in changing how we view animal intelligence. Their accomplishments inaugurated deep soul-searching among us humans about the moral basis of our relationship with nature. Koko and Was...

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The Ragged Edge of the World
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Winds of Change
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Afterword to the softbound edition.


The Octopus and the Orangutan
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The Future In Plain Sight
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The Parrot's Lament
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Silent Partners
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Affluence and Discontent
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The Alms Race
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Apes, Men, & Language
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GLOBALFEVER

CLIMATE CHANGE THREATENS MORE THAN MEGASTORMS, FLOODS AND DROUGHTS. THE REAL PERIL MAY BE DISEASE
BY EUGENE LINDEN


Monday, Jul. 08, 1996
Floods. Droughts. Hurricanes. Twisters. Are all the bizarre weather extremes we've been having lately normal fluctuations in the planet's atmospheric systems? Or are they a precursor of the kind of climactic upheavals that can be expected from the global warming caused by the continued buildup of CO2 and the other so-called greenhouse gases? Scientists are still not sure. But one of the effects of the unusual stretch of weather over the past 15 years has been to alert researchers to a new and perhaps even more immediate threat of the warming trend: the rapid spread of disease-bearing bugs and pests.

Climate change, whether natural or man-made, may already be spreading disease and pestilence, according to a host of new studies, including a major report being prepared by the World Health Organization and other international institutions for release this summer. Malaria, for example, has been flourishing in recent years owing to unusually hot weather. Similarly, climate disruptions may be giving new life to such ancient scourges as yellow fever, meningitis and cholera, while fostering the spread of emerging diseases like hantavirus.

Underlying all these outbreaks is the same Darwinian mechanism: unusual weather such as dry spells in wet areas or torrential rains in normally dry spots tends to favor so-called opportunistic pests--rodents, insects, bacteria, protozoa, viruses--while making life more difficult for the predators that usually control them. Episodes of extreme weather are routinely followed by outbreaks of plagues, both old and new. Among the most recent examples:

CHOLERA. In 1991 a freighter coming from South Asia emptied its bilges off the coast of Peru. Along with the wastewater came a strain of cholera that found a home in huge algal blooms stimulated by unusually warm ocean waters and abundant pollution. The microbe then made its way into shellfish and humans. So far, the epidemic has infected over half a million people and killed at least 5,000.

HANTAVIRUS. In 1993 a six-year drought followed by heavy rains produced a tenfold increase in the population of deer mice in the American Southwest, leading to an outbreak of a deadly form of pulmonary hantavirus. The disease, which first appeared on a Navajo reservation, has since spread to 20 states and killed 45 people, nearly half of those infected.

PLAGUE. In 1994 a long monsoon in northern India followed by 90 consecutive days of 100[degrees]F heat drove rats into the cities. In Surat, they caused an outbreak of pneumonic plague. The ensuing panic killed 63 people and ultimately cost India $2 billion.

DENGUE FEVER. The coastal mountain ranges of Costa Rica had long confined dengue fever, a mosquito-borne disease accompanied by incapacitating bone pain, to the country's Pacific shore. But in 1995 rising temperatures allowed Aedes aegypti mosquitoes to breach the coastal barrier and invade the rest of the country. Dengue also advanced elsewhere in Latin America, reaching as far north as the Texas border. By September the epidemic had killed 4,000 of the 140,000 people infected.

Of all the infectious diseases humans will have to contend with as the world gets warmer, malaria may be the worst. Malaria is already the world's most widespread mosquito-borne illness. Rising temperatures will not only expand the range of Anopheles mosquitoes, but make them more active biters as well. Paul Epstein, an epidemiologist with the Harvard School of Public Health, notes that a temperature rise of 4 [degrees] F would more than double mosquito metabolism, forcing them to feed more often. A 4 [degrees] F rise in global temperatures could also expand malaria's domain from 42% to 60% of the planet. When temperatures rise above 104 [degrees] F, mosquitoes begin to die off--but at those temperatures, so do people and the crops on which they live.

Humans often make matters worse for themselves by the changes they make in their local environments. Unusually warm waters played an important role in the cholera epidemic that hit Latin America in 1991, but the outbreak was also exacerbated by sewage poured into the waters off Asia and Latin America, the destruction of pollution-filtering mangroves in the Bay of Bengal and overcrowding in the cities.

The same synergies that empower microbes also weaken our defenses against them. Heat, increased ultraviolet radiation resulting from ozone depletion, and pollutants like chlorinated hydrocarbons all suppress the disease-battling immune systems--both for humans and for other animals. Epstein, who is one of the principal authors of the upcoming WHO study, notes that in recent years variants of the class of viruses that includes measles have killed seals in the North Sea, lions in the Serengeti and horses in Australia--three very different animals widely scattered around the globe.

A common denominator in each case: abnormal weather had caused malnutrition, weakened animal immune systems and spurred the reproduction of viruses. Epstein also notes that once ordinarily benign microbes invade weakened animals, they can become sufficiently deadly to invade healthy populations. The real threat for people, says Epstein, may not be a single disease, but armies of emergent microbes raising havoc among a host of creatures. "The message I take home," he says, "is that diseases afflicting plants and animals can send ripples through economies and societies no less disastrous than those affecting humans."

A small but persistent group of critics, many of them supported by the oil and coal industries, still don't buy it. S. Fred Singer, president of the industry-funded Science and Environment Policy Project, argues that Epstein and his colleagues fail to note the positive health benefits of warmer nights and winters. Others, like John Shlaes, executive director of the Global Climate Coalition, suggest that when the world is faced with the pressing health problems stemming from overcrowded cities and the collapse of sanitation systems, the threat of disease caused by climate change may seem like a minor concern.

No one disputes the role of poverty and overpopulation in spreading disease. That is no reason to ignore the warnings sounded by Epstein and his colleagues, however. Scientists first raised alarms about climate change in the late 1980s, but the international community has taken few concrete steps to address the problem. The world is gambling, in effect, that problems in the future will not be serious enough to warrant inconvenience in the present. With each passing year, the future gets closer and that bet gets bigger.

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Short Take

I’ve just read Black Edge, by Sheelah Kolhatkar, which is about the huge insider trading scam that characterized Steve Cohen’s SAC Capital at the height of its power. I’m going to offer the thoughts it prompted in two parts. The first will delve into the trade itself, and the second will explore the fallout from this insider trading scandal and subsequent events in the market.

Part One:

A good part of Black Edge focuses on one specific instance of insider trading at SAC Capital: Mathew Martoma’s quest for advance knowledge of the results of trials on the efficacy of Elan Pharmaceutical’s experimental drug to halt Alzheimer’s disease. The drug, bapineuzumab, was designed to attack the amyloid plaques that Elan’s scientists viewed as the cause of cognitive decline. In his quest for “black edge” (illegal inside information) Martoma and his compatriots compromised the integrity of the procedures for drug trials and ruined the life and reputation of a distinguished scientist.  Even that wasn’t enough for them. SAC also had access to vast amounts of biotech expertise, both from PhDs on their payroll, and the expert networks they paid handsomely to give them access to researchers with direct access to the studies and trials.

 

In the short run, this inside information paid off for SAC as Martoma’s advance knowledge of the results allowed the hedge fund to reverse a billion dollar position and make a profit of over $180 million versus certain losses of hundreds of millions had they not gotten advance information on a disappointing field trial. In the long run, while Steve Cohen skated, the insider cases led to $1.8 billion in fines, the dissolution of SAC, and jail time for Martoma.

 

In retrospect, it was all so stupid. SAC could have come to the conclusion that Elan’s drug was not going to work without resorting to anything illegal.

 

Instead of deploying all this massive intellectual firepower on getting advance word on the results of the trials, the analysts might have started by asking how solid were the assumptions on which the therapy was based: namely, whether attacking the plaques would halt or reverse the progress of the disease.

 

Even in 2008 and 2009, there were a number of researchers at distinguished universities who questioned that basic assumption. The alternate theory was that the plaques were not the cause of the disease, but rather an analogue of scabbing, the result of the body’s attempt to protect the brain from infection.

 

 In subsequent years, this alternate view has gained some traction, with some now arguing that Alzheimer’s is akin to an autoimmune disease in the sense that as the environment in developed countries has become more antiseptic, protective devices in the brain have turned on the brain itself as the infections they evolved to fight have disappeared. In any events a drumbeat of failed trials with drugs attacking amyloids has discredited this approach. As Tara Spires-Jones, of Edinburgh University’s Centre for Cognitive and Neural Systems put it in an interview with Britain’s Independent, “Most of the trials have been based on the assumption that amyloid is important in causing Alzherimer’s diseas, as opposed to something that happens alongside it. That assumption, I think, is probably wrong…”

 

Even in 2007, SAC’s analysts should have known that many attempts to fight Alzheimer’s by fighting the formation of plaques had failed. Given all the time the fund spent analyzing the drug and trials it must occurred to someone to ask whether Elan was barking up the wrong tree. Maybe someone there did just that, but there’s no indication that the decision makers ever questioned the assumptions upon which the drug was built.

 

Maybe that wouldn’t have mattered. SAC wanted certainty. Clearly, detailed advance knowledge of the results of a field trial is more compelling than a dissenting theory on the nature of the disease. Had SAC questioned the assumptions of the study, they never would have amassed a position in Elan, and they probably wouldn’t have had sufficient certainty to short the stock prior to the results being announced.

 

What can be drawn from this? There are implications about the pressures of the markets – SAC employees felt that had to cheat to maintain performance – but there are also implications about the culture of world of investing.  Alzheimer’s is a horrifying disease, but the book makes a strong case that neither Cohen, nor anyone else at SAC, gave a rat’s ass whether the drug worked or not; they only cared about knowing the results before anyone else and about how other traders would view the data when it came out.  The same probably applied to every other fund playing Elan.

 

It isn’t news that the markets are amoral, but this amorality has real world consequences. The punishment the market meted out to Elan (and other companies with failed trials) makes all but the largest companies risk averse about investing in therapies for difficult diseases. There is a short-term logic to this from an investor’s point of view, but, increasingly, the market sets research priorities, and the market’s priorities – controlling costs and maximizing short-term profits – may not serve the needs of society. Researchers know that breakthroughs often come from learning from failed previous attempts.  So where will breakthroughs come from as fewer and fewer companies risk failure?

 

Part Two:

 

Further thoughts on Black Edge by Sheelah Kolhatkar

The insider trading scandal at SAC confirmed a widely held suspicion among ordinary investors that Wall Street is a rigged game where powerful players can cheat with impunity.  Regardless of the truth of that suspicion, the widely held perception that this is the case has had its own reverberations. In a delicious irony, one of the derivative effects of the market crash and subsequent insider trading scandals has been to make more likely a future in which black edge is less useful.

 

Bear with me.

 

What happened with Elan revealed a contradiction at the heart of the markets. SAC was driven to seeking black edge by the ruthless competition of the markets. In the minds of their analysts and portfolio managers, access to publicly available information wasn’t enough because competing funds had their own PhDs pouring over the same information. Moreover, competing funds also had access to the same expert networks (which might be viewed as “grey edge”) as did SAC.

 

In such a situation, we’d expect that different analysts would take different perspectives on the prospects of the drug and the trials. I would have expected that at least some analysts would question whether the assumptions behind the drug were correct. The market says that wasn’t the case. Rather the hedge fund world was massively longs before the release of the trial results, and Elan’s subsequent 66% price drop suggests that the herd mentality applied on the way down too.

 

So market efficiency drove SAC and some others to seek black edge, while the subsequent drop exposed a herd mentality and deep inefficiency that made the market anything but a black box that continuously adjusts prices for all information.

 

The result for the markets is analogous to the evolutionary theory of punctuated equilibrium: markets will proceed smoothly until some event produces rapid change. Because, as the crash of 2008 demonstrated, the big price-change inducing event can come from any number of directions inside or outside the economy, many investors are giving up on analysis of individual stocks and moving to passive investment funds and ETFs. The size of this shift is staggering. The amount of managed money in passive strategies has risen from an estimated 6% in 2006 to as much as 40% today (these figures vary depending on definitions of what a constitutes passive strategy).

 

That latter figure may be larger given the relationship between value investing and money moved by algorithms and quantitative strategies.

 

Quantitative types try to beat their peers by focusing on changes in pricing or volatility, and/or seeking an edge through speed and data crunching, rapidly identifying anomalies, and then trading at warp speed. Many hundreds of billions of dollars now take this route into the markets. And results have proven that this approach can work; some of these funds have done fabulously well.

 

So, stepping back, it becomes clear that the trillions of dollars invested through passive strategies and ETFs basically piggybacks on the decisions of active managers relying on traditional analysis of individual companies and sectors. Moreover, the hundreds of billions of dollars of money invested in quantitative, momentum, derivative, and volatility strategies, also piggybacks and even amplifies, the decisions made by traditional investors as those decisions become evident in price movements.

 

So the response to the pain inflicted by past booms and busts and insider trading scandals has created a situation today where the huge amounts of money moves in sync with an ever smaller base of active managers. Value investing based on analysis of individual companies has become an ever-smaller tail wagging an ever larger dog.

 

Perversely, this, in turn, has created a situation where in the next crash, Steve Cohen, the quant and momentum funds, and even the Warren Buffets will ultimately have no edge. All it will take to set the next crash in motion is for a fair number of investors to say, “gee I think I should shift more to cash.” Then the passive investment funds will be forced to sell, and they will sell regardless of the merits of any individual stock. This will cause volatility to rise and the billions of dollars of investments tied to volatility will also start selling, and as this is happening, the algorithmic traders, the momo guys and the others looking for direction to exploit will jump in juicing the sell off.  The trigger might be some external event, or something as banal as a simple change in mood, but no insider will have any better insight as to when this occurs than anyone with access to a newspaper.

 

As a coda, it’s worth noting that Steve Cohen has now been cleared to manage other people’s money. At the end of Black Edge the author quotes a savvy market player as saying that the day Cohen could do that, money would come pouring in. Well, according to the New York Times, that day is here and money is not pouring in. Maybe this is because his fees are too high, or because the insider trading scandal has made him tainted goods. Or maybe, it’s because investors doubt that he can achieve his former results without black edge.



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