Eugene Linden
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Latest Musing

The Supreme Court's Own Goal on Climate Change

[This article appeared in Lawfare. It's long for a musing, but I think it's important that the public see just how shoddy was the majority reasoning in West Virginia v EPA]

In 1970, Sen. Roman Hruska of Nebraska achieved a dubious immortality when he argued that mediocrity deser...

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Books


Fire & Flood
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Deep Past
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Articles by Category
endangered animals
rapid climate change
global deforestation
fragging

Books
The Ragged Edge of the World



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

HOW THE OPTIONS TAIL HAS COME TO WAG THE MARKET DOG: A Simple English Language Explanation of How Structural Changes in the Stock Markets Contribute to Whipsaw Movements in Prices.

Lately a string of violent price movements and reversals in the equity markets make it look like the markets are having a nervous breakdown. The last day of trading in April 2022 saw a 939 point drop in the Dow. The day before that, the Dow rose about 625 points, and two days before that it fell over 800 points. The very next week, after two quiet days, the Dow rose over 900 points after the Fed announced its biggest rate hike in 22 years (ordinarily a big negative for the markets), and then, the next day, fell over 1000 points (more on this later).  There have been plenty of headlines – about the Ukraine Invasion, inflation, the threat of a Fed caused recession, supply chain disruptions – to justify increased uncertainty, but the amplitude of the moves (and the sudden reversals) suggest something more may be at work. Here follows an effort to explain in simple language the significant changes in the market that have contributed to this volatility.

 

“This time it’s different” is perhaps the most dangerous phrase in finance as usually it’s uttered by market cheerleaders just before a bubble bursts. That said, markets do change, and those changes have their impacts. One change in the markets has been the shift from intermediaries (such as brokers) to direct electronic trading, a shift that has made the markets somewhat frictionless, and allowed computer driven funds to do high speed trading. This shift began a couple of decades ago. Today’s markets can move faster than a human can react.

 

Another shift has been the degree to which passive investing through index funds and algorithmic trading through various quant funds have come to eclipse retail investing and dominate trading. A consequence of this is that to some degree it has mooted individual stock picking because when investors move in or out of index funds, the managers have to buy or sell the stocks held on a pro rata basis and not on individual merit. This change too has been developing over recent decades.

 

A more recent and consequential shift, however, has been the explosion in the sale of derivatives, particularly options (the right to buy or sell a stock or index at a specified price on or before a specific date). Between 2019 and the end of 2021, the volume of call options (the right to buy a stock at a specified price on or before a particular date) has roughly doubled. During times of volatility, more and more retail and institutional investors now buy calls or puts rather than the stocks. 

 

Today, trading in options has reached a scale that it affects market moves. A critical factor is the role of the dealers who write options and account for a significant percentage of the options issued. Dealers have been happy to accommodate the growth in option trading by selling calls or puts. This however, makes them essentially short what they have just sold. Normally, this doesn't matter as most options expire out of the money and worthless, leaving the happy dealer to book the premium. Being short options, however, does begin to matter more and more as an option both moves closer to being in the money and closer to expiration. 

 

This situation is more likely to occur when markets make large and fast moves, situations such as we have today given the pile of major uncertainties. Such moves force dealers to hedge their exposure. 

 

Here’s how it works. If, for instance, a dealer has sold puts on an index or a stock, as a put comes closer to being in the money (and closer to expiration), the dealer will hedge his short (writing the put) by selling the underlying stock. This has the combined effect of protecting the dealer -- he's hedged his potential losses – while accelerating the downward pressure on the price. In other words, this hedging is pro-cyclical, meaning that the hedging will accelerate a price move in a particular direction.

 

Traders look at crucial second derivatives of stock prices, referred to by the Greek letters delta and gamma to determine exposure to such squeezes. As an option moves closer to in the money it's delta -- it's price movement relative to the price movement of the underlying, and its gamma -- the rate of change of the delta relative to a one point move in the underlying, both rise. The closer to both the strike price and expiration date, the more the dealer is forced to hedge. The result is what’s called a gamma squeeze. Once the overhang of gamma exposure has been cleared, however, the selling or buying pressure abates, and gamma may flip, with new positioning and hedging done in the opposite direction. The result can be a whipsaw in the larger markets. This same phenomenon can happen with indexes and futures.

 

How do we know that the hedging of option positioning are contributing to violent price changes and reversals in the market? While not conclusive, perhaps the strongest evidence is that large lopsided agglomerations of options at or near the money have been coincident with surprising market moves as expiration dates approach. In fact, some market players use this data to reposition investments, in effect shifting investment strategy from individual companies to the technical structure of the markets. This is what Warren Buffett was referring to when, at his recent annual meeting, he decried the explosion of options and other Wall Street fads as reducing companies to “poker chips” in a casino.

 

The week of the May Fed meeting gave us a real-time example of how a market move that looks insane on the surface reflects the underlying positioning in various derivatives. To set the stage: ordinarily, given debt burdens and the threat of recession, the markets would be expected to react badly to a Fed tightening cycle that is accelerated by the biggest rate hike in 22 years. On Wednesday, however, market indices began to soar on Wednesday when Fed Chairman Powell, one half hour after the Fed announced it 50 basis point raise, suggested that the Fed was not considering larger 75 basis point hikes during this tightening cycle. Traders interpreted this as taking the most hawkish scenario off the table. Up to that point, institutions were extremely bearish in their positioning, heavily weighted to puts on indexes and stocks, and also positioned for future rises in volatility in the markets. Right after Powell made his comments, investors started hedging and unwinding this positioning, and all the pro-cyclical elements entailed in this repositioning kicked in. By the end of the day, the technical pressures producing the squeeze had largely abated, setting the stage for a renewed, procyclical push downward the next day, as the negative aspects of the tightening cycle (and other economic headwinds) came to the fore. 

 

What these violent moves in the market are telling us is that while in the broader sense, this time is not different --the overall sine wave of the market is still that bubbles build and burst -- how the present bubble is bursting may be following a different dynamic than previous episodes. The changes since the great financial crisis-- the rise to dominance of passive trading through indexes and algorithmic trading through various quant strategies – reduced the friction in the markets as well as the value of picking individual companies. Now, the more recent explosion of option issuance, further accelerates market moves, and leads to unpredictable reversals that have to do with option positioning rather than fundamentals such as earnings, politics, or the state of the economy. 

 

The tail (the options and other derivatives markets) now wags the dog (the equities markets).

 

 



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