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THE PROBLEM WITH MUSK'S BID FOR TWITTER IS NOT THAT HE'S A BILLIONAIRE

Matt Taibbi, a journalist whose writing I admire, has joined the throng decrying the hypocrisy of pundits who write on the pages of the Washington Post (owned by a billionaire) that if billionaire Elon Musk buys Twitter it will be a threat to democracy. This is too glib. The problem isn’t b...

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Maybe American Sniper Really is Anti-war


Sunday February 01, 2015

I like a good action movie and I like Clint Eastwood movies and so I went to see American Sniper. I also had a personal interest: decades earlier in Vietnam, I'd interviewed America's top sniper -- a dead-eyed killer nicknamed Papa Leech -- when I was investigating fragging as a journalist. Mr. "Leech" wasn't the kind of guy who would be played by Bradley Cooper -- he told me that he was thinking of becoming a hitman for the Mafia after he left the military (a dream that was heartlessly snatched away as he was killed by his own men before he left Vietnam). Back then, the American military wouldn't publicly confirm that we had sniper units because they were in a grey area under the Geneva Convention. How times have changed!

My first reaction to the movie was similar to Matt Taibbi's recently published evisceration in Rolling Stone -- that the movie was an appallingly simple-minded embodiment of an obtuse, morally bankrupt mindset that has led the U.S. to perpetually look for the next Vietnam without absorbing the lessons of the last one. Then, as things go bad, we once again scratch our heads as to why our vast firepower and technological superiority couldn't win the day. In the movie,

Chris Kyle's motivation for putting his life on the line as a sniper in Iraq was to avenge 9/11, and to bring the fight there so that he wouldn't be fighting in San Diego. He's never presented as a brain surgeon, but I would have thought that at some point during his four tours of duty, he might have come across at least one of the credible reports documenting that Iraq had nothing to do with 9/11; or, as he saw the countless civilians radicalized by the immense collateral damage of the war, wondered whether our actions in Iraq were creating recruits for Al Queda, and making it more likely that terrorism would some day come to San Diego. Apparently not.

That was my first reaction. Then, as I thought more about the movie, I wondered whether Mr. Eastwood was attempting something sly and subtle. By now, most people who will watch the film know that Bin Laden's crew were largely Saudi; they know that Saddam Hussein did not have the wherewithal to attack San Diego; and they are aware of the metastasis of ISIL, which could be described as the evil spawn of the wars in Iraq and Syria, and which does seem hell-bent on bringing the battle to the West. Eastwood certainly knows this; maybe he felt that viewers now know enough that they can draw their own conclusions if the story is simply told.

You can't watch the film, for instance, without noting that despite being overwhelmingly overmatched, the Iraqi irregulars are willing to die for their cause, whatever that is (you won't find out by watching this film). Yes, the Iraqi adversary in one city, "The Butcher," is presented as being almost cartoonishly cruel, but there is also a scene in which a kid contemplates picking up and launching a grenade launcher after its handler is killed by Kyle. The scene is meant to illustrate that Kyle has moral compunctions about shooting a kid, but it's hard to watch that scene and not wonder about the level of hatred against American troops that would prompt a kid to even consider picking up the weapon. There are many other scenes in the movie that make you wonder about the awesome idiocy of that war.

The film also allows us to make our own judgments about sniping. One scene shows Mustafa, Kyle's mirror image, leaving his beautiful wife to rush off to fight after getting a call that Americans are in the area. In the narrative of the film, Mustafa is a bad guy, but many viewers will wonder what makes him bad if Kyle is good? Several tearful scenes on the home front as Kyle signs up for yet another tour make it quite clear that the American sniper vastly prefers killing people in faraway places to being home with the wife and kids.

American Sniper also subtly suggests that even Kyle knew that there was something unsavory about shooting people from a concealed and relatively safe position. In one scene, he puts down his sniper rifle and picks up an automatic weapon to join a group of marines going house to house. When his spotter balks at leaving the safety of their hideout, he all but accuses him of cowardice if he does not join Kyle in this real fighting.

I'm probably giving Hollywood too much credit, but it's possible that the makers were attempting something similar to the send up of militarism in Paul Verhoeven's Starship Troopers, which on one level is a very well made SciFi adventure about the defense of the planet from a race of giant alien insects, while on another, it deftly skewers the mindless jingoism, empty slogans and mass hysteria that incite the clean-cut, best and brightest of any society to rush off to war. For this interpretation of American Sniper to be believed, we have to assume that Hollywood embraces subtlety and that viewers have done some critical thinking about events of the past 15 years. Perhaps a stretch on both counts, but wouldn't it be nice if it were so?

 

 

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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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