Eugene Linden
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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...



Fire & Flood
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Deep Past
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endangered animals
rapid climate change
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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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Imagining a Post Pandemic World

Friday April 10, 2020

How might a post-pandemic world look and feel? Let’s imagine a creative team at a New York City advertising agency pitching a campaign in 2050 for a new perfume (more than most products, perfumes are sold by attaching to the dreams and aspirations of their times).  The Big Apple, thirty years hence, remains a vital hub, but the city is greener and quieter than it is today. The few pedestrians on the streets give each other a wide berth. 

Cities such as New York persist because people need to meet face to face. Chance encounters, however, are not as welcomed as they were in more free-wheeling times. Waves and air kisses have replaced handshakes (and even Japanese-style bowing has made a comeback). There are far fewer bars and many more private clubs (with their vetting procedures, clubs offer better protection against encounters with carriers of infectious disease). Most office buildings maintain positive air pressure and have air locks to prevent contagion from entering, and during periods of outbreaks, those entering or leaving are subject to containment protocols that require the sterilization of clothes and exposure to a brief microbe-killing dose of ultraviolet light.

The protocols are so cumbersome that they’ve had an impact on how people dress. Many people wear robes, not to signal religious affiliation, but because they are easy-on, easy-off when disinfectant procedures are activated. The long, flowing garments also level rank and affluence in a society that has become intolerant of greed and privilege. Those with money take pains to be inconspicuous.

The biggest changes, however, have to do with values. And in world traumatized by past pandemics, the clues the future lie in the past. The rhythm of history has been periods of stability and prosperity followed by a descent into instability. As we try to understand how the COVID-19 pandemic may transform our lives, the present may be one of those times when we need to look to the past to get a glimpse of what lies ahead for society. 

Stability is fundamental. It provides a lens through which to view the contours of the future. If we could make an informed guess as to whether the future will be more or less stable than the present, we would know a lot about what’s to come. That’s because we know how peoples and societies have reacted during past periods of instability. 

What is stability? For ecologists, stable systems are characterized by attributes such as persistence and resilience. Resilience, for instance, enables a system to recover from shocks. These attributes aptly describe the post-World War II period, which saw the global economic order power through the collapse of the Communist empire, multiple financial crises (including 2008), religious fanaticism, and other shocks. Whether the present stability, with its reliance on globalization, will survive the shock of the coronavirus pandemic remains an open question.

Stability has obvious benefits.  A sense of security nurtures innovation, investment, and technological experimentation and advance. There is also more social experimentation and blurring of cultural identity, which is a mixed blessing because couples no longer need to stay together out of financial necessity and families can come apart. 

In both ecology and human society, however, stable systems contain the seeds of their own undoing. During stable times food supplies increase, threats recede, and populations explode. In a world of finite arable land and fresh water, however, the margins of error diminish with change to any of the conditions that fostered the population explosion -- e.g. a good climate. At that point, second order effects such as xenophobia and nationalism come into play as, for instance, people forced off their lands by drought or political upheaval seek refuge only to find that such sought after safe havens are already fully occupied. 

Pandemics, though massively disruptive, are but one of the factors that might tip a stable system into a tailspin. Others include climate change, the rise of religious extremism, a widening gap between the rich and poor, destabilizing tides of migrants, ever more volatile markets, and hard limits imposed by demands on fresh water. All of these factors have proven themselves to be destabilizing to one degree or another around the world in the new millennium, and the interaction of these factors can accelerate a decline.

“Dark Age” is one phrase used to describe past periods of instability. The forbidding words remind us that the march of civilization is not a straight-line progression towards enlightenment. While not all is dark in such unstable periods, life and values are very different.

In stable times, people look outward; in unstable times societies turn inward. When instability rules, people take out “insurance” of various sorts. They turn to families, tighten ties to community, and accept the trade-off that these deeper entanglements limit opportunities for exceptional wealth for any one individual. Expertise becomes more important. Amid renewed xenophobia, people tend to cluster with their own. In the New York of 2015, Chinatown, for instance, has re-established itself as an enclave for Chinese. 

With a less exuberant economy there is less innovation and experimentation. Religion becomes more important as people search for answers, though amid instability, traditional religions compete with emergent messianic sects and new faiths. Given the right mix of circumstances, strongmen and gangs can also gain influence. Witness the decades long chaos afflicting Somalia, or the growth of MS-13, a gang which has flourished in the instability of Central America.

As for the perfume campaign, in this particular pitch, the creative group shows the client a tableau featuring a woman and her children in a sylvan setting raptly listening of an elderly man in a flowing white robe – an image more akin to something out of the Jehovah’s Witnesses magazine, The Watchtower, than something one might see in Vogue today. Celebration of youth culture is dead, replaced by a yearning for order and stability. The man pitching the campaign says, “We are talking to a woman who sees herself comfortably ensconced in the values of the day, a woman who dreams of a refuge and the comforting presence of elders – in short a woman of the fifties.” He’s referring, of course, to the 2050s. 

Could this happen? Such dark ages have happened many times in the past. And with coronavirus, some of these changes are already underway. Exhibit A: there’s a grass roots movement to nominate Dr. Anthony Fauci, the 79 year-old face of efforts to combat COVID-19, as People magazine’s sexiest man alive.  The coming changes won’t be all bad; indeed, cooperation for the greater good is what will get us through this pandemic.



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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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