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...



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Tuesday November 30, 2021

Lately, I’ve had a sense of deja vu witnessing the rage boiling in America: voters sending death threats to Republican representatives who voted for a bipartisan infrastructure; school board meetings blowing up in fights over reading lists; passengers punching airline crews in the face over wearing a simple surgical mask; and countless other expressions of fury completely disproportionate to the events that prompted them. 

I’ve seen this kind of anger before, 50 years ago in Vietnam. Back then I was a young journalist investigating and writing about an epidemic of “fragging”, which is what we called the murder of officers by their own troops. Here’s a sample of the piece I published in the Saturday Review, back in 1972:

Fragging is a macabre ritual of Vietnam in which American enlisted men attempt to murder their superiors. The word comes from the nickname for hand grenades, a weapon popular with enlisted men because the evidence is destroyed with the consummation of the crime. Fragging has ballooned into intra-Army guerrilla warfare, and in parts of Vietnam it stirs more fear among officers and NCOs than does the war with "Charlie." To predict who will be the assassin is impossible: it could be anyone, almost as though the act of murder chooses its executor at random. The victim too, can be any officer or NCO in contact with enlisted men. Officers who survive fragging attempts often have no idea who their attackers were and live in fear that "they" will try to kill them again. Fraggings occur among the detritus of a demoralized army: a world of heroin, racial tension, mutiny, and fear. They express the agony of the slow, internal collapse of our Army in Vietnam. Ultimately, the roots of these murder attempts lie outside the military and even the war. They lie in the crush of forces that brought our Army in Vietnam to its present state.

Fraggings were not unique to Vietnam. They happened in many wars, usually on the front lines when the enlisted soldiers in a given unit conspire to rid themselves of an officer considered dangerously incompetent. But, in the closing years of Vietnam such attacks mysteriously and dramatically increased in the rear echelons—even as the war was winding down and the danger to the average enlisted man was receding.

At the time I heard different reasons for these rear echelon fraggings, including racial tensions and rampant drug use. But there were other issues that had clearly set the stage for the outbreak.

One was the deterioration in communications between the enlisted ranks and their immediate officers. Another was that few in the ranks understood why they were still in Vietnam at all. A third was that as the war dragged on, the more crafty and connected individuals learned how to avoid the armed services—or if they had to serve, learned how to avoid the front lines.

This was a change from World War II, where the enlisted ranks consisted of a cross section of society. An example: My dad was a classical pianist; he ended up in the jungles of New Guinea. But in the last years of Vietnam, the ranks were dominated by the kind of men who didn’t have the connections or social capital to get out of service. They disproportionately came from the less-educated and—not unreasonably—were resentful of the fact that they hadn’t gotten deferments, or Air National Guard postings the way many in the upper classes managed. And if you couldn’t talk your way out of the ranks you were also more likely to act out rather than talk out your frustrations.

The non-commissioned sergeants and corporals—who traditionally mediated between commanders and soldiers—tended to be lifers and were as alienated from their conscripted troops as the college-educated officer corps above them. So when someone in a unit started muttering, “Let’s frag the lieutenant,” the sergeant was less likely to hear about it. And there were fewer other voices in the unit to say, “That’s murder.”


The United States is not a war zone—not yet, anyway. But even so, I sense some parallels in the unprecedented rage and fury we see on all sides of our polarized society. From the shooting of a congressional baseball team practice to the storming of the Capitol.


One of the commonalities is a widespread sense of limitless grievance. It’s not just that one side feels put upon by the other—it’s that both sides see themselves as victims of the other. And what’s worse, both sides feel a sense of powerlessness to redress those grievances. Then there’s the siloing of our media consumption: In Vietnam, isolated units of soldiers found in each other sympathetic audiences and no dissenting voices. So today, anyone who blames some hated party or group for their frustrations easily finds validation among the like-minded people and news feeds that constitute our closed communications bubbles. We’re a big country, and even if there only a small percentage of the population dives down the rabbit hole of conspiracies and demonization, that’s still millions of people, and unlike pre-interconnect times, those aggrieved and willing to act can now easily connect with others who share their views.


In our current struggle with ideologies and identities, the most aggrieved are rallying to figures who profit from justifying and stoking their anger, rather than to leaders arguing for compromise and practical solutions. Yet while there is evidence of this disastrous development on both right and left, it is impossible to ignore the fact that for four years the president of the United States himself was the most angry, most persistent, and most opportunistic figure inflaming the nation’s sense of intolerable grievance—his presence magnified by obsessive coverage from the media ecosystems that amplify our political disagreements. 

And while it’s one thing for a president or his media enablers to tell their chosen audience that their anger is justified, it’s another to call on them to act on that anger with violence. 

There’s another parallel between the rear echelon fraggings of Vietnam and our current epidemic of rage. When I interviewed a soldier who had been convicted of trying to kill his commanding officer, he seemed to have no sense that he had done anything wrong. At one point he told me that he would have been “tickled pink” had he succeeded, and before his trial he asked the prosecutors whether it would save a lot of trouble if he took a discharge instead of court martial. That disconnect from reality resonates with the attitude of many of those who invaded the Capitol on January 6, many of whom either have no sense of the gravity of that insurrection, or believe that they were entirely justified in their actions.

The military’s problem with internal warfare was solved when we exited Vietnam and switched to an all-volunteer army. In other words, the military didn’t solve the problem—they changed their personnel and then relocated. Alas, that option isn’t available to us when our unit is the whole of society.

We’re going to have to solve our rage problem right here at home. And we know from the long experience of many nations that rage and blame breeds rage and blame. The worst possible mistake would be to underestimate its consequences.





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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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