Eugene Linden
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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...



Fire & Flood
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Deep Past
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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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Tuesday April 19, 2022

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 billionaires owning media outlets, or the hypocrisy of pundits writing on platforms owned by billions saying that billionaires shouldn't own media platforms; the very rich have dominated media for much of the life of the republic, and many of them oversaw the growth of our most outstanding publications, e.g. the Fleischmann family and The New Yorker, or the Sulzbergers and The New York Times. Today, given the deteriorating value proposition of almost all media, we need the very rich to keep storied outlets alive. The issue with Musk has to do with what he has said he wants to do with the outlet -- strip it of its moderators. That indeed is a threat to democracy. The lesson of the digital era is that without intermediaries, information outlets degrade into a cesspool of spin, disinformation, agitprop, unfounded conspiracy theories, exhibitionism, racism, sadism, and porn. 

In Silicon Valley disruption is a good thing, but not all disruptions pave the way for something better. As everything has shifted online over the past few decades, the shedding of intermediaries stands out as the most pervasive and destabilizing side-effect of this transition. In financial markets that has meant the disappearance of brokers and market makers, and the rise of ETF’s, index funds, bizarre meme stocks, and arcane quant strategies that whipsaw markets and mystify market veterans. In the world of information, it has meant the disappearance of editors and fact checkers, the erosion of the hold of the dominant print and network brands, and the rise of social media, blogs, ezines, and a flock of personalities who can distribute opinions, information, and disinformation with little or no vetting whatsoever.

            On the internet, with a modicum of copy editing and design, everything looks equally authoritative, and the online world turns out to be perfectly designed to optimize the human tendency for confirmation bias (particularly given the algorithms that govern news feeds on the big social media platforms). If you’re on the edge of going down a rabbit hole, the algorithm, like Lloyd, the Satanic and imaginary bartender in The Shining, is there to give you a gentle shove over the edge. Does anyone think that batshit crazy fringe alternative reality games like Qnon could have metastasized as quickly and extensively as they did without the internet?

Another transformational aspect of the internet is that no matter how fringe or eccentric an obsession one might entertain, there is now a community that will welcome you. In a country of 330 million people, even the rarest of niches can become pretty big – if like-minded people can find each other, which they now can courtesy of the internet. For instance, an estimated 12 million Americans believe that we are secretly ruled by lizard people, malevolent aliens who came to earth long ago. If one percent of that group is crazy enough to act on their belief, that’s still 120,000 people, and they can now find each other and plot violence. It’s arguable that the Jan. 6 insurrection would not have happened had not scantily moderated social media platforms such as Gab, Parlor, 4Chan as well as more moderated platforms such as YouTube, Facebook and Instagram allowed organizers to coordinate the attack, and muster and incite the mob.

Could moderators (the people who perform the intermediary function for social media platforms) have aborted the attack? To answer this question, first think about what might have happened before the advent of the internet. No major news outlet would have published a call for violent insurrection on Jan. 6, and those fringe publications that did call for violence, would have reached isolated, small groups. In a non-digital world, Jan. 6 wouldn’t have happened (and, in fact, didn’t happen). By contrast, online interconnectedness means that even if the big platforms rigorously police their content for violent incitement, the internet is porous enough that extremists would be able to find each other, issue calls to action, and coordinate their efforts. That said, if the biggest platforms had rigorously moderated their content, the insurrection would have been smaller, and probably easier to block from breaching the capitol. As with poisons and drugs, dosage is everything, and the internet amps up dosage by orders of magnitude.

This brings us back to Musk and his bid for Twitter. He has claimed to be a free speech absolutist, which strongly implies that he would dial back moderation of content. Presumably that means reinstating Trump and his giant salad bowl of lies, distortions, insults and grievances. Presumably, that also means opening the gates to trolls, propagandists, and extremists. It would also pave the way for those who would mobilize the next attack on Congress. If we’ve learned anything from two plus decades experience with the online world, it’s that, particularly in the world of information, we need more intermediaries and moderators, not less.

Nor is this a matter of free speech, as Twitter is a private company. I don’t hear anyone calling for Disney to distribute porn (indeed, DeSantis, supposedly a free speech advocate, is calling for Disney to muzzle itself on gay rights). Should Musk prevail in his bid (and he’s subsequently provided evidence that his bid was performative and not serious), he might also discover that not only is unmoderated content bad for democracy, it’s bad for business. Less moderated sites such as Parlor have trouble finding, much less maintaining audiences that are a tiny fraction of Twitters’.

Despite the promise of the internet to flatten the earth since everyone now has access to the accumulated wisdom, science, and art of all of humanity, what we’ve discovered is that our citizenry is less informed than ever, susceptible to conspiratorial thinking, and often unable to distinguish between fact and disinformation. This is an indictment of our educational system, but it also points towards the need for moderators, editors, producers and fact checkers to do the job that used to bolster trust in journalism. Given the power of the internet to connect and distribute, without intermediaries, we’re effectively putting a baby in a room with a nuclear button, and if we don’t bring back adult supervision we shouldn’t be surprised at the results.

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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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