Eugene Linden
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Trump, the Toxic Legacy of the Financial Crisis

Today, the Lost Angeles TIMES published my oped as part of a a package on the first anniversary to Trump's election. Space was limited, so I tho...


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As the temperature rises in the Arctic, it sends a chill around the planet

Monday, Sep. 04, 2000
Here's a tip for anyone trying to figure out when and whether global warming might arrive and what changes it will bring: hop a plane to the Arctic and look down. You'll see that climatic changes are already reworking the far-north landscape. In the past two decades, average annual temperatures have climbed as much as 7[degrees]F in Alaska, Siberia and parts of Canada. Sea ice is 40% thinner and covers 6% less area than in 1980. Permafrost--permanently frozen subsoil--is proving less permanent. And even polar tourists are returning with less than chilling tales, one of which was heard around the world last week. Back from a cruise to the North Pole aboard the Russian icebreaker Yamal, tourists told the New York Times that a mile-wide lake had opened up at 90[degrees] north, with gulls fluttering overhead, and they had the pictures to prove it. The newspaper declared that such an opening in polar ice was possibly a first in 50 million years, though that claim was dismissed by scientists who nonetheless see other serious signs of Arctic warming (see box, page 56). On a less cosmic level, Mike Macri, who runs nature tours in Churchill, on the western shores of Hudson Bay in Canada's Manitoba province, has had to rewrite his brochures. The old ones encouraged tourists to arrive at Churchill in mid-June to see beluga whales, which migrate up the mouth of the Churchill River following the spring ice breakup. The new brochure encourages visitors to arrive as early as May. The ice also forms as much as two weeks later in the autumn than it used to in Hudson Bay, creating a bewildering situation for some of the local wildlife. Polar bears that ordinarily emerge from their summer dens and walk north up Cape Churchill before proceeding directly onto the ice now arrive at their customary departure point and find open water. Unable to move forward, the bears turn left and continue walking right into town, arriving emaciated and hungry. To reduce unscheduled encounters between townspeople and the carnivores, natural-resource officer Wade Roberts and his deputies tranquilize the bears with a dart gun, temporarily house them in a concrete-and-steel bear "jail" and move them 10 miles north. In years with a late freeze--most years since the late 1970s--the number of bears captured in or near town sometimes doubles, to more than 100. Humans are feeling the heat too. In Alaska, melting permafrost (occasionally hastened by construction) has produced "roller coaster" roads, power lines tilted at crazy angles and houses sinking up to their window sashes as the ground liquefies. In parts of the wilderness, the signal is more clear: wetlands, ponds and grasslands have replaced forests, and moose have moved in as caribou have moved out. On the Mackenzie River delta in Canada's Northwest Territories, Arctic-savvy Inuit inhabitants have watched with dismay as warming ground melted the traditional freezers they cut into the permafrost for food storage. Permafrost provides stiffening for the coastline in much of the north; where thawing has occurred, wave action has caused severe erosion. Some coastal Inuit villages are virtually marooned as the ground crumbles all around them. And as the ice retreats farther from the coast, Inuit hunters are finding that prey like walrus has moved out of reach of their boats. These isolated dramas play out far from the mid-latitudes of the planet, where the vast majority of people live, but they could soon have serious implications for all of us. What is really at risk in the Arctic is part of the thermostat of the earth itself. The difference in temperatures between the tropics and the poles drives the global climate system. The excess heat that collects in the tropics is dissipated at the poles, about half of it through what has been nicknamed the ocean conveyor, a vast deepwater current equivalent to 100 Amazon Rivers. Much of the rest of the heat is conveyed as energy in the storms that move north from the tropics. If the poles continue to warm faster than the tropics, the vigor of this planetary circulatory system may diminish, radically altering prevailing winds, ocean currents and rainfall patterns. One consequence: grain production in the breadbaskets of the U.S. and Canada could be in jeopardy if rainfall becomes less steady and predictable. Already, severe and unpredictable storms across the northern hemisphere may be a sign that the global system is changing. Even greater climate change could be on the way. Growing numbers of scientists fear that the warming trend will so disrupt ocean circulation patterns that the Gulf Stream, the current that warms large parts of the northern hemisphere, could temporarily shut down. If that happens, global warming would, ironically, produce global cooling--and bring on a deep freeze. Such a calamity could be self-inflicted. Many scientists believe that the current warming is related to the increased burning of fossil fuels, such as gasoline and coal, which overloads the atmosphere with carbon dioxide and other greenhouse gases. That's why 160 countries signed the 1997 Kyoto Protocol, which requires industrial nations to reduce their greenhouse emissions to an average of 5.2% below 1990 levels between the years 2008 and 2012. But even that weak treaty remains controversial, and governments have made little progress toward implementing the pact. The U.S. Senate hasn't even considered ratifying it. Opponents seize on the possibility that the warming we're seeing may not be our doing but just part of the natural variation in climate. Partly in response to this deadlock, NASA climatologist James Hansen last week unveiled an alternative strategy. Instead of pursuing the politically unpopular goal of drastically reducing consumption of fossil fuels, he suggests going after other greenhouse gases, such as methane, which he thinks has accounted for as much warming as carbon dioxide in the past century, even though it is present in the atmosphere in much smaller quantities. Without action, major changes appear inevitable. Should surface water temperatures in the high Arctic rise just a few degrees, the sea ice could disappear entirely, but even a partial melting could devastate the northern hemisphere's climate. A combination of melting ice, increased precipitation and runoff from melting glaciers on land could leave a layer of buoyant freshwater floating atop the denser salt water, at a point in the North Atlantic where water ordinarily cools and sinks. The lighter freshwater wouldn't sink, interrupting the vertical circulation at a crucial point in the cycling of heat through the ocean--as if you're grabbing a conveyor belt and slowing it down. So how would that produce cooling? Ordinarily the conveyor is propelled by the pull created by masses of water sinking in the North Atlantic. When this pull diminishes, the movement of warm water north in the Gulf Stream could slow or stall, driving down temperatures in Europe and North America, and possibly elsewhere. It has happened before. Roughly 12,000 years ago, at the end of the last Ice Age, a natural warming sent freshwater from melting glaciers flowing out of the St. Lawrence River into the North Atlantic, all but shutting down the Gulf Stream and plunging Europe into a 1,300-year deep freeze. The more that becomes known about this period, named the Younger Dryas (after a tundra plant), the more scientists fear that the rapid melting of sea ice could cause the same catastrophe again. Only next time, writes geophysicist Penn State's Richard Alley in a forthcoming book, Two-Mile Time Machine, the effects would be much greater, "dropping northern temperatures and spreading droughts far larger than the changes that have affected humans through recorded history." Would this be "the end of humanity?" he asks rhetorically. "No," he replies. "An uncomfortable time for humanity? Very." A sudden chill would shorten growing seasons, and the resulting changes in precipitation could be even more damaging. Colder air is dryer air, and Alley points out that during the Younger Dryas, the monsoon weakened in Asia and the Sahara expanded. Harvey Weiss, a Yale archaeologist who has studied the role of climate in human history, notes that it's not changes in temperature that bring down civilizations but changes in precipitation. Protecting civilization is the goal of the Kyoto Protocol, but the treaty allows 12 more years for implementation, on the assumption that climate change will be gradual. That assumption looks shaky. Studies of deep underground ice layers in Greenland, which reveal a record of climate changes over hundreds of thousands of years, show that major climate shifts, like the onset of the Younger Dryas, can come very abruptly--within a few decades. It probably won't be possible to avoid some climate change this century, up or down--and there's still a chance that the earth's systems will compensate for any that occurs--but the possibility that climate turns rapidly and unpredictably should spur us into doing whatever is practical to turn from fossil fuels--fast. If done right it can be a boon. Energy conservation usually increases profits. In developing nations it's often cheaper to use alternatives like wind power to electrify new areas. At the entrance to the Churchill Northern Studies Centre, a base for investigations of regional climate change, a rusting rocket is a mute reminder of the complex's earlier life as part of defenses against Soviet nuclear attack. That threat never materialized, and now, belatedly, scientists venture from the base to study a threat that has materialized but against which no adequate defense has been mounted. Despite the danger that climate change poses, the resources currently devoted to studying this problem--and combatting it--are inconsequential compared with the trillions spent during the cold war. Twenty years from now, we may wonder how we could have miscalculated which threat represented the greater peril.

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Short Take

I’ve just read Black Edge, by Sheelah Kolhatkar, which is about the huge insider trading scam that characterized Steve Cohen’s SAC Capital at the height of its power. I’m going to offer the thoughts it prompted in two parts. The first will delve into the trade itself, and the second will explore the fallout from this insider trading scandal and subsequent events in the market.

Part One:

A good part of Black Edge focuses on one specific instance of insider trading at SAC Capital: Mathew Martoma’s quest for advance knowledge of the results of trials on the efficacy of Elan Pharmaceutical’s experimental drug to halt Alzheimer’s disease. The drug, bapineuzumab, was designed to attack the amyloid plaques that Elan’s scientists viewed as the cause of cognitive decline. In his quest for “black edge” (illegal inside information) Martoma and his compatriots compromised the integrity of the procedures for drug trials and ruined the life and reputation of a distinguished scientist.  Even that wasn’t enough for them. SAC also had access to vast amounts of biotech expertise, both from PhDs on their payroll, and the expert networks they paid handsomely to give them access to researchers with direct access to the studies and trials.


In the short run, this inside information paid off for SAC as Martoma’s advance knowledge of the results allowed the hedge fund to reverse a billion dollar position and make a profit of over $180 million versus certain losses of hundreds of millions had they not gotten advance information on a disappointing field trial. In the long run, while Steve Cohen skated, the insider cases led to $1.8 billion in fines, the dissolution of SAC, and jail time for Martoma.


In retrospect, it was all so stupid. SAC could have come to the conclusion that Elan’s drug was not going to work without resorting to anything illegal.


Instead of deploying all this massive intellectual firepower on getting advance word on the results of the trials, the analysts might have started by asking how solid were the assumptions on which the therapy was based: namely, whether attacking the plaques would halt or reverse the progress of the disease.


Even in 2008 and 2009, there were a number of researchers at distinguished universities who questioned that basic assumption. The alternate theory was that the plaques were not the cause of the disease, but rather an analogue of scabbing, the result of the body’s attempt to protect the brain from infection.


 In subsequent years, this alternate view has gained some traction, with some now arguing that Alzheimer’s is akin to an autoimmune disease in the sense that as the environment in developed countries has become more antiseptic, protective devices in the brain have turned on the brain itself as the infections they evolved to fight have disappeared. In any events a drumbeat of failed trials with drugs attacking amyloids has discredited this approach. As Tara Spires-Jones, of Edinburgh University’s Centre for Cognitive and Neural Systems put it in an interview with Britain’s Independent, “Most of the trials have been based on the assumption that amyloid is important in causing Alzherimer’s diseas, as opposed to something that happens alongside it. That assumption, I think, is probably wrong…”


Even in 2007, SAC’s analysts should have known that many attempts to fight Alzheimer’s by fighting the formation of plaques had failed. Given all the time the fund spent analyzing the drug and trials it must occurred to someone to ask whether Elan was barking up the wrong tree. Maybe someone there did just that, but there’s no indication that the decision makers ever questioned the assumptions upon which the drug was built.


Maybe that wouldn’t have mattered. SAC wanted certainty. Clearly, detailed advance knowledge of the results of a field trial is more compelling than a dissenting theory on the nature of the disease. Had SAC questioned the assumptions of the study, they never would have amassed a position in Elan, and they probably wouldn’t have had sufficient certainty to short the stock prior to the results being announced.


What can be drawn from this? There are implications about the pressures of the markets – SAC employees felt that had to cheat to maintain performance – but there are also implications about the culture of world of investing.  Alzheimer’s is a horrifying disease, but the book makes a strong case that neither Cohen, nor anyone else at SAC, gave a rat’s ass whether the drug worked or not; they only cared about knowing the results before anyone else and about how other traders would view the data when it came out.  The same probably applied to every other fund playing Elan.


It isn’t news that the markets are amoral, but this amorality has real world consequences. The punishment the market meted out to Elan (and other companies with failed trials) makes all but the largest companies risk averse about investing in therapies for difficult diseases. There is a short-term logic to this from an investor’s point of view, but, increasingly, the market sets research priorities, and the market’s priorities – controlling costs and maximizing short-term profits – may not serve the needs of society. Researchers know that breakthroughs often come from learning from failed previous attempts.  So where will breakthroughs come from as fewer and fewer companies risk failure?


Part Two:


Further thoughts on Black Edge by Sheelah Kolhatkar

The insider trading scandal at SAC confirmed a widely held suspicion among ordinary investors that Wall Street is a rigged game where powerful players can cheat with impunity.  Regardless of the truth of that suspicion, the widely held perception that this is the case has had its own reverberations. In a delicious irony, one of the derivative effects of the market crash and subsequent insider trading scandals has been to make more likely a future in which black edge is less useful.


Bear with me.


What happened with Elan revealed a contradiction at the heart of the markets. SAC was driven to seeking black edge by the ruthless competition of the markets. In the minds of their analysts and portfolio managers, access to publicly available information wasn’t enough because competing funds had their own PhDs pouring over the same information. Moreover, competing funds also had access to the same expert networks (which might be viewed as “grey edge”) as did SAC.


In such a situation, we’d expect that different analysts would take different perspectives on the prospects of the drug and the trials. I would have expected that at least some analysts would question whether the assumptions behind the drug were correct. The market says that wasn’t the case. Rather the hedge fund world was massively longs before the release of the trial results, and Elan’s subsequent 66% price drop suggests that the herd mentality applied on the way down too.


So market efficiency drove SAC and some others to seek black edge, while the subsequent drop exposed a herd mentality and deep inefficiency that made the market anything but a black box that continuously adjusts prices for all information.


The result for the markets is analogous to the evolutionary theory of punctuated equilibrium: markets will proceed smoothly until some event produces rapid change. Because, as the crash of 2008 demonstrated, the big price-change inducing event can come from any number of directions inside or outside the economy, many investors are giving up on analysis of individual stocks and moving to passive investment funds and ETFs. The size of this shift is staggering. The amount of managed money in passive strategies has risen from an estimated 6% in 2006 to as much as 40% today (these figures vary depending on definitions of what a constitutes passive strategy).


That latter figure may be larger given the relationship between value investing and money moved by algorithms and quantitative strategies.


Quantitative types try to beat their peers by focusing on changes in pricing or volatility, and/or seeking an edge through speed and data crunching, rapidly identifying anomalies, and then trading at warp speed. Many hundreds of billions of dollars now take this route into the markets. And results have proven that this approach can work; some of these funds have done fabulously well.


So, stepping back, it becomes clear that the trillions of dollars invested through passive strategies and ETFs basically piggybacks on the decisions of active managers relying on traditional analysis of individual companies and sectors. Moreover, the hundreds of billions of dollars of money invested in quantitative, momentum, derivative, and volatility strategies, also piggybacks and even amplifies, the decisions made by traditional investors as those decisions become evident in price movements.


So the response to the pain inflicted by past booms and busts and insider trading scandals has created a situation today where the huge amounts of money moves in sync with an ever smaller base of active managers. Value investing based on analysis of individual companies has become an ever-smaller tail wagging an ever larger dog.


Perversely, this, in turn, has created a situation where in the next crash, Steve Cohen, the quant and momentum funds, and even the Warren Buffets will ultimately have no edge. All it will take to set the next crash in motion is for a fair number of investors to say, “gee I think I should shift more to cash.” Then the passive investment funds will be forced to sell, and they will sell regardless of the merits of any individual stock. This will cause volatility to rise and the billions of dollars of investments tied to volatility will also start selling, and as this is happening, the algorithmic traders, the momo guys and the others looking for direction to exploit will jump in juicing the sell off.  The trigger might be some external event, or something as banal as a simple change in mood, but no insider will have any better insight as to when this occurs than anyone with access to a newspaper.


As a coda, it’s worth noting that Steve Cohen has now been cleared to manage other people’s money. At the end of Black Edge the author quotes a savvy market player as saying that the day Cohen could do that, money would come pouring in. Well, according to the New York Times, that day is here and money is not pouring in. Maybe this is because his fees are too high, or because the insider trading scandal has made him tainted goods. Or maybe, it’s because investors doubt that he can achieve his former results without black edge.

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