Eugene Linden
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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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Fire & Flood
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Deep Past
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endangered animals
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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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TheBigMeltdown

As the temperature rises in the Arctic, it sends a chill around the planet
BY EUGENE LINDEN/CHURCHILL


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

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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