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OUR CONFEDERACY OF DUNCES

            The Darwin Award confers mock recognition on individuals killed by their own stupidity, thereby improving the gene pool by removing themselves from it. If there existed such an award at the national level, the U.S. of today would be ...

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TheLastDrops

Population growth and development have depleted and polluted the world's water supply, raising the risk of starvation, epidemics and even war
BY EUGENE LINDEN


Monday, Aug. 20, 1990
Swaminathan Asokan dreams of water. It gushes out of a giant tap and fills bucket after bucket. But then he wakes up -- to a nightmare. For at Asokan's house in Madras, India's fourth largest city, there is no water. The tap has long been dry. So he must get up in the dark of night and, laden with plastic pails, take a five-minute walk down the street to a public tap. Since the water flows only between 4 a.m. and 6 a.m., Asokan, 34, a white-collar worker at a finance company, tries to be there by 3:30 a.m. to get a good place in line. His reward: five buckets that must last the entire day.

Compared with many of his countrymen, Asokan is fortunate. At least 8,000 Indian villages have no local water supply at all. Their residents must hike long distances to the nearest well or river. In many parts of the country, water is contaminated by sewage and industrial waste, exposing those who drink it to disease.

The sad state of India's water supply is just one sign of what could become a global disaster. From the slums of Mexico to the overburdened farms of China, human populations are outstripping the limited stock of fresh water. Mankind is poisoning and exhausting the precious fluid that sustains all life.

In the Soviet Union, the mismanagement of land around the Aral Sea has cut it off from its sources of water, causing the volume of the once giant lake to shrink by two-thirds in 30 years. Now storms of salt and pesticides swirl up from the receding shoreline, contaminating the land and afflicting millions of Uzbeks with gastritis, typhoid and throat cancer. In Beijing, one-third of the city's wells have gone dry, and the water table drops by as much as 2 meters (2.2 yards) a year. In the Western U.S., four years of drought have left municipalities and agricultural interests tussling over diminishing water stocks. Says Ivan Restrepo, head of the Center for Ecodevelopment in Mexico, where as many as 30 million people do not have safe drinking water: "We've been enduring a crisis for several years now, but it is in this decade that it will explode."

) Camouflaged by its very familiarity, the water problem has crept up on a world distracted by fears of global warming and other emergent environmental threats. Yet water could be the first resource that puts a limit on human population and economic growth. Shortfalls of water will mean shortfalls of food, since up to three-quarters of the fresh water that humanity uses goes for agriculture. Moreover, contaminated drinking water in heavily populated areas endangers the health of hundreds of millions of people. According to the United Nations, 40,000 children die every day, many of them the victims of the water crisis.

At the moment, countries are poised to go to war over oil, but in the near future, water could be the catalyst for armed conflict. Israel and Jordan, Egypt and Ethiopia, and India and Bangladesh are but a few of the neighboring nations at odds over rivers and lakes. Warns Arnon Sofer, professor of geography at Israel's Haifa University: "Wars over water might erupt in the Middle East in the '90s when states try to control each other's supplies."

Whatever the human consequences of the crisis, it has an even greater effect on many other living things. Fish, birds and countless creatures are crowded out, marooned or poisoned as industry, agriculture and municipalities reroute rivers, dry up wetlands, dump waste and otherwise disrupt the normal functioning of delicate ecosystems. The world is learning that there are limits to mankind's ability to move water from one place to another without seriously upsetting the balance of nature.

The idea of a global shortage seems incredible when 70% of the earth's surface is covered by H2O. But 98% of that water is salty, making it unusable for drinking or agriculture. Desalinization is technically feasible, but it is far too expensive to use anywhere except in an ultra-rich, sparsely populated country like Saudi Arabia. Other options, like towing icebergs from the poles, are also beyond the means of poor nations.

The scarcity of fresh water for agriculture makes famines more likely every year. The world consumes more food than it produces, and yet there are few places to turn for additional cropland. Only by drawing on international stockpiles of grain have poorer countries averted widespread starvation. But those supplies are being depleted. From 1987 to 1989, the world's stock of grain fell from a 101-day surplus to a 54-day one. A drought in the U.S. breadbasket could rapidly lead to a global food calamity.

Even if rainfall stays at normal levels, current world food production will be difficult to maintain, much less increase. The food supply has kept pace with population growth only because the amount of land under irrigation has doubled in the past three decades. Now, however, agriculture is losing millions of hectares of this land to the effects of improper watering.

Without adequate drainage, continuous irrigation gradually destroys a piece of land -- and any streams or rivers near it -- through a process called salinization. As the heat of the sun evaporates irrigation water, salts are left behind. The water also flushes additional salts out of soils with high concentrations of minerals, leaving them to dry on the surface into a cakelike residue or to dissolve in groundwater and poison plant roots.

History shows that such environmental destruction can have far-reaching consequences. The salinization of irrigated land led to the fall of Mesopotamia and Babylon, and perhaps even the Mayan civilization of Central America. Similar pressures are at work today. Sandra Postel of Worldwatch Institute estimates that 60 million hectares (nearly 150 million acres) of irrigated land worldwide have been damaged by salt buildup.

Human activities have also disrupted the delicate natural systems that maintain water supplies. To obtain wood and clear land for homes and farms, mankind is chopping down forests at an unprecedented rate. But vegetation traps water, reducing runoff and replenishing groundwater supplies. Throughout the world, tree cutting has led to floods, mud slides and soil erosion during rainy seasons and acute water shortages during dry periods.

Deforestation can set in motion forces that reduce the amount of rainfall in a given area. In a rain forest, for example, as much as half the moisture settles on trees and quickly evaporates into the sky, only to precipitate again in a continuous cycle. Thus when trees are cut down, rainfall may diminish.

Even in dryer regions sparse shrubs can help maintain rainfall. Some scientists argue that once ground cover is stripped, the land hardens and evaporates less moisture into the air. At the same time, the naked soil reflects more sunlight, triggering atmospheric processes that reduce rainfall by drawing dryer air into the area.

The result is desertification, a gradual conversion of marginal land into wasteland. This process is often driven by population pressures, which force people to work lands unsuitable for agriculture. In sub-Saharan Africa, for instance, settlers move into an area when it is wet and green, and then stay and remove the ground cover when the inevitable drought returns. Without a green barrier to stop them, sand dunes march inexorably forward.

While no place is safe from the effects of the water crisis, Egypt, in particular, faces hard times. The country's population of 55 million is growing by 1 million every nine months. Already the people must import 65% of their food, and the situation could grow far worse. The flow of the Nile, Egypt's only major water supply, will be reduced in coming years as upstream neighbors Ethiopia and Sudan divert more of the river's waters. Egypt's only practical course is to brake population growth and reduce the enormous amount of water wasted through inefficient irrigation techniques.

Competition for water is especially fierce between Israel and Jordan, which must share the Jordan River basin. Many towns in Jordan receive water only two times a week, and the country must double its supply within 20 years just to keep up with population growth. "We are cornered," admits Munther Haddadin, a Jordanian development official. With time running out, Jordan hopes to draw additional reserves from the Yarmuk river. Israel, however, will fight any plans for use of the river that do not give guarantees of access to the Yarmuk waters that the country currently uses.

In the grip of a three-year drought, Israel too is far from secure, despite its formidable conservation technologies. An expected 750,000 Soviet emigres will probably settle in the cities, where the use of pure water is the highest. At the same time, 750,000 Palestinians in the Gaza Strip face what Zemah Ishai, Israel's water commissioner, calls a "catastrophe" because of overpumping and contamination of groundwater.

A decade ago, a government study in China estimated that the nation's water resources might support only 700 million people. That was alarming, since the population had already reached 900 million. Unable to increase the supply, the Politburo took the simpler expedient of revising the study to conclude that there was enough water for 1.1 billion people. As the population continues to grow and now surpasses the 1.1 billion mark, China has gradually increased the numbers in the study.

Chinese leaders, aware of the true severity of the crisis, have at last begun to focus the nation's scientific talent on the water issue. The country has been working to develop salt-tolerant and drought-resistant crops, and it has begun to have some success in reclaiming salt-damaged land.

In the West the most troubled dry spot is Mexico, where a government report asserts that "water will be a limiting factor for the country's future development." The demands of Mexico City's 20 million people are causing the level of their main aquifer to drop as much as 3.4 meters (11 ft.) annually. Water subsidies encourage the wealthy and middle classes to waste municipal supplies, while the poor are forced to buy from piperos, entrepreneurs who fix prices according to demand. Belatedly, the government has begun to establish a more sensible system of tariffs as well as promote water-saving devices like low-flush toilets.

Despite the global breadth of the water crisis, the situation is not completely hopeless. In industrial nations the revitalized environmental movement has spawned a fresh offensive against pollution. Jan Dogterom, who runs a consulting firm in the Netherlands, represents a new breed of detective hired by governments to track down the culprits who contaminate waterways. Faced with the knowledge that toxins can be traced back to their source, many companies comply readily in cleanup efforts. Says Dogterom: "It is my honest- to-God conviction that the West European rivers will be clean in 50 years, and the East European rivers will soon follow."

The water-supply picture may not be entirely bleak. Mohamed El-Ashry of the World Resources Institute estimates that around the world 65% to 70% of the water people use is lost to evaporation, leaks and other inefficiencies. The U.S. has a slightly better 50% efficiency, and El-Ashry believes it is economically feasible to reduce losses to 15%.

Government officials and businesses are looking for ways to reuse waste water. With the aid of advanced technology, even highly contaminated water can be made drinkable again. Alcoa has just begun to market a new claylike material called Sorbplus that helps clean water by adsorbing toxic materials.

Most tantalizing of all is the possibility that there are great, undiscovered reservoirs throughout the globe. Speaking in Cairo last June at a water summit organized by the Washington-based Global Strategy Council, Farouk El-Baz of Boston University raised hopes among African nations when he announced that an analysis of remote sensing data has revealed unsuspected supplies of underground water in the dryest part of the Egyptian Sahara. El- Baz believes there may be twice as much water stored underground worldwide as previously assumed.

New supplies could take some pressure off rivers and lakes and would be a temporary godsend to millions of people. But if societies returned to business as usual, this bounty would only postpone the day of reckoning for humans and all other species. Humanity has long deluded itself into thinking that water shortages merely reflect temporary problems of distribution. Both industrial and developing nations are finally realizing that the world's fresh water is a finite and vulnerable resource, an irreplaceable commodity that must be respected and preserved.

contact Eugene Linden

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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