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...

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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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Apes, Men, & Language
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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

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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