Eugene Linden
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Latest Musing

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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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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The Winds of Change

Climate, Weather, and the Destruction of Civilizations Buy from Amazon “In this articulate polemic…Linden draws his conclusion from millennia of historical evidence….The authors passion for the world to comprehend a coming catastrophe helps propel his alarming narrative.” --Publishers Weekly “Relatively restrained in tone, and consequently more persuasive by its sobriety, Linden’s presentation of scientists’ theories on historical climate change will provoke readers concerned about the implications of global warming for modern civilization.” --Booklist “Linden lays out the evidence that climate change is the culprit behind the demise of civilizations….The effect of climate fluctuation on the planet is a hot topic….This text provides a sound orientation to a controversial subject.” --Kirkus Reviews “Hurricanes, floods, droughts, melting ice caps—Nature’s serving them up at what seems like an ever-increasing clip. Which makes this compelling account of the weather’s impact on civilization the book of the moment for all of us. Eugene Linden elegantly weaves history, science, and narrative into a must-read tale of the earth’s most powerful forces.” --Susan Casey, author of The Devil’s Teeth “The Winds of Change is fascinating—a tour de force. Linden has accumulated a greater comprehension of paleo-climatic and oceanographic issues than all but a very few scientists. I have nothing but admiration for this book, which is just what we need right now.” --George Woodwell, founder of the Woods Hole Research Center and former president of the Ecological Society of America “Eugene Linden’s drama is profoundly disturbing, yet strangely enthralling in its grand sweep across human history. He recounts the life and death of civilizations across millennia when the ‘angry beast’ of nature suddenly turned on people and destroyed their settled ways. We are now flirting with our uniquely man-made catastrophe. The danger seems more plausible (and scary) once you learn the true story science has uncovered about the past.” --William Greider, The Soul of Capitalism The possibility of drastic climate change as a result of human activity has been a fiercely debated subject since the 1970s. The science of climate change is still evolving, and its connection to particular weather events is difficult to establish. Yet the enormous damage inflicted on New Orleans and the Gulf Coast by Hurricane Katrina has alerted the public to the dangers of extreme weather as never before. Nevertheless, most Americans assume that if any fundamental change in the climate actually occurs, it will be gradual enough that our society and economy will be able to absorb the impact without any long-term disruption. Eugene Linden, a veteran writer on science and the environment, shakes such complacency to its core in THE WINDS OF CHANGE: Climate, Weather, and the Destruction of Civilizations (Simon & Schuster; February 13, 2006; $26.00). Linden, the author of numerous Time magazine cover stories and acclaimed books including The Future in Plain Sight, contends that climate change is a “serial killer” that has destroyed or at least been a major accomplice in the fall of many civilizations, including the Akkadians of the ancient Middle East; the Assyrians and Minoans of 700 B.C.; the Byzantine, Peruvian, and Mayan empires; and the Vikings of Greenland in the fourteenth century A.D. His investigation of the human consequences of climate change has become possible only in the past few years, as reliable and highly precise data from new scientific techniques has been made available. In his vivid and engaging narrative, Linden presents compelling evidence of specific ways in which a changing climate may have disrupted agriculture, fostered the spread of disease, prompted migrations, devastated economies, undermined the legitimacy of rulers, and started wars. Against this backdrop of the havoc climate has caused in the past, Linden looks at the present and then the future, posing a series of questions. Is climate changing? What might those changes bring? Are we any better equipped than past civilizations to deal with dramatic climate change? WINDS OF CHANGE offers perhaps the most specific evocation yet of the ways individuals, businesses, economies and nations might be buffeted by a climate gone haywire. There is no longer any doubt that the climate is changing. Nearly all the warmest years of the last 120 years since modern records began have taken place since 1980, and the pace of warming only increased during the 1990s and the early years of the twenty-first century. In addition, over the past decade scientists have discovered that previous climate changes were often abrupt and catastrophically severe, rather than incremental, as had been previously thought. In other words, while we have comforted ourselves in the past by thinking that climate change is like gradually turning a dial, the reality is that shifts in climate are more like flipping an on-off switch. Yet scientists’ warnings about the potential perils of climate change have largely gone unheeded, a phenomenon that Linden explores. In part, the answer is that modern humans have had the good fortune to prosper and multiply during one of the most benign climate periods ever recorded. This makes it very difficult for anyone living today to imagine a climate that we could not cope with, since our reference point for climate change can only be the minor variations that have occurred in the near past. But as Linden shows, there is a limit to how many shocks on the order of Katrina, the killer heat wave of 2003 in Europe, or the floods of the 1990s in the American Midwest that even a rich and technologically advanced society can absorb before it spirals into precipitous decline. In December 2004, tourists stood on a Thai beach, gawking at an oncoming tsunami simply because they had never seen anything like it. Similarly, we may be making an equally fateful misjudgment by refusing to react to the coming wave of climate change with any sense of urgency. As a segue between ancient and future climate change, Linden looks at El Niño, a now-familiar event that is not nearly as disruptive as other climate events. Nonetheless, it has had huge impacts on humanity at various times by altering global storm tracks and rainfall patterns. Indeed, some historians argue that a series of El Niños in the late nineteenth century killed more people through droughts and famines than the two world wars of the twentieth century combined. The El Niño of 1997-1998 did more than $100 billion worth of damage to the global economy and killed tens of thousands of people. But when compared with the major climate changes that may be looming in the future, even the most severe El Niño would barely register. After exploring the bizarre politics swirling around the science of climate change, Linden looks forward, and offers one of the most detailed and well-founded analyses of what we may face in the future because of a changing climate. For example, even a moderate climate change – what one scientist calls a “best-case scenario” based on current trends – could reduce available water in the Los Angeles area by 50 percent by 2050. The winter snowpack would be smaller and melt earlier, causing the region to dry up prematurely each year. Eighty-eight percent of the water in California currently goes to agriculture, but some of that would have to be diverted to immediate human needs. Trees killed by drought and insects would become tinder for wildfires like the ones that destroyed hundreds of homes in Southern California in 2003. Diseases liberated by the changing weather could afflict crops, livestock, and even humans, as was the case when El Niños led to outbreaks of the deadly Hanta virus in the Southwest in the 1990s. Linden writes: “Having proven through history that extreme climate shifts are costly if not fatal for past civilizations, our species is busily pushing the climate towards producing extremes never before experienced during modern times. Instead of preparing or trying to avert climate change, people are dismantling natural protections against climate extremes and making changes that will likely amplify the events themselves. The explanation is a combination of a collective failure of the imagination, and belief in the godlike power of markets and progress.” But we have a crucial advantage over past civilizations that were blindsided by climate change, Linden assures us – we can learn from their misfortunes. Like Jared Diamond’s Collapse, Bill Bryson’s A Short History of Nearly Everything, and Malcolm Gladwell’s The Tipping Point, Eugene Linden’s THE WINDS OF CHANGE offers an intriguing history of some of the most calamitous events in history – this time through the lens of climate change. With new evidence of a changing climate emerging almost on a daily basis, and with the advent of cutting-edge technologies that can predict these occurrences and repercussions, Linden takes a hard and timely look at climate’s role in past disasters that will help us understand, anticipate, and avoid coming threats. ABOUT THE AUTHOR: Eugene Linden writes about the environment, nature, science, and technology. He has written for Time, including many cover stories, for almost twenty years, and has contributed articles and essays to Atlantic, National Geographic, The New York Times Magazine, Foreign Affairs, Condé Nast Traveler, The New York Times, The Wall Street Journal, The Los Angeles Times, Fortune, and Slate. He is the author of seven books, including The Octopus and the Orangutan: More Tales of Animal Intrigue, Intelligence, and Ingenuity; The Parrot’s Lament: And Other True Tales of Animal Intrigue, Intelligence, and Ingenuity; and The Future in Plain Sight, which the Rocky Mountain News called “the most important book of the decade.” Linden speaks frequently about nature and the environment and is the recipient of numerous journalism awards. He lives in Washington, D.C. ABOUT THE BOOK: THE WINDS OF CHANGE: Climate, Weather, and the Destruction of Civilizations By Eugene Linden Published by Simon & Schuster February 13, 2006 0-684-86352-9 www.simonandschuster.com Buy from Amazon

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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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