Bubble Economy or Not?

Doug Nolan

"The US economy has made tremendous progress in recovering from the damage from the financial crisis. Slowly but surely the labor market is healing. For well over a year, we have averaged about 225,000 jobs (gains) a month. The unemployment rate now stands at 5%. So, we’re coming close to our assigned congressional goal of maximum employment. Inflation which my colleagues here, Paul (Volcker) and Alan (Greenspan), spent much of their time as chairmen bringing inflation down from unacceptably high levels. For a number of years now, inflation has been running under our 2% goal, and we are focused on moving it up to 2%. But we think that it’s partly transitory influences, namely declining oil prices and the strong dollar that are responsible for pulling inflation below the 2% level we think is most desirable. So, I think we’re making progress there as well. This is an economy on a solid course - not a bubble economy. We tried carefully to look at evidence of potential financial instability that might be brewing and some of the hallmarks of that - clearly overvalued asset prices, high leverage, rising leverage, and rapid credit growth. We certainly don’t see those imbalances. And so although interest rates are low, and that is something that can encourage reach for yield behavior, I certainly wouldn’t describe this as a bubble economy.” Janet Yellen, April 7, 2016, International House: “A Conversation with Janet Yellen, Ben Bernanke, Alan Greenspan and Paul Volcker”

From my analytical perspective, unsustainability is a fundamental feature of “Bubble Economies.” They are sustained only so long as sufficient monetary fuel is forthcoming. Over time, such economies are characterized by deep structural maladjustment, the consequence of years of underlying monetary inflation. Excessive issuance of money and Credit are always at the root of distortions in investment and spending patterns. Asset inflation and price Bubbles invariably play central roles in latent fragility. Risk intermediation is instrumental, especially late in the cycle as the quantity of Credit expands and quality deteriorates. Prolonged Credit booms – the type associated with Bubble Economies – invariably have a major government component.

Japanese officials in the late-eighties recognized the risks associated with their Bubble economy and moved courageously to pierce the Bubble. Outside of that, few policymakers have been willing to even admit that Bubble Dynamics have taken hold in their systems. Apparently, only in hindsight did U.S. monetary authorities recognize the Bubble component that came to exert pernicious effects on the U.S. economy in the late-eighties, later in the nineties and again in the 2002-2007 mortgage finance Bubble period. I would strongly argue that the U.S. has been in a “Bubble Economy” progression for the better part of thirty years, interrupted by financial crises relatively quickly resolved by aggressive governmental reflationary measures. And each reflation has been more egregious than the previous, with each resulting boom exacerbating underlying financial and economic maladjustment.

Chair Yellen stated that the U.S. “is an economy on a solid course - not a bubble economy” – “we tried carefully to look at evidence of potential financial instability that might be brewing.”
That the Fed has for seven post-crisis years clung to near zero rates and a $4.5 TN balance sheet (with reassurances that it can grow larger) argues against such claims. That the Fed rather abruptly backed away from its 2011 “exit strategy” and repeatedly postponed “lift off” due to market instability rather clearly demonstrates the Fed’s underlying lack of confidence in the soundness of the markets and real economy.

I have argued that the more systemic a Bubble the less obvious it becomes to casual observers. By the late-nineties, the “tech” Bubble had turned rather conspicuous (although the Fed and the bulls still rationalized with claims of New Eras and New Paradigms). While having quite an impact on the technology, telecom and media sectors, these relatively narrow Bubble distortions had yet to cultivate more general structural impairment throughout the economy.

The mortgage finance Bubble was a much more powerful Bubble Dynamic, clearly in terms of Credit expansion, economic imbalances and systemic impairment. Alan Greenspan nonetheless argued that since real estate was driven by local factors, a national housing Bubble was implausible. Only in hindsight was the degree of systemic “Bubble Economy” maladjustment recognized.

It’s now been seven years since my initial warning of an inflating “global government finance Bubble” – the “Granddaddy of All of Bubbles.” This Bubble did become systemic on a globalized basis, ensuring the strange dynamic of a somewhat less than conspicuous global Bubble of historic proportions. Over the past eight years, global Credit growth has been unprecedented – driven by an extraordinary expansion of government borrowings. The inflation of central bank Credit has been simply unimaginable. Global asset inflation has been extraordinary – especially in securities markets and real estate.

The expansion of Chinese Credit has been greater than I had previously imagined possible. 
Hundreds of billions – perhaps Trillions - have flowed out of China, with untold amounts flowing into the U.S. (real estate, securities and M&A). For that matter, I believe huge inbound flows have been inflating U.S. securities and some real estate markets, especially “money” fleeing bursting EM Bubbles.

Indeed, extraordinary international financial flows are fundamental to the global government finance Bubble thesis, flows that I believe are increasingly at risk. Along with Bubble flows from China and out of faltering EM, I believe speculative flows grew to immense proportions. 
And, importantly, the massive global pool of destabilizing speculative finance has been inflated by the proliferation of leveraged strategies. Chair Yellen may not see “high leverage,” yet on a globalized basis I strongly believe speculative leverage reached new heights over recent years. 
“Carry trade” speculation – borrowing in low-yielding currencies (yen, swissy, euro, etc.) - has proliferated over recent years, especially after the 2012 “whatever it takes” devaluations orchestrated by the European Central Bank and Bank of Japan.

How much of the resulting speculation-related liquidity ended up flowing into U.S. markets and the American economy? What are the consequences – to the markets and overall economy – if these flows stop - or even reverse? Moreover, I suspect unprecedented amounts of leverage have accumulated throughout the U.S. Credit market – Treasuries, corporates and munis. And Wall Street has definitely been hard at work in recent years creating all varieties of instruments, products and strategies that benefit from the combination of ultra-low rates and leverage (certainly including higher-yielding equities).

Over time, Bubble Economies become increasingly vulnerable to economic stagnation, Credit degradation and and asset price busts. Bubbles are fueled by Credit excesses that distort risk perceptions and resource allocation. Credit and asset price inflation will incentivize speculation, another key dynamic ensuring misallocation and malinvestment. In the end, Bubbles redistribute and destroy wealth. Major Bubbles will tear at the threads of society.

It remains my view that the global Bubble has burst. The recent rally in global risk markets restored hope that things remain central bank-induced business as usual. This week provided support for the view that the respite from heightened volatility and vulnerability has likely run its course.

Global equities were under pressure this week, while safe haven bonds and gold rallied. Japan’s Nikkei dropped 2.1%, increasing 2016 losses to 16.9%. The German DAX fell 1.8%, boosting y-t-d declines to 10.4%. Spanish stocks were down 2.0% (down 11.7%), and Italian shares fell 1.5% (down 18.3%). Ten-year German bund yields dropped to nine basis points

Ominously, global financial stocks continue to trade poorly. After the recent notably unimpressive rally, selling of global bank and financial shares has resumed. The STOXX Europe 600 Bank index sank 3.5% this week, pushing 2016 losses to 24.7%. This week’s 3.1% decline boosted Italian bank stock y-t-d losses to 35.4%. Deutsche Bank has returned to February lows (down 34%). European bank stocks generally are quickly approaching February lows. Italian bank stocks traded this week slightly below lows from the February tumult period. Hong Kong’s Hang Seng Financial index was down 2.0% this week (down 12.6%). Here at home, U.S. bank stocks (BKX) dropped 3.6%, increasing y-t-d declines to 14.7%. The security broker/dealers (XBD) sank 6.2%, increasing 2016 losses to 13.7%. Goldman Sachs closed Friday trading at about $150, after trading as high as 200 this past November.

I would argue that currency market instability has negative portents as well. The Japanese yen surged 3.2% this week to a 17-month high. The yen gained about 5% versus the Australian dollar, New Zealand dollar and Mexican peso. Its worth noting that the Chilean peso, Colombian peso, Turkish lira and Brazilian real were all under pressure, as the recent EM rally appears increasingly vulnerable.

A few headlines were telling: “Japanese Yen Trade Mystifies and Could Penalize” (CNBC); “Stunning Rally in Japanese Yen Risks Too Little Faith in BoJ Policy Genius” (Australian Financial Review); and “Japan Faces Trouble Controlling Yen Rise” (Reuters).

It is no coincidence that the yen is rising as global financial stocks are sinking. Both are indicative of market fears that global policymakers are losing control. The yen has rallied significantly in the face of the BOJ imposing punitive negative interest rates. The euro has also risen to a six-month high in the face of the ECB’s surprise one-third increase in its QE program.

Keep in mind that both the BOJ and ECB boosted stimulus, as the Fed assumed a more dovish posture, in a concerted response to heightened global market instability. These measure did incite a robust short squeeze, an unwind of bearish hedges and a general rally in global risk markets. Yet markets are already again indicating waning confidence that policy makers actually have things under control.

The Japanese have lost control of the yen, which has hurt prospects for Japan’s equities and overall economy. It has also turned various leveraged strategies on their heads, portending pressure on the global leveraged speculating community more generally. Meanwhile, the half life of Draghi’s latest “shock and awe” has proved alarmingly short. Boosting the ECB’s QE program reversed what had been a significant widening of Credit spreads throughout Europe. 
It’s worth noting that European periphery spreads (to German bunds) widened meaningfully this week. Portuguese spreads surged 48 bps and Greek spreads widened 41 bps. Italian spreads widened 13 bps and Spanish spreads increased 12 bps.

I’ve excerpted below from my recent analysis of the Fed’s Q4 2015 Z.1 “flow of funds” report:

Treasury Securities ended 2007 at $6.051 TN. By 2015’s conclusion, Treasuries had inflated to $15.141 TN, an increase of $9.090 TN, or 150%, in eight years. It’s worth noting that Agency Securities ended 2015 at $8.153 TN, having now almost recovered back to 2008’s record high.

Total Debt Securities (Treasuries, Agencies, Corporates & muni’s) ended 2015 at a record $38.741 TN. Total Debt Securities have increased $11.3 TN, or 41%, from what had been 2007’s record level. Total Debt Securities as a percent of GDP ended 2015 at a near record 217% of GDP. For perspective, this ratio began the eighties at 66%, the nineties at 110%, and the 2000’s at 140%.

Equities ended 2015 at $35.687 TN, or 199% of GDP. This compares to Equities/GDP of 44% to begin the eighties, 67% to start the nineties and 200% to end Bubble Year 1999. Combining Debt and Equity Securities, Total Securities ended 2015 at a record $74.428 TN. This was up 40% from 2007 (a then record 366% of GDP) to 415% of GDP. This compares to 109% to begin the eighties, 178% to start the nineties and 341% to end the nineties.

Household… Assets ended 2015 at a record $101.306 TN, up $2.953 TN during the year.
Household Assets have increased almost 50% since the end of 2008. …Household Net Worth jumped another $2.607 TN last year. For the year, Household holdings of Real Estate increased $1.562 TN (to a record $25.267 TN), with Financial Assets up $1.171 TN (to a near-record $70.327 TN). Household Net Worth as a percentage of GDP ended 2015 at 484%. For comparison, Household Net Worth to GDP began the nineties at 379%, ended 1999 at 446% and closed Bubble Year 2007 at 461% of GDP.

Total Non-Financial Debt increased $1.912 TN in 2015 to a record $45.149 TN. NFD has increased $10.218 TN, or 29%, over the past seven years. NFD to GDP ended 2015 at a record 252%. For perspective, this ratio began the eighties at 138%, the nineties at 179% and the 2000’s at 179%.

The U.S. economy has all the characteristics of a Bubble economy – one increasingly vulnerable on myriad fronts.

Europe Versus the Islamic State

Dominique Moisi

France security

PARIS – After the November 13 terrorist attacks in Paris that left 130 dead, I wrote a commentary entitled “We Are At War” – and faced considerable criticism from readers, Europeans and non-Europeans alike. How dare I use the word “war” to describe the attacks!

Words are weapons, and misusing them is irresponsible, even dangerous. Had I not learned anything from George W. Bush’s jingoism?
In fact, I knew exactly what I was doing when I chose that word. And last week, when Brussels faced a terrorist attack on its airport and a metro station, the emergency services personnel chose the same word, calling for the treating of “war wounds.” So I will say it again: We are at war.
Of course, it is not a traditional war. No formal declaration of hostilities was made; but the attacks on Paris and Brussels were acts of war – deliberate and brutal maneuvers planned by a group of people controlling a large chunk of territory.
These acts targeted not just Europe’s people, but also its fundamental values, and they are part of a broader pattern of aggression that will not simply fade away. Indeed, though the Islamic State’s territory may be shrinking in Syria and Iraq, it is expanding in Libya. And who knows which countries ISIS may seize tomorrow? Parts of Algeria, for example, could be vulnerable.
It is time for the European Union to recognize the reality – it is at war, whether it likes it or not – and respond accordingly. If there was ever a moment since the end of World War II when Europe needed to take charge of its security, it is now. This means both managing the threat at home and taking a leading role in the fight against ISIS, not only because of Europe’s geographical proximity, but because of the past contributions some of its member states, such as France, Italy, and the United Kingdom, have made to destabilizing the region.
In this endeavor, it is critical that the terrorists are not conflated with the refugees flowing into Europe. The refugees, who are being driven out of their homes largely by the actions of ISIS and other violent actors, represent an important opportunity for Europe. Today’s surging European populists, who hold European values in contempt, cannot be allowed to cause us to miss that opportunity through bigotry and fear mongering.
Of course, terrorism is not the only security threat that the EU currently faces. With the United States focused on Asia and the Middle East (not to mention itself), it is up to EU leaders to grasp the nettle of limiting Russia’s ambitions in the eastern part of Europe.
At a time when the EU – which, if given the choice, would tend to focus its attention inward – must confront such daunting external challenges, the last thing it needs is a destabilizing internal challenge.
Yet that is precisely what it is facing, thanks to Prime Minister David Cameron’s feckless attempt to appease the rabid anti-Europeans in his Conservative Party by planning a referendum on whether the UK should remain a member. When your shared house is in danger of burning down, you work with the other tenants to put out the fire; you don’t fuss over who should carry the hose.
The discrepancy between what Europe needs and what it is ready to do reflects a gap between reason and emotion. Rationally, the need for greater European cooperation on security and defense, as Italian Prime Minister Matteo Renzi has noted, is obvious. Emotionally, however, the reverse appears to be true, as illustrated by the EU’s failure to formulate a common policy toward the arriving refugees.
Like Renzi today, German Chancellor Angela Merkel was alone in her plea for a humane response to the refugee crisis. For most Europeans, the situation seemed overwhelming, so they shrank from it.
“Refugees, this is your problem,” Latvian President Raimonds Vējonis famously told Merkel in a European Council meeting last year. Terrorism, with its unpredictable tactics and nebulous borders, elicits a similar response.
The challenge is so overwhelming, in fact, that EU countries have been unable even to share information effectively. A similar problem arose after the September 11, 2001, terror attacks in the US, which then withheld information even from its closest allies, Canada and the UK. I saw the frustration this caused first-hand in January 2002 at the World Economic Forum, where I co-chaired a private session among Western security chiefs.
Today, according to Europe’s self-determined pecking order, there are the French and British intelligence and security services, and then there are the rest. Belgium, poorly regarded in this area, given its weak state structures and complex linguistic and cultural identities, is not receiving the information that the French and British are collecting. But this is no time for arrogance, much less fear and concealment.
If terrorists are targeting Europe, it is because they believe Europe is the West’s weak link. For its own sake, Europe must prove them wrong. The only way to do that is to stop allowing the emotional desire to hide behind nationalist claims to overwhelm the rational recognition that united action is the only way to be safer.


Bucking the trend

The dollar’s long rally seems to have halted

AT THE beginning of the year the dollar was on a tear. In trade-weighted terms, it had risen by almost 20% since the start of July 2014. With the Federal Reserve tightening interest rates for the first time since 2006, the greenback seemed destined to head higher.

In fact, doubts were already emerging. In mid-December fund managers polled by Bank of America Merrill Lynch thought that being bullish about the dollar was the most overcrowded trade in the financial markets and that the currency was overvalued.

The dollar continued to rise for the first three weeks of the year but then the tide turned: since January 20th, the currency has fallen by 3.8% in trade-weighted terms (see chart). The main reason may be a perceived shift in Fed policy; as the year began, investors were expecting three or four rate increases in 2016. The latest statement from the central bank suggests that only two rises are on the menu.

The dollar’s ascent may have played a part in the Fed’s stance, since a stronger currency, by itself, represents a tightening of monetary conditions. The central bank has lowered its forecast for growth this year to 2.2%. Even that could be an overestimate: the Atlanta Federal Reserve’s GDPNow model, which tracks American growth, points to an annualised increase in output in the first quarter of just 0.6%. In a speech that took a cautious approach to further tightening, Janet Yellen, the Fed’s chairman, said this week that worries about global growth were another factor; similar concerns stopped the Fed from pushing up rates last September.

Ms Yellen’s remarks drove the dollar down and pushed share prices higher.

An exchange rate is the relative price of two currencies, so the dollar’s recent decline reflects more than just Fed policy. First, a pickup in commodity prices has allowed emerging-market currencies to rebound. Capital Economics, a research group, says its emerging-market exchange-rate index is at its highest since November. In some cases, currencies have been helped by tighter monetary policy: central banks in Colombia, Mexico and Peru have all pushed up rates. Another sign of confidence is a decline in the spread (the interest premium relative to Treasury bonds) paid by emerging-market debtors.

Second, recent market reaction to the policy moves of other central banks has been rather counter-intuitive. Normally, you would expect monetary easing by a central bank to lead to a weaker currency. But recent policy shifts by the European Central Bank and the Bank of Japan have sent the euro and the yen higher, not lower. It is not clear why. Some think these market moves indicate that central-bank policy is less effective than it was in the aftermath of the 2008 crisis. Others believe that negative interest rates hurt bank profits, and are thus a poor policy instrument.

This is a tricky area. Negative rates may well be designed to weaken the exchange rate or, at the very least, to stop a currency from strengthening. Other rich countries seem willing to turn a blind eye to a modest bit of depreciation. But if their own currencies appreciate too far, they will respond with monetary easing of their own. This fuels talk of “currency wars”.

But if central-bank easing doesn’t even have the desired impact on the exchange rate, what next? One answer could be outright intervention: selling the domestic currency and buying foreign assets. The Swiss National Bank pursued such a policy from September 2011, capping the franc’s level against the euro, before suddenly abandoning it in January last year.

Japan’s economy continues to struggle, more than three years after the launch of Abenomics; the latest figures show that industrial production fell by 6.2% in February. That suggests the Bank of Japan will be concerned about the yen’s strength. Mansoor Mohi-Uddin, a currency strategist at Royal Bank of Scotland, says that an appreciation of the yen beyond 110 to the dollar “will substantially increase the risk of the authorities intervening to counter the rise of the currency.”

A change in the dollar trend may simply have shifted the problem. A rising greenback was bad news for emerging markets: in those with pegs to the dollar, the appreciating currency weakened their competitive position in export markets; in those with floating currencies, debt-servicing costs jumped for companies that had borrowed in dollars. A weaker dollar makes life more difficult for advanced economies, which are counting on exports to revive their moribund economies (see Free exchange). They may spend the rest of 2016 figuring out what to do about it.

martes, abril 12, 2016



Gold Defies Stock Bear Rally

By: Adam Hamilton

Gold has spent much of the past couple months consolidating, vexing traders and bleeding away most of early 2016's enthusiasm that catapulted the yellow metal higher. But this sideways grind has actually been a very impressive show of strength. Gold managed to hold its massive gains despite an incredible stock-market rally, which can really sap gold investment demand. This portends another major gold upleg.

Gold's performance this year has been nothing short of remarkable. This unique portfolio-diversifying asset that tends to move counter to stock markets was universally loathed as recently as December. It actually fell to a 6.1-year secular low the day after the Fed's first rate hike in 9.5 years.

The vast majority of investors scoffed at gold, believing it was doomed to spiral lower indefinitely with the Fed tightening.

But such popular antipathy was a dream come true for hardened contrarians who really strive to buy low. With gold hated, the sellers had already sold and its price was way too low relative to its worldwide supply-and-demand picture. On New Year's Eve when gold closed slightly above that secular low at $1060, I published an essay "Fueling Gold's 2016 Upleg" arguing "a mighty new gold upleg in 2016" neared.

And indeed that soon came to pass. Fed-rate-hike cycles are actually very bullish for gold historically, contrary to the bearish hype surrounding that first rate hike. The Fed has executed 11 cycles of 3 or more consecutive rate hikes since 1971, and gold's average gain throughout all of them was 26.9%. In the 6 where it rallied, the more gradual ones launching with gold near major lows, it soared 61.0% on average!

During the last Fed-rate-hike cycle between June 2004 and June 2006, gold powered 49.6% higher. This was despite the Fed hiking 17 consecutive times totaling 425 basis points, more than quintupling its federal-funds rate to 5.25%! So late last year's popular notion among futures speculators that gold was going to get slaughtered in a rate-hike cycle was utterly ridiculous in light of all historical precedent.

With the dominant bearish-gold theory staked, there was no reason not to be heavily long. Gold started rallying right out of the gates in January as the Fed-levitated US stock markets began selling off. The deeper that selloff grew, the more investors returned to left-for-dead gold. Falling stock markets made them finally remember the millennia-old wisdom of prudent portfolio diversification using the yellow metal.

All this culminated with gold soaring 17.5% in the first 6 weeks or so of 2016 while the flagship S&P 500 stock index plunged 10.5%. The false belief carefully cultivated by central bankers in recent years that they can engineer stock markets to rise indefinitely without material selloffs was starting to implode. So even American stock investors defied their endless Wall Street anti-gold training to flock back to gold.

This was evident in the holdings of the world-leading GLD gold ETF. They surged by 11.5% during that initial 6-week stock-market selloff. Stock investors hadn't bought gold so aggressively since early 2009, in the early months of a massive gold bull market. Naturally gold excitement was really growing, since everyone loves a winner. But then in mid-February, that major stock-market selloff reversed into a rally.

That stock buying quickly accelerated and drove a gigantic rally that was still forging new highs last week. With stock markets surging, the perceived need to diversify portfolios away from being all-stocks largely evaporated. Thus gold started falling out of favor again, as recent years' dominating buy-stocks and sell-gold psychological paradigms came roaring back. This could very well have crushed gold.

But it didn't! Gold defied what is almost certainly a bear-market rally in general stocks, by consolidating high and holding its strong early-year gains. This first chart looks at the gold price superimposed over the benchmark S&P 500 (SPX) over the past 15 months or so. Gold's resilience and even progress in the face of an exceptional stock-market rally that was a major threat to gold's sharp gains was amazing.

S&P500 and Gold 2015-2016 Chart

Between mid-February and early April, the SPX rocketed 13.3% higher in just 7 weeks! That made for one of the biggest intra-quarter recoveries the US stock markets have ever witnessed. Working with Dow 30 data since its history extends back much farther than the S&P 500's, researchers at a company called My401kPro.com did a fascinating study on intra-quarter rebounds. They started way back in 1900.

It turned out Q1'16 was only the fourth quarter since 1900, out of 465 calendar quarters, where the US stock markets finished positive after falling 10%+ within a quarter. So the rally we saw in the second half of Q1'16 was extreme and exceptional. This study dug deeper, expanding intra-quarter rebounds to recovering 8%+ after a 10%+ intra-quarter selloff. That happened 26 other times since 1900 in the Dow 30.

Here's the kicker. It turns out that fully 24 of those 26 massive intra-quarter rebounds happened within secular bear markets! There are near-certain odds what we just witnessed was a bear-market rally. The reasons a new stock bear is awakening are legion, and the technical profile of that surge just happened to perfectly match that of bear-market rallies. It erupted sharply in fear off major lows fueled by short covering.

But as that short covering petered out, the pace of the surge moderated in anemic low-volume up days. There was little buy-side conviction, with serious asymmetry between the high volume of the preceding major selloff and fading volume of the subsequent sharp rally. It perfectly executed the mission of bear-market rallies, to eradicate the excessive fear at recent selloff lows and rekindle widespread complacency.

Even at this bear-market rally's apex last Friday, the SPX was still seeing a long series of lower highs since its all-time record peak late last May. The stock markets have been rolling over on balance for almost an entire year now, their lower highs and lower lows forming a powerful technical downtrend. Such developments simply aren't seen in bull markets, the Fed-distorted stock-market cycles have finally turned.

Nevertheless, this enormous stock-market rally radically changed investors' psychology from those mid-February lows. Instead of being fearful of more selling to come, they've once again come to believe that everything is awesome and there's nothing but smooth sailing ahead for stocks. Wall Street analysts have led this bullish-sentiment charge, almost universally calling for 2016 to see double-digit SPX gains.

So naturally with gold prices tending to move counter to stock-market levels, this huge sentiment shift among investors is certainly hostile to gold investment. Why diversify with gold if stocks are poised to yet again rally indefinitely courtesy of super-easy central banks worldwide? This same Pollyannaish stock-market psychology that pervaded 2013 to 2015 could very well have driven a major gold selloff.

Gold was certainly overbought on a short-term basis after rocketing higher into mid-February. And the Wall Street rhetoric attacking this unpopular asset was as bearish as ever. But gold didn't collapse or even correct, instead it merely consolidated high while the stock markets surged! During the exact span of that mighty 13.3% SPX bear-market rally, gold merely slipped 1.9%. That is absolutely remarkable.

After soaring $186 between New Year's Eve and the day the SPX bottomed in mid-February, gold had only given back $24 by the SPX's bear-market-rally peak last Friday. That's just 1/8th of early 2016's outsized gains! Gold held on to 7/8ths of its progress even when all the sentiment cards were heavily stacked against it. As if that's not bullish enough, this metal even advanced within this high consolidation.

In early March as over 2/3rds of the typically-front-loaded SPX bear-market rally had already happened, gold shot up to a 20.1% gain off its mid-December secular low. That surpassed the 20% threshold for a new bull market! Gold hadn't been in an advancing bull market since 2011, so this milestone marked a major secular reversal. A week later, gold's total bull gain extended to +21.0%, decisively across that marker.

So gold not only consolidated high and held the vast majority of its huge early-year gains as the stock markets surged, it continued advancing and entered its first bull market in many years! Such relative gold strength in the face of such a gigantic stock-market rally slaughtering contrarian sentiment is well beyond anything gold investors could've hoped for. Gold resolutely defied a powerful stock bear-market rally!

How did this happen? If you'd have asked even gold enthusiasts back in mid-February how gold would fare if the stock markets were soon going to soar 13%+ to take the SPX within less than 3% of its all-time record high, they would've universally said lousy. And after central-bank-levitated stock markets gutted gold investment demand in recent years, that was certainly the high-probability bearish outcome for gold.

But gold investors didn't fold as widely expected, they weathered the storm of complacent stock-market sentiment to not only maintain their new gold positions but aggressively add to them. They championed gold, rallying to its support. Nowhere is this more evident at this point than in the gold-bullion holdings of the world flagship GLD SPDR Gold Shares gold ETF. It offers the best daily window into gold investment.

In addition to being one of the only records of daily capital flows into physical gold bullion, GLD towers over the rest of the world's gold ETFs. As of the end of Q4, the World Gold Council reported that GLD's holdings represented over 40% of all gold ETFs'. And the next biggest competitor was under 10%, so GLD is unchallenged. GLD's holdings reveal why gold was so strong in defiance of that stock bear-market rally.

This last chart looks at GLD's physical gold-bullion holdings held in trust for its shareholders, rendered in metric tons. They are reported every trading day, effectively showing gold investment by American stock traders. Each monthly draw or build in GLD's holdings is noted, in both percentage and tonnage terms. All this GLD-holdings data is again superimposed over the S&P 500, highlighting its sharp surge.

S&P500 and GLD Holdings 2015-2016 Char

GLD's physical gold-bullion holdings have skyrocketed in 2016, particularly in February. That month alone saw GLD add 108.0 tonnes of gold, growing its holdings by 16.1%! This was an extraordinary build, the biggest in absolute tonnage terms since May 2010 and the biggest in percentage terms since February 2009. That was early in a major bull market that would see gold power 166.5% higher in 2.8 years.

And that strong gold investment buying didn't falter as the SPX's bear-market rally rocketed higher. In the exact span of that 13.3% stock-market surge, GLD's holdings actually blasted 14.3% higher! Stock investors not only didn't flee gold, but they aggressively added to their positions as complacency in the stock markets soared. It was this heavy investment buying that drove gold's strength, without any doubt.

GLD's mission is to track the price of gold. But GLD shares have their own unique supply-and-demand profile totally independent from gold's. So the only way GLD can mirror the gold price is by actually acting as a conduit for stock-market capital to flow into and out of gold. Excess buying or selling pressure on GLD shares must be equalized directly into gold bullion, or else GLD's price would decouple from gold's price.

When GLD's holdings are rising, stock-market capital is flowing into gold. Differential buying pressure on GLD shares is pushing them up faster than gold is climbing, threatening GLD to fail its tracking mission to the upside. So its managers issue enough new GLD shares to offset this excess demand. They then plow the proceeds from these sales directly into physical gold, which boosts GLD's gold-bullion holdings.

From New Year's Eve to the stock markets' mid-February low, stock investors' differential buying of GLD shares forced this ETF to buy 73.6t of gold. That was the most seen in years, and it all could've been unwound as the stock markets surged higher. But during the subsequent bear-market rally where the SPX surged 13.3%, stock investors actually stepped up their buying forcing GLD to add another 102.1t!

Gold defied stocks' bear-market rally because American investors continued aggressively buying GLD shares despite the fierce sentiment headwind from surging stock markets. Despite Wall Street's tired old self-serving and false message that all portfolios need are stocks and bonds, investors not only kept on diversifying into gold but accelerated their buying. Their capital inflows enabled gold to consolidate high.

And this new massive gold investment buying is exactly what makes 2016's gold rally so incredibly bullish. Gold had seen a half-dozen major rallies between 2013 and 2015 as the stock markets levitated thanks to the Fed's zero rates, money printing, and jawboning about more easing. But all were just fueled by American futures speculators primarily covering their hyper-leveraged shorts, which soon exhausted itself.

When speculators stopped buying gold futures, gold's rallies all fizzled out because there was little investment buying. Gold rallies can't transition into bull markets unless investors, with their vastly-larger pools of capital, little or no leverage, and long time horizons take the gold-buying baton from the futures speculators. 2016 is the first time gold has enjoyed major investment buying since way back in 2011!

And it's not just American stock investors buying GLD shares. When the World Gold Council releases its latest Gold Demand Trends report for Q1'16, the most-comprehensive read on global gold supply and demand available, world gold investment demand will certainly have exploded higher. GLD is merely a handy proxy for overall gold investment demand since its gold-bullion holdings are published daily.

If American stock investors kept on aggressively adding gold to their portfolios in the past 7 weeks or so even as the stock markets surged and complacency soared, imagine how their buying will intensify and accelerate as this stock bear-market rally inevitably rolls over! Just like in early February, falling stock markets will ignite massive new gold demand from legions of investors who've neglected diversification.

The SPX's bear-market rally extended so far in March because it was artificially goosed by dovish talk and actions from central banks no fewer than 4 separate times as it was losing momentum. There was a dovish regional-Fed-president speech in China as March dawned, a bazooka-sized European Central Bank easing a week or so later, then a surprisingly-dovish FOMC meeting, and finally a dovish Yellen speech.

With a big lull in major central-bank meetings now and Q1'16's earnings season upon us, which is expected to be terrible with SPX component-company profits falling 8% YoY, odds are this exceptional bear-market rally is already giving up its ghost. As stock markets start sliding decisively again, there is no doubt 2016's strong gold investment demand will grow and spread. This will fuel a major new gold upleg.

So gold is now poised to surge again in a major spring rally, right in line with its bull-market seasonals. Investors and speculators can position for this young bull market's next major upleg in physical bullion or GLD shares, or GLD call options. But as always, the biggest gains by far will come in the stocks of the gold miners. They recently fell to fundamentally-absurd secular lows, and their profits greatly leverage gold's gains.

While gold stocks have soared so far in 2016 trouncing the performance of every other sector, their baby bull remains tiny. They still have vast room left to rally merely to mean revert to normal levels relative to gold, which of course drives their profits and hence ultimately stock prices. The gold stocks will keep on far outperforming gold as investment capital continues to return to gold and fuel its next major upleg.

Finding the best of the gold stocks to invest in certainly isn't easy, but we've spent 16+ years studying and trading this high-potential contrarian sector at Zeal. This unparalleled knowledge and experience has fueled many hundreds of gold-stock and silver-stock trades over the years, which have multiplied our subscribers' wealth. Few people in the world have spent more time immersed in this realm than we have.

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The bottom line is gold utterly defied the massive bear-market rally witnessed in the stock markets since mid-February. Despite soaring complacency, investors kept on aggressively buying gold to continue diversifying their stock-heavy portfolios. This pushed gold into its first new bull market in years right in the midst of the stock-market surge, and kept the yellow metal beautifully consolidating high on balance.

And if gold investment demand is already accelerating despite that fierce sentiment headwind from bullish stock-market psychology, it's going to explode again as stock markets inevitably roll over and head lower again. Nothing fuels gold investment demand like bear markets in stocks, since gold moves counter to stock markets. Both the stock-market bear and gold's new bull have only barely begun.

The Invisible Catastrophe

Over the course of four months, 97,100 metric tonsof methane quietly leaked out of a single well into California’s sky. Scientists and residents are still trying to figure out just how much damage was done.


‘It just seems like a beautiful day in Southern California,” Bryan Caforio said.

It was late January in Porter Ranch, an affluent neighborhood on the northern fringe of Los Angeles.

Caforio and I sat at a Starbucks overlooking an oceanic parking lot crowded with shoppers.

The air was still, dry, 70 degrees. Caforio, a young trial lawyer running for Congress in the state’s 25th District, gestured at the pink and orange striations of sky above Aliso Canyon, its foothills bronze in the falling daylight. “It seems like a beautiful sunset in a wonderful community,” Caforio said, “and we’re sitting outside, enjoying a wonderful coffee.”
But there were scattered clues that suggested that everything was not so wonderful. Near a trio of news vans parked in front of the Starbucks, antenna masts projecting from their roofs, a cameraman stared quizzically up at the canyon. Next to the SuperCuts, security guards stood outside two nondescript storefronts; stenciled on the windows were the words “Community Resource Center” and, in smaller letters, “SoCalGas.” The guards asked for identification and dismissed anyone who tried to take a photograph. At the entrance to Bath & Body Works, a device that resembled an electronic parking meter was balanced on a tripod; the digital display read “BENZENE,” followed by a series of indecipherable ideograms. The parking lot held a preponderance of silver Honda Civics bearing the decal of the South Coast Air Quality Management District. Inside the cars, men sat in silence, waiting.
Beyond the Ralphs grocery store and the Walmart rose a neighborhood of jumbo beige homes with orange clay-­tiled roofs and three-car garages. The lawns were tidily landscaped with hedges of lavender, succulents, cactuses and kumquat trees. The neighborhood was a model of early-­1980s California suburban design; until October, it was best known for being the location where Steven Spielberg shot “E.T.” But now the meandering streets were desolate, apart from the occasional unmarked white van. As you ascended the canyon, reaching gated communities with names like Renaissance, Promenade and Highlands, the police presence increased. On Sesnon Boulevard, the neighborhood’s northern boundary, an electric billboard propped in the middle lane blinked messages: “REPORT CRIME ACTIVITY; L.A.P.D. IN THE AREA; CALL 911.” Holleigh Bernson Memorial Park was empty aside from three cop cars, patrol lights flashing.
But the most significant clues were the spindly metal structures spaced along the ridge of the canyon. They resembled antennas or construction sites or alien glyphs. Until recently, most residents of Porter Ranch did not pay them much attention.
“You look at the hills, you see a few towers,” Caforio said. “But do you really know what they are?” He shook his head. “You try to say, ‘Hey, we’re having an environmental disaster right now!’ But it just looks like a beautiful sunset.”

The first sign of trouble came on Oct. 25, when the Southern California Gas Company filed a terse report with the California Public Utilities Commission noting that a leak had been detected on Oct. 23 at a well in its Aliso Canyon storage facility. Under “Summary,” the report read: “No ignition, no injury. No media.”
The local news media began to take notice, however, when Porter Ranch residents complained of suffocating gas fumes. In response, SoCalGas released a statement on Oct. 28 pointing out that the well was “outdoors at an isolated area of our mountain facility over a mile away from and more than 1,200 feet higher than homes or public areas.” It assured the public that the leak did not present a threat.
The foothills on which Porter Ranch was built, O’Connor learned, once belonged to J.Paul Getty. His Tide Water Associated Oil Company hit crude in 1938 and did not sell the land until the early 1970s, after it had extracted the last drop. The drained oil field was bought by Pacific Lighting, which used it to store natural gas. With a capacity of 84 billion standard cubic feet, the cavity, which lies between 7,100 and 9,400 feet below the surface, is one of the country’s largest reservoirs of natural gas (which is composed mainly of methane). The facility functions as a kind of gas treasury. When prices are low, the company hoards the gas inside the canyon; when they are high, it releases the gas into pipelines that snake through Los Angeles, heating homes, fueling stoves and providing power to solar-­and ­wind-­energy facilities.
The 115 wells in Aliso Canyon can be imagined as long straws dipping into a vast subterranean sea of methane. The leaking well, SS-25, is a steel tube seven inches in diameter that descends 8,748 feet from the canyon’s ridge. The well is plainly visible from many of the streets in Porter Ranch. From the ground, it resembles a derrick, set beside a series of low white buildings. If you look at it through a pair of binoculars, you can make out, flying from its highest girder, an American flag.
After conducting some basic calculations, O’Connor arrived at a shocking conclusion. Given the pressure and quantity of gas stored within, the canyon was like an overinflated balloon; a puncture could release in a single day as much gas as 1,785 houses would consume in a year. As it turned out, O’Connor was mistaken — the figure ended up being much higher than that — but he included it in an urgent letter he sent the next day, on Nov. 4, to the governor’s senior energy adviser and members of the California Air Resources Board, Public Utilities Commission, Energy Commission and Department of Conservation. He demanded that the agencies conduct “an accurate and public accounting of the gas lost at Aliso Canyon.”
That evening, O’Connor attended a hearing at the Community School in Porter Ranch with about 100 panicked residents. They complained that the gas fumes were causing headaches, respiratory problems, nosebleeds and vomiting. The next morning, having yet to receive a response to his letter, O’Connor realized that he didn’t have to wait for the state to take action. He could call Stephen Conley.
Conley is an atmospheric scientist at the University of California, Davis, and the founder of Scientific Aviation. He flies a single-­engine Mooney TLS that looks like something Cary Grant might have flown in “Only Angels Have Wings.” Public agencies, scientists and nonprofit organizations that study the climate hire Conley to loop over oil and gas fields at low altitudes, measuring methane concentrations with a device called a Picarro analyzer. At 10:30 a.m. on Nov. 5, Conley took off from Lincoln Regional Airport, just north of Sacramento. As a courtesy, O’Connor notified Jill Tracy, the director of environmental services at SoCalGas. He began to receive a flurry of text messages from executives at SoCalGas. They said the flight was unsafe and inappropriate. But SoCalGas was not concerned for the safety of the pilot, as O’Connor first assumed. The executives claimed to be concerned for the workers on the ground, who were operating cranes and drills in an effort to plug the leak. The workers, Tracy wrote, might become distracted by the sight of an airplane overhead, with catastrophic consequences.

Charles Chow, a resident of Porter Ranch. Credit Ewan Telford for The New York Times

O’Connor found this reasoning odd, because Porter Ranch lies in the flight path of Van Nuys Airport. Nearly 600 flights take off or land there every day. He proposed that the airplane keep one mile away from the well site. SoCalGas executives said they still considered this unsafe.

O’Connor asked whether there was a safe distance from the well at which the airplane could fly. The company said there was not. Conley was forced to turn back.
Two days later, though, Conley was back in the air, this time on assignment for the California Energy Commission. Over the course of the next four months, Conley flew 15 flights over the site. On his first flight, Conley’s Picarro analyzer registered 50 parts per million. The normal concentration of methane in the atmosphere is two parts per million. Conley thought something was wrong with the instrument. But a backup analyzer gave the same reading. He recalled, “That’s when I said, Oh, my God, this is real.”
What is real to a climate scientist is abstract to the rest of us. The study of the climate is a study of invisible gases. In order to translate findings to a public lacking a basic understanding of atmospheric chemistry, climatologists must resort to metaphor and allegory. They must become writers, publicists, politicians. This doesn’t always come easily. The leak at Aliso Canyon, Conley discovered, was the largest methane leak in the country’s history. But what did that mean?
You could begin by comparing emissions from the gas leak at Aliso Canyon with other pollution sites. Conley had logged about 1,500 hours of flight time over oil and gas fields, moonscapes like the Barnett and Eagle Ford Shales in Texas, the Julesburg Basin in Colorado and the Bakken Formation in North Dakota. The highest methane-emission rate he had ever recorded was three metric tons per hour. The methane was leaking from Aliso Canyon at a rate of 44 metric tons per hour. By Thanksgiving, it had increased to 58 metric tons per hour. That is double the rate of methane emissions in the entire Los Angeles Basin. This fact takes some effort to absorb. It means that the steel straw seven inches in diameter plugged into Aliso Canyon was by itself producing twice the emissions of every power plant, oil and gas facility, airport, smoke stack and tailpipe in all of greater Los Angeles combined.
In a paper published in the February issue of Science, Conley and his co-­authors estimate that 97,100 metric tons of methane escaped the Aliso Canyon well in total. Over a 20-year period, methane is estimated to have a warming effect on earth’s atmosphere 84 times that of carbon dioxide. By that metric, the Aliso Canyon leak produced the same amount of global warming as 1,735,404 cars in a full year. During the four months the leak lasted — 25 days longer than the BP oil spill in the Gulf of Mexico — the leak contributed roughly the same amount of warming as the greenhouse-­gas emissions produced by the entire country of Lebanon. If well SS-25 were a nation-­state, it would have contributed to global climate change at a rate exceeding that of Senegal, Laos, Lithuania, Estonia, Zimbabwe, Albania, Brunei, Slovenia, Nicaragua, Panama, Jamaica, Latvia, Georgia, Guinea, Equatorial Guinea, Costa Rica, Honduras, Tajikistan, Armenia and Iceland. SS-25 would rank just behind Mali.
These facts, despite their world historical significance, still failed to make much of an impression locally and nationally, let alone internationally. What was one more airborne toxic event at a time when the global climate was itself an airborne toxic event? The World Health Organization has called climate change the greatest global health threat of the 21st century, an opinion shared by the United Nations, the Environmental Protection Agency and the National Institutes for Health, among others.

By 2030, increased rates of heat stress, infectious-­disease transmission and malnutrition caused by climate change are expected to cause an additional 250,000 deaths a year. Yet as gargantuan as the Aliso Canyon emissions might be, their influence on the climate would have no immediate or direct effect on the lives of the residents of Porter Ranch. Residents were as concerned about the leak’s contribution to atmospheric warming in the years and centuries to come as everyone else on the planet — which is to say, not especially. We are already immersed in leaking invisible gases with largely invisible effects too overwhelming to control. What difference was another Lebanon’s worth of emissions?
The residents of Porter Ranch were very concerned, however, about what the inhalation of the gas might do to their brains and their lungs. Some residents found the smell of gas so overwhelming that they sealed their windows and doors and refused to go outside. Others could not smell the gas and experienced no symptoms. Sometimes those with severe symptoms and those without lived in the same household. In the absence of reliable information from SoCalGas or state agencies, the residents of Porter Ranch underwent their own transformation: They became amateur scientists, epidemiologists, sociologists, political theorists. They began to develop their own hypotheses.
“Yellow spots,” Charles Chow said, “are coming out of the atmosphere.”
I met Chow, a 76-year-old retiree with mirthful eyes and springy joints, in his driveway in late January. He was installing new shocks on his 1992 burgundy Cadillac Brougham Elegante. Beside the Cadillac was a 1986 Silver Spirit Rolls-­Royce. In the street, which is called Thunderbird Avenue, there was a 2002 Black Thunderbird. Chow pointed out the spots. They were about the size and color of a yellow split pea. They had appeared on the windshields of his cars, on the Cadillac’s vinyl roof, on the canyon-­facing windows of his home.

Development near the SoCalGas storage facility. Credit Ewan Telford for The New York Times 

Chow first became concerned about the Aliso Canyon leak in October, when Chaka Khan, his Chihuahua-­miniature pinscher, began having severe respiratory problems. His wife, Liz, who is 73, began suffering chronic headaches, eye irritation and a sore throat. Her doctor said there was nothing he could prescribe her. The only thing she could do, he said, was to leave Porter Ranch. Most of their neighbors fled before Thanksgiving. On their block alone, Chow estimates that 15 households, mostly retirees, relocated. Since then, the Chows have driven four times a month to a vacation rental they share on the Baja Peninsula, 60 miles south of the border, “just to get out of the atmosphere,” Chow said. In the Mexican air, Liz’s symptoms vanished.
Chow was soon joined in his driveway by Rick Goode, a neighbor of 25 years with a slender build and a birdlike gait. Goode wanted Chow’s advice about legal representation: About two dozen plaintiff’s firms had descended on Porter Ranch since October, competing to sign as many clients as possible. What did Chow think of Robert Kennedy’s firm? Or Weitz & Luxenberg, which had sent Erin Brockovich to solicit clients? The previous week, Brockovich told reporters that she “started feeling kind of dizzy” within 10 minutes of arriving in Porter Ranch. Chow ruled her out.
“I’ve been having terrible headaches,” Goode said. “Have you?”
“My wife has headaches every day, sore throats,” Chow said. “I don’t. We both live in the same house. Everybody is different.”
Liz returned from a doctor’s appointment. She removed her sunglasses to reveal a new cyst on her eyelid. She searched for a word to describe her general condition since October. “A malaise,” she said finally.
Barbara Weiler, 64, who was walking her dog very slowly several blocks away, first experienced the malaise in gym class. “You felt like you were lazy,” she said. “It was obvious when we were using the resistance bands. We felt like we didn’t want to work as much as we normally would.”
Paula Vasquez found the smell of gas so strong in late October that she was certain there was a leak inside her house. She hasn’t opened a window since. She and her family — she lives with her husband, their 33-year-old daughter and their 13-year-old grandson — have experienced bloody noses, blurred vision and nasal congestion. But Vasquez has also noticed other signs.
She pointed to fruit trees in her neighbors’ backyard. “I see them picking lemons,” she said. “I don’t say anything, but I’m concerned for them. Is there gas in the fruit?”
She showed me photographs she made her grandson take on her cellphone while she was driving home on the Ronald Reagan Freeway. In the sky above Porter Ranch, a heavy funnel of clouds was lit neon orange.
“It looks like a big atomic cloud,” she said. Vasquez had a warm, cheerful manner; horror did not come naturally to her. “Creepy, huh? But I don’t know anything about science.”
We are a show-me species, wired to look for visible evidence of invisible harm. That impulse can lead a person to blame global warming for a hot day in February or, conversely, make a climate-­change denialist find vindication in a snowstorm. But the world’s largest natural-­gas leak has no known effects on clouds or lemons. (It may, however, create yellow dots. Michael Jerrett, the director of the Center for Occupational and Environmental Health at U.C.L.A., explained that the dots are most likely a residue of the petroleum-­laced slurry used to plug the leak.) The most dangerous threats to our species are precisely those that are most difficult to visualize: long-term, slow-­to-­emerge, amorphous. These threats include not only warming temperatures but also mutating viruses and political corruption and tend to be invisible, dimensionless and pervasive, like death. Like natural gas.
All that the residents in Porter Ranch could see during those months of yawning uncertainty were empty streets and mysterious white vans. They were desperate for answers: Was the gas making them sick? How could they protect themselves? Who would be held responsible? The personal-­injury lawyers were well prepared. They offered clarity, assurance, optimism. They could predict, with confidence, the future — a profitable future for the residents of Porter Ranch. Since November, the firms had been holding weekly informational meetings at local churches and hotels. At each session, lawyers answered questions from the community, often for several hours at a time, and circulated client forms.
Rick Goode and the Chows attended one such meeting in late January, two days after their driveway conversation on Thunderbird Avenue. It was hosted by R.Rex Parris at the Hilton in Woodland Hills, about 10 miles south of Porter Ranch. R.Rex Parris belongs to a consortium of law firms that on Dec. 2 filed the first class-­action complaint against SoCalGas and its parent company, Sempra Energy, the nation’s largest natural-­gas utility, on behalf of thousands of Porter Ranch residents. The group’s news release anticipated that the leak would end up costing Sempra shareholders “well over $1 billion.” On this morning, about 20 community members sat at conference tables, grazing on the free coffee, doughnuts and bagels. A young lawyer, who seemed to have consumed a large quantity of the coffee, stood at the front of the room, delivering her sales pitch.
“Anything SoCal tells you,” she said, “don’t listen to it. Everything they say means nothing.”
She advised the residents to keep daily journals. They were to note each occurrence of a physical symptom or a gas smell and list all expenses incurred by relocation or illness. Someone asked whether he could qualify as a plaintiff even if he lived 10 miles from Aliso Canyon.
“Nothing’s been established yet,” the lawyer said. “I’ve heard between five and 10 miles. But we don’t have the data yet.”

Igor Volochkov emptied his pool over pollution concerns after the methane leak began. Credit Ewan Telford for The New York Times        
“They claim it started on Oct. 23,” one older woman said. “But in April, my dog, a boxer, died within two weeks. I know it was the gas.”
“It was earlier than Oct. 23,” the lawyer said. “I just don’t know when. We want it to be as early as possible, so we can get much more money for everyone.”
The lawyer explained that about 30 attorneys were assigned to the case. The firms would receive as their fee 30 percent of any payouts. “We’re predicting a settlement,” she said.
A Russian man who resembled Gérard Depardieu exclaimed, “I escaped Chernobyl for this!”
The man, Igor Volochkov, later told me that in 1986 he moved from Kiev, 60 miles south of Chernobyl, to Los Angeles when his wife was pregnant with their son. “We ran away to save our lives and the lives of our children.”
Volochkov said he knew something was wrong in October, when his parrot, Bon, dropped dead. He bought a new parrot and a parakeet, Gosha and Margosha, but they died within a month. The same thing happened in Kiev, when, he said, nuclear radiation from Chernobyl killed his parakeet, Petruschka. Volochkov said his son had asked why they moved from one Chernobyl to another Chernobyl.
“Maybe,” Volochkov replied, “our destiny is to fight against Chernobyls.”
In mid-­november, nearly a month into the leak, the Los Angeles County Department of Public Health ordered SoCalGas to pay for new housing for anyone affected by the gas odors. Nearly 6,000 households, about half of Porter Ranch’s population, accepted the offer, moving to hotels, apartments and houses in surrounding neighborhoods. Those who did not relocate immediately struggled to find available short-term rental properties, but others took advantage of the gas company’s largess.
Charles Chow said he knew a family paying $10,000 in monthly rent. “People are gouging the gas company,” he said. “I don’t believe in unfair practice. I was a businessman. I think fair is fair. All I might take is reimbursement for money I’ve had to pay the vet for Chaka Khan.”
Jerry McCormack, another neighbor of the Chows, has rarely detected an odor and has not been sick. “I think there’s a lot of foolishness going on,” he said. “This is not Fukushima. The rental market has gone crazy. Everyone is out to get the gas company. The hysteria is proportional to the number of lawyers coming to town.” He conceded that his wife, who is recovering from cancer, “can smell it quite well” and is concerned. Her oncologist advised her to leave.
Adam and Mindi Grant, a couple in their mid-40s, live a mile from the leak site. Their three children play basketball and swim outside. “We’ve legitimately smelled it one day,” Adam said. “We joke about it. Every time someone gets a bloody nose, we say, It’s the gas!”
Adam teaches world history at a local high school. Mindi is an insurance lawyer. “I have friends with real symptoms,” she said. “Some, maybe not. They’re setting up for a money grab. They think there’s big money, deep pockets. But they’re going to have trouble showing causation.”
“Had the smell been horrific,” Adam said, “we would have relocated. But because it’s not affecting us as a family, I’m a little lackadaisical about it.”
If the smell of gas makes one person dizzy while the neighbor next door can’t smell anything, is one of them lying? If a man does not actually inhale gas but develops headaches and nausea anyway, is his suffering any less? Disaster psychiatrists call this phenomenon “somatization,” a word that has replaced “hysteria” and “psychosomatic,” terms now considered offensive. “In man-made disasters, the psychological consequences can be very severe and ongoing,” David Eisenman, the director of the Center for Public Health and Disasters at U.C.L.A., told me.
“Unexposed individuals can have symptoms similar to people who have exposure.” Fear makes you sick. As it turns out, inhaling poisonous gas causes the same symptoms as the fear of inhaling poisonous gas: headaches, dizziness and nausea.
Porter Ranch residents had reason to be afraid. Nobody could tell them what they were breathing.
Methane was gushing from the leak, of this they could be certain, but methane was not what they smelled. Methane is odorless. What they smelled were mercaptans: sulfur compounds that in nature are released in animal feces. Mercaptans are added to natural-­gas pipelines to provide an olfactory alarm in case a leak occurs, the way banks insert exploding dye packs into bags of cash. Inhalation of mercaptans can cause headaches, dizziness and nausea, but like methane, they are not currently known to cause significant long-term health effects. The main health concern about the leak was that other, more toxic gases might also be escaping from the bowels of Aliso Canyon — including gases remaining from its previous life as an oil field.
Chief among these was benzene, a known carcinogen. Los Angeles air, among the most polluted in the nation, tends to have a background concentration of benzene between 0.1 and 0.5 parts per billion. The World Health Organization has declared that “no safe level of exposure can be recommended.” In November, readings taken by SoCalGas near its facility found benzene concentrations fluctuating wildly between 0.3 p.p.b. and a nightmarish 30.6; readings taken by the company in Porter Ranch shot as high as 5.5 p.p.b. Other toxic gases — toluene, xylene, hexane and hydrogen sulfides — were also detected at higher-­than-­normal concentrations. The South Coast Air Quality Management District tested the air in Porter Ranch during the first two months of the leak, but the monitoring was sporadic and conducted at only a handful of locations. By mid-January, after efforts to depressurize the well had managed to reduce the leakage rate considerably, a more rigorous study by Michael Jerrett of U.C.L.A. found that the air in Porter Ranch was in fact unusually clean — most likely because of the absence of so many residents and their cars.
California health officials believe that there will be no long-term health effects from the leak. “Increased cancer risk is very small,” said Dr. Melanie Marty, the acting deputy director for scientific affairs for California’s Office of Environmental Health Hazard Assessment. “Much smaller than routine risks we experience every day.” But Jerrett suspects that during the first six weeks of the leak, when the gas escaped at a much higher rate, conditions might have been dangerous, particularly for children and older residents. On March 10, following complaints from relocated residents who suffered nosebleeds and skin rashes after moving back home, Jerrett took dust samples at seven houses in Porter Ranch. Two contained benzene and hexane, a finding that Jerrett found “concerning.”
The actual composition of the gas was only the beginning of what the residents of Porter Ranch did not know about the invisible fumes seeping from Aliso Canyon. They did not know how far the gas was drifting or in what quantities. It seemed that the smell was stronger the higher you went up the mountain and stronger at dusk and dawn, but there was little data to support this.
There was also the mystery of the complex local wind patterns, which resemble those of no other part of the Los Angeles Basin and change direction capriciously.
No one even knew what had caused the leak in the first place, though a broken safety valve, removed by SoCalGas in 1979 and never replaced, received some blame. In 2012, President Obama signed a pipeline-­safety bill that should have prevented a leak of this kind. “We have the law, but no one is complying,” said Mel Reiter, the editor of The Valley Voice, a monthly newspaper that may be the only local business to profit from the leak: More plaintiffs’ law firms sought full-page ads than it has pages. “There are 115 active wells, and more than two-thirds were built before 1980,” Reiter said. “If one is leaking, what are the odds that 30 more are, or will soon?”

The SoCalGas property in Los Angeles. Credit Ewan Telford for The New York Times                

Regulations are in place, but nobody knows who can enforce them. When Matt Pakucko, a lead plaintiff in the class-­action lawsuit, first smelled the leak on Oct. 24, he called SoCalGas. He said he was told that the company was merely “releasing gas into the air,” which was “something that they do periodically,” and that there wasn’t a leak. He knew that the South Coast Air Quality Management District was responsible for investigating air-­quality complaints. But SoCalGas, a private utility, did not fall under the regulatory oversight of any single agency. Besides the Air Quality Management District, agencies responsible for responding to the leak included the State Energy Commission; the Los Angeles County Department of Public Health; the Air Resources Board; the Public Utilities Commission; the Division of Occupational Safety and Health; the Department of Conservation’s Division of Oil, Gas and Geothermal Resources; the Environmental Protection Agency; the Office of Environmental Health Hazard Assessment; the County Fire Department; and the Governor’s Office of Emergency Services. In January, the Los Angeles County Board of Supervisors called for the creation of yet another regulatory “structure,” to oversee gas-­storage facilities.
For most Porter Ranch residents, all this confusion added up to a single fact: An invisible gas was threatening their lives. “We don’t know what methane is,” said Sam Kustanovich, a Belarussian pawnbroker who had the misfortune of buying his house two months before the leak was detected. “Nobody knows. It could mean explosions. Me, I’m afraid of explosions.”
The global climate, even in drought-­stricken Southern California, is not an especially consequential campaign issue. A menacing disaster that causes mass vomiting and mass nosebleeds in a wealthy, vote-rich community, however, is a candidate’s dream. In this election season, the procession of scientists and lawyers heading to Porter Ranch has been trailed by a caravan of Californian politicians. None have come out in favor of mass nosebleeds. Though the 25th Congressional District reaches only its pinkie toe into Porter Ranch, Bryan Caforio, a Democrat, has made the leak a central issue of the election, which promises to be one of few closely contested races in the House. The Republican incumbent, Steve Knight, who has received campaign donations from Sempra Energy, said in December that he was confident that SoCalGas was “working on this as diligently as they can” but more recently called for a congressional hearing on the matter and introduced safety regulations for natural-­gas storage. Even a Los Angeles County supervisor, Michael Antonovich, a Republican who has voted consistently against regulation efforts, has loudly proclaimed his determination to hold SoCalGas responsible.
“We’re all kind of feeding on it in a weird way,” said Henry Stern, a Democrat who is running for State Senate in the local district. He previously served as senior counsel on energy and environmental policy for the district’s current senator, Fran Pavley, a Democrat who cannot run again because of term limits. “How often are there climate disasters in suburbia?”
Stern has been struck at community meetings by the comments of local residents, many of them self-­identifying conservatives, who have begun to question the wisdom of relying on fossil fuels.
“Climate change is not a real thing for most of these people,” Stern said. “But you change your mind quick when your kids are puking.”
The only politician who has failed to use the gas leak for political gain is Gov. Jerry Brown. His Office of Emergency Services, following protocol, began monitoring the leak in October and began coordinating the state’s response in mid-­November, overseeing the various state agencies responsible for responding to it. On Dec. 18, Brown, a Democrat, sent a stern letter to the chief executive of SoCalGas, urging cooperation and demanding accountability. “Everything that could be done under the authority of the governor was being done,” Mark Ghilarducci, the director of the Governor’s Office of Emergency Services, told me. But Brown did not visit Porter Ranch until January, when he toured the SoCalGas facility and met privately with four members of the local Neighborhood Council; this was 11 weeks into the leak and nearly a month after he attended the United Nations climate talks in Paris, where he boasted of California’s emissions-­reduction plan, the most ambitious in North America. Brown declared a state of emergency in Aliso Canyon on Jan. 6, but for many in Porter Ranch, that wasn’t nearly soon enough.
“We’re suffering because Jerry Brown is so not involved in this,” Matt Pakucko said. “There he was in Paris, saying look how green California is, while 10 years of green stuff is going into the air right now.”
Ghilarducci disputes this. “This concept that nothing happened and the governor was not engaged until he issued a state of emergency on Jan. 6 is just absolutely not correct,” he said.
“Let’s face it: We deal with so many emergencies out here. This is not Vermont, this is not Oklahoma. ... This is a nation-­state.” He continued, “The governor is very confident that he doesn’t need to be on the scene, holding a press conference, to show that he’s doing something.”
The governor’s reputation in Porter Ranch was not helped by the revelation that his younger sister, Kathleen Brown, is a paid board member of SoCalGas’s parent company, Sempra Energy. “I’m sure there’s a conflict of interest,” Rick Goode said. “My feeling is it’s an ‘I scratch your back, and you scratch mine.’ It concerns me.” In 2013 and 2014, Kathleen Brown received $456,245 in compensation, including stock awards. A partner at the firm of Manatt, Phelps & Phillips, she also has, according to the Public Accountability Initiative, a $949,653 stake in the Forestar Group, a real estate and natural-resources company, where she is a director and major shareholder. Forestar is developing Hidden Creeks Estates, a gated community of 188 luxury homes, right next to Porter Ranch, on property abutting Sempra’s.
Kathleen Brown’s office at Manatt referred me to Doug Kline, the director of corporate communications for Sempra Energy. He would not give a specific comment on Brown’s role, but he did say, “Our board of directors has been actively engaged and regularly briefed on the Aliso Canyon incident.” Deborah Hoffman, Jerry Brown’s deputy press secretary, wrote in a statement that any implication that the state did not exercise “its full regulatory and oversight authority” was “scurrilous and irresponsible.”
It is uncertain whether the residents of Porter Ranch will experience health effects in the long term. It is certain that the atmosphere will experience long-term effects. But the effects will be as indecipherable as a plume of colorless gas leaked into a windswept canyon. How do we make sense of the addition to the atmosphere of thousands of tons of invisible gases that will have semi-­invisible effects on us and only slightly more visible effects on generations we won’t live to see?
“If you compare the Aliso Canyon leak to other leaks,” said Stephen Conley, the aviator-­scientist, “it’s top dog. It’s a monster. It throws off L.A.’s emissions for the year. It’s a significant percentage of California’s annual carbon budget. But it’s about 0.002 percent of the global methane budget. It’s not like next year will be warmer because of Aliso Canyon.”

This is true. It’s not like next year will be warmer because of the car trips that Porter Ranch residents make to their temporary rental homes, or the gas they use to cook dinner, or the energy required to heat their swimming pools. Next year won’t be warmer because of the 200,000 airplanes passing through Van Nuys Airport. Next year won’t even be warmer, necessarily, because of the roughly 140 billion cubic meters of natural gas that oil companies flare into the atmosphere. But next year will be warmer.