Regime Change

Doug Nolan

Deutsche Bank (DB) dropped 13% this week to a 15-month low. DB is now down 28% y-t-d. European banks (STOXX) sank 5.0% this week. Hong Kong (Hang Seng) Financials were down 4.9%. Japan's TOPIX Bank index fell 3.3%. In the U.S., banks (BKX) were slammed 8.0%, the "worst loss in two years." The Broker/Dealers (XLF) fell 7.3%.

It was also an active week in Washington. The Powel Federal Reserve raised short-term interest rates, and the new Chairman completed his first news conference. President Trump announced trade sanctions against China. There was more shuffling within the administration, including John Bolton replacing National Security Advisor H.R. McMaster.

Let's start with the FOMC meeting. Analysts - along with the markets - were somewhat split between "hawkish" and "dovish." As expected, the Fed boosted short rates 25 bps. On the dovish side, the Fed's "dot plot" showed a median expectation of three rate increases in 2018 versus pre-meeting average market expectations of 3.5 - and fears of four hikes. The Fed upgraded its view of GDP prospects and lowered its view of the expected unemployment rate. Steady as she blows for normalization - markets not so much.

Chairman Powell did nothing overtly to rattle the markets. The message, at least for the near-term, was continuity. He was clear and concise. There were, however, important subtleties.

A couple of headlines worth noting: From the Financial Times: "Jay Powell Plays it Safe in Federal Reserve Debut." From Bloomberg, "Powell Disses Dots Again as He Stresses Limit of Fed's Knowledge" and "Powell Debuts as Show-Me Fed Chair in Shift From Theory, Models."

Jerome Powell faces an extraordinary challenge as Fed Chairman. If he does not move quickly and aggressively to flood the global financial system with liquidity upon the onset of financial crisis, history books will surely have him tarred and feathered. Greenspan, Bernanke and Yellen hold responsibility for history's greatest Bubble. Yet it will be on Powell's watch when the Fed faces the harsh consequences. In the end, he'll be left with little alternative than more QE and zero rates - surely deemed too little too late in hindsight. Winless.

I've been impressed with our new Fed Chairman. For the first time in (at least) a couple decades, I can listen intently to the head of the Federal Reserve (testimony and press conferences) without that recurring urge to roll my eyes. I feel respectful.

Alan Greenspan was the master of obfuscation. His conversations seemed guided by some game theory, and I was too often left pondering what went unsaid - and why. Greenspan's ego, free-market ideology and personal ambitions over time fostered an overly-powerful cult status. With direction from an intellectual advocate, market pricing mechanisms can be all the more awe-inspiring. The wonder of bolstering securities markets with a few enlightened words or, when necessary, 25 bps. No unelected individual should ever assume such power. And when a central banker is idolized in real time, he's surely too accommodative. As financial innovation quickened and Bubble Dynamics took hold, Greenspan became incapable of correcting - or even admitting - mistakes.

Ben Bernanke had his own issues. Dr. Bernanke's formidable biases revolved around his academic research and unconventional theories. His limited experience with the markets only heightened the insecurities facing anyone replacing "The Maestro." Bernanke had spent much of his academic career fashioning his theory that the Fed's failure to print money after the 1929 crash was the prevailing cause of the Great Depression. A seemingly modest man had become convinced he'd unearthed the "Holy Grail" of economics. He promised Milton Friedman on his 90th birthday that the Fed had learned from its catastrophic mistake and wouldn't allow it to happen again. The opportunity presented itself early in his term as chairman, and Bernanke unleashed history's greatest monetary experiment. His radical reflationary doctrine captivated - and then changed - the world.

The Wall Street Journal's Jon Hilzenrath once referred to Bernanke as a "gun slinger." This monetary cowboy was incapable of unbiased analysis and decision-making. As his inflationary experiment mutated beyond short-term crisis management measures, Bernanke increasingly dug in his heels. In the throes of untested monetary doctrine, he turned defensive and "100% certain" of too many things.

For traders in the market, it's seeing a losing short-term trade morph into a long-term "investment." With everything invested in his runaway global experiment, Dr. Bernanke lost touch with reality - not to mention monetary conventions. He turned hostage to the financial markets, somehow promising that he would not tolerate any tightening of financial conditions - let alone a bear market, recession or crisis. What unfolded was a complete breakdown of responsible central banking.

Chair Yellen followed too comfortably in Dr. Bernanke's footsteps. The unassuming market darling that wouldn't dare do anything that might rock the boat; another seasoned academic with a theoretical framework that essentially posed no risk to raging market Bubbles. Gratified that unemployment was declining as core consumer inflation stayed below target, she discerned nothing problematic unfolding in the markets or economy that might risk future crisis. In the final analysis, it was a four-year term notable for a complete failure to tighten financial conditions when the backdrop beckoned for significant tightening measures. No "gun slinger", but a competent and pleasant enabler of vicious "Terminal Phase" Bubble excess.

This history rehash is to emphasize the stark contrast between Chairman Powell and his predecessors. He's from a completely different mold. For the first time in decades, the Fed Chairman is not beholden to ideology, academic theory nor activist monetary doctrine. This allows straightforward answers to questions. No obfuscation necessary - no extoling nor canonizing. Academic dogma need not eclipse studious observation and common sense. Powell respects the institution. And I believe his leadership will promote a soberer perspective, clearer analysis and sounder policy from our central bank.

While pundits underscore "continuity," the markets must contemplate what this means for the Greenspan/Bernanke/Yellen "market put". Of course, the Powell Fed's support will be there in the event of crisis. But the timing: how much time - and market value - will pass before central banks come to the rescue? Does Powell appreciate how previous Fed policies nurtured dangerous securities market excess? Would the Chairman prefer to return to more traditional central bank management - hesitant to resort to QE, rate cuts and other tools of market intervention? Would he rather let markets deal with volatility without members of the Fed jumping to render vocal support?

The implied government guarantee of GSE obligations was a root cause of the mortgage finance Bubble. Washington was content to let the markets operate as if the Fed and Treasury would always be there with a backstop. For years now, there has been an implied guarantee that global central bankers would freely offer liquidity backstops to financial markets. Markets inflated, which implicitly increased the scope of this implied guarantee. Meanwhile, responsible central bankers, more appreciative of mounting risks, should be compelled against further emboldening Bubble markets. Implicit guarantees must be reined in.

I believe Chairman Powell understands the dangerous role the "Fed put" has played over the years. His bias would be to wean the markets off of central bank liquidity, excessively low interest rates and aggressive "activist" market intervention. Markets would be healthier standing on their own - to reacquaint themselves with risk and prudence.

In Wednesday's press conference, Chairman Powell was notable for downplaying the "dot plot" and underscoring the limitations of Fed forecasts. It was subtle, but my thoughts drifted back to ECB President Trichet's "we do not pre-commit." The Fed Chairman was cautious and adept, as he commenced the process of dialing back market expectations for certainty, accommodation and unconditional support from our central bank. Fixated on continuity, markets have thus far been unable to focus on Regime Change. Policy doctrine is changing, creating major uncertainty for a marketplace increasingly coming to terms with myriad mounting risks.

March 21 - Bloomberg (Alex Harris and Liz McCormick): "From Riyadh to Sydney, short-term funding markets worldwide are starting to feel the effects of soaring U.S. dollar Libor rates. The surge in recent weeks in this key global short-term financing indicator may have a mostly technical explanation, meaning it's probably not flashing warning signals like it was during the credit crunch or the European sovereign debt crisis. Nonetheless, it's still making funding more costly for some borrowers outside the U.S. The three-month London interbank funding rate rose to 2.27% Wednesday, the highest since 2008. The concern is that the Libor blowout may have more room to run, a prospect that borrowers and policy makers in various markets are just beginning to grapple with."

The Libor/OIS interbank Credit spread widened further this week, indicative of tightening liquidity conditions. It's my view that risk premiums are now generally rising partially on concerns for the Fed and global central bank liquidity backstops. For years, the implied central bank market backstop worked to depress the cost of all varieties of market "insurance" - from the VIX in U.S. equities, to hedging costs in global equities, corporate Credit, sovereign debt and, last but certainly not least, the currencies. The scope of Bubbles has inflated tremendously, while confidence in the future efficacy of central bank support measures has just begun to wane. The cost of market protection is now rising rapidly, with profound ramifications for myriad interrelated global Bubbles.

March 23 - Bloomberg (Molly Smith and Austin Weinstein): "U.S. companies are finding that the flow from the foreign-money spigot is slowing. Foreigners showed signs of being net sellers of U.S. investment-grade corporate debt this week, according to Bank of America… Any selling pressure comes after international investors bought just $38 billion of U.S. investment-grade corporate debt in the fourth quarter, according to UBS…, the least since the beginning of 2016… Overseas money managers are a key pillar for the market, having bought more than $1.4 trillion of the securities since 2013, UBS said. With the dollar extending losses after plunging last year and hedging costs near decade-highs by one measure, overseas investors have fewer reasons to buy… The securities are on track for their worst first quarter since 1994… For many foreign investors, rising hedging costs are eating into or erasing the extra yield to be earned from a U.S. corporate bond. European investors must sacrifice around 2.7 percentage points in annual yield to hedge using rolling three-month forwards for a year when buying in U.S. dollars and hedging back to euros, data compiled by Bloomberg show. The Japanese have to forfeit about 2.4 percentage points when hedging back to yen, around the highest level since 2008… 'The math just doesn't work anymore,' said Josh Lohmeier, head of U.S. investment-grade credit at Aviva Investors… 'It's driving away foreign investors that hedge.'"

The rising cost of hedging, widening Credit spreads, waning demand for corporate Credit and abating general market liquidity now pose a major challenge for vulnerable global markets. No longer will it be so easy to dismiss risk. And with various risks now coming into clearer view on a daily basis, markets must confront the harsh reality of significantly higher hedging costs across the spectrum of risk markets.

The Washington spectacle has finally become a major market issue. Tariffs and trade wars do matter, at this point more from a financial standpoint than economic. Members of the Trump cabinet matter. The composition of Trump's foreign policy team matters. The nature of his advisors and attorneys matter. The mid-terms will matter, perhaps profoundly. It is said that the President is becoming more comfortable in the job - and ready to call the shots. Markets are increasingly uncomfortable.

With fragilities surfacing, global markets have turned increasingly vulnerable. The threat of foreign selling of U.S. Treasuries, corporate debt, equities and dollar balances is now real and consequential - just as liquidity becomes a festering issue. The stock market is sliding - prices along with its standing on the President's priority list.

Initially spooked by steel and aluminum trade tariffs, markets were relieved by prospects they'd be watered down. Markets had remained surprisingly relaxed at the prospect of tariffs and trade measures directed at China. Suddenly, markets are spooked at the thought that the President's issue with China might go way beyond U.S. trade deficits and manufacturing jobs. Is the unspoken objective to rein in China's global superpower ambitions?

March 23 - Financial Times (Shawn Donnan): "Viewed from the standpoint of big business and classical economics, Donald Trump's increasingly protectionist trade policy has looked like a collection of impetuous acts of economic self-harm in recent weeks. But is there political method in the economic madness? Ordering new tariffs on up to $60bn in Chinese imports on Thursday, Mr Trump declared that his administration was out to punish Beijing for its systematic theft of American intellectual property and reverse the loss of US factory jobs. 'We're doing things for this country that should have been done for many, many years,' he declared. The president then added: 'It's probably one of the reasons I was elected; maybe one of the main reasons.' … 'I don't agree with President Trump on a whole lot, but today I want to give him a big pat on the back. He is doing the right thing when it comes to China,' said Chuck Schumer, a long-time China hawk who leads the minority Democrats in the Senate."
March 22 - New York Times (Carlos Tejada): "Arranged marriages. Whispered warnings. Outright theft. For years, American companies have complained that the Chinese government finds ways to get them to hand over their most valuable trade secrets. Those companies - which usually complain anonymously, fearing Chinese retribution - have found a sympathetic ear in the Trump administration. American trade officials on Thursday cited those practices as a major motivation for their plans to levy tariffs and penalties on $60 billion in Chinese imports and to take a tougher stance on the vast and lucrative trade relationship between the two countries. The report outlines in blunt terms how intellectual property - everything from product designs and sensitive data to general know-how - has become a point of contention in global trade relations, joining longstanding areas of dispute like steel."

March 20 - Financial Times (Charles Clover, Lucy Hornby, Sherry Fei Ju and Xinning Liu): "Xi Jinping has promised that China will 'ride the mighty east wind of the new era' and 'charge forward with a full tank', in a patriotic speech that parted decisively with the previous era of caution in Beijing's foreign relations. The president's nationalistic message came in closing remarks to the National People's Congress, the rubber stamp legislature, which this month confirmed changes to the constitution that would allow Mr Xi to rule for life. He used the occasion to outline his vision for China's peaceful 'rejuvenation' as a world power, but also to warn against foreign plots. 'All acts and tricks to split China are doomed to failure and will be condemned by the people and punished by history,' he said, alluding to Beijing's longstanding goal of taking back the breakaway territory of Taiwan."

Beijing has been getting prepared. For what, is an open question. China's initial response to Trump Tariffs has been restrained. Like many of us, they're surely working to comprehend what he's really up to. The President has rather hastily assembled a hawkish foreign policy team. To be sure, Beijing will not stick to modest measures if they suspect Trump's Chinese ambitions go beyond measured trade adjustments. They have big levers to pull: Treasuries, U.S. securities, Taiwan, and currency devaluation, to name a few. Beijing has taken measures to exert significant control over China's markets and economy. I'll assume Beijing believes China is better prepared to manage through global market turbulence than their adversary.

There's a general complacency deeply embedded in U.S. financial markets. No toxic securities Bubble at the brink. There is no Lehman vulnerable to a run and swift collapse. Interestingly, however, from the global financial markets Bubble perspective, there is Deutsche Bank and its double-digit stock decline this week. It seems to be the first place global players look when risk begins to be an issue, financial conditions start to tighten and risk premiums escalate. DB operates, after all, in the core of global derivatives markets and securities finance.

Derivatives lurk at the epicenter of global financial crisis risk. It's right here where global central bank policies have fomented the greatest distortions and associated fragilities. The perception - the implied guarantees - of liquid and continuous markets. And when DB's stock is sinking (down 13%) and its CDS is blowing out (33bps this week!), then the issue of counterparty risk and derivative market dislocation begins to creep into market psychology (and positioning).

Greed to Fear. "Risk On" shifting to "Risk Off." This week had the feel of de-risking/de-leveraging dynamics gathering important momentum. This was no VIX (24.87 close) accident. This was a general widening of Credit spreads, waning liquidity and overall market instability. Dollar weakness reemerged this week, which sparked a nice safe haven bid in gold and the precious metals. Crude surged. Curiously, it also awakened a bit of safe haven buying for Treasuries (with widening corporate Credit spreads).

I couldn't help but to ponder the possibility that the rising cost of hedging dollar risk is a game changer for U.S. corporate debt. There's a huge amount of leverage there, along with big foreign ownership. It's certainly not a strong position for instigating tariffs and risking trade wars. It's instead a backdrop increasingly susceptible to panic selling, liquidity shocks and derivative issues.

The new power superpowers

Clean power is shaking up the global geopolitics of energy

Energy transitions change the world, writes Henry Tricks. So who will be the winners and losers of the green revolution?

TO ENTER TAFT, two hours north of Los Angeles, you drive along the “Petroleum Highway”, past miles of billboards advertising Jesus. God’s country is also oil country. Spread over the sagebrush hills surrounding the town are thousands of steel pumpjacks (pictured), contraptions that suck oil out of the ground. They look like a herd of dinosaurs. Some Californians would describe the oil industry in the same way.

The oil produced at Taft is not produced by hydraulic fracturing, or fracking, as much of it is in Texas and North Dakota. It is so heavy it needs to be steamed out of the ground, in a process known locally as “huff and puff”. Yet Kern County, with Taft on its western edge, produces 144m barrels of oil a year, the second highest output of any county in America. Fred Holmes, a third-generation oilman and patron of the West Kern Oil Museum, says he is proud of the heritage, however much it irks local drivers of electric Tesla cars that the Golden State has such a carbon-heavy underbelly. “Oil is renewable energy. It just takes longer to renew,” he quips. He has built a giant wooden derrick at the museum to celebrate it.

In its heyday, oil was prized in southern California. The Lakeview Gusher, which blew on the edge of Taft in 1910, became as emblematic of a boom era as the gold rush farther north. Taft also played a starring role early on in the geopolitics of energy. In 1910 the American navy, worried about its dependence on insecure coal supplies, commissioned its first oil-fired destroyer. Two years later President William Taft created the first naval petroleum reserve in Taft’s Elk Hills to guarantee supplies of oil in the event of an international crisis. It came into its own in the second world war, when production soared. The president gave the town, formerly called Moron, a better name.

Since then the geopolitics of energy—usually defined as the impact of energy flows on the power and influence of nations—has been mostly about the world’s thirst for oil. The efforts to secure it, safeguard its shipment, stop enemies from getting or keeping hold of it, and monopolise it if possible, loomed large in 20th-century history (see chart).

Since oil and gas are exhaustible and not available everywhere, they have often been rationed, to the benefit of an oligopolistic group of producers. Consuming nations have long felt that the scarcity of oil makes them more vulnerable. That is why, since the Arab oil embargo of 1973, every American president has seen the country’s dependence on imported oil as a weakness. Policies like the “Carter Doctrine” proclaimed by the then president in 1980, which asserted the United States’ right to use military force to protect its strategic interests in the Middle East, were aimed at ensuring a stable supply of oil.

This notion of scarcity is coming to an end, thanks to three big developments. The first is America’s shale revolution, which has turned the country into the world’s biggest combined producer of oil and gas (see chart). After decades of declining output since the 1970s, America is now producing as much oil as it has ever done: 10m barrels a day in November last year. It is making the country less reliant on imported oil, which has helped it shed a long-standing paranoia about such dependence. This could reduce the country’s need to expend blood and treasure to protect supply routes from the Middle East. And it has added an abundance of oil and gas to world markets that has benefited energy consumers everywhere.

The second major change is taking place in China as it attempts to move from an energy-intensive economy to a more service-led one. Without choking off economic growth, in the past few years it has made staggering progress in moderating its demand for coal and oil, slowing the rise in electricity consumption, deploying gas and renewable energies and arresting the growth of carbon-dioxide emissions. It remains the world’s biggest importer of fossil fuels, but its experience with filthy air and its concerns about over-dependence on imported oil have made it keener to harvest more of its own wind and sunlight. It also has by far the world’s most ambitious plans for electric vehicles. Subsidies and a streak of energy authoritarianism have played a big role. But in its own way, China’s energy transition has been as remarkable as America’s.

These two developments play into the third, longer-term trend: the need to create a low-carbon energy system to fight climate change. The Paris agreement of 2015, though a milestone, still leaves a huge distance to travel before global warming can be stopped. To achieve that, trillions of dollars will have to be invested in wind and solar energy, batteries, electricity grids and a range of more experimental clean-energy sources.

This so-called energy transition has set off a global race for the best technologies and raised concerns about access to the rare earths and critical minerals needed to make the necessary hardware. As Francis O’Sullivan of MIT Energy Initiative, part of the Massachusetts Institute of Technology, puts it: “We are moving from a world where the value of the energy is embedded in the resource to where technology is the resource.”

The democratisation of energy

This special report will look at the energy transition from the perspective of America, the EU and China as well as petrostates such as Russia and Saudi Arabia. It will pinpoint winners and losers. It will argue that America is at risk of squandering an early lead, obtained by using natural gas and renewables to slash emissions, promoting clean technology and helping pioneer the Paris agreement. China is catching up fast. Saudi Arabia and Russia are in most obvious peril.

The past few years of growing American self-reliance and Chinese self-restraint have offered a glimpse of the foreign-policy implications of a new energy order. For America, some see it as a windfall, the title of a recent book by Meghan O’Sullivan of Harvard University. She says the shale revolution has helped temper predictions of American decline, made it easier to impose sanctions on adversaries, helped create a global gas market to ease Russia’s stranglehold over Ukraine, and reduced tensions over China’s pursuit of energy resources. She describes it as “a boon to American power—and a bane to Russian brawn”.

That may be over-optimistic. Russia and the OPEC oil cartel have been surprisingly successful at cutting production to counter the shale glut. They have also turned towards China, which is pouring money into their energy infrastructure. Most important, American shale risks entrenching reliance on oil even more deeply in the global economy, with potentially perilous consequences for the climate. If America focuses too much on producing fossil fuels, it may lose sight of the need to develop cleaner energy for the future.

The geopolitical implications of the broader energy transition will be even more complex. When in January a global commission to study the geopolitics of clean energy was launched under the auspices of the Abu Dhabi-based International Renewable Energy Agency, the underlying hope was that such a development would make the world “more peaceful, stable—and boring”.

Champions of clean energy believe that boring is good. Unlike hydrocarbons, renewable energy is potentially available almost anywhere. Collaborative efforts to halt global warming could lead to open-source development and the sharing of technology. As power generation becomes more dispersed (examples include Germany, China and California), regions may become more self-sufficient in energy, a process labelled “energy democratisation”. In Africa and elsewhere, enhanced access to energy, via mini-grids and rooftop solar panels, could reduce energy poverty even as the global population is soaring.

David Criekemans of the University of Antwerp points out that from the Industrial Revolution onwards, energy transitions such as that to coal and then to oil have changed the world. This latest one could have equally far-reaching effects. “The [nation] state and central power supply go hand in hand. They need one another,” he writes. He expects decentralisation of the energy supply to boost the power of regions in relation to central authorities. The beauty of the energy transition, enthusiasts believe, will be to give communities “super powers” over their energy, rather than turn countries into energy superpowers.

Yet the transition has plenty of potential to cause geopolitical friction, too. The most obvious example is the challenge it will pose to economies that depend on petroleum. A new book, “The Geopolitics of Renewables”, edited by Daniel Scholten of Delft University of Technology in the Netherlands, argues that the clearest losers will be those blessed with ample fossil-fuel reserves and those who bet on oil for too long without reforming their economies. The book also notes that,whereas in the traditional energy system the main constraint is scarcity, with abundant renewables it is variability. This could be mitigated by cross-border energy trade, but that, too, could cause arguments.

As economies become more electrified, with “supergrids” to handle the additional power demand from urbanisation, electric vehicles and unimaginable quantities of data, the risks could multiply. Grid politics could replace pipeline politics. Ukrainian saboteurs, for instance, reacted to Russia’s annexation of Crimea by cutting off electricity supplies to the peninsula in 2015. Chinese investment in grids in Europe and Australia is also under scrutiny, on national-security grounds. And ever more electrified economies are at ever higher risk from cyber-attacks.

The new power tool

It seems inevitable that the geopolitics of energy will develop into a contest to see which country can produce the most energy of its own, and which has the best technology. Miguel Arias Cañete, the EU’s commissioner for climate and energy, explains that, “We are on an irreversible pathway to renewable energy…those who don’t embrace the clean-energy transition will be losers in the future.”

The EU has set itself a clear goal to decarbonise all energy by 2050, and has appropriate market structures in place. That puts it in a strong position. China, too, is firmly committed to clean energy and boasts some impressive clean-tech entrepreneurs. America, for its part, has invented much of the world’s clean-energy technology; and the shale revolution has opened up vast potential supplies of natural gas that can generate electricity far more cleanly than coal, serving as a bridge to a lower-carbon future. But the country risks losing its focus. It is divided between fossil-fuel fundamentalists, mostly Republicans, and clean-energy enthusiasts, mostly Democrats, who cannot agree on the best way forward for the economy and for the climate.

 Silver Speculators Go Short – Which Is Extremely Bullish  

Friday’s commitment of traders (COT) report for gold and silver offered more of the same.

Which is to say the gold futures action was boring and the silver action was strange and exciting.

Starting with gold, the large speculators – who, remember, tend to be wrong at big turning points – got a little less optimistic, while commercials – who tend to be right at big turning points – did the opposite. But both groups are still in unfavorable territory, with the speculators too long and the commercials too short. Looked at in a vacuum this is not good short-term news for gold.

Silver is a whole different story, with speculators going aggressively net short, something very seldom seen, and commercials almost in balance, which is also unusual. Looked at in a vacuum, this is hyper-bullish.

But of course the games futures traders play aren’t all that matters. Between trade wars, massive ongoing government deficits and spiking stock market volatility, the reasons for owning safe haven assets like gold and silver are both multiplying and gaining urgency.

Which brings us to that damn $1,360 gold resistance level. As you can see on the next chart, since 2014 this has been where gold rallies go to die. The past week’s nice pop brought the metal back to within striking distance, once again raising the question of who feels compelled to sell before 1400 and why.

One of these days gold will blow right through on its way to some much higher pocket of resistance. And based on the tide of chaos that seems to be engulfing the world (see, for instance, David Stockman’s latest on US politics), it might be wise to start acting like the next leg up is now imminent rather than just inevitable.

A year is coming (or maybe has arrived) when financial reporters doing their annual winners and losers articles will be shocked to find a list headed by precious metal miners, silver bullion and gold bullion.

Should Some Species Be Allowed to Die Out?

As the list of endangered animals worldwide grows longer, society may soon be faced with an impossible decision: which ones to take off life support.


One day last spring, Lisa Crampton stood at the base of a tall ohia tree, deep in the forested interior of Kauai. That morning, Crampton and five other field biologists had spent two hours hiking to a narrow clearing, where a hovering helicopter airdropped a large aluminum ladder. Although the distance from the clearing to the tree was comparatively short, it took the team most of the morning to maneuver the ladder across a stream, through the brush and up a steep slope. During that time, it also started to rain.

Ohia trees are tall and spindly, with a flowering red crown that spreads out in twiggy filaments. The object of the team’s efforts was a scraggly nest, about two inches wide, that was gusting around at the end of a branch four stories overhead. Peering up at it, Crampton frowned. “It’s pretty high up,” she said. “Do you think we can get the ladder close enough on this slope?”

The nest belonged to an akikiki, a small gray-and-white bird that feeds on insects, doesn’t sing much and has noticeably large feet. As head of the Kauai Forest Bird Recovery Project, Crampton is tasked with saving the akikiki, along with the rest of the island’s endangered birds. Even by conservation standards, this can be dispiriting work. Of Kauai’s eight remaining native forest birds, four are listed as endangered or threatened, including a honeycreeper so rare that researchers have managed to find just 14 of its eggs in three years, of which only four have survived. 

       On a hike for egg collection. Credit Spencer Lowell for The New York Times 

When Crampton took over the program, in 2010, it was focused on protecting a reclusive bird known as the small Kauai thrush, which had been on the verge of extinction for years. Not long after she arrived, though, the situation changed. While thrush numbers were up, thanks in part to a successful captive-breeding program, the number of akikiki had plummeted. “The surveys weren’t picking up any akikiki,” Crampton told me, “like, none.”

Because akikiki numbers dropped so rapidly — the population is estimated to have fallen by 83 percent in 10 years, thanks to a combination of avian malaria and invasive rats, leaving just 468 birds — the government approved a plan to start a captive-breeding program in 2015, using eggs harvested from nests in the wild. (When akikiki lose their eggs, they typically lay a second clutch, keeping population numbers stable.) Mandy Peterson, who has a master’s degree in ecology and is doing fieldwork with the recovery project, told me about a prop Crampton’s team often takes to island schools: a pint glass filled with 500 synthetic akikiki eggs, each the size of a small gumball. “We show them: This is what 500 birds look like. This is every bird that still exists.”

Under the rules of the Endangered Species Act, once a species is discovered to be at risk of extinction, government agencies are required by law to take steps to save it. For years, critics have challenged that mandate, arguing that it undercuts the ability to weigh a species’ value or to consider the economic impact of its preservation — for instance, the cost of prohibiting logging in a valuable tract of forest. Since Donald Trump took office, these objections have gained ground; there are currently six bills pending in Congress, all aimed at overhauling (some would say gutting) the Endangered Species Act.

For Crampton, these political developments have been alarming but also comparatively remote, at least relative to her immediate problem: getting a pair of extremely fragile eggs out of a tightly built nest at the very top of the tree canopy. This process can take up to two days, given the ruggedness of the akikiki’s habitat, a remote area known as the Alakai Swamp. That morning, after some discussion, Crampton and the team chose a spot on a 45-degree slope almost directly below the nest, and cautiously began to erect the ladder: a free-standing spire with thin, round rungs that was balanced at a precise angle and then secured with ropes lashed to the surrounding trees. 

A helicopter flight to Alaka’i swamp for egg collection. Credit Spencer Lowell for The New York Times 

Until recently, the Alakai held the title of the wettest place on Earth, with one to two inches of rain a day (it was eclipsed by a village in far eastern India), and the terrain is almost impossibly steep: a welter of accordion-fold ridges and deep, narrow canyons, all running with water. Because there are no trails, researchers often have to bushwhack for miles in search of nests, wading up knee-deep streams or descending knife-edge slopes spongy with deadfall and slippery with mud. In part because the terrain is so punishing, Crampton estimates that it takes roughly 130 person-hours to recover a single pair of eggs, which must then be hiked out in a heated container and flown to a special incubation facility, where the eggs will be hatched and the chicks hand-raised by specialists from the San Diego Zoo. (So far, this process has produced 39 birds, who will be bred in captivity to create a reservoir population.) 
Saving a species becomes substantially harder the closer it gets to extinction, and the argument for preserving the akikiki may seem particularly tenuous. Though the akikiki perform various environmental functions, like eating insects off tree branches, they don’t appear to play a crucial role in the Alakai ecosystem. And because akikiki retreated to the highlands several decades ago and weren’t particularly noticeable in the first place, it’s hard to argue that their loss impoverishes our experience of the world. Even Crampton admitted that a majority of Hawaii residents probably haven’t noticed the bird’s disappearance, while tourists tend to assume that the island’s brightly colored tropical birds (the Mexican redheaded parrot and the Indian tricolor munia, for example) are indigenous.

One arguably legitimate criticism of the Endangered Species Act is that trying to save every creature is both unrealistic and inefficient. Because the act requires that we help all species at risk of extinction, the argument goes, agencies end up spending vital resources on less-important species, rather than concentrating on the most critical ones. Assigning value to species is a nearly impossible undertaking, because it involves a bewildering number of variables, including ecological importance, utility (coral reefs can act as breakwaters during coastal storms), the species’ place in our heritage, even its beauty or symbolism. Conservation has no formula for weighting these factors, either alone or in combination, and it’s hard to imagine one that people could agree on. How do we decide whether the wolf or the snow leopard is more valuable?

In response, some conservation groups have argued that we should put our efforts toward saving the most genetically diverse species, with the goal of increasing our long-term ecological resiliency. (In this view, saving the akikiki, which is one of 18 living species of Hawaiian honeycreeper, would be a low priority.) Others have suggested prioritizing “functional diversity”: the preservation of key species, like predators and pollinators, whose presence can radically affect an ecosystem.

All of which makes the akikiki a complicated case in point: In the face of growing political and environmental pressures, how should we decide what to save? 

     An incubator and other gear for the eggs. Credit Spencer Lowell for The New York Times  

    The conservation team looking at the nest with the eggs. Credit Spencer Lowell for The New York Times 

Of the 1,280 endangered animals and plants listed by the United States Fish and Wildlife Service, 557 are from Hawaii, including the short-tailed albatross, the Hawaiian hoary bat and the Kauai cave wolf spider, as well as four species of turtle, six damselflies, two varieties of pond shrimp, four snails and seven kinds of yellow-faced bee. Conservationists have called the islands “the extinction capital of the world.”

This is true in part because Hawaii is a tropical paradise so fertile that seeds from a foreign plant can spread to blanket the island in the space of a few years. When the islands were new bits of volcanic rock in the middle of a vast ocean, this fertility worked in species’ favor, allowing them to diversify, Galapagos-style, into dozens of discrete niches, with few competitive pressures. In the last hundred years, though, those same factors have become a liability.

Hawaii’s tropical weather and location as a Pacific trade and tourism hub have made it a kind of petri dish for invasive species, which arrive from nearly every continent and multiply extravagantly. On the Big Island, mongoose have proliferated, devastating local bird populations; so have Puerto Rican coquí frogs, which chirp abruptly and erratically at 90 decibels, like a mobile infestation of alarm clocks. Cases of rat lungworm have risen sharply over the past five years, driven first by the arrival of the lungworm parasite, from Southeast Asia, followed by the spread of a nonnative slug that carries the disease. Kauai, meanwhile, is plagued by feral pigs, rose-ringed parakeets and a new invasive seaweed that arrived either in ballast water or in the dumped contents of aquarium tanks and that has begun to smother the island’s reef ecosystem. Since 1992, when a hurricane knocked over chicken coops, the island has also been overrun by roving bands of roosters and chickens; on my first day in Lihue, I saw dozens of them, many trailing hordes of chicks.

Faced with these cosmopolitan arrivals, island species can seem like the wildlife equivalent of a naïve Midwesterner asking a guy in Times Square to hold his wallet. Native trees and plants have often lost their defenses — the islands have stingless nettles and thornless raspberries — and in many cases grow more slowly, making them easy marks for more aggressive species like miconia, a flowering plant from Central America that grows like a weed, produces thousands of seeds and shades out everything in its vicinity. Native animals and birds don’t fare much better.

“We have a seabird, the Laysan albatross, that nests on the ground,” said Joshua Fisher, a biologist with the U.S. Fish and Wildlife Service. “A rat or a cat or a mongoose can literally walk right up to it and start eating its eggs. The birds just don’t know what to do.”

And once nonnative species do begin to take over, stopping them can be a Sisyphean task. One invasive fungus that kills ohia trees can spread just from the quantity of dirt trapped in the tread of a sneaker. (To combat this, Hawaii has asked hikers to scrub their boots with alcohol or a bleach solution.) A recent study at Kahului Airport on Maui found an average of one new insect species arriving every day. In the Alakai and elsewhere, these pressures have steadily squeezed out native species, at the same time as development has left them with less land to occupy. On top of that, even when an endangered animal survives in captivity, it often can’t be reintroduced to the wild without falling victim to the same factors that drove it toward extinction in the first place. 
As a result, our role as stewards of the earth is becoming more and more like that of doctors in a global intensive-care unit, trapped in a cycle of heroic, end-of-life measures. Many conservationists now operate in a state of constant maintenance: endlessly working to weed out invasive plants and predators, while trying to prop up species that have fallen into decline. At worst, an endangered animal becomes a literal ward of the state: preserved only in breeding facilities or in tiny, meticulously maintained “wild” habitats. “They’re like patients that are never going to be discharged from the hospital,” the environmental writer Emma Marris told me. “It’s a permanent situation.”

The official term for such species is “conservation-reliant.” When I spoke with Michael Scott, a wildlife biologist at the University of Idaho who helped direct the California condor research effort, he estimated that roughly 84 percent of species on the United States endangered list are currently conservation-reliant. Of those, he added, a vast majority are in Hawaii. “Hawaii is the world capital of conservation-reliant species,” Scott said. 

Nicole Fernandez from the San Diego Zoo collects Akikiki eggs from a nest. Credit Spencer Lowell for The New York Times 


Nicole Fernandez collecting the Akikiki eggs. Credit Spencer Lowell for The New York Times   

Eggs being lowered down in the thermos with warm millet. Credit Spencer Lowell for The New York Times 

It’s not surprising that, at least initially, an endangered species would survive only with outside help. Where things get more complicated is when that care becomes perpetual. Proponents of the Endangered Species Act like to point to its efficacy: of all the species listed since 1973, 99 percent are still around. The flip side, critics observe, is that only 1 percent of those species have been sufficiently rehabilitated to leave the list.

But while conservation might benefit from a nuanced discussion of how best to allocate resources around vanishing species, a far more sweeping set of proposals has recently been put forward by elected officials hoping to take advantage of the Trump administration’s willingness to weaken the environmental protections afforded by the Endangered Species Act. One bill, proposed by Pete Olson, a Republican congressman from Texas, would require a financial accounting before a species could be listed as threatened, ostensibly to prevent overspending but in practice giving local and federal governments a way to thwart new listings, especially those that might conflict with business interests like ranching, logging and development. Another, sponsored by Dan Newhouse, a Republican congressman from Washington, would change the criteria used to determine whether a species is endangered by expanding the definition of “best available” science to include studies conducted by local governments — a practice that Nora Apter at the Natural Resources Defense Council has described as “undermining the scientific listing process” by giving equal weight to potentially shoddy or biased studies.

“Behind closed doors, I think most conservationists would agree that some judicious modifications to the act could improve the situation,” Chris Costello, a resource economist at the University of California, Santa Barbara, says. But, he adds, “there’s also a real and legitimate concern that if you open the E.S.A. up to economic criteria, it will almost immediately become much weaker. Without that mandate, it’s very hard to generate the political will to save species.”

Political maneuvering around the Endangered Species Act isn’t particularly new. Since the late 1980s, critics have argued that the act limits industry and also hurts ranchers and loggers, for instance, by preventing ranchers from shooting wolves that prey on their livestock (a prohibition that has now largely been repealed). In 2008, an investigative report by The Washington Post concluded that the Bush administration managed to limit the species eligible for protection by erecting “pervasive bureaucratic obstacles” — for instance, by preventing Department of the Interior officials from using information in agency files that might support new listings.

What makes the current set of proposed bills different, Apter and others say, isn’t their content but the current political environment — a sympathetic president and a Republican-controlled House and Senate — which makes them more likely to succeed. The real purpose of the bills, opponents argue, is to create business-friendly loopholes that would drastically undermine the protections of the original law, not least because one of the biggest impacts of the act isn’t the resuscitation of an individual species but the other benefits that effort brings. According to the act, protecting a species also means preserving its habitat, a provision that inevitably helps the vast number of plants and animal that happen to occupy the same ecosystem. (A fence built to keep invasive wild pigs out of the akikiki’s breeding area, for instance, will also help protect dozens of native plants and trees, including the ohia, because it will stop the pigs from spreading invasive seeds in their feces.)

“They’re basically trying to steamroll it,” Apter told me. She said that at least one bill was also trying to make the listing requirements for endangered species more elaborate, further hobbling a process — data gathering, scientific assessment and priority and practicality evaluation — that is already backlogged. (The U.S. Fish and Wildlife Service puts the number of potentially at-risk species waiting review at 550.) 
When I mentioned this concern to Paul Ferraro, an economist at Johns Hopkins University, he acknowledged the danger posed to the Endangered Species Act by the current bills. But he also noted that, at a purely economic level, some trade-offs will be inevitable. “The fact is that when you spend resources on one species, you by definition are not spending them on another,” Ferraro said. “In the end, you can’t get away from putting values on species.”

          An Akikiki nest. Credit Spencer Lowell for The New York Times 

Before I joined Crampton and Michelle Clark, a biologist from the Pacific Islands Fish and Wildlife Office, at the Lihue heliport for the 15-minute flight into the interior, Crampton warned me that journalists tend to underestimate the Alakai. She recalled how one photographer, who had planned to spend a full week with the team, made it just a few hundred yards before giving up; she spent the remainder of the day at the field camp. Another visitor, who regularly hiked the Sierra Nevada, was flown out after less than 24 hours. “I guess she was used to pine trees or something,” Crampton told me. “And trails.”

By the time I arrived in late May, the team had spent the past three months rotating in and out of a muddy field camp consisting of a single large tent with four cots, a Coleman stove, a laminated map and several musty plastic ration tubs. With the season winding down, the team that week consisted of just two people: Mandy Peterson and Marcus Collado, a wildlife biologist from Maine who was easygoing but prone to turning morose. Crampton called his bleaker comments “Marcus musings.”

Before coming to Kauai, Collado worked banding golden-eagle chicks, a task that required him to stand on the skid of a helicopter as it flew, then jump from the skid to the cliff-face ledge where an eagle had nested. By comparison, harvesting eggs in the Alakai qualified as a relaxing vacation, though Collado noted that “it can get a little sad” because akikiki are so scarce. “In the job interview, they warn you: ‘You may not see any birds or find any nests,’ ” Collado told me. “And I thought, Man, this could be tough.” 

    Akikiki eggs in millet in an incubator. Credit Spencer Lowell for The New York Times 

When the akikiki’s steep decline was discovered in 2012, the Fish and Wildlife Service convened a panel of experts to determine what, if anything, should be done to stave off extinction. After three days of debate, the group agreed to a set of interventions, including the construction of an eight-foot-tall, five-mile-long, pig-proof fence, and the installation of what would eventually be 300 reusable rat traps, each of which to be hand-placed in key areas and stocked with bait, to keep nonnative rats from eating the birds’ eggs, their chicks and sometimes even the birds themselves, usually when a bird refused to abandon its nest.

People tend to go into conservation biology to save species, but in practice, the job can be more about killing things. The camp keeps two binders for logging information. One is devoted to akikiki sightings and nests. Another tracks rat kills and is labeled “Charlie work,” a reference to the TV show “It’s Always Sunny in Philadelphia,” in which a character named Charlie is regularly dispatched to kill rats. When I pointed out that the rat binder was almost four times thicker than the bird binder, Peterson shrugged. “We do a lot of rat killing. We probably kill more rats than we find birds.”

Either way, the work can be wearing. Earlier this season, the camp started keeping a dream journal, which ended up doubling as a kind of anxiety log. A few weeks back, Collado said, he had a dream in which he saw the last surviving akikiki drowning in a canal. He raced to save it but arrived too late. Not long after that, Peterson dreamed that she saw an akikiki made of Legos and knew, in that moment, that all the real akikiki had died.

I joined Collado and Clark one morning when they went to check on an akikiki nest in a valley known as Far Quarter, about two hours from camp. At a previous job on Mono Lake, the associate director of the Kauai Forest Bird Recovery Project, Justin Hite, worked with a biologist who gave colorful names to the lake’s islets — Little Norway, Little Tahiti — and in the Alakai, Hite carried on the tradition. A sharp-edged stretch became Titanic Ridge (“I’m on top of the world!”). An area that shone with a rare forest rainbow was called Unicorn Paradise. One particularly inaccessible stretch became the Chasm of Doom, but when this nickname led field teams to avoid the area, it was rechristened Kasmadu.

That day, the forest had a sleepy feel. Clark stopped to admire a tiny, lacy fern known as lady of the mountain; later, she pointed out another, larger fern covered in soft brown hairs, which were once collected to make mattresses. Surprisingly, there was almost no bird song and not even much in the way of insects, just the occasional drone of a helicopter. (Though tourist helicopters aren’t supposed to fly that low over the Alakai, Clark told me, some still do.)

By the time we got to the site, it was almost midday and hot. Because the team had already harvested eggs from this pair of birds, Collado’s task was to see whether the new clutch had hatched and, if so, to find out how many of the chicks survived. Sitting on the stream bank, Collado used athletic tape to lash a GoPro video camera to the top of a collapsible 30-foot aluminum pole. Fully extended, the pole had an alarming sway; maneuvering it close enough to see inside a nest, without hitting the nest itself, was a heart-stopping project.

Fernandez carries the eggs in the incubator to a helicopter that will take them to the egg-rearing facility. / Credit Spencer Lowell for The New York Times 

That morning, though, the main problem was getting the camera high enough; even held directly overhead, the pole was almost 10 feet too short. Peering around, Collado considered the landscape. “Justin wasn’t kidding when he said it was nearly impossible to check this nest,” he said. Spotting some scuff marks on a dead ohia tree, he began to shinny up. “I know Justin managed it somehow,” he added. “But I’ve also seen him fall a lot. He does sketchy stuff that the rest of us won’t.”

Once he managed to climb about 10 feet, Collado asked Clark to hand him the pole, which he carefully levered into the canopy, only to find that the view was blocked by leaves. For the next 20 minutes, Collado patiently worked the camera closer, while Clark watched the video feed on her phone. Finally, a blurry image of a small gray bird came into view. “There she is!” Clark said excitedly. Peering at the screen, I saw a small, disgruntled-looking bird with a slim tail and a tiny patch of white over its eye.

Over dinner the night before, Crampton described akikiki as “the little guys that at first you think are really boring, but then you spend a little time with them and discover that they have all these talents that are totally endearing. They do flips around the branches.” That morning, though, the only talent the akikiki exhibited was an unbudging perseverance.

Hoping to get a look inside the nest, Collado climbed down, assuming that the akikiki would eventually fly off to feed. It didn’t. My notes from the time say: “Been here an hour. No change. Nothing to do but sit and watch.”

The history of the planet is rife with extinctions, often sweeping ones. Roughly 250 million years ago, a cataclysmic eruption destroyed more than 95 percent of the life in the oceans and 70 percent of the animals on land, effectively erasing about 10 million years of evolution. In the past five centuries, extinctions have become less dramatic but arguably more constant: a slow drip of change as humans have spread across the globe, clearing forests, planting crops, building cities and roads.

When the Endangered Species Act was passed in 1973, it was in response to a slowly dawning awareness of how the planet was changing under human dominion. Centuries of aggressive hunting and development had shrunk the once-spectacular abundance of American wildlife to a degree that prompted widespread bipartisan alarm. The new law, which was unanimously approved by the Senate, made it a federal crime to kill an endangered animal and, more radical, established the rigorous protection measures still in place today: that once a species reaches the point of endangerment, government agencies are required to take steps to save it. At the time, this inflexibility was considered a crucial bulwark against the pressure that would be brought by politically powerful industries, like logging and drilling. “Nothing is more priceless and more worthy of preservation than the rich array of animal life with which our country has been blessed,” President Nixon said while signing the act.

Though it can be hard to imagine today, the Endangered Species Act was intended to be a starting point rather than an endgame; a last-ditch way to save species that were vanishing until more comprehensive and farsighted conservation plans could be put in place. As Chris D. Thomas, an ecologist and evolutionary biologist at the University of York, puts it, “The fact that we reach this point, with all the heroic measures, shows that we’re not great at planning ahead.” 

Lisa Crampton, head of the Kauai Forest Bird Recovery Project. Credit Spencer Lowell for The New York Times 

But it’s also true that extinctions just seem to get to us. We make a modest effort as a species dwindles and then, when it’s really on the ropes, we suddenly panic. “There’s just something gutting about a thing being lost to us forever,” Thomas says. 
More debatable is the degree to which extinctions are genuinely catastrophic. Do these disappearances represent the loss of rare, beloved plants and birds? Or are they simply the next evolutionary step in an ever-changing, increasingly global ecosystem? When I spoke with Thomas, he supported the idea that truly invasive species — the kind that transform the landscape — may need to be contained. But it’s also true that the early isolation of the Pacific islands was itself an artifact. “If you look at it cruelly and unemotionally, Hawaii has native birds and introduced birds,” he told me. “The native birds are dying out, and the introduced birds are malaria resistant. Are the introduced birds worse? Not necessarily. You could argue that this is simply a case where island species have lost out and continental species have won.”

In this view, the loss of Hawaii’s native birds and plants and their replacement by species that are more resistant to disease and predators, is just another case of the fittest surviving. If humans have accelerated this process by planting Argentine pampas grass in their gardens or by dumping tropical aquarium fish in their local lake, it’s still just a faster, looser version of what has been happening on the planet anyway: Starbucks in Paris and McDonald’s in Soweto; Australian brown tree snakes in Guam and Asian carp in the Great Lakes.

In short, it’s fair to ask why, exactly, biodiversity matters. As Thomas says: “Even if we were to lose 10 percent of all species in the next hundred years, would biology stop? Would ecology stop? No. In fact, most people wouldn’t even be aware of the loss.” Given how radically we’ve already altered the landscape, how bad would it be if we just kept doing what we’re doing: paving the land, overfishing the oceans and letting the chips fall where they may?

Faced with this dilemma, some conservationists have tried to shift the focus to an economic argument known as “ecosystem services”: the idea that we benefit from preserving biodiversity either because it saves us money (mangroves prevent coastal erosion that we would otherwise have to handle with an expensive engineering project) or because it contains something of value to us, either now or in the future. For instance, a biodiverse planet may provide a first defense against global warming. Or it may act as a repository of potential discoveries: new materials that mimic the strength of spider silk; drones modeled after insects; an anticancer drug derived from Amazonian moss. 

The ladder used to reach the eggs being flown back from the field. Credit Spencer Lowell for The New York Times 

While all this may be true — mangroves do prevent coastal erosion; research into new cancer drugs derived from plants is underway — it can also sound wishful, like a hoarder arguing that his pile of junk might someday contain collectors’ items. The difference, Thomas says, is that unlike a hoarder’s pile, ecosystems perform vital planetary functions, like keeping soil fertile, preventing desertification and absorbing carbon dioxide. The reason some conservationists want to prioritize genetic or functional diversity isn’t that either of those things are inherently valuable to people, though they can be, but because they’re essential to the health and resiliency of ecosystems themselves. The true problem, then, is not whether we would notice those vanished species and ecosystems; it’s that there’s no good way to quantify the opportunity cost of our loss, which in turn can lead us to underestimate it. “The species we have now are the ancestors of all future species,” Thomas says. “And I don’t think we know enough about ecology or evolution, or how humans are going to affect the planet over the next thousand years, to bet on which animal or plant to keep.”

All of which makes it hard to know where to draw the line. We can’t put every ecosystem in the world under glass. (We can’t even manage to do that on Kauai, a 500-square-mile island in the middle of the Pacific.) Even if we could, conservation isn’t always an ethically straightforward choice; in countries like Brazil and Kenya, do we prioritize protecting wild animals and their habitats or the farmers facing hunger who hunt those animals and who log forests to plant crops?

Presumably, though, we also don’t want a planet that’s nothing but pavement, cattle farms and monoculture farmland. The biologist E.O. Wilson eloquently argued against living in a world of crows and rats, and against the loss of beautiful, fragile species like snow leopards, white rhinos and tiny mouse lemurs; even if you never see a lemur or an arctic fox in person, the world can be a richer place by having such creatures in it. Others simply see conservation as a moral duty: because we’re the ones creating these problems, isn’t it up to us to fix them? 
Whether we regard conservation as an ethical or an economic issue, we’re still faced with the question of how we decide what to save. In an ideal world, Michael Scott told me, conservation science would have the resources to study this question, rather than being stuck reacting to the latest crisis. “Figuring out which species and ecosystems are the most important to protect is a complicated project,” Scott says. “At this point, just coming up with a list of qualities we want to investigate would be a good start.”

But for such an approach to take hold, the conservation movement would have to undergo a profound shift — away from triage mode and toward a more coherent and deliberate plan for global conservation. And such a shift would most likely require more resources and more political support than currently exist. The question is whether it will happen in time to shelter us from some of the more significant changes that climate change and development are likely to bring.

Nine-day-old akikiki chicks that were hatched at the egg-rearing house on Kauai. Credit Spencer Lowell for The New York Times 

One overcast morning, I drove up a winding road hung with vines to the Egg House, where recovered akikiki eggs are incubated and hatched. Mapping my route that morning, I envisioned the Egg House as a sophisticated research lab, stocked with high-powered equipment in temperature-controlled hatcheries. Instead, I found myself driving past suburban cul-de-sacs, lined with tidy houses, lawns and miniature palm trees, until I reached a small bungalow overlooking a forested canyon.

To say that the Egg House was no-frills radically understates things. Aside from the room housing the chicks, which has air-conditioning, the house is humid and almost completely empty. In the living room, someone had set up a single cot, with a sleeping bag.

That summer, the hatching and raising of the akikiki chicks was overseen by Amy Klotz and Becky Geelhood, from the San Diego Zoo’s Institute of Conservation Research. Klotz, a thin woman in a turquoise Kauai Forest Bird Recovery Project shirt, described the work as exhausting. Chicks must be fed every one to two hours and are weighed every day. “I lie awake nights wondering, Why didn’t that chick gain any weight since yesterday?” Klotz told me.

In principle, captive breeding will keep a species alive while conservationists try to change the environmental factors that killed it off in the first place. But recreating the many conditions that allow a species to thrive can be staggeringly complex.

When I spoke to Bryce Masuda, a conservation-program manager who oversees the captive-breeding program for the akikiki, he said that whether species reproduce can depend on complex cues in their environment: one bird might be signaled to mate by the appearance of a particular fruit, another by the abundance of a particular flower. Though zoo personnel do their best to replicate those conditions, Masuda told me, it can be difficult to determine what the important cues are. “With the akikiki, we increase the number of insects they get in the late winter and early spring,” Masuda said, “because we’re hoping that that will be a cue for them to lay eggs. But do they also need certain plants in their enclosures? Does the amount of rain each year matter? A lot of it, we just don’t know.”

Even should the akikiki overcome these hurdles, it will most likely remain susceptible to avian malaria, which has begun spreading into the last of the island’s protected areas as the weather has grown both warmer and drier. When I asked Masuda why we should try to save the akikiki, given that it might never be able to survive in the wild, he demurred; even now, he said, the University of Hawaii was developing mosquitoes that would produce sterile offspring, significantly reducing the risk of avian malaria. 
In theory, the potential for revitalization exists for most conservation-reliant species, even those, like the akikiki, currently on life support. When the California condor was on the verge of extinction — largely as a result of lead poisoning from eating animals shot by hunters but also because of their tendency to fly into power lines — David Brower, the former director of the Sierra Club, urged conservation groups to give the species “death with dignity.” (His view did not prevail, and the population is now back up to more than 440.)

The peregrine falcon was similarly conservation-reliant for years, then rebounded after Congress outlawed DDT, which had been weakening the birds’ shells; they can now be seen nesting on New York skyscrapers. “Even if a species is dependent on us now, it may not be dependent indefinitely,” Chris Thomas says. But it’s not easy to see which species will eventually win out. In the case of the akikiki, Thomas says, unless something radical is done — impairing the vectors of the disease, or making the birds resistant with gene therapy — the birds will never survive in the wild. There may be a solution around the corner, or there may not.

In the meantime, Geelhood and Klotz maintained their assiduous vigil. Because someone has to be watching over the eggs at all times — even an ordinary power outage could be lethal — the responsibility could be all-consuming. “Sometimes I won’t leave the house for days,” Klotz said. “Not even for 10 minutes to go to the store.”

This sense of urgency was coupled with an awareness of just how long the odds for an endangered species can be. “You’re basically terrified all the time,” Klotz told me. “It’s a lot on your shoulders when there are 500 birds left in the world.” 

Credit Illustration by Hagar Vardimon

Ok, Who's Confused?

by: The Heisenberg

- Dissensus seems to be the order of the day again for markets, but now, it seems to be accompanied by a perceptibly bearish bias.

- For my first trick this weekend, I want to take you through curve dynamics in light of the recent shift back to a flattening regime.

- And secondarily, I'll walk you through the buyback "plunge protection" bid.

Along the way, you'll hear from two of the best analysts on the Street.
So it's Saturday morning as I write this and there's obviously a ton to talk about when it comes to takeaways from the week that was in markets.
Increasingly, documenting the manic news cycle in real-time over on my site is making it difficult to pen quick takes for this platform during the week, but as I mentioned earlier this month, when I sit down to do my weekend posts for my readers here, I never assume that everyone reads Heisenberg across platforms, so to anyone who does, some of this will be a recap. But as usual, I never recycle posts. So even if you know the story, everything you read from me on this platform is freshly written and therefore this weekend's posts should be enjoyable for all of my readership whether you read Heisenberg here, there and everywhere or not.
Again, there's a ton to get to, so I'm going to deploy a strategy I used early last month and try and break it up into several concise posts, this being the first.
There's a sense in which this week felt a bit like a return to a dissensus-driven regime for markets.
That is, a regime characterized by a lack of ability to form consensus about anything, whether on the policy front, from a geopolitical perspective, and/or what the incoming data and price action seem to be conveying about the economy and the near-term trajectory for markets.
Previously, dissensus led to vol. selling, because as Deutsche Bank's Aleksandar Kocic famously put it last summer (and I'm paraphrasing here) when there is no consensus, indecision becomes to order of the day. And what does one do when one cannot make a decision? Well, one waits.
And what is a vol. seller? A vol. seller is a seller of that “waiting time”.

In the wake of the short vol. blowup that unfolded in early February, the predisposition to sell vol. seems to have faded a bit. As one strategist I spoke to on Friday put it:
This has to do with the unwind of the QE trade (everything used to rally, so we are going into an environment where everything wants to selloff). Asset managers, pension funds in particular, have already scaled down on their equity positions - they have bought into this narrative 'sell the rally'.
When it comes to the unwinding of QE, you should note that the whole "flow" versus "stock" argument (i.e. whether it's the ongoing monthly central bank bid for assets that matters or the overall size of the Big 3 banks' balance sheets that's important) is set to become less relevant precisely because both the flow and the stock are in decline. Here's what BofAML wrote on Wednesday:
The flow of global QE peaked a few quarters ago. Now we have likely reached another milestone: per our estimates, the aggregate balance sheet of the G4 central banks peaked this quarter. 
Investors have been divided about whether the stock of QE matters more than the flow. Going forward there should be more of a consensus that the aggregate balance sheet effect is one of “tightening” rather than “easing” because the stock is declining and the flow is not just falling, it is negative.

So there's that and what it amounts to is the monetary policy tailwind morphing into a potential technical headwind, which is to be expected. Remember, one of the reasons monetary policy had to remain accommodative over the past several years is because fiscal policy was hamstrung. So when you see people like Jerome Powell and Lael Brainard talking about "headwinds becoming tailwinds" on the economic and fiscal policy front, the flip side of that same coin is that monetary policy will, to the extent possible, do the opposite - morph into a headwind from a tailwind precisely because rate hikes and tapering are the way in which central banks replenish their counter-cyclical ammo in preparation for the next downturn.

What you come away with in an environment characterized by rampant political and policy uncertainty, a slow unwind of accommodation and conflicting data (last month the inflation scare dominated the headlines only to give way to a Goldilocks jobs report and a similarly benign CPI number which itself gave way to a lackluster retail sales print only to give way to ebullient consumer sentiment, and on and on), is a kind of holding pattern with a bearish bias.
Here's what that looked like this week:
One thing that's particularly important to note about the incoming data is that while the headline payrolls print from the February jobs report certainly seemed to underscore the idea that the U.S. economy is still humming along, the retail sales data this week prompted multiple downward revisions to GDP tracking estimates (including from the Atlanta Fed). And while the CPI print and the AHE number that accompanied the jobs report put to rest (for the time being anyway) the notion that inflation was set to accelerate rapidly, it's abundantly clear that price pressures are building, and when taken together there are concerns that while "Goldilocks" is still viable as a framework, she's on her last legs.
The worry here is that the Fed is going to make a policy mistake by trying to squeeze one "too many" hikes in. Recent comments from Powell and Brainard and others clearly suggest that Fed hike risk is to the upside, and whereas last month equities were jittery amid aggressive bear steepening of the curve, this week equities were shaky amid aggressive flattening. I flagged this over at Heisenberg Report on Wednesday afternoon, writing the following:
It’s starting to seem like stocks are worried more about a recession than they are runaway inflation – the curve is starting to flatten pretty aggressively.

Bloomberg’s Ye Xie said the same thing, noting that “in early February, the stock correction was accompanied by a steepening yield curve, as the surprisingly strong wage growth caused a simultaneous selloff in Treasuries and equities [but] now, stocks are falling as the yield curve flattens.”
Fast forward to Thursday and the above-mentioned Aleksandar Kocic was out with a new note called "Waiting To Inhale". Here's an excerpt:

It started with bear steepening (BeS) from mid-Jan to 8-Feb, followed by bear flattening (BeF) after that. The reaction of vol reflects this mode of the curve: a bid for long tenors as the market inhales followed by partial retraction, its mirror image. 
That pattern has been going on for years as illustrated in the following additional chart from Kocic (note: this is the swaps curve):
(Deutsche Bank)
While bear steepening episodes are prone to catalyzing cross-asset vol. spikes like we saw in February, and while those same episodes are thus conducive to a quick and painful unwind of multiple crowded trades, it's entirely possible that the more likely risk is the Fed inadvertently overtightening and inverting the curve. You can read more about that here, but suffice to say an inversion brings with it undesirable consequences for the economy and for risk assets.
So what's the good news? Well, the good news is that there is indeed a "plunge protection team" that has your back if you're in equities and when I say "plunge protection team", I'm not talking about any conspiracy theories that involve Janet Yellen coming out of retirement to run a shadowy futures trading operation from her living room. Rather, I'm talking about buybacks. Have a look at this:
As you can see, that's a chart of activity at Goldman's buyback desk and volume during the February pullback was multiples of the average 2017 daily volume suggesting companies were voraciously buying the dip.
On Goldman's estimates, buybacks are set to surge 23% in 2018 to $650 billion and that's hardly the highest Street estimate. According to JPMorgan, buybacks will total more than $800 billion, and with that in mind, consider this excerpt from the latest note from JPM's Marko Kolanovic (that would be the Marko Kolanovic, who's affectionately known as "Gandalf" on the Street):
This year, we expect $800bn of buybacks vs. ~$600bn in 2015. The difference ($200bn) on its own, equates to all the value of all recent systematic strategies’ selling. And while systematic strategies will buy back most of what they sold, buybacks will not reverse. This is all supportive of the market reaching new highs relatively soon (e.g., with the onset of Q1 earnings season), and is consistent with our previous fundamental and quantitative research.

What he's doing there is comparing the market turmoil that accompanied the August 2015 Chinese yuan devaluation to the February pullback that was catalyzed and exacerbated by some $200 billion in de-risking from systematic strategies like CTAs and risk parity. Here's that $200 billion figure visualized:
Kolanovic's point is that the difference between the corporate bid in 2015 and what JPMorgan anticipates for buybacks in 2018 (i.e. ~$800 billion this year minus $600 billion in 2015 equals $200 billion) is itself enough to offset the entirety of the systematic deleveraging we witnessed last month.

If you needed a bullish technical, you'd be hard pressed to find a more powerful one than that.
Coming full circle, I should state the obvious which is as follows. The political turmoil in Washington has reached a fever pitch. The staff shakeups and the extremely contentious decision to fire Andrew McCabe two days before his retirement add to what was already an exceptionally fraught backdrop on the domestic political front. At a certain point, markets may simply become exhausted with that situation and assume the worst. Or perhaps the "noisy status quo" will return. On that note, I'll leave with you with a throwback quote from the above-mentioned Kocic because it seems more relevant this weekend than ever:
But shocks, if they are predictable, lose their spell and gradually become facts of life. Predictable political shocks feed back into their source. Due to their antagonistic character, they gradually erode the ability to make consensus. We are stuck with the status quo, albeit a noisy one.