Public Schools Are the Best Advertisements for Homeschooling

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Homeschooling was supposed to be a temporary pandemic-era expedient and many students will, undoubtedly, return to traditional classrooms once COVID-19 is a memory. But growing familiarity with do-it-yourself education, the continuing slow-motion disaster engulfing government-run schools, and long-term changes in the way we live and work are likely to permanently transform learning. Homeschooling in all its myriad forms is here to stay.

Part of the issue is that public school bureaucrats and teachers unions seem dedicated to testing families’ patience.

“At the beginning of the school year we had a good amount of folks calling, but it hasn’t really let up at all,” Spencer Mason of North Carolinians for Home Education recently told The North State Journal. “Now it’s people who are frustrated with the way that public schools have been going.”

Across the country, public schools struggle with their pandemic responses. Teachers unions battle school officials and have even gone on strikes and sick-outs to prevent in-person education. Wrestling matches between unions that don’t want their members to have to show up for their paychecks and government officials often under their thumbs leave many parents uncertain as to when children might return to a classroom.

“Biden has pledged to reopen most schools for in-person instruction by May, but some experts fear the revised guidance published by his administration could make it harder for some schools to do so – even by next fall,” CNN noted February 28. “In some places, school authorities face strong opposition from powerful teachers’ unions,” the report added.

Disruption of the public school could have been tolerable if they’d adapted to the new environment and offered good-quality remote education through online platforms. It’s certainly possible—many charter schools and private educators mastered this approach years ago. But that wasn’t the case as government schools fumbled teaching students, or even making sure they show up for lessons. 

“[T]he cumulative learning loss could be substantial, especially in mathematics—with students on average likely to lose five to nine months of learning by the end of this school year,” concluded a December 2020 report by McKinsey & Company.

Education bureaucrats compounded the problem by, apparently, deciding that a health crisis was a great time to jettison anything that might attract parents and students to their institutions. Boston Public Schools, for example, suspended enrollment in gifted programs in part because participants don’t precisely reflect the demographic makeup of the city’s population. 

“There’s been a lot of inequities that have been brought to the light in the pandemic that we have to address,” Superintendent Brenda Cassellius told WGBH of the decision. “There’s a lot of work we have to do in the district to be antiracist and have policies where all of our students have a fair shot at an equitable and excellent education.”

Illinois, for its part, just mandated that teacher training programs adopt instruction on ideologically charged concepts including “implicit bias,” “historical inequities,” and “systems of oppression.”

“Critics are rightly concerned that the overhaul embeds politics into teacher training,” the Chicago Tribune editorialized in mid-February.

These fiascos can only encourage the ongoing exodus from government schools to the competition. In the fall, NPR found “enrollment declines in dozens of school districts across 20 states.”

In Massachusetts, “some 13,166 students from public schools have transferred into private schools this fall, compared with 7,299 transfers the previous year,” the Boston Globe reported in November. “Many families are also giving home schooling a try this year, with 7,188 students withdrawing from public schools to receive instruction led and chosen by their parents or another adult, compared to 802 the previous year.” 

“During an unusual school year, Illinois public schools saw student enrollment drop in greater numbers than expected, according to recent projections by the state board of education,” according to a February story in Chalkbeat Chicago. “Board members said they suspected students were lost to homeschooling, private schools, or public school districts in other states.”

Families have been forced to improvise by the failures of public schools, which were once the default education choice, by the abandonment of programs, and by the accelerated politicization of classrooms. They’ve enrolled their kids in private schools when budgets allowed, taught their children at home, reinvented homeschooling co-ops as pandemic pods, and tried out competent remote-learning options. Many discover that previously daunting choices are pretty enticing once they’re familiar.

“[P]arents’ dissatisfaction with the public education system and a newfound preference for working from home could lead to a permanent increase in the popularity of homeschooling,” writes Anne Dennon, who covers higher education trends, policy, and student issues for BestColleges. “Many academics who study homeschooling say the pandemic’s boost to the homeschool movement will last.”

Permanent growth in homeschooling is in the works, Christopher Lubienski, a professor of education policy at Indiana University, advised Education Week, “partly because people who haven’t really thought about it before suddenly saw themselves forced into [home schooling], and then realizing that it’s something they can see themselves doing.”

“I had no desire to homeschool. I actually did not want to homeschool,” Kristin Kanipe told North Carolina’s WUNC of her pre-pandemic reaction to the idea. “And now I love it.”

Easing the transition is not just the collapse of the public schools, but also changing habits. Both the Bureau of Labor Statistics and McKinsey predict big growth in people working from home after the pandemic ends, up to 25 percent of the workforce. Experts interviewed by Pew Research also foresee a more tech-driven life for both better and worse. On the positive side will be expansion in “a robust marketplace of education choices that allow students to create personalized schooling menus.”

Parents working from home are better able to homeschool their children, or enroll them in a virtual program of their choice, than are those who have to go to an office every day. They’re also more likely to have the Internet connections and devices needed to take advantage of such opportunities. And, importantly, they’re inherently more comfortable with family-based options that were thrust upon them but which, in many cases, have become very welcome.

Americans didn’t plan on a national experiment in homeschooling and other education innovations. But floundering public schools are a great inducement to take the plunge.

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Exxon Soars After Activists Jeff Ubben, Michael Angelakis Join Board Of Directors

Exxon Soars After Activists Jeff Ubben, Michael Angelakis Join Board Of Directors

Could Exxon wind up being the next ESG play?

Shares of the oil and gas giant spiked Monday pre-market after CNBC’s David Faber reported that Jeff Ubben would be joining the company’s board. In addition, Mike Angelakis – the former CFO of Comcast and a “green” activist – was also said to be joining the board. 

“Mike Angelakis, the chairman and chief executive officer of Atairos and former CFO of Comcast, is also joining the board,” CNBC reported

Two weeks ago we noted that Ubben was looking to raise another $8 billion for his impact fund. Ubben was looking to raise the capital for his Spring Fund II, a successor to his $1.5 billion Spring Fund that he started while at ValueAct, which he founded in 2000, according to Bloomberg. The goal of the fund was reportedly going to be looking at “impact investing”, which aims to “make systemic changes at companies and sectors to the betterment of society.” As we said at the time:

This, of course, would fit nicely if Ubben was looking to make a major operational, ideological (and PR) shift at an undervalued legacy oil and gas company like Exxon. 

In early February we reported that Ubben was considering a “meaningful stake” in Exxon and could, as a result, even wind up with a seat on the board.

Ubben left ValueAct last year to start his own firm that is focused on investments in social and environmental issues. 

Tyler Durden
Mon, 03/01/2021 – 08:26

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Blain: Catching A Falling Knife Can Get Messy

Blain: Catching A Falling Knife Can Get Messy

Authored by Bill Blain via MorningPorridge.com,

“The wilder and more ridiculous something is, however, the firmer and more solid the evidence will have to be.”

There is an old market rule – don’t fight the Fed. Jay Powell has been crystal clear: rates are staying lower for longer. But the ongoing sell-off in Treasuries, and rising global bond yields, paints an interesting story of a market unconvinced rates can be held down, and therefore the cosy rationale behind the current stock market is over. Unconvinced is not the same as certain. 

Does the rise in the bond yields and the resulting wobble in stocks, represent something fundamental? Or will we see another bouncing case of Mad March Madness? 

Last year, stocks cratered on Coronavirus fears, but quickly found a bottom buoyed by swift government stimulus and increased central bank bond QE buying. These promises were a trampoline that bounced last year’s stratospheric market rally to improbable record-breaking levels even as global economies continue to flatline. 

Since March – 12 months ago – there has been that shadow of doubt overhanging the rally. The market has been struggling to convince itself its justified. Was it simply fuelled by cheap money? Relative value? Broken risk pricing? Has it fully priced in recovery?  What are the threats? Inflation is the obvious one: all that new money on the back of unrestrained government injections and spending promises – it has to go somewhere if it isn’t sloshing round financial asset markets. 

My opening quote this morning is Asimov: asking what evidence is there to justify sky-high prices?

Some folk think domestic savers – who have repressed their spending – are all set to plough their Covid pots into financial assets. Or maybe not. It’s more likely they are going to price compete for luxury holidays, new homes, new clothes and new everything as economies reopen. And what will the legions of new day-trading Reddit investors do when they discover stocks can down as well as up? 

The sector suffering most doubt is Tech. Why? Ask any Tech fan-boy and they will tell you the tech fundamentals remain sound – based on disruption and new things. The market’s horizons expand on tech innovation, and the speed of adoption is accelerating due to Covid and climate change – they say. Therefore, this is time to buy any Tech when the opportunities present themselves. That seems to be the bet many asset managers heavily invested in Tech are taking. 

Call it disruption – or all it something else… The market is awash with tale about how really smart firms like ARK, and its uber-clever market maven CEO Cathie Wood has been buying the dip in Tesla. Well, if she’s knows it’s going higher – who’s to disagree? (US Readers: mild sarcasm alert.)

(The other side of the ARK coin is the stories in places like Zerohedge, suggesting Ark has been dumping high quality stocks to cover ETF redemptions, while a number of problem stocks like Workhorse and 3D Systems are eating into its valuations. Buying Tesla as it slides could prove a pretty desperate gamble to keep the price up and avoid a cascade of ETF sellers. Catching a falling knife can get messy.)

To understand the current market crumble you need to start by taking the 5 mile high view: on a relative basis stocks look less valuable, dividend yields are in line with bonds – and no one wants to take more risk to be paid the same. It feels like stocks are already fully pricing in global recovery (look at the recent recovery stories in airlines, cruise, and hotel stocks), and the rotation into value sectors including, perversely, oil and financials is underway. 

But it also feels there is something of an Emperor’s New Clothes moment in Tech underway. Just because a firm announces its going to sell hundreds of flying taxis in the 5 years does not make it a fact or worth billions. The crash in the Lucid SPAC vehicle immediately after the merger announcement highlights the questions about whether an EV maker that hasn’t sold a car is worth $24 bln (1/3rd the value of GM)? 

Buying fantastical new stocks can pay off. Tesla shows that. But they also have to deliver. How long have we been waiting for a truly Autonomous car? (Personally I have my doubts – if we can’t make trains run on time on a straight line because of signalling problems, then how do you get cars to miss each other, and where are Flying Taxis going to land without hitting each other?)

I have an insatiable appetite for good science fiction – because its fiction. The American’s all believe the Jetsons is the blueprint for the future – which is absolute nonsense. I was brought up on a diet of good, practical British futurism: Thunderbirds, Captain Scarlet and Joe 90. The brilliant “UFO” envisaged a Moonbase in 1980. 

I still like to imagine a fantastical future – which was planted in my head by my grandad who was editor of DC Thomson’s Comic business in Dundee. I learnt to read from a 30 year high pile of Eagle, Victor and Hotspurs kept up in the attic (and the Waverly novels of Sir Walter Scott). To me, the 2030s are still going to be about well pressed kids in 1950 school uniforms jet packing into school, and Dan Dare and the Royal Space Force keeping the universe safe from the Mekon and Donald Trump. Sadly.. these things are even less likely than Lucid selling cars by 2025.  

The big picture is faith in these tech stocks. Many will fail. But many will succeed. What you need to do is work out which and what are they worth. Let me start by saying I am convinced Tesla will be a success and is here for the long-term. But I reckon it’s a worth a fraction of where Cathie Wood and the fan-boys perceive it. 

This is where you have to step down from the 5 mile view, and look at the individual stories. Cathie’s top pick (aka the one that has so inflated her funds) is Tesla: what’s changed? Well, nothing. The fact is it still ain’t making money selling cars – it’s meagre profits remain entirely due to sales of regulatory credits. Like every other car maket it faces competition; it’s just cut its already wafer-thin margins, announcing a cut in the price of its base model (which it then pulled it from the sales website). Like every other car maker its having to close production lines because of the global chip shortage. And exactly I predicted in January, the threat to Tesla is competition as the existing car giants switch to EVs and new entrants like Lucid all expect to sell millions of cars and eat Tesla’s lunch. 

The fact Tesla is barely 23% down from of its high in January might even be good as a chance to still exit. What’s it really worth.. ?

Tyler Durden
Mon, 03/01/2021 – 08:10

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Stocks, Futures, Commodities Surge As Bond Yields Stabilize

Stocks, Futures, Commodities Surge As Bond Yields Stabilize

After last week’s global bond rout, central banks weren’t taking any chances, and as soon as the overnight session started yields plunged first in Australia and then everywhere else after the RBA doubled the amount of daily QE to enforces its YCC, sending 10Y Australian bond yields plunging by as much as 32bps, the biggest drop since last March. Other joined in verbally, with the ECB saying said it will not tolerate higher yields even though the Fed has for now said it sees little cause for concern in the rapid run up (BofA disagrees and expects Powell to calm markets as soon as this week). Meanwhile, a barrage of sellside reports over the weekend, sought to reassure investors about the risk of a breakout in inflation, with the likes of JPM and Goldman all saying that fears of a rapid increase in consumer prices are overblown (although in case they aren’t, Goldman conveniently provided a list of companies that will be hammered if yields continue to rise).

In any case, S&P500 futures jumped more than 1% on Monday thanks to the stabilization in bond yields and as Johnson & Johnson’s newly approved COVID-19 vaccine and progress in a new $1.9 trillion coronavirus relief package fueled optimism over a swift economic recovery. At 07:30 a.m. ET, Dow E-minis were up 297 points, or 0.954% and S&P 500 E-minis were up 40.00 points, or 1.05%. Nasdaq 100 E-minis were up 167.50 points, or 1.29%

The risk advance was broad, with stocks tied to economic reopenings and faster growth notching some of the biggest gains. Futures on the small-cap Russell 2000 Index outperformed the Nasdaq 100 Index.

In the latest positive covid news, Johnson & Johnson began shipping its single-dose shot vaccine after it became the third authorized COVID-19 vaccine in the United States over the weekend. As a result, shares of “Back to normal” stocks such as cruise liner and hotel operators, and carriers including Carnival Corp, Royal Caribbean Cruises Ltd Hilton, Delta Air Lines Inc and American Airlines gained between 1% and 5% premarket.

The reflation trade also got a boost after Joe Biden scored his first legislative win as the House of Representatives passed his $1.9 trillion coronavirus relief package early Saturday. The bill now moves to the Senate. Sectors that stand to benefit more from an economic rebound outperformed, with Bank of America, Citigroup and JPMorgan jumping between 1.3% and 2.2%, and energy firms Chevron and Exxon Mobil between 1.6% and 3.5%.

Tech stocks were also broadly higher, with Apple, Microsoft, Facebook and Amazon.com all rebounding between 1.3% and 2.3% on Monday.

Europe’s Stoxx 600 Index rose the most in three months, although after rising as much as 1.5%, it has since retraced gains to 1.25%. The FTSE 100 outperformed, rallying as much as 2% in early trade. Retailers, travel and mining stocks lead broad based gains across all sub-sectors. Europe’s Stoxx 600 travel & leisure index was up 2.4% as of 8:37am in London trading, extending last week’s 2.4% increase; European travel and leisure outperformed almost all other industry subgroups on Monday, led by carrier IAG, tour operator TUI and cruise ship company Carnival amid wider optimism in equity markets and hopes for a return to normality in a sector that’s been hard hit by the Covid-19 pandemic.

Earlier in the session, Asian stocks bounced back from Friday’s tumble as technology giants climbed and expectations rose for changes in Hong Kong’s benchmark index. The MSCI Asia Pacific Index was up 1.5%, the best performance in a month, led by gains in Japan. Tencent was the biggest boost to the MSCI Asia Pacific Index, which rose 1.5 after posting its worst drop in 11 months on Friday. SoftBank Group gained after it reached a settlement with WeWork and its co-founder Adam Neumann. The Hang Seng Index climbed 1.6% after plans were announced to expand the gauge to 55 members and eventually to 100, from 52 currently. Hang Seng Indexes is also expected to confirm later Monday whether it will undertake a major revamp that would make it easier to include new stocks. Key equity gauges also climbed more than 1% in Japan, Australia, China, Vietnam, Indonesia, India and Philippines. Markets in South Korea and Taiwan were closed for holidays.

Naturally, all eyes were on bonds this morning, with the Treasury long-end unwinding most of Friday’s late month-end-led gains while belly of the curve holds its sharp outperformance during Asia session in choppy market conditions and poor liquidity. Long-end yields were higher by ~5bp on the day, 10-year by ~3bp at ~1.43%, 5-year is lower by ~1bp, steepening 5s30s by nearly 6bp; 2s5s30s fly is richer by 7bp, 2s5s10s by 5bp.

Analysts at Rabobank said the moves were explained by a rally in eurodollar futures, which investors use to bet on future interest rate moves, showing an unwinding of some of the moves last week that priced in a U.S. Federal Reserve rate hike in early 2023.

Over the weekend, strategists recommended long positions in belly and dip-buying, arguing that pricing of Fed rate hikes is too aggressive. No coupon supply due this week, which features appearance by Fed’s Powell Thursday and February jobs data Friday. European bonds rallied amid speculation over ECB buying and in a catch-up effect with Treasuries.

Sebastien Galy, senior macro strategist at Nordea, noted that the benchmark Treasury yield has settled below the one-year highs over 1.60% touched last week, even as the Fed and others like the European Central Bank refused to intervene and cap rising yields.

“This is most likely the end of this temper tantrum and presents opportunities for investors faced with dislocated markets,” he said.

Indeed, after a week of intense volatility in bond markets, investors were shaking off concern about the effects of rising borrowing costs and ready to once again buy risk assets. The big question, however, remains – how central banks will react to rising bond yields. While policy makers at the European Central Bank have said they won’t tolerate higher yields if they undermine the economy, the institution will publish its latest bond-buying figures later today. A significant increase in purchases would show they are backing their words with action.

“With a lot of the move in yields due to the improving growth outlook and reopening prospects, risk appetite is holding up,” said Esty Dwek, head of global strategy at Natixis Investment Manager Solutions. “The pace and scale of the move in yields is more important than the absolute level, suggesting that as long as the move is gradual, risk assets should be able to absorb them.”

Still, sentiment remained wary, with analysts noting that verbal intervention by central banks would not be enough to drive yields much lower. That caution appeared evident in U.S. 30-year yields, which bore the brunt of February’s sell-off. Underperforming the rest of the Treasury yield curve, they were up 3 bps to 2.21% on Monday, though still far below last week’s highs.

Focus on Monday will be on U.S. February manufacturing data, due at 1430 GMT from the Institute for Supply Management. A Reuters poll forecast it would be roughly in line with the previous reading. Mizuho analysts, noting recent U.S. data releases, said another strong reading was likely. Government bond yields, which are inversely related to their price, usually rise when economic data is better than expected as that cuts demand for safe-haven assets.

In FX, the Bloomberg Dollar Spot Index was steady and the greenback was mixed versus its Group-of-10 peers; 10-Treasury yields rose by 3bps in Europe after Friday’s plunge. The euro fell from the European open and is set for its biggest 2-day drop versus the dollar since September. The yen fell to 106.74 per dollar, its weakest level since August last year. Bank of Japan officials are still prepared to stem any risk of Japan’s benchmark bond yield rising too much ahead of a policy review later this month and could even act before it hits 0.2%, according to people familiar with the matter. Commodity currencies, led by the Canadian dollar, gained as stocks advanced and oil prices rebound ahead of a key OPEC+ meeting this week that may see some supply returned to a fast-tightening market. 

Emerging-market currencies fluctuated between gains and losses, following their worst weekly drop since September. The lira was the best performer among peers, after leading global currency losses last week, as Turkey’s fourth-quarter gross domestic product report showed the economy picked up last quarter. MSCI Inc.’s emerging-market currency index climbed and fell as much as 0.2% before trading little changed. It’s an “encouraging signal for emerging-market currencies” that the 10-year U.S. Treasury yield has pulled back to the resistance area of 1.4% to 1.44%, said Piotr Matys, strategist at Rabobank in London. “As long as this area holds in the coming days, the selling pressure on the emerging-market currencies should ease.”

Meanwhile, commodities marched higher. Oil futures in New York rose toward $63 a barrel after losing 3.2% on Friday. The OPEC+ alliance is due to meet on Thursday and expected to loosen the taps after prices got off to their best ever start to a year. But it’s unclear how robustly the group will act, with the Saudi Arabian energy minister calling for producers to remain “extremely cautious.”

In crypto, Bitcoin rebounded strongly to trade around $47,000 in a rebound from last week’s steep losses, which saw the crypto plunge over the weekend. In the latest potential catalyst, billionaire hedge fund manager Dan Loeb said “I’ve been doing a deep dive into crypto lately.”

Looking at today’s calendar, the U.S. February manufacturing PMI is 9:45 a.m. with ISM Manufacturing at 10:00 a.m. New York Fed President John Williams and Fed Governor Lael Brainard speak later, and three regional presidents are on a panel on racism and the economy held by the Minneapolis Fed. Zoom Video Communications Inc., NIO Inc. and Novavax Inc. are among the companies reporting results. CERAWeek begins.

Market Snapshot

  • S&P 500 futures up 1.2% to 3,854.25
  • Stoxx Europe 600 gains 1.6%
  • MXAP up 1.4% to 209.53
  • MXAPJ up 1.3% to 702.31
  • Nikkei up 2.4% to 29,663.50
  • Topix up 2.0% to 1,902.48
  • Hang Seng Index up 1.6% to 29,452.57
  • Shanghai Composite up 1.2% to 3,551.40
  • Sensex up 1.4% to 49,770.22
  • Australia S&P/ASX 200 up 1.7% to 6,789.55
  • Kospi down 2.8% to 3,012.95
  • Brent Futures up 1.3% to $65.25/bbl
  • Gold spot up 0.8% to $1,748.19
  • U.S. Dollar Index up 0.2% to 91.024
  • German 10Y yield fell to -0.301%
  • Euro down 0.3% to $1.2033

Top Overnight News from Bloomberg

  • A new market consensus has quickly formed after last week’s fire sale in bonds — rate-hike expectations have become too aggressive and it’s time to buy. Swap traders now see the Federal Reserve raising rates in March 2023, with more than 90 basis points of increases priced in by the end of 2024. A number of strategists have come out saying that’s too much and investors should buy short-maturity bonds to fade the move
  • In the showdown between traders and central bankers over rising bond yields, the Bank of England is aligned more with the relaxed views of the U.S. Federal Reserve than peers in Asia and Europe that are trying to rein in markets
  • The ECB will reveal on Monday how serious it is about countering rising bond yields. After days of top policy makers saying they won’t tolerate higher yields if they undermine the economy, the institution will publish its latest bond-buying figures at 3:45 p.m. Frankfurt time. A significant increase in purchases would show they are backing their words with action
  • Wall Street’s most bullish economic forecasts hang on a simple prediction: everybody will flood back soon to their local gyms, bars and yoga studios as if the pandemic was in the past
  • Chancellor Angela Merkel faces further pressure to lay out a path to ease Germany’s coronavirus lockdown after Finance Minister Olaf Scholzbecame the latest senior official to call for a quicker reopening of Europe’s largest economy
  • Euro-area manufacturers are reporting the steepest increases in their input costs in almost a decade as the coronavirus disrupts supplies, and are passing at least some of that burden onto customers. Rising demand for goods is running into virus restrictions that are causing delivery delays and pushing up prices for raw materials and components, according to an IHS Markit survey
  • Bitcoin is nursing losses after its worst weekly plunge in almost a year and on one view its longer term outlook could be even worse because of environmental concerns and tightening regulations

A quick look at global markets courtesy of Newsquawk

Asian equity markets gained with the regional bourses picking themselves up from Friday’s losses as the bond market rebounded from last week’s turmoil and with sentiment encouraged by an improving COVID-19 situation after JNJ’s vaccine approval and a slower pace of infections over the weekend. ASX 200 (+1.7%) was led higher by notable outperformance in tech after the easing of yields spurred flows back into the sector and into growth stocks, with property names also boosted after CoreLogic data showed the sharpest increase in house prices since 2003. Nikkei 225 (+2.4%) coat-tailed on the rebound in JPY-crosses and after PM Suga announced the removal of the state of emergency in 6 prefectures effective yesterday, with the emergency declaration set to be lifted for the Greater Tokyo area on March 7th. Hang Seng (+1.6%) and Shanghai Comp. (+1.2%) were also positive but with gains tempered after Chinese Official Manufacturing PMI (50.6 vs. Exp. 51.1) and Caixin Manufacturing PMI (50.9 vs. Exp. 51.5) both missed expectations but remained in expansion territory and as tensions continued to linger with the US set to impose Trump-era rules aimed at threats from Chinese tech, while NYSE will delist CNOOC’s American depository shares on March 9th to comply with an executive order that was issued during the prior US administration. There were also comments from Secretary of State Blinken who condemned the detention and charges against pro-democracy advocates in Hong Kong and called for their immediate release, while focus in Hong Kong turns to the outcome of the public consultation for reconstruction of the Hang Seng Index which are due today and could result in an increase of constituents, cap on weightings for individual companies and a fast-track of new listings with the press briefing set for 08:30GMT/03:30EST. Finally, 10yr JGBs traded higher as yields cooled off from last week’s surge but with upside capped by the lack of haven demand and with the BoJ present in the market today for just JPY 470bln, mostly concentrated in the 3yr-5yr maturities, while the Australian 10yr yield declined around 20bps due to a proactive RBA which announced to purchase AUD 4.0bln of government bonds.

Top Asian News

  • Myanmar Court Charges Suu Kyi With Incitement Amid Protests
  • Asian Stocks Rebound From Selloff on Tech Gains, Hang Seng Moves
  • China Developers’ Dollar Bonds Slide: Sinic Sees Record Drops
  • Indonesia Says Govt to Bear VAT on Home Sales to Push Growth

European equities (Eurostoxx 50 +1.3%) have kicked the week/month off on a firmer footing as investors cheer the US approval of the single-dose Johnson & Johnson vaccine, eye stateside stimulus developments and yields stabilise from recent advances in what is a particularly busy week of Fed speak and tier-1 data releases. From a European-specific standpoint, investors will continue to assess commentary from ECB officials given the pushback from various members of the governing council last week with Stournaras of Greece the most explicit in his desire to temper the recent increase in yields. Comments from the ECB, in part stood in contrast to those of the Fed with the latter more sanguine about the recent increase in yields; any further divergence in the assessment of recent moves could lead to differing performances for the two regions. In terms of the broader tone of the market this morning, the market has a slight pro-cyclical feel to it with the e-mini Russell (+2.0%) outperforming the tech-heavy Nasdaq (+1.4%). A similar trend can also be observed in Europe with retail, travel & leisure and basic resources some of the best performers in the region with these sector part of the typical “reopening play”. Stock specific news stories have been on the lighter side this morning; however, in the UK homebuilding names are a clear source of strength amid reports that Chancellor Sunak is set to announce a mortgage guarantee scheme to assist those with small deposits in an attempt to bring back 95% mortgages. Danone (+2.0%) is firmer on the session amid reports the Co. is working on a sale of Mengniu, their Chinese dairy unit, valued at circa EUR 1.8bln and could see a capital gain of EUR 1bln, according to sources. Postal names are also a pocket of strength in Europe after PostNL (+4.5%) reported better-than-expected earnings.

Top European News

  • Bank of England Aligns With the Fed Over Rout in Bond Market
  • Danone Prepares to Sell $1 Billion Stake in China’s Mengniu
  • Heathrow Imposes Passenger Charges to Cover Pandemic Costs
  • ECB to Show Whether Pledge to Cap Yields Is More Than Just Talk

In FX, the Aussie and Kiwi are both off overnight highs vs their US rival, but holding up relatively well given the fact that the Greenback is on the rebound, and in index terms has eclipsed last Friday’s 90.975 peak at 91.127. Aud/Usd is keeping sight of 0.7750 and Nzd/Usd likewise near the 0.7250 half round number against the backdrop of pretty marked debt yield and curve compression that has boosted broad risk appetite, but also capped divergence between US Treasuries and bonds with larger premiums, such as the Aussie 10 year that recoiled 27 bp after RBA intervention via Aud 4 bn+ QE on the eve of Tuesday’s policy meeting. Meanwhile, the Aud/Nzd cross has rebounded to pivot 1.0650 following another snap lockdown in Auckland, NZ, but will likely be capped indirectly as a hefty 2.2 bn option expiries reside in Aud/Usd at the 0.7770 strike before attention switches to NZ Q4 terms of trade tonight. Elsewhere, the Loonie is straddling 1.2700 with assistance from firm crude prices ahead of OPEC+, and awaiting Canada’s Q4 current account and manufacturing PMI for some independent impetus, while the DXY is now eyeing nearest resistance in the form of a 91.228 high from February 8 in advance of US construction spending, the manufacturing ISM and a host of Fed speakers.

  • GBP – Sterling is also displaying a degree of resilience against its US counterpart around 1.3950 in wake of an upward tweak to the final UK manufacturing PMI and mixed BoE data, but the Pound has started the new month back in the ascendency vs the Euro after the late February technical correction as the cross pulls back sharply from circa 0.8731 to sub-0.8650.
  • CHF/EUR/JPY – Somewhat conflicting impulses for the Franc, as Swiss retail sales dipped in January after an upward revision to the previous month, but February’s manufacturing PMI beat expectations and accelerated through 60.00. Meanwhile, latest sight deposit balances infer no intervention from domestic banks on behalf of the SNB, but IMM data shows that specs re-established long positions last week. Usd/Chf is hovering above 0.9100 and Eur/Chf is meandering between 1.0988-64 even though the Euro has lost 1.2050+ status vs the Dollar after testing 1.2100, but failing to breach the psychological level or derive much traction from broadly better than expected Eurozone manufacturing PMIs and firmer German state CPIs. Perhaps Eur/Usd is conscious about more dovish guidance from the ECB pre-comments via several GC members including President Lagarde, and the same goes for Usd/Jpy following sourced reports suggesting that the BoJ could defend its YCC ranges before 10 year cash gets to 0.2% and cap any further spike to 0.3% ahead of its strategic review. Note also, the Yen may have option expiry interest in mind as it trades within a 106.37-74 range and mostly below 2.3 bn at 106.55-45, as an additional 1.8 bn lie from 106.25-20.

In commodities, WTI and Brent front-month futures are firmer on the session but off best levels during early European trade. The complex has seen upside this morning which is in-fitting with the overnight APAC session and broader market sentiment. Moreover, oil prices may have derived support from the US House passing a USD 1.9trln stimulus bill which has lifted investors risk appetite. Alongside this, the approval of Johnson & Johnson’s one shot COVID-19 vaccine has buoyed the economic outlook. Overall, the fundamentals surrounding commodities remains the same with vaccine progress and the OPEC+ meeting, on Thursday, the focusses. Regarding price action, it is anticipated that prices will follow the general market sentiment until the OPEC+ meeting, where a plethora of viewpoints are held and discussions into whether as much as 1.5mln BPD of crude will go back in the market are expected to be conducted. Analysts at OCBC have stated, “if the combined OPEC+ increase does not exceed 500,000 bpd, that will be bullish for prices” and ING analysts said “OPEC+ will need to be careful to avoid surprising traders by releasing too much back into the markets” as there is a large amount of speculative money in oil, so they will want to avoid any action that will see looking for an exit. WTI resides towards the low USD 62/bbl mark (vs high USD 62.92/bbl) and Brent low USD 65/bbl (vs high USD 65.93/bbl). Elsewhere, precious metals are modestly firmer in-spite of ongoing USD strength but remain in proximity to recent lows given last week’s sell off; spot gold +0.6%, just below USD 1,750/oz and spot silver USD 26.90/oz. Turning to base metals, they aptly abide by the same sentiment and see gains across the board with LME copper +1.3%. On copper, the head of the world’s biggest listed producer, Freeport, has stated the rise in price is no temporary spike and expects it to persist; due to its mass use and the expected ‘greening’ of the economy.

US Event Calendar

  • 9:45am: Feb. Markit US Manufacturing PMI, est. 58.5, prior 58.5
  • 10am: Jan. Construction Spending MoM, est. 0.7%, prior 1.0%
  • 10am: Feb. ISM Manufacturing, est. 58.6, prior 58.7
    • 10am: Feb. ISM Employment, prior 52.6
    • 10am: Feb. ISM New Orders, est. 60.0, prior 61.1
    • 10am: Feb. ISM Prices Paid, est. 80.0, prior 82.1

DB’s Jim Reid concludes the overnight wrap

Welcome to Spring here in the U.K.. With the sudden improvement in the weather a pollen bomb has exploded and hay fever is well and truly impacting me at the moment. Usually at this time of the year I can escape the pollen by going to heavily polluted London in the week to ease my symptoms but that’s not an option this year of course. I’m triple dosing my tablets and my eyes are still itching like crazy and they are struggling to open up properly this morning. Anyway that’s my excuse for any errors below!

Markets were pretty allergic to the fun and games in rates markets last week but before we go into that, in the next 30 minutes we’ll put out our monthly performance review. Over the month equities just about held onto their gains (but with a much more negative second half). Yields sold off but commodities such as Oil and Copper surged. See the full report in your inboxes very soon for more.

Onto the current market conditions. My theme this year has been that it’s going to be very complicated for financial markets with volatility high. The forces working in both directions (high growth and stimulus versus inflation and higher yields) are huge and both sides will dominate for periods causing us to move between extremes. There is little doubt that US growth is going to be very strong with our economists upgrading Q4/Q4 2021 growth to 7.5% last week (see here). With inflation this could mean nominal GDP getting close to 10%. The last time we were in double digits was the early 1980s. With these sort of numbers it has always seemed unlikely that bonds would have a calm low yield, low vol year. Even if growth and inflation eventually roll over in 2022 and 2023 we are not going to know for a few quarters yet. In addition without knowing who is going to win the mid-terms we can’t be sure that the Democrats aren’t going to dip into the fiscal well a few times more before the next Presidential election. When I talked about the inflation picture slowly turning before the pandemic, the major reason was that I thought we were moving more towards a helicopter money / MMT world and away from fiscal austerity. The pandemic has accelerated this and a Blue Wave has picked up the baton in its crest.

In risk, while many sectors and areas will benefit more from strong growth than lose out from higher yields, there is no doubt that some areas (eg US equities) are more exposed to secular growth (eg tech) than before and these have massively benefited from ultra low yields. This is a sizeable and influential part of the market.

Having said all this, there is little doubt in my mind that central banks will eventually lean quite hard against a sustained rise in yields. They simply can’t afford to see it happen with debt so high. So far though, Fed officials have been largely relaxed over the recent moves, suggesting that it reflects more positive economic growth. But as it all happened so fast last week they will have had a chance to regroup and align their message for this week.

Although last week’s price action was more about fairly extreme ranges than the overall weekly move given a big rally back on Friday (see later for full recap of the week), the main highlights this week will probably be the Fed speakers in their final week of comments before the blackout period begins ahead of the March 16-17 FOMC meeting. Today see Williams, Bostic, Mester and Kashkari speak but Brainard’s speech on financial stability this morning US time is probably the one to watch for any official Fed comments on last week’s events

Brainard will also make an appearance tomorrow, as will Daly. Evans speaks on Wednesday with Powell himself on Thursday. So plenty of opportunity for the Fed to get a message across to the market. They will likely have been troubled by the recent rise in real yields and possibly by the repricing of Fed Funds contracts. So I would expect some pushback here.

However I’ll end this yield discussion by quoting my colleague Francis Yared (head of rates strategy) who said that the recent move had probably “happened too fast, but did not go too far”. He thinks that the (mildly so far) dysfunctional nature of the repricing should lead to some level of central bank intervention. It would make sense for the Fed to push back against front-end (up to Dec-22) pricing and the ECB to lean against the rise in longer-term real rates. However, from a medium-term perspective, the absolute level of yields is not too high given reflation proxies, the prospects for reopening and US fiscal policy. See his note here from Friday

Asian equity markets have started the week on the front foot with the Nikkei (+2.17%), Hang Seng (+1.17%), Shanghai Comp (+0.72%), Asx (+1.74%) and India’s Nifty (+1.82%) all up. Futures on the S&P 500 are up +0.69% and the European counterparts are pointing to a positive open too. Turning to sovereign yields, 10yr Australian (-25.2bps), New Zealand (-17.1bps) and Japanese (-1.8bps) yields are down this morning. Australia’s large 10y move is coming on the back of the US rally on Friday and the RBA announcement that it would buy AUD 4bn of long dated bonds, double the usual amount, in a regular operation. The RBA meet tomorrow and this will be more closely watched than usual around the world as the Aussie 10 yr rose +48.5bps to 1.91% last week and seemed to help start the global rout. The RBA stepped in to defend their 3-year yield target on Thursday alongside record buying. They also organised an unscheduled purchasing operation on Friday.

Back to the overnight action, yields on 10y USTs are trading flattish overnight and Brent and WTI are up +1.66% and +1.61% respectively but industrial metals are trading softer.

Overnight we have also seen the February manufacturing PMIs in Asia with Japan’s final PMI coming in at 51.4 (vs. 50.6 in flash). Other PMIs in the region also continued to remain in expansionary territory with India’s print at 57.5 (vs. 57.7 last month), Vietnam’s at 51.6 (vs. 51.3 ), Philippines at 52.5 (vs. 52.5) and Indonesia at 50.9 (vs. 52.2). Meanwhile, China’s Caixin PMI printed at 50.9 (vs. 51.4 expected), the lowest since May 2020. Over the weekend, China’s official manufacturing PMI fell to a 9 month low of 50.6 (51.3 in January and 51 expected) largely due to new export orders falling. The week long Lunar NY holiday will have played a part here though. Non-manufacturing fell to 51.4 (52 expected). The composite index dropped to 51.6, the lowest since the lockdowns a year ago.

In other news, former US president Donald Trump said yesterday to a conference of conservative supporters that he’s already laying the groundwork for a third presidential campaign and stopped just short of declaring himself a candidate for 2024.

Turning to the latest on the pandemic there was a tightening of restrictions in some regions in Europe (eg Italy and Norway) and on the other side of the world New Zealand’s largest city Auckland entered a seven-day lockdown on Sunday after a lone case. Turning to vaccines now and the US approved use of J&J vaccine over the weekend, giving the US its third approved Covid-19 vaccine. The company said in a statement that it planned to ship 100mn doses in the first half of the year. Elsewhere, Bloomberg has reported that Germany’s STIKO health authority will soon reconsider its decision not to recommend the AstraZeneca vaccine for people over 65. Can they persuade the public to use it now after a misinformation campaign around Europe that has lead to hundreds of thousands of unused doses?

Looking forward, in terms of other main events this week outside of the Fed, there are a number of highlights. Key data releases include the February PMIs (today and Wednesday) and the monthly jobs report in the US (Friday), with some attention on the UK budget on Wednesday which may be the first major country to start tax rises in some areas as a result of the pandemic. Talking of tax rises, the US decision on Friday not to stand in the way of a global digital tax is a breakthrough on a multi year attempt to harmonise this with the OECD being the driver of the multilateral plan. Although many hurdles may still exist, not least getting it passed through the US Congress, this is certainly a step forward on this plan and could have long-term implications, especially for tech.

Finally, we’re coming to the end of earnings season now, with 480 companies in the S&P 500 having released their earnings at time of writing. Around 79% of them have reported a positive surprise on earnings, and c.70% have reported a positive surprise on sales. Over the week ahead, a further 15 companies in the S&P 500 will be reporting, as well as 64 from the STOXX 600. Among the highlights to watch out for include Zoom today, Target tomorrow, Prudential on Wednesday, Broadcom, Costco, Merck, Aviva and Lufthansa on Thursday, and the London Stock Exchange Group on Friday.

Recapping last week now, the main story for markets was of course the extraordinary selloff in sovereign bonds. That said, much of these losses were pared back on Friday, meaning that the moves over week as a whole look a lot less extreme than they were experienced day-to-day. Indeed, by the end of the week, yields on 10yr Treasuries had “only” risen +6.9bps to 1.405%, thanks to a move of -11.5bps lower on Friday. So the Thursday move (+14.4bps), which was the biggest daily move higher since last March, was followed by the biggest daily move lower for yields since November. The driving force behind higher 10yr yields over the week was real rates (+7.5bps) rather than inflation expectations (-0.6bps), though real yields also saw a massive decline on Friday, falling -13.3bps in their biggest daily move lower since March last year. Over in Europe, the moves in rates were more subdued but still saw large daily ranges, with yields on 10yr bunds up +4.6bps on the week (-2.9bps Friday) to -0.26%, though sovereign bond spreads widened, with the Italian and Spanish spreads over bunds rising +9.2bps and +2.2bps respectively.

As we mentioned on Friday, investors have been moving forward their expectations for Fed rate hikes over the last week, to the point where they’re now pricing in two full hikes by the end of 2023. If realised, that would represent a faster move than the Fed have implied, with their most recent dot plot in December showing most participants keeping rates on hold until at that point. That said, that dot plot was before the results of the Georgia senate election, so before markets were pricing in the chances of significantly higher stimulus, so it’ll be interesting to see if that’s still their view at the March meeting in a couple of weeks’ time. It’s probably far too soon for them to get close to this more hawkish market view. And speaking of stimulus, Friday saw the House of Representatives pass the $1.9tn Biden package by 219-212. However, the version they passed included the proposed minimum wage hike to $15, which the Senate parliamentarian has ruled can’t be included in the bill if the reconciliation procedure is to be used, by which it can be passed by a simple majority. This has seen proposals to restructure it as a fiscal measure, for instance Senator Ron Wyden, who chairs the Senate Finance Committee, has proposed a new tax penalty if workers are paid less than a certain amount. So watch this space for more on this.

Global equity markets also lost significant ground last week as investors questioned whether current valuations could be justified in a higher-yield environment. By the end of the week, the S&P 500 had fallen -2.45% (-0.48% Friday) while Europe’s STOXX 600 was down -2.38% (-1.64% Friday). Tech stocks were the big losers however, with the NASDAQ down -4.92% (+0.56% Friday), while the NYSE FANG+ Index fell -6.27% (+0.12% Friday) in its worst weekly performance since last March. Meanwhile bank stocks outperformed thanks to the prospect of higher interest rates, and the STOXX Banks index gained +1.43% (-2.16% Friday) in its 4th consecutive weekly advance.

Finally, data releases on Friday continued to fuel hopes of a stronger-than-expected recovery. US personal income rose +10.0% in January (vs. +9.5% expected), propelled by the receipt of relief checks. Personal spending also rose +2.4% (vs. +2.5% expected), while the personal saving rate rose to 20.5%, which was its highest level since May last year, supporting the idea that there could be a lot of pent-up demand later in the year as consumers draw down their savings. Meanwhile, the core PCE price index rose +0.3% in January month-on-month (vs. +0.1% expected although the forecasts inputted after the strong recent healthcare component in the PPI were around +0.3%).

Tyler Durden
Mon, 03/01/2021 – 07:53

via ZeroHedge News https://ift.tt/2Oc2zC1 Tyler Durden

ARK Omitting Some Daily Trade Updates, Burry Says Shorts Will Be “Ruthless” To Wood

ARK Omitting Some Daily Trade Updates, Burry Says Shorts Will Be “Ruthless” To Wood

One of the big things that has helped ARK’s public image during its wild run to over $50 billion under management has been its stated commitment to transparency. Every day, at the end of the day, ARK has been emailing out its trades so that followers of the firm and investors can see which stocks “visionary” stock picker Cathie Wood and her team are moving in and out of.

Except now, after a week mired by several days of massive outflows, it appears that ARK Invest isn’t exactly disclosing all of its sales anymore. In fact, it’s adding numerous disclosures and disclaimers to its daily e-mail lists. 

What used to be a simple spreadsheet showing buys and sells now comes with a warning that the list of trades going out “exclude initial/secondary public offering transactions and ETF Creation/Redemption Unit activity.”

In fact, the entire disclaimer can be found on ARK’s site, here, admitting that trade files do not include certain trades. 

Trade notifications are for informational purposes only. ARK offers fully transparent ETFs and provides trade information for all actively managed ETFs. ARK’s statements are not an endorsement of any company or a recommendation to buy, sell or hold any security. Trade notification files are not provided until full trade execution at the end of a trading day. ARK may not trade every day. The time stamp of the email is the time of file upload and not necessarily the exact time of the trades. Files of trades are not comprehensive lists of a day’s trades for the ARK ETFs and exclude initial/secondary public offering transactions and ETF Creation/Redemption Unit activity. Additional files may be posted at a later time. Most ARK ETF portfolio trades settle on a T+2 basis. These files represent an UNOFFICIAL, UNRECONCILED account, as all official accounting and custody processes for the ARK ETFs are performed by BNY Mellon resulting in a daily Net Asset Value (“NAV”) for the ARK ETFs. Updated ARK ETF end of day holdings are available on ark-funds.com/investor-resources.

As often happens when funds start experiencing a little chaos, the goal posts appear to be in motion. Recall, just two days ago we noted record outflows for ARK’s flagship ARKK ETF. The fund saw over $200 million in outflows, breaking with a trend it had been setting in the 18 months prior of continued, seemingly endless, inflows. 

Between five of ARK’s ETFs, Wood saw outflows of $443 million in one day, at one point last week.

Additionally, Jesse Felder noted last week on Twitter that more people now, than ever, were either lining up specifically to bet against Wood, or using her funds as a levered ShitCo-specific vessel for positioning short the index itself. After all, what speculative names go up, must come down. 

Doubts about Wood’s stock picking acumen seem to be growing. Short bets against ARK continue to rise – a trend we first pointed out that had started weeks ago. “The average short interest as a percentage of float for ARKK holdings is 4.4%,” Bloomberg noted this weekend. “The average is 3.4% for Russell 3000 companies and 2.3% for those in the Russell 1000.”

But even still, the worst may be yet to come. The Big Short’s Michael Burry took a shot at Wood when he noted mid-day on Sunday that he thought she was “too early” and “too hot”. He tweeted that “today, short sellers are timid, but Wall Street will be ruthless in the end”. 

To make his point that the worst could be yet to come, he noted that of the 29 stocks ARKK owns 10% or more of, only 5 have seen more puts than calls trade on average over the last 5 days. Burry is ostensibly suggesting that there could be a long way to go for the Cathie Wood pain-trade. 

It also appears as though due to Wood’s recent positioning – which we noted last week included selling out of well known liquid names and piling into some speculative tech small caps – that liquidity could be an issue.

This is likely what the above put buyers are betting on.

As we have continually noted, one thing Wood hasn’t had to deal with over the last 18 months during her meteoric rise has been a serious sell off in Tesla. And the stock – one of the main driving forces behind Wood’s investing “genius” – has continued to look shaky over the last week while, at the same time, Bitcoin – another asset with numerous ties to Wood’s portfolio and positions – continues to also be volatile. 

We noted several weeks ago that short interest in ARK funds had “exploded” after ARK’s banner 2020. Short interest as a percentage of shares outstanding for the firm’s flagship $21 billion ARK Innovation ETF spiked to an all time high of 1.9% from just 0.3% two months ago, according to data from IHS Markit Ltd. and Bloomberg.  That number now stands at nearly 3.5%, as evidenced in the chart above. 

We were one of the first to highlight how the law of large numbers could eventually stand in the way of Cathie Wood’s success.

Tyler Durden
Mon, 03/01/2021 – 06:45

via ZeroHedge News https://ift.tt/2MzYTtb Tyler Durden

What It’s Like To Treat Opioid Addiction in Appalachia

interview2

Why did prescription opioids bring so much misery to the small towns of postindustrial America?

The standard narrative puts the blame on OxyContin, a powerful painkiller supposedly pushed on rural Americans by the profiteers at Purdue Pharma, which ended up filing for bankruptcy and settling criminal charges with the federal government for $8.3 billion. In this telling, the opioid epidemic is a morality tale of capitalism run amok and regulations made toothless by anti-government zealots.

Sally Satel, a practicing psychiatrist who works at a meth-adone clinic in Washington, D.C., has a more complicated story to tell. In 2018, she moved to Ironton, Ohio, an economically depressed town in Appalachia, where she worked with patients and social service providers. Satel doesn’t stint on criticism of drug makers, but she says that the opioid crisis is an outgrowth of a century-old tradition of medicating pain as a way of tending to the broken bodies of the region’s laborers.

She stresses that when Purdue’s sales force came to small towns in Appalachia, it was “pushing on an open door.” While there’s no question that OxyContin was a particularly potent painkiller whose potential for abuse was criminally downplayed by its makers, it was merely the latest in a long line of legal and illegal substances used by people in the region to ease physical and psychological suffering. That’s one of the reasons that, even after OxyContin was reformulated to reduce abuse and opioid prescriptions declined, overdoses and dysfunction are still commonplace.

Satel also challenges conventional theories of addiction that characterize it as a disease like diabetes or Alzheimer’s. Substance abuse, she says, derives from both inborn predilections and a person’s environment, or what she calls “dark genies” and “dark horizons.” Satel stresses that the best way forward is to give individuals tools to make better use decisions while improving their chances to live lives with open-ended futures.

Satel is a resident scholar at the American Enterprise Institute and co-author of the 2013 book Brainwashed: The Seductive Appeal of Mindless Neuroscience, among other works. She spoke with Reason‘s Nick Gillespie via Zoom in late December.

Reason: What drew you to rural Ohio, and how long did you stay?

Satel: I was there for a year. I became the only psychiatrist in Lawrence County in southern Ohio. I worked in a clinic, and I ran a group with a wonderful seasoned social worker. I saw patients and found, not to my surprise, that addiction is addiction.

In the inner city, the drug that was available was heroin and, increasingly, fentanyl. By the time I got to Appalachia, heroin had already moved in, but pills still had a presence. There has always been a pill problem in rural America and especially in central Appalachia, where coal mining was huge.

Many people, when they talk about the opioid epidemic in Appalachia, start the clock in 1996, which is when OxyContin was introduced. OxyContin is a long-acting form of oxycodone, which is the actual opioid. But a lot predates that. There had been trafficking of prescription pills for a long time, mainly Percocet, Lortab, Vicodin—all of those are preparations of oxycodone and hydrocodone. They’ve been very, very popular, and doctors had a fairly low threshold for prescribing them.

OxyContin is extremely potent because it’s long-acting. The pill has a lot of oxycodone in it. For example, your average Percocet is 5 to 10 milligrams of oxycodone, but an OxyContin pill can have up to 80 milligrams. The immediate-release pills—the Vicodins and Percocets—are designed to last between three and six hours. If you’re dealing with acute pain, that’s usually fine. Most people never needed the 30-day [supply] they were given for their tooth extraction or whatever. The appeal of OxyContin is that it was long-acting, so that if you had severe or moderate chronic pain, you had a more steady blood level. You wouldn’t have almost mini-withdrawals in between doses. That is a pharmacologically legitimate strategy.

When you chop it up and either snort it or mix it with water and inject it, you’re getting an enormous rush. It’s pharmaceutical grade, so it’s safe in terms of no impurities. But of course, if you don’t have tolerance, it’s not safe, and you can overdose on that.

What were people being prescribed pain pills for?

Any blue-collar area is going to have a lot of hard-labor jobs. Coal mining is just brutal. Of course, that’s not a dominant industry there any longer, but coal mining was unbearably brutal and dangerous. In the 1920s and ’30s, many men lived in coal camps, which were owned by the mining companies. The coal camp doctor, who was employed by the company, had to get them into the mines. They medicated them so that they could work. This culture of prescribing for non-cancer chronic pain was endemic to the region even after coal mining disappeared.

What’s it like now?

You had communities that were economically imperiled, because there had been a deindustrialization due to globalization or automation. In Ironton, there were jobs; they were just low-paying jobs. There was a great out-migration of what would have been the middle and upper classes, so you’re left with a hollowed-out community. The social service layer was huge. Hospitals are often the major employer in these areas. There’s a whole layer of people who are struggling, a whole miasma of hopelessness. The drug companies did target Appalachia, and also northern Maine in the Northeast, because they’d been selling there for so long. The drug reps were pushing on an open door.

Most people who are prescribed these drugs use them uneventfully, and that’s the end of it. They don’t even finish their prescriptions. But there’s a problem that they then put the extra in the medicine cabinet, and those end up getting in the wrong hands.

One of the most pernicious myths of the opioid epidemic is that of the accidental addict. The idea that you go to the doctor and he gives you an opioid—not necessarily OxyContin. Only 4 percent of all prescriptions for pain were written for OxyContin, although they were always preferred by people who abused pills.

Overwhelmingly, studies will show that fewer than 1 percent [of users with prescriptions become addicted] is a common finding. You find some that are about 8 percent. The meta-analyses that separated out studies that exclude patients with a history of addiction, or a concurrent problem with depression or anxiety, found these rates of under 1 percent. Patients who are vulnerable are those with a history of addiction, history of alcoholism, or a concurrent problem with either a psychiatric diagnosis or a severe existential problem. You can imagine getting in an accident, having a completely otherwise normal psychiatric history, but the accident is devastating. You’ve lost your job. You’ve lost function. It’s a deeply depressing and demoralizing and terrifying state, and these drugs are not only good for physical pain, they’re excellent for psychic pain. Those are the folks who are vulnerable. Those are the folks we have to watch.

You’ve found that the bigger problem is with people who were never prescribed these drugs.

Much more often, they’re abused by people who were never prescribed them at all. There is a nice graphic from a government agency showing that only 22 percent who misused prescription painkillers got them from a doctor. The average person who abuses these medications knows what they’re doing. I ran a group with this wonderful social worker named John, a real Santa Claus of a guy and very seasoned. We’d sit in the group, and sometimes the patients would say, “Well, I wouldn’t have gotten in trouble with OxyContin if my doctor didn’t prescribe it for me.” John would lay back in his seat and say, “I get it. You mean the doctor wrote a prescription that said, ‘OxyContin, 40 milligrams, twice a day, chop and snort.’ Is that what he wrote?” The folks in the room would laugh. What you really find is that most people who abused prescription medications had abused other drugs before that, and they abused other drugs with their medication.

When you look at toxicology screens of people who have overdosed and died, you rarely find one drug in there. You find alcohol, or Valium-type drugs, benzodiazepines, cocaine, other depressants, which are together more dangerous than either alone.

The truth about addiction is that people seek whatever it is they seek. When your life eventually strikes you as unlivable, these drugs become what I call obliviants. I mean, we call cocaine stimulants and alcohol depressants, but opioids are obliviants. They can numb you. They can make all kinds of distress bearable.

You found there were strong, informal folkways about what drugs were around and how to use them.

Drug information often passes from person to person. It’s very grassroots. Before OxyContin, people in Appalachia would chop up Tylox, which is Tylenol and oxycodone. Before that, it was Vicodin. It was other pills—Valiums and Xanaxes. They would be traded for goods or services. But OxyContin became an extremely potent kind of currency.

There had always been doctors that were very free with prescriptions. By no means were all of them lazy Dr. Feelgoods who just wanted cash. I spoke to about 16 physicians who were all in their 60s and 70s, so they really saw the evolution of this problem. They knew that some of their patients would be selling the drugs to make rent or because their husband had just lost his job. They didn’t like doing it, but they felt sympathy for these folks. They also knew that there was no pain program to send them to.

How did Medicare and Medicaid help fuel the problem?

OxyContin is quite expensive. It’s not generic, and neither were other long-term opioids. They’re still on patent and they’re quite expensive, but because Medicare paid for it, there was really little motivation for doctors to think twice about [the cost to the patient]. The copayment was almost nothing. Then when you turn around and you can make a dollar a milligram, you can make an enormous amount of money on this.

OxyContin and other prescription pills were vilified to the point where prescriptions for them declined. How did heroin and fentanyl come in to fill the void?

Pill prescribing peaked around 2010–2011. OxyContin was reformulated so it couldn’t be chopped up. Pill mills were really clamped down on, and prescription monitoring programs became more stringent. Doctors were getting much wiser to the fact that we were over-prescribing.

As pills became less available to people who abused them, heroin was there. You start to see the rise of heroin in 2010. It was always waiting in the wings. People will use what’s available and what’s inexpensive, and that was heroin. Around 2014, you can see just a sweep up into the stratosphere of deaths that are attributable to fentanyl, which is about 100 times as powerful as morphine. If you have a surgery, when you wake up with a drip in your arm that you get to actually control through a button, it’s likely going to be fentanyl—it’s excellent. And fentanyl patches are extremely effective. It’s long-acting, so people would cut them out [of the bandage]. If you’re interested in abuse, you don’t want something long-acting. You want something short-acting. You could slice open the fentanyl and suck it out.

That’s a sign of desperation. People would dive into dumpsters outside of nursing homes, and there was that whole culture of if your loved one died of cancer, don’t mention that in the obituary because that’ll put a red flag on your house that you’ve got a lot of pills there.

What are the specific numbers involved for regular users?

About 2 million people are estimated to use, abuse, or misuse pills. It is so hard to get a measure of heroin. It’ll be maybe half a million or less when you look at government statistics. I don’t think there has been an increase in people using opioids for the past few years; it’s more of an overdose phenomenon, because the drug used now, fentanyl, is just so powerful.

Is there actually more despair in various parts of the country than there was 50 or 100 years ago? Or are deaths increasing because we have access to more powerful drugs that might kill us?

That’s too difficult to answer. Suicides are going up. A death is a death, and coroners could still make mistakes about identifying suicides, but it’s a little more clear than arguing over whether there’s more depression or not, because now people are culturally more comfortable with coming forward.

More people are dying at their own hands. It might be that the mode of self-medication is more dangerous, but it also does seem that more people are looking to escape.

Some of my patients were young people who were fourth-generation [substance abusers], where the grandfather or the great-grandfather lost the job at the factory in the ’60s. He always drank too much and maybe was a little rough with the wife. When he lost it, he started drinking more, and domestic violence really became an issue. By the fourth generation, there’s too much dysfunction handed down for too long, and you’ve got people who are not well-educated and don’t see much promise.

You have families that don’t work. That kind of discipline is not internalized of having to be somewhere, of being responsible. How to delay gratification, how to control impulses, how to develop trust, how to have relationships—that kind of development really gets derailed. You have people with a triple whammy: They live in environments where the boredom is crushing, their future doesn’t look very bright, and they don’t have these inner strengths. It’s easy to understand why these substances have appeal.

You’ve written that you are “hesitant to call addiction a disease,” especially a “disease of the brain.” Yet addiction, or at least serious substance abuse, seems to be at or near the center of the opioid epidemic.

I prefer calling addiction a symptom rather than a disease. I’m not going to argue with someone, especially someone in recovery, who conceptualizes their problem as a disease. Whatever works for them. But from a conceptual standpoint, I do have a significant problem with the disease model, especially with the formulation of brain disease.

This is something that the National Institutes of Health has been pushing since 1995. I understand why that has appeal, because the more you medicalize something, the theory goes, the more you take it out of the realm of the criminal justice arena, the less you think in terms of punitive responses, and the more you think about therapy and funding for treatment and funding for research. It’s an anti-stigma kind of strategy. I appreciate that and I like those ends. I just don’t feel that they’re accomplished well by reducing one of the most complex behaviors to a slice of brain tissue. I’m not going to deny any of the neurobiological facts or the very dramatic and eye-catching brain scans that they use—of course the brain has changed in addiction. So that’s all true. But the point is the brain isn’t changed to the point where a person can no longer make decisions.

If my choices are saying addiction is a disease vs. it’s a sin or it’s a crime or it’s evidence of moral failing, well, damn, I’m going to pick disease. But it’s a condition, a behavioral phenomenon that responds to contingencies, that responds to consequences, and that people engage in for -reasons.

In Ironton and D.C., there’s not one patient who walked into a clinic and didn’t say that they were there because their wife was going to leave them, their boss is going to fire them, their probation officer is going to punish them, or their kid’s going to hate them. The point is they’re responding to something in their environment. If I had Alzheimer’s disease, which is to me a classic brain pathology, it wouldn’t matter what was going on in the environment or in my cognition or in my view of myself.

If you talk to someone who drinks too much or uses drugs too much—and I emphasize the too much, because that’s the problem—I’d say to them, “Why are you doing that? What’s going on?” That question makes sense. That question can be answered in existential terms. If I said to a person with Alzheimer’s disease, “Why do you have Alzheimer’s disease?” maybe they’ll talk to me about [brain] plaques and tangles and neural pathology. The answer doesn’t come in the form of existential language. That’s very important, because that goes to why people use and how we get them out of it.

The vast majority of pill abusers were not prescribed the medication by their physicians. Instead, they were mostly individuals who were already involved with drugs or alcohol. OxyContin, fentanyl, and heroin are all powerful drugs, but their use is building on an existing problem. How does that insight influence treatment?

Most people stop on their own, which is another thing that is not well known. Start with a hundred people who just try heroin or cocaine for the first time. Half of them are going to just go, “What’s the big deal?” A smaller fraction of the other half is going to say, “Wow, this is really good.” What is it about one person’s brain that finds this drug more rewarding than the other person?

Let’s focus on the group that found it rewarding, intensely pleasurable. They say, “That was really good. Give me more.” Some of them are going to go home and the spouse is going to say, “Where the hell were you? What’s happening to the money? Why didn’t you come to Timmy’s baseball game?” They’re going to say, “Oh, wait a minute, wait a minute. What am I doing?” They stop, and that’s the end of it.

You get a smaller and smaller population of people who think, “You know, this is costing me, but I’m so unhappy that this kind of relief, which was great at the beginning and has now cost me a lot, is still worth it.” You have a person who has basically two layers of anguish. First, they have that genie that made drugs attractive to them in the first place, so that was always a baseline misery. Now they have a second layer that they’ve accrued: Maybe they’ve gotten hepatitis, maybe they’ve lost their job, maybe their wife is going to divorce them, maybe they just hate themselves because of all the people they’ve disappointed, and that makes the drugs even more appealing.

It’s a very, very hard cycle to stop, but there’s the example of the woman I met in Ironton and I wrote about. She ran out of pills, really wanted them, went to her friend’s house because she thought her friend would give her some. The friend wasn’t there, but her gross boyfriend was. He said, “I’ll give you those pills.” The young woman was already starting to develop withdrawal symptoms. If you want to talk about brain scans, her brain was probably on fire at that moment, and the guy said, “Here are the pills, but I’m going to expect something from you.” And that was an unsavory act.

The woman got help the next day. Some people don’t even get help. They just stop the next day, and you can’t really predict who’s going to respond to what.

I’ve seen people who come in and you think, “My God, haven’t you hit bottom enough?” Yet it’s that next time that does it. The problem with fentanyl is it’s very dangerous to keep waiting for that next time. That’s where harm reduction comes in, with Narcan [a drug that reverses opioid overdoses], where you can at least keep people alive until they make a decision or until they’re arrested. I have to say that coerced [court-ordered] treatment can work. The addicts ultimately have to internalize the values of the treatment system, because it’s not like pneumonia, where you can be in a coma and I can give you a penicillin IV and you’ll wake up cured. You have to be motivated, but that motivation can actually come to people even when they’re in a coerced setting.

You’re an M.D. and a psychiatrist. Over the past 30 or 40 years, do you think we’ve made progress in understanding and treating addiction?

The more we medicalize this problem, the more we’re going to be misled, the more we’re going to put emphasis on medications—the methadones, the buprenorphines, the naltrexones. I’m all in favor of those medications, because they help people stand still. If you’re craving, you’re never going to make the first step toward stopping. I’m all for the medications, but to think that could possibly be enough strikes me as incredibly naive. The National Institute on Drug Abuse, ironically and to its credit, funds lots of [treatment] research, but they don’t talk about that. Instead, they show brain scans and talk about addiction as “a disease like any other,” which of course it’s not. When you go to a place like Ironton, you can see how medicine and even public health are necessary but not at all sufficient. What do you do when you finally do get somebody sober but they’re in an environment that doesn’t appear to offer much?

There are lots of different crosscurrents here. Maybe because the pill problem is mainly a white problem, it has been treated with more understanding and compassion and seen in a broader light as a response to circumstances. That’s a positive thing, but it goes beyond medicine. People drop out of treatment at enormous rates. Fewer than 60 percent will still be in a treatment program at the end of the year. I can tell you that very few people came into our methadone clinic and were able to be just fine with their first or second or third dose of methadone. If your problem was simply withdrawal, if it was simply physiological instability, then we should have been able to fix you with a medication. Of course, we didn’t, but we helped you stand still, and if you were motivated, we could really help you.

Talk a bit more about the perils of medicalizing behaviors.

I have two thoughts: The first is that it can be problematic even in the clinic, let alone in society more broadly. I worked in an urgent care clinic in D.C. It was connected with the criminal justice system, and I would see people who were awaiting trial. The judge would say, “Well, we sent him to you because he cried” or “We sent him to you because he was once on a medication in jail.” So many were not happy people—they had a lot of problems with making good decisions and with controlling their impulses—but they weren’t mentally ill in a classic way, and they weren’t people who were going to be responsive to medication. They needed help, but not in the domain of psychiatry.

The second thing is that we don’t medicalize some problems enough. We’ve underserved and ignored people with schizophrenia, and that is a huge blight on our society. Rikers Island and L.A. County Jail and Cook County Jail are the biggest psychiatric facilities in the country. We criminalize severely mentally ill people. On the one hand, we over-medicalize, and on the other, we have people with real brain diseases and we don’t pay enough attention to them.

Do you think we’ve become more psychologically sophisticated or astute as a society over the past half-century?

I think in terms of people who have the wherewithal or the financial means to do creative things with psychedelics, that’s a very interesting development. I don’t mean they should run off and experiment on their own at all, but research into that is so important. But there’s also a lot of unhelpful pop psychology, which is the whole field of trauma. I don’t want to diminish the life-altering impact of child abuse and devastating things that happen to people, but people are looking for explanatory systems and exoneration. The trauma field, which consists of the most brilliant psychiatrists and psychologists I know and the most two-bit counselors, is often reduced to a system of: This happened to you, it’s horrible, and it’s ruined your life. You can’t do anything about it, and you should forever stew in the resentment of what was done to you.

Have we become too dependent on pills?

I’m not blaming pharmaceutical companies, God bless them. They make wonderful, life-saving medications for many people. But a lot of the time the message looks like, “If I just had this pill, everything would be fine.” Sometimes, a pill does make a massive difference, but usually so much other work needs to be done as well that the fantasy of a magic bullet doesn’t help.

This interview has been edited for clarity and style. To listen to the full version, subscribe to The Reason Interview With Nick Gillespie.

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What It’s Like To Treat Opioid Addiction in Appalachia

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Why did prescription opioids bring so much misery to the small towns of postindustrial America?

The standard narrative puts the blame on OxyContin, a powerful painkiller supposedly pushed on rural Americans by the profiteers at Purdue Pharma, which ended up filing for bankruptcy and settling criminal charges with the federal government for $8.3 billion. In this telling, the opioid epidemic is a morality tale of capitalism run amok and regulations made toothless by anti-government zealots.

Sally Satel, a practicing psychiatrist who works at a meth-adone clinic in Washington, D.C., has a more complicated story to tell. In 2018, she moved to Ironton, Ohio, an economically depressed town in Appalachia, where she worked with patients and social service providers. Satel doesn’t stint on criticism of drug makers, but she says that the opioid crisis is an outgrowth of a century-old tradition of medicating pain as a way of tending to the broken bodies of the region’s laborers.

She stresses that when Purdue’s sales force came to small towns in Appalachia, it was “pushing on an open door.” While there’s no question that OxyContin was a particularly potent painkiller whose potential for abuse was criminally downplayed by its makers, it was merely the latest in a long line of legal and illegal substances used by people in the region to ease physical and psychological suffering. That’s one of the reasons that, even after OxyContin was reformulated to reduce abuse and opioid prescriptions declined, overdoses and dysfunction are still commonplace.

Satel also challenges conventional theories of addiction that characterize it as a disease like diabetes or Alzheimer’s. Substance abuse, she says, derives from both inborn predilections and a person’s environment, or what she calls “dark genies” and “dark horizons.” Satel stresses that the best way forward is to give individuals tools to make better use decisions while improving their chances to live lives with open-ended futures.

Satel is a resident scholar at the American Enterprise Institute and co-author of the 2013 book Brainwashed: The Seductive Appeal of Mindless Neuroscience, among other works. She spoke with Reason‘s Nick Gillespie via Zoom in late December.

Reason: What drew you to rural Ohio, and how long did you stay?

Satel: I was there for a year. I became the only psychiatrist in Lawrence County in southern Ohio. I worked in a clinic, and I ran a group with a wonderful seasoned social worker. I saw patients and found, not to my surprise, that addiction is addiction.

In the inner city, the drug that was available was heroin and, increasingly, fentanyl. By the time I got to Appalachia, heroin had already moved in, but pills still had a presence. There has always been a pill problem in rural America and especially in central Appalachia, where coal mining was huge.

Many people, when they talk about the opioid epidemic in Appalachia, start the clock in 1996, which is when OxyContin was introduced. OxyContin is a long-acting form of oxycodone, which is the actual opioid. But a lot predates that. There had been trafficking of prescription pills for a long time, mainly Percocet, Lortab, Vicodin—all of those are preparations of oxycodone and hydrocodone. They’ve been very, very popular, and doctors had a fairly low threshold for prescribing them.

OxyContin is extremely potent because it’s long-acting. The pill has a lot of oxycodone in it. For example, your average Percocet is 5 to 10 milligrams of oxycodone, but an OxyContin pill can have up to 80 milligrams. The immediate-release pills—the Vicodins and Percocets—are designed to last between three and six hours. If you’re dealing with acute pain, that’s usually fine. Most people never needed the 30-day [supply] they were given for their tooth extraction or whatever. The appeal of OxyContin is that it was long-acting, so that if you had severe or moderate chronic pain, you had a more steady blood level. You wouldn’t have almost mini-withdrawals in between doses. That is a pharmacologically legitimate strategy.

When you chop it up and either snort it or mix it with water and inject it, you’re getting an enormous rush. It’s pharmaceutical grade, so it’s safe in terms of no impurities. But of course, if you don’t have tolerance, it’s not safe, and you can overdose on that.

What were people being prescribed pain pills for?

Any blue-collar area is going to have a lot of hard-labor jobs. Coal mining is just brutal. Of course, that’s not a dominant industry there any longer, but coal mining was unbearably brutal and dangerous. In the 1920s and ’30s, many men lived in coal camps, which were owned by the mining companies. The coal camp doctor, who was employed by the company, had to get them into the mines. They medicated them so that they could work. This culture of prescribing for non-cancer chronic pain was endemic to the region even after coal mining disappeared.

What’s it like now?

You had communities that were economically imperiled, because there had been a deindustrialization due to globalization or automation. In Ironton, there were jobs; they were just low-paying jobs. There was a great out-migration of what would have been the middle and upper classes, so you’re left with a hollowed-out community. The social service layer was huge. Hospitals are often the major employer in these areas. There’s a whole layer of people who are struggling, a whole miasma of hopelessness. The drug companies did target Appalachia, and also northern Maine in the Northeast, because they’d been selling there for so long. The drug reps were pushing on an open door.

Most people who are prescribed these drugs use them uneventfully, and that’s the end of it. They don’t even finish their prescriptions. But there’s a problem that they then put the extra in the medicine cabinet, and those end up getting in the wrong hands.

One of the most pernicious myths of the opioid epidemic is that of the accidental addict. The idea that you go to the doctor and he gives you an opioid—not necessarily OxyContin. Only 4 percent of all prescriptions for pain were written for OxyContin, although they were always preferred by people who abused pills.

Overwhelmingly, studies will show that fewer than 1 percent [of users with prescriptions become addicted] is a common finding. You find some that are about 8 percent. The meta-analyses that separated out studies that exclude patients with a history of addiction, or a concurrent problem with depression or anxiety, found these rates of under 1 percent. Patients who are vulnerable are those with a history of addiction, history of alcoholism, or a concurrent problem with either a psychiatric diagnosis or a severe existential problem. You can imagine getting in an accident, having a completely otherwise normal psychiatric history, but the accident is devastating. You’ve lost your job. You’ve lost function. It’s a deeply depressing and demoralizing and terrifying state, and these drugs are not only good for physical pain, they’re excellent for psychic pain. Those are the folks who are vulnerable. Those are the folks we have to watch.

You’ve found that the bigger problem is with people who were never prescribed these drugs.

Much more often, they’re abused by people who were never prescribed them at all. There is a nice graphic from a government agency showing that only 22 percent who misused prescription painkillers got them from a doctor. The average person who abuses these medications knows what they’re doing. I ran a group with this wonderful social worker named John, a real Santa Claus of a guy and very seasoned. We’d sit in the group, and sometimes the patients would say, “Well, I wouldn’t have gotten in trouble with OxyContin if my doctor didn’t prescribe it for me.” John would lay back in his seat and say, “I get it. You mean the doctor wrote a prescription that said, ‘OxyContin, 40 milligrams, twice a day, chop and snort.’ Is that what he wrote?” The folks in the room would laugh. What you really find is that most people who abused prescription medications had abused other drugs before that, and they abused other drugs with their medication.

When you look at toxicology screens of people who have overdosed and died, you rarely find one drug in there. You find alcohol, or Valium-type drugs, benzodiazepines, cocaine, other depressants, which are together more dangerous than either alone.

The truth about addiction is that people seek whatever it is they seek. When your life eventually strikes you as unlivable, these drugs become what I call obliviants. I mean, we call cocaine stimulants and alcohol depressants, but opioids are obliviants. They can numb you. They can make all kinds of distress bearable.

You found there were strong, informal folkways about what drugs were around and how to use them.

Drug information often passes from person to person. It’s very grassroots. Before OxyContin, people in Appalachia would chop up Tylox, which is Tylenol and oxycodone. Before that, it was Vicodin. It was other pills—Valiums and Xanaxes. They would be traded for goods or services. But OxyContin became an extremely potent kind of currency.

There had always been doctors that were very free with prescriptions. By no means were all of them lazy Dr. Feelgoods who just wanted cash. I spoke to about 16 physicians who were all in their 60s and 70s, so they really saw the evolution of this problem. They knew that some of their patients would be selling the drugs to make rent or because their husband had just lost his job. They didn’t like doing it, but they felt sympathy for these folks. They also knew that there was no pain program to send them to.

How did Medicare and Medicaid help fuel the problem?

OxyContin is quite expensive. It’s not generic, and neither were other long-term opioids. They’re still on patent and they’re quite expensive, but because Medicare paid for it, there was really little motivation for doctors to think twice about [the cost to the patient]. The copayment was almost nothing. Then when you turn around and you can make a dollar a milligram, you can make an enormous amount of money on this.

OxyContin and other prescription pills were vilified to the point where prescriptions for them declined. How did heroin and fentanyl come in to fill the void?

Pill prescribing peaked around 2010–2011. OxyContin was reformulated so it couldn’t be chopped up. Pill mills were really clamped down on, and prescription monitoring programs became more stringent. Doctors were getting much wiser to the fact that we were over-prescribing.

As pills became less available to people who abused them, heroin was there. You start to see the rise of heroin in 2010. It was always waiting in the wings. People will use what’s available and what’s inexpensive, and that was heroin. Around 2014, you can see just a sweep up into the stratosphere of deaths that are attributable to fentanyl, which is about 100 times as powerful as morphine. If you have a surgery, when you wake up with a drip in your arm that you get to actually control through a button, it’s likely going to be fentanyl—it’s excellent. And fentanyl patches are extremely effective. It’s long-acting, so people would cut them out [of the bandage]. If you’re interested in abuse, you don’t want something long-acting. You want something short-acting. You could slice open the fentanyl and suck it out.

That’s a sign of desperation. People would dive into dumpsters outside of nursing homes, and there was that whole culture of if your loved one died of cancer, don’t mention that in the obituary because that’ll put a red flag on your house that you’ve got a lot of pills there.

What are the specific numbers involved for regular users?

About 2 million people are estimated to use, abuse, or misuse pills. It is so hard to get a measure of heroin. It’ll be maybe half a million or less when you look at government statistics. I don’t think there has been an increase in people using opioids for the past few years; it’s more of an overdose phenomenon, because the drug used now, fentanyl, is just so powerful.

Is there actually more despair in various parts of the country than there was 50 or 100 years ago? Or are deaths increasing because we have access to more powerful drugs that might kill us?

That’s too difficult to answer. Suicides are going up. A death is a death, and coroners could still make mistakes about identifying suicides, but it’s a little more clear than arguing over whether there’s more depression or not, because now people are culturally more comfortable with coming forward.

More people are dying at their own hands. It might be that the mode of self-medication is more dangerous, but it also does seem that more people are looking to escape.

Some of my patients were young people who were fourth-generation [substance abusers], where the grandfather or the great-grandfather lost the job at the factory in the ’60s. He always drank too much and maybe was a little rough with the wife. When he lost it, he started drinking more, and domestic violence really became an issue. By the fourth generation, there’s too much dysfunction handed down for too long, and you’ve got people who are not well-educated and don’t see much promise.

You have families that don’t work. That kind of discipline is not internalized of having to be somewhere, of being responsible. How to delay gratification, how to control impulses, how to develop trust, how to have relationships—that kind of development really gets derailed. You have people with a triple whammy: They live in environments where the boredom is crushing, their future doesn’t look very bright, and they don’t have these inner strengths. It’s easy to understand why these substances have appeal.

You’ve written that you are “hesitant to call addiction a disease,” especially a “disease of the brain.” Yet addiction, or at least serious substance abuse, seems to be at or near the center of the opioid epidemic.

I prefer calling addiction a symptom rather than a disease. I’m not going to argue with someone, especially someone in recovery, who conceptualizes their problem as a disease. Whatever works for them. But from a conceptual standpoint, I do have a significant problem with the disease model, especially with the formulation of brain disease.

This is something that the National Institutes of Health has been pushing since 1995. I understand why that has appeal, because the more you medicalize something, the theory goes, the more you take it out of the realm of the criminal justice arena, the less you think in terms of punitive responses, and the more you think about therapy and funding for treatment and funding for research. It’s an anti-stigma kind of strategy. I appreciate that and I like those ends. I just don’t feel that they’re accomplished well by reducing one of the most complex behaviors to a slice of brain tissue. I’m not going to deny any of the neurobiological facts or the very dramatic and eye-catching brain scans that they use—of course the brain has changed in addiction. So that’s all true. But the point is the brain isn’t changed to the point where a person can no longer make decisions.

If my choices are saying addiction is a disease vs. it’s a sin or it’s a crime or it’s evidence of moral failing, well, damn, I’m going to pick disease. But it’s a condition, a behavioral phenomenon that responds to contingencies, that responds to consequences, and that people engage in for -reasons.

In Ironton and D.C., there’s not one patient who walked into a clinic and didn’t say that they were there because their wife was going to leave them, their boss is going to fire them, their probation officer is going to punish them, or their kid’s going to hate them. The point is they’re responding to something in their environment. If I had Alzheimer’s disease, which is to me a classic brain pathology, it wouldn’t matter what was going on in the environment or in my cognition or in my view of myself.

If you talk to someone who drinks too much or uses drugs too much—and I emphasize the too much, because that’s the problem—I’d say to them, “Why are you doing that? What’s going on?” That question makes sense. That question can be answered in existential terms. If I said to a person with Alzheimer’s disease, “Why do you have Alzheimer’s disease?” maybe they’ll talk to me about [brain] plaques and tangles and neural pathology. The answer doesn’t come in the form of existential language. That’s very important, because that goes to why people use and how we get them out of it.

The vast majority of pill abusers were not prescribed the medication by their physicians. Instead, they were mostly individuals who were already involved with drugs or alcohol. OxyContin, fentanyl, and heroin are all powerful drugs, but their use is building on an existing problem. How does that insight influence treatment?

Most people stop on their own, which is another thing that is not well known. Start with a hundred people who just try heroin or cocaine for the first time. Half of them are going to just go, “What’s the big deal?” A smaller fraction of the other half is going to say, “Wow, this is really good.” What is it about one person’s brain that finds this drug more rewarding than the other person?

Let’s focus on the group that found it rewarding, intensely pleasurable. They say, “That was really good. Give me more.” Some of them are going to go home and the spouse is going to say, “Where the hell were you? What’s happening to the money? Why didn’t you come to Timmy’s baseball game?” They’re going to say, “Oh, wait a minute, wait a minute. What am I doing?” They stop, and that’s the end of it.

You get a smaller and smaller population of people who think, “You know, this is costing me, but I’m so unhappy that this kind of relief, which was great at the beginning and has now cost me a lot, is still worth it.” You have a person who has basically two layers of anguish. First, they have that genie that made drugs attractive to them in the first place, so that was always a baseline misery. Now they have a second layer that they’ve accrued: Maybe they’ve gotten hepatitis, maybe they’ve lost their job, maybe their wife is going to divorce them, maybe they just hate themselves because of all the people they’ve disappointed, and that makes the drugs even more appealing.

It’s a very, very hard cycle to stop, but there’s the example of the woman I met in Ironton and I wrote about. She ran out of pills, really wanted them, went to her friend’s house because she thought her friend would give her some. The friend wasn’t there, but her gross boyfriend was. He said, “I’ll give you those pills.” The young woman was already starting to develop withdrawal symptoms. If you want to talk about brain scans, her brain was probably on fire at that moment, and the guy said, “Here are the pills, but I’m going to expect something from you.” And that was an unsavory act.

The woman got help the next day. Some people don’t even get help. They just stop the next day, and you can’t really predict who’s going to respond to what.

I’ve seen people who come in and you think, “My God, haven’t you hit bottom enough?” Yet it’s that next time that does it. The problem with fentanyl is it’s very dangerous to keep waiting for that next time. That’s where harm reduction comes in, with Narcan [a drug that reverses opioid overdoses], where you can at least keep people alive until they make a decision or until they’re arrested. I have to say that coerced [court-ordered] treatment can work. The addicts ultimately have to internalize the values of the treatment system, because it’s not like pneumonia, where you can be in a coma and I can give you a penicillin IV and you’ll wake up cured. You have to be motivated, but that motivation can actually come to people even when they’re in a coerced setting.

You’re an M.D. and a psychiatrist. Over the past 30 or 40 years, do you think we’ve made progress in understanding and treating addiction?

The more we medicalize this problem, the more we’re going to be misled, the more we’re going to put emphasis on medications—the methadones, the buprenorphines, the naltrexones. I’m all in favor of those medications, because they help people stand still. If you’re craving, you’re never going to make the first step toward stopping. I’m all for the medications, but to think that could possibly be enough strikes me as incredibly naive. The National Institute on Drug Abuse, ironically and to its credit, funds lots of [treatment] research, but they don’t talk about that. Instead, they show brain scans and talk about addiction as “a disease like any other,” which of course it’s not. When you go to a place like Ironton, you can see how medicine and even public health are necessary but not at all sufficient. What do you do when you finally do get somebody sober but they’re in an environment that doesn’t appear to offer much?

There are lots of different crosscurrents here. Maybe because the pill problem is mainly a white problem, it has been treated with more understanding and compassion and seen in a broader light as a response to circumstances. That’s a positive thing, but it goes beyond medicine. People drop out of treatment at enormous rates. Fewer than 60 percent will still be in a treatment program at the end of the year. I can tell you that very few people came into our methadone clinic and were able to be just fine with their first or second or third dose of methadone. If your problem was simply withdrawal, if it was simply physiological instability, then we should have been able to fix you with a medication. Of course, we didn’t, but we helped you stand still, and if you were motivated, we could really help you.

Talk a bit more about the perils of medicalizing behaviors.

I have two thoughts: The first is that it can be problematic even in the clinic, let alone in society more broadly. I worked in an urgent care clinic in D.C. It was connected with the criminal justice system, and I would see people who were awaiting trial. The judge would say, “Well, we sent him to you because he cried” or “We sent him to you because he was once on a medication in jail.” So many were not happy people—they had a lot of problems with making good decisions and with controlling their impulses—but they weren’t mentally ill in a classic way, and they weren’t people who were going to be responsive to medication. They needed help, but not in the domain of psychiatry.

The second thing is that we don’t medicalize some problems enough. We’ve underserved and ignored people with schizophrenia, and that is a huge blight on our society. Rikers Island and L.A. County Jail and Cook County Jail are the biggest psychiatric facilities in the country. We criminalize severely mentally ill people. On the one hand, we over-medicalize, and on the other, we have people with real brain diseases and we don’t pay enough attention to them.

Do you think we’ve become more psychologically sophisticated or astute as a society over the past half-century?

I think in terms of people who have the wherewithal or the financial means to do creative things with psychedelics, that’s a very interesting development. I don’t mean they should run off and experiment on their own at all, but research into that is so important. But there’s also a lot of unhelpful pop psychology, which is the whole field of trauma. I don’t want to diminish the life-altering impact of child abuse and devastating things that happen to people, but people are looking for explanatory systems and exoneration. The trauma field, which consists of the most brilliant psychiatrists and psychologists I know and the most two-bit counselors, is often reduced to a system of: This happened to you, it’s horrible, and it’s ruined your life. You can’t do anything about it, and you should forever stew in the resentment of what was done to you.

Have we become too dependent on pills?

I’m not blaming pharmaceutical companies, God bless them. They make wonderful, life-saving medications for many people. But a lot of the time the message looks like, “If I just had this pill, everything would be fine.” Sometimes, a pill does make a massive difference, but usually so much other work needs to be done as well that the fantasy of a magic bullet doesn’t help.

This interview has been edited for clarity and style. To listen to the full version, subscribe to The Reason Interview With Nick Gillespie.

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Who Is The Sucker In The SPAC Market?

Who Is The Sucker In The SPAC Market?

Authored by Irv Schlussel, Managing Director at IngleSea Capital,

The SPAC market has become frothy and is reminiscent of the 1999 .com Bubble. SPAC evangelists (Bankers, Sponsors & Hedge Funds), most of whom are gaining great wealth from the Bubble, will say: “This time is different”. The argument they make is that SPACs are an increasingly mainstream, speedier path to IPO with less required disclosure and are acquiring better-quality companies than they have in the past. I think the less stringent regulation of SPACs feeds the risks borne by the end purchaser who is paying as much as 2X the true value of the underlying asset. The quality of SPAC acquisitions is poorer today than it has ever been, and the valuations are inflated as sponsors have no incentive to have any price discipline, rather their sole motivation is to get the deals done.  

When I think about the SPAC market, I see all the parties involved making money, including the sponsors, investors and acquired companies. I then ask myself the same question one is supposed to ask when entering a poker Game: Who is the SPAC sucker, and why is this Bubble happening?   



SPAC 101

It is first important to start with an explanation of SPACs as the particulars are often misunderstood. If one invests in a SPAC (Special Purpose Acquisition Company), he/she typically buys a unit consisting of a share and a warrant. This unit can be split and traded separately into a share and the proportional amount of warrants typically 1/2-1/3 per share. The sponsors contribute cash (sponsor equity) to the trust to cover expenses and receive a promote which is a combination of shares and warrants that typically averages 20% of the value of the SPAC. This promote vests upon the consummation of the deal with a lockup on his/her shares for a period that is often reduced, depending on the prevailing price per share. This is a Key Problem as SPACs are incented to do poor deals. Profit realization for SPAC sponsors is based on getting a deal done, even if it the stock trades down substantially.  

The investor can opt not to participate in the deal and instead redeem his share for the cash invested plus the yield on short term treasuries, aka “Cash-in-trust.” Upon the earlier of: 

1. SPAC maturity (18-24 months) or 

2. The SPAC announcing and closing on a prospective deal. 

Alternatively, the investor can stay in the deal and be an investor in the new company through the “De-SPACing.”

I have been investing in SPACs for over ten years as an arbitrageur. I rarely have the intention of holding shares through the deal or “De-SPACing.” Prior to the second half of 2020, most deals ended up trading at or just below cash in trust, incenting a redemption for cash rather than the selling of shares on the open market. This phenomenon changed after NIKOLA and Virgin Galactic as investors started paying a premium for the hot deals. Today, almost all SPAC shares are trading at a substantial premium of 2-3% above their cash in trust. This is down from 8-9% a few weeks ago and could quickly go negative.

Historically, the sucker has been the guy who buys the SPAC and owns it on the back by rolling his shares into the newly merged company. Industry research shows that, for the SPACs that completed de-SPAC transactions between 2015 and July 2020, their shares delivered an average loss of 18.8%. That compares with the average after-market return from traditional IPOs of 37.2% since 2015. These days, most SPACs are doing bad deals and overpaying by a premium of say 20% to capture the sponsor economics (more on this later). That back-end investor is also giving up a 20% promote and is likely buying the stock post-IPO at a premium of say $0.50. So, in total, in he is overpaying by almost 50% for this stock.

The Value Chain & Why This Will Go Away

Prior to the middle of last year, 60% of SPAC $ were redeemed. Today that is 0, as they all trade well above cash in trust. Once the bubble bursts, the SPACs will no longer trade at a premium to their value of “Cash in Trust.” Arbs will be the holder base and they will redeem for “Cash in Trust.” The value that the sponsors currently bring to the acquiree is the stupid cash that is rolling into the deal at an aggressive valuation. This value has been increasingly accessible given the bubble, as historically most SPAC money is redeemed. This is a retail/bubble driven phenomenon where investors opt to stay in deals at inflated values. When this goes away, the huge amount of SPAC equity capital contributed to recent raises may well end up being the loser. Those sponsors will have to do genuinely good deals to convince investors to participate rather than redeeming the shares. 

I have seen an 11% number quoted for the % of SPACs liquidating over the past 10 years, but what that does not capture is the number of deals where the sponsor forfeits his upside to get the deal done, as historically, he has brought far less cash into the deal. At that point, the sponsor is only providing a shell. With the number of available SPAC shells increasing every day, their value declines, as does the liquidity profile for the shares on the back end, and thus the true exit value for the acquiree.

Some Signs of a SPAC bubble:

1. Dramatic increase in notional outstanding: Total Notional has increased by $84B over the past year to about $100B. At current pace, total outstanding notional SPAC is projected to get to $190B by June.

2. Increased Retail Participation: SPACs have gone from the arcane to the hottest mainstream discussion topic.

3. Increasing Institutional Leverage from PBs: 5 years ago it was 1X to 2X, one year ago it was 3X, now 4X is standard and the larger Multistrats are getting 10X with 6 months of term. 

4. Sponsors Bringing Multiple deals: Chamath, Sternlicht.

5. Lower Quality of Sponsors/Celebrity SPACs: Billy Beane, Shaq, Arod, Colin Kaepernick, Serena Williams, Jay-Z, Paul Ryan. This is not that different than celebrities getting paid to promote crypto and there is some overlap here. 

6. Recent SPAC Hedge Fund and ETF launches

Why will it pop?

  • Simple issue of Supply and Demand: In January, issuance was $63B. February is projected to be on Pace. If this continues, even with a moderate slowdown ($20B of net monthly issuance), I estimate total notional SPAC $ outstanding will be around $200B by mid-2021 and $320B at year-end.

  • The SPAC IPO narrative will break down: The view is that SPACS are now the preferred route to IPO: SPACS are now more mainstream, but the perceived speedy path to issuance for a lower quality company understates the hidden costs. The standard fee structure associated with SPACS is a 20% promote (paid in shares). This fee remains regardless of how poorly the SPAC trades on the backend and well exceeds costs of a traditional IPO. The lack of disclosure required for SPAC reverse mergers may cause SEC concern and potential changes. In the past few months, we have seen fraud and disclosure issues (Nikola, Clover Health) that may draw regulator attention. If the market cooled down, the appetite for newer issues would decline and we will be left with too many SPAC shells with lesser prospects. 

Tyler Durden
Mon, 03/01/2021 – 06:10

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