More evidence of millennials’ economic headwinds

I’ve written before about the intergenerational issues associated with Social Security in the US.  Now I read more evidence of the millennial generation having lower real wages, thus leading to negative savings rates.  Not altogether surprising, with the higher level of student debt.

Where does this leave us?  A lot of software development jobs are required for all those indebted millennials…

Happy Friday!

Median incomes and housing affordability

Housing: get it while it’s hot? Source: Google Images.

Today’s Bloomberg has an article about housing affordability in various US cities, with some harrowing statistics.  Apparently an average Brooklyn residence would cost 98% of median income in mortgage payments (10% down payment; 30-year fixed mortgage).

So that got me wondering about London.  A quick calculation, using the same methodology as RealtyTrac in the Bloomberg article:

• London median income: £23,800 p.a.  Source: London Datastore
• London median house price: £322,000.  Source: same as above
• Average mortgage payment: £1,770 per month.  That’s a 90% LTV, 25-year 5.5% mortgage.  Source: MoneySupermarket
• Therefore, mortgage payment as % of median income: 95%

BUT WAIT

1. A median income couldn’t borrow that much: The same mortgage calculator limits borrowing to around £100,000 for the median income.  Smart, seeing as 95% would be taken by the mortgage payments.  I assume this would be the same as the US.
2. UK doesn’t do truly fixed mortgages: The nice things about US mortgages are:
   1. Tax-deductibility of interest (at highest marginal rate)
   2. 30-year interest rate fix.  Today’s rate is around 4% p.a. (Source: bankrate.com)
   3. Therefore: if UK mortgage rates went up (and let’s be honest: they’re unlikely to go down much from here), the median income would quickly be insufficient altogether.

In sum: I guess we already knew this.  Housing is VERY unaffordable.  I’m sticking with other options.

Why is there so much trading? – A new addition to my Blogroll

I happened upon The Market Completionist today; Evan Jenkins, the author, writes very well on a range of more or less theoretical market concepts (e.g. efficient markets hypothesis/CAPM).  I only wish he’d write more often.

Anyway, reading his older posts, I happened upon this one addressing market information efficiency.  Among the ideas, the post asks why there is so much trading, when very little is required to achieve information efficiency.  In sum, informed traders will look to ‘pick off’ uninformed (noise) traders, such that the latter should run away/not take the other side of the trade unless duly compensated.  I imagine the end result of this is (similar to the study cited in the post) a market with very infrequent exchange, and discontinuous prices.

As an aside, this sounds a bit like the residential real estate market.  When you’re looking to sell your house, you’re looking for a buyer that hopefully gets an emotional attachment to the property; that allows you to extract a surplus from the buyer based on his/her irrationality (or maybe a rational ’emotion’ premium?).  Same when you’re buying a house: you want the seller to think you’re an emotionless market-maker, who demands a large discount to take the other side of the trade.  Where shall the two meet??

Anyway, I’m very happy that most financial markets these days have a great deal of (over?) trading.  The reason is simply price continuity.  Not only do I feel very confident that my shares in AAPL are worth the latest closing price (i.e. I know the value of what I own); but I’m reasonably confident that, should the need arise for me to sell my shares, I can achieve a price very near what I’ve seen posted on Google Finance.  As a house-seller in 2010, I can very much appreciate the latter point.

I guess we’re back to that old ‘market-makers/HFT as a service provider’ topic.  Does there need to be so much trading to ensure information efficiency in markets?  Probably not.  Am I still sanguine with the idea that so much trading takes place?  Sure.

More on ETF vol drag, via tastytrade

I’ve written before on the topic of vol drag; mainly why I like to take advantage of the concept in a long-term trading strategy.  In summary, volatility drag provides a nice tail wind for going short the leveraged ETF (the risk of the underlying can be hedged away using the unleveraged ETF, as well).

It seems that this concept is one of the more popular posts on my blog.  I’m not exactly sure why, but hopefully it’s from people who either stop using levered ETF longs to achieve portfolio diversification (e.g. using a long 2x/3x S&P ETF for long-term equity exposure), or from folks looking to use shorting strategies (e.g. long puts, short call spreads, short stock) to capitalise on vol drag itself.  I like to combine these two: for example, I’ll get most of my US Treasury exposure through writing synthetic covered puts on TBT.  That way I pocket vol drag on top of Treasury yields.

Tastytrade has done a segment on vol drag recently; it’s a pretty good overview of why vol drag exists, and how to take advantage.  If you like to have someone explain the item,  I recommend.  It was somewhat refreshing to see them use a short-VXX strategy as an example – the first time I’ve seen them softly advocate being short VIX.  The fact is, being short VIX is usually a winning strategy – indeed, this is just a purer form of writing option strangles on the S&P.  Just remember to cover your backside in case Oct 2014 happens again…

Latest read: Alex Elder

Equities continue to be a bit ‘meh’; oil and the rest of the commodity complex are keeping me busy.  Now that I’ve sorted back-adjustments for daily futures, it’s on to intraday…

Onto the next problem… Source: Google Images.

What else am I doing?  The latest trading book for me is Trading for a Living by Alex Elder, an oldie but goodie.  It’s basically a practical overview of technical indicators, along with notes on money management and psychology.  His ‘Triple Screen’ system is quite popular, and easy to understand: it implements several notions that successful traders use (I’m guessing?):

• Examine multiple time frames.  Dr Elder uses weekly/daily/hourly as the example for his Triple Screen, but mentions this can be scaled down proportionally for intraday trading (e.g. hourly/10min/2min).
• Use multiple indicators.  In particular, use trend-following indicators to give the allowed direction of trades (e.g. if the long-term trend is up, only buy to enter), then use oscillators to give the entry criterion (e.g. stochastics/MACD hist).  He’s trying to maximise the value of both types of indicators, while admitting that each has drawbacks.
• Use tight stops.  Money management is pretty conservative.  Someone using the system will likely need to be OK with being stopped out a lot.

Anyway, seems like a logical, mechanical system.  I’ll try a bit this week to see how it gets on.