Tuesday, October 27, 2020

CDC data on TN Covid hospitalization and death rates (17 day lag)



Why are house prices climbing?

Two obvious answers:  cheaper borrowing is increasing demand; or consumers want a better place to work-at-home.  The bigger price increases in lower density (lower virus risk) areas suggest that it is the latter:

Phoenix, Seattle and San Diego reported the highest year-over-year gains among the 19 cities (Detroit excluded from report due to virus-related reporting constraints). Chicago and New York reported the weakest YoY gains.

Thursday, October 15, 2020

Airlines are Sunk Costs

Demand for air travel fell during the pandemic, like a lot. It fell to about 5% of the previous year in early March and is still at 30%. And it won't get back to 100% for at least a year, maybe two or three. Assets are going to have to leave this industry.

The physical assets are very industry specific. There is little else you can do with an airplane but fly it. This is a risk one takes when one invests in airlines. Subsidizing these does not help since these assets are sunk costs.

Human capital is also very industry specific. There is little use for most pilot, flight attendant, and airplane mechanic skills for a years. For many, this human capital is now worthless. Fortunately, humans are more fungible than airplanes. They can acquire new human capital. Perhaps we want to help them out until then. How much?

The bailout in March was $25 Billion and the industry employed ~634,000 full-time workers. This comes to ~$40,000 per worker for six months. Unfortunately, a stipulation was to prevent layoffs - that is, keep people from acquiring new human capital. They say they need another $25 Billion to keep these workers employed over the next six months. Perhaps, instead, we allow the airlines to shed these workers but give these laid-off workers retraining subsidies.

HT: Tim Wunder

Monday, October 12, 2020

Are workers being compensated for living in Minnesota?


It appears that the higher real wages (adjusted for the cost of living) reflect the cold, unpleasant climate.  

Sunday, October 11, 2020

Reducing leverage hurts options buyers

Financial options on funds are bets that, e.g., a fund's price will increase up to a specified strike price.  Leverage tends to make a fund more risky, and more likely that the fund price will hit the strike price at which the option pays off.  

So far so good.  But for every person who buys an option (long) hoping that the price will increase to the strike price, there is a seller on the other side (short), who hopes that it doesn't.  

Colleague Bob Whaley has pointed out that changes in leverage of the fund can reduce its volatility which would make it less likely to pay off (link).  Using data from 2018, Whaley gives an example:

...ProShares had reduced its leverage ratios in Ultra VIX Short-Term Futures fund (UVXY) and its Short VIX Short-Term Futures ETF (SVXY). The combined market value of options on the two names fell more than $116 million, ... 

These types of corporate events, not accounted for properly, result in “windfall transfers of wealth from outstanding long to outstanding short option holders,” Whaley concluded. 

BOTTOM LINE:  Beware of buying options on funds that can change their own volatility.  (I wonder if anyone sold options on the stock who had had control of the fund's leverage.  If so, it is a textbook example of Moral Hazard!)

Wednesday, October 7, 2020