Millennials And The FED
THIS is the Financial Stability Report that the Federal Reserve Bank compiles and releases. Twice a year, in May and again in November, the FED takes a bird’s-eye view of the economy and where the major risks are to be observed. The report is lengthy; this one is 85-pages long, so I want to summarize the keys to its message, because it’s unique.
I’ve never seen the FED acknowledge the topics within it so broadly, decisively and emphatically, so strap up; this report shows why the markets have entered a cyclically-active period.
I remember how in September, as the weather in Tel Aviv cooled off a bit and humidity levels subsided to 70%, down from August’s disgusting humidity averages of 85%-90%, I went rowing in the river, stand up paddling in the Mediterranean, go-karting with friends, wall climbing with my daughter, cycling the city with my wife, drinking coffee at rooftop bars and just wanted to enjoy the outdoors much more.
Recently, I have been in the mood to just kick back in the apartment, but my itch for sunlight and adventure is coming back and I will probably exploit the perfect November weather to enjoy some activities in the days ahead.
This is cyclical behavior; it ebbs and flows and can go from really wanting to be active to not willing to leave the apartment and just enjoying staying in.
The FED believes that the millennials are behaving in a cyclical manner, with regards to markets.
Their observation is that millennials have now entered equities, use far more debt, margin and options trading (double the amount) as the average investor does, and are far more susceptible to wild swings, big crashes and volatility to the downside.
They’re right, of course, on one thing, but are gravely mistaken on the other…
As you can see, millennials have completely and utterly changed options trading. The world of investing before the pandemic hit and the one we live in today are far different.
$894bn of single stock options traded on October 29th, the highest single day ever traded!
For comparison, the value of shares traded on that very day was $470bn, or HALF the amount!
93% Of Investors Generate Annual Returns, Which Barely Beat Inflation.
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Retail investors are trading short-term options mostly, with expiry dates of two weeks.
They can’t sit on a few thousand dollars in cash; they’d rather just gamble those miniscule sums on YOLO trades and let the chips fall where they may. The reason they do that, in my personal opinion, is that they see that with their salaries and wages, it will take them thirty years to amass larger sums, so they feel desperate on the one end, and on the flipside, the river flow of information on “juicy trades” on social media is almost irresistible.
If you’re on any financial blog or platform, you’ll see dozens of ideas floating around every single week, so the temptation to make a quick buck, especially with access to amazing research for free, is too big.
Of course, it helps that the markets are basically hitting new highs weekly, same as cryptocurrency prices, so you feel reinforced to take on leverage.
Where the FED is getting this wrong is not on their observation that millennials now play a major role in determining market trends and equities valuations (I agree with them there), but on the idea that this is “cyclical” behavior.
The millennials don’t have a hobby or a pet toy called a trading account; they’re here to stay, because they love it.
They love the game and the action, and unless something truly crazy happens, they are sticking around in a structural fashion and will continue to increase volatility with their options and with the speed at which they flock from one place to another.
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