Gundlach Macro View; Goldman-E*Trade Speculation; Digital Banks Are Hot

By Tito Donis

December 8, 2019

Greetings,

This week, we touch on the macro front, reactions to the Schwab/TD Bank deal, and the latest industry news.

On the macro front, Bond King, Jeff Gundlach (DoubleLine CEO) has a 45-minute video interview sharing his thoughts on the big picture.

What has helped asset class returns in 2019 is the Fed’s U-turn reversal. The Fed has resumed expansion of its balance sheet to quell issues in the repo market, but they don’t want to call it “QE 4.”
- PQ: See our October write-up concluding the same here.
Macro picture - Based on the ISM report, GDP has started to look worse. Bond markets are showing troubling signs. The growth in national debt is substantially higher than the growth in national GDP. The expansion we’ve seen in recent quarters is debt based.
- “Dust up in the repo market shows the Fed has manipulated interest rates to a level that the market doesn’t accept. If you can’t overnight money at the Fed Funds Rate, it means that the national demand isn’t there.”
Elections - When asked about the upcoming election, Gundlach believes that if the economy holds, President Trump will win again. Gundlach believes that all candidates on the democratic slate have weaknesses. He thinks Pete Buttigieg is “terrific,” but will not endure.
Gundlach states there is a ~40% chance of a recession in 2020 (an improvement from 75% in the summer). We need to watch for consumer confidence and the continued weakness in retail stocks. Leading indicators are close to zero, but not negative.
- PQ: See PeerIQ recession watch indicators here.

Source: The Daily Shot, ISM, PeerIQ

Last week featured the announcement of Schwab’s interest to buy TD Ameritrade. In 60 days, Schwab has reframed the terms of competition by offering zero-fee trades (launched a price-war), launching a consumer lending business (threatening some FinTechs), and executing big ticket M&A to scale. After share prices of rivals tanked, Schwab was able to swoop in and make a well-timed bid for TD Bank.

As a result, there is speculation that Goldman might acquire a brokerage firm such as E-Trade (or we argue a cheaper robo-advisor), or potentially a depository institution to improve its net interest margin overnight.

Historically, Goldman has focused on bite-sized, tuck-in acquisitions. Whether Goldman does a deal or not will tell a lot about how aggressive and committed GS is to build out a consumer banking franchise to close the ROE gap. We should learn more within months - M&A activity is accelerating before election season, while the regulatory climate is favorable.

In financing news, Figure, led by CEO Mike Cagney, raised $103 million in Series C funding led by Morgan Creek Digital at a $1.2B valuation for Mike Cagney. Also participating in the deal were MUFG Innovation Partners Co. and other new and existing investors. Figure also announced they have received a license for crypto currency trading.

Digital banks are hot. Chime now has a valuation if $5.8B. Chime, led by CEO, Chris Britt, raised $500 million in Series E funding. The financing round was led by DST Global and included participation by General Atlantic, ICONIQ, Coatue, Dragoneer, Access Technology Ventures and Menlo Ventures. The proceeds will be used to hire more employees and to build out new financial products. The funding could also be used to make FinTech acquisitions.

Industry News:

U.S. Jobless Claims Tumble Again to 203,000 and Return to Near a 50-Year Low (MarketWatch, 12/05/2019) Unemployment claims drop by 10,000, the lowest level in seven months.
The 5 Debates that will Shape Fintech in the 2020s (Forbes, 12/02/2019) Top debates that may drive the FinTech industry in the coming decade.
FDIC's McWilliams 'Inclined' to Join OCC on CRA but Still has Concerns (American Banker, 12/03/2019) FDIC Chair is willing to collaborate with the OCC to restructure the Community Reinvestment Act, but has concerns about how the plan will impact CRA assessment areas and compliance metrics.
Meet the Man Loosening Bank Regulation, One Detail at a Time (New York Times, 11/29/2019) Federal Reserve Vice Chairman, Randal K. Quarles, aims to “refine” post-crisis bank regulation.
BankThink There's a Better Way to Regulate Small-Dollar Lending (American Banker, 12/04/2019) Bank-FinTech partnerships could be a better way to to regulate small-dollar lending as opposed to capping interest rates.
FINNOSUMMIT Miami by LendIt Fintech – Highlights from our First Latin American Event (Lend Academy, 12/05/2019) LendIt hosts its first ever LatAm FinTech event.
E-Trade’s Future is Clouded by Schwab-TD Ameritrade Deal (Wall Street Journal, 11/29/2019) How E-Trade is impacted by Schwab-TD merger, despite speculations of a Goldman acquisition.
Digital Bank Chime Now Has a Valuation of $5.8 Billion (Forbes, 12/05/2019) Chime raised $500 million in Series E financing, which it will use to hire more employees and to build out new financial products
Figure Scores $1.2B Valuation for Mike Cagney (PitchBook, 12/05/2019) Block-chain based lending startup, Figure, raised $103 million in Series C funding led by Morgan Creek Digital.
Goldman Makes Biggest Mexico Fintech Bet with MercadoLibre Loan (Bloomberg, 12/02/2019) Goldman Sachs lends $125 million to Latin American FinTech Mercado Credito to help them “democratize financial services.”
San Francisco-based Fintech Migo Raises $20 Million in Round Led by New York’s Valor Capital Group (Crowd Insider, 12/04/2019) FinTech firm that developed a cloud based lending solution secures $20 million in Series B investment round.
Online Lender SoFi Gets NY BitLicense, Clearing Way to Offer Crypto Trading (Yahoo Finance, 12/03/2019) SoFi gets approved for a New York virtual currency license granted by the New York Department of Financial Services.
Robinhood Pulls Bank Charter Application as FinTechs Face Hurdles to Disrupting Financial System (CNBC, 11/27/2019) Robinhood withdraws bank charter application with the OCC.
German FinTech N26 Targets IPO in 4-5 Years -Exec (Reuters, 12/03/2019) Berlin-based FinTech startup, N26, is in no rush for IPO.
Citi Ventures MD Ramneek Gupta: “Fintech Will Soon Become a Native Component of How Companies Operate” (Crowd Insider, 12/03/2019) Citi Ventures Managing Director believes that big tech companies will continue to launch and integrate financial services to their offerings in 2020.

Lighter Fare:

Your House on Mars Will Probably b e Stocked with IKEA Furniture (Popular Mechanics, 12/02/2019) IKEA sends Designer, Christina Levenborn, to a desert in Utah in order to simulate living on the Red Planet.