To our U.S. readers, happy Memorial Day weekend.
Thank you for spending your precious time with us.
In macro news, it’s time to make the call.
The Recession is Over. What’s Next?
We suggested in our prior newsletters “That This Time Is Different.” The contraction in activity was due to the physical constraints on economic activity. And so the recession ends just as soon as those restrictions are lifted.
All 50 states are now opening in some manner. We see a resumption in retail sales, employment, and industrial production growth.
Capital markets, looking about 6 to 12 months ahead, have roared in anticipation of recovery – even if off low levels.
Still, markets outside the $Tn+ safety blanket (including MPL loans and bonds) remain dislocated. The real economy has real harm and carnage not visible in public equities.
The good news – massive stimulus, early reads on treatments, and flattening the curve – is now mostly old news.
From Risk On to Risk Off?
We believe the next set of questions credit and equity markets will shift to are:
- What is the risk of a double-dip recession or disorder in the fall? (due to a second wave in the fall, contested elections over mail-in ballots, etc.)
- What is the “next normal” of consumer spending vs. baseline?
- What % of temporary layoffs will be permanent?
- What will credit losses look like when stimulus and hardship programs end?
We’ve been constructive on markets since our “Don’t Fight the Fed,” “This Time Is Different,” “Contrarian View on Consumer Credit,” and “Resolving the Asset Price Conundrum” analyses over the past several weeks.
We are at a point where no one really knows where we go from here. Our view is shifting to “expect more downside volatility ahead” as markets make sense of it all.
What to do as a Lender or Investor?
We believe vigilant monitoring and contingency planning is the best response to an uncertain future (e.g., have a “break the glass” plan as a lender, have a pre-approved investment committee plan to know what assets to buy if/when spreads blowout, etc.).
That argues for being flexible and responsive to market conditions, come what may.
The bedrock of vigilance is real-time data and analytics to help navigate the stormy seas. Reach out to see if we can play a role in this turbulent period ahead.
Takeaways from Powell’s 60 Minutes Interview
Fed Chair, Jerome Powell, had an interview with 60 Minutes. Below are some of the excerpts that we found helpful.
Source: Compass Point, PeerIQ
COVID-19 Accelerated Digital Spending & Lending: Grandma & Grandpa Go Digital
New customer segments (namely, the elderly population) are transacting digitally at a level never seen before the crisis.
On the retail front, Walmart and Target reported a dramatic increase in digital e-commerce transactions – 74% and 141% respectively.
In the earnings call, management noted an increase in not only new buyers, but also repeat rates across the board. Also, higher digital growth rates amongst customers who are 50 years of age or older.
COVID-19 has opened up a new segment of digital point-of-sale customers that would otherwise not have gone digital before.
Infrastructure players are benefitting as well. We saw in Jack Henry’s earnings (and Square and PayPal previously) that stimulus checks are increasing digital adoption.
Jack Henry reported a 63% spike in digital usage the first day stimulus funds were released.
Shopify noted that only a fraction of its brick-and-mortar users (~2%) were using some form of local delivery or buy online and pickup in-store service. By the end of April, that had risen to 26%.
Shopify Takes a Swipe at POS
Over the last few weeks, Shopify has made a definitive push to capture more payments and lending volume. Shopify issued a press release on a slew of new features and products.
It is a compelling offering that merges in-store and online sales. Key features include:
- Simplified omnichannel management that integrates online and off-line orders
- Interest free and no additional fee solutions
- The ability for staff to provide checkout anywhere in the store or curbside; and
- Reopening options like the ability to sell merchandise at alternate locations and calculation of shipping rates at checkout.
What does this mean for other POS lenders?
The big takeaway for “non-platform” POS lenders is that the winners in small business lending continue to be the channel players that have access to proprietary channels, unique data, and a frictionless experience (e.g., Intuit, Amazon, Paypal, etc.).
LendingTree release data showing evidence of “forbearance gaming.”
The takeaway is that the majority – 70% – of those in this survey who were approved for forbearance would have been able to pay their bills, but “wanted a break” from the normal pattern of making payments.
Here are the key findings from the survey:
- 25% of homeowners surveyed applied for forbearance due to a coronavirus-related hardship
- Of the 25% that applied, 80% were approved for forbearance
- While the majority of people who applied were approved, only 5% said they wouldn’t have been able to pay their mortgage without forbearance
- Another 26.2% of survey respondents said they could have paid their mortgages if they had not received forbearance, but would have needed to skip other essential bills to do so
- Constitutional Malice. Need to prove that high degree of awareness of falsity and furnish evidence. Also can’t get punitive damages
- 72% of those who received forbearance reported feeling at least a little guilty about it
For more on forbearance data, check out this WSJ article: “Millions of Americans Skip Credit-Card and Car Payments.” Highlights from TransUnion’s April data:
- About 840,000 personal loans were in deferment or another type of financial hardship in April, which accounts for 3.6% of those tracked. TransUnion’s estimates include accounts where the borrowers are pausing their payments with permission, as well as accounts that have been frozen
- About 15MM credit cards (about 3% of total) are in “financial hardship” programs according to TransUnion
- Nearly 3MM auto loans were in these hardship programs, which accounts for about 3.5% of those tracked. That’s up from 0.03% of credit cards and 0.5% of auto loans last year
Latest PeerIQ Tracker on Hardship %
Here at PeerIQ, we’ve been tracking the rate of loans in hardship programs on our platform. The PeerIQ analytics platform is summarizing exposures.
Source: PeerIQ Analytics Platform
Looking at U.S. consumer loans specifically, after a spike in early April, loans enrolled in hardship programs continue to stabilize around 14%.
Cross River’s Platform for PPP Loans
Times are tough. If you are a qualifying small business struggling to get a PPP loan, take a look at applying via our partner Cross River.
Cross River, a leading FinTech bank, has rolled out a fully digital process to make applications as seamless as possible. And you don’t need an existing bank relationship to apply.
Borrowers can securely link their own bank account and apply for loans (up to $2MM).
Click here for more information on how to apply.
Brex Raised $150MM and Plans for IPO?
Brex, led by CEO, Henrique Dubugras, raised another $150MM in a Series C extension from existing investors and Lone Pine Capital. Dubugras hinted that the startup was preparing to go public.
It’s a timely move for Brex. Small business credit cards generally are drawn down in a recession. It can be hard for a non-bank to stomach as contingent liabilities are going up, just as access to wholesale funding is going down.
Goldman Acquires Folio Financial to Build a “Full Stack Wealth” Offering
Goldman Sachs acquired Folio Financial. Folio Financial, led by CEO, Steven Wallman, will be acquired by Goldman Sachs for an undisclosed amount.
Whispers of the deal are in the $250MM range, with the deal set to close in the third quarter.
These fit into Goldman’s broader strategy to diversify its revenue mix towards retail banking and wealth management and the “spend, borrow, and save” paradigm.
- The Day Coronavirus Nearly Broke the Financial Markets (WSJ, 5/20/2020) The stock crash that occurred on March 16th, was part of a broader liquidity crisis that threatened the viability of America’s companies and municipalities.
- Fear of Risk Could Diminish the Economic Rescue by the Treasury and Fed (NY Times, 5/18/2020) The Treasury does not want to lose taxpayer money on the central bank’s emergency lending, which could leave riskier companies out in the cold.
- Millions of Americans Skip Credit-Card and Car Payments (WSJ, 5/20/2020) According to estimates from TransUnion, about 15MM credit-card accounts and 3MM auto loans didn’t get paid in April.
- Many Jobs May Vanish Forever as Layoffs Mount (NY Times, 5/21/2020) As layoffs ramp up, 42% of layoffs could result in permanent job loss.
- S. Expected to Revise Small-Business Aid Program (WSJ, 5/17/2020) Lawmakers and government officials are getting ready to make significant changes to the PPP program.
- Weekly Mortgage Applications Point to a Remarkable Recovery in Homebuying (CNBC, 5/20/2020) Buyers are coming back to the housing market faster than expected.
- Plaid Launches API Exchange To Accelerate Open Banking And Digital Transformation (Forbes, 5/19/2020) Plaid announced the launch of the Plaid Exchange (PX), which gives institutions an open finance platform that will help them manage the data connectivity that customers demand.
- Bank of America CEO Says Sees Recovery at End of 2021 (Bloomberg, 5/19/2020) Bank of America CEO, Brian Moynihan, said that they are “not seeing the type of credit damage that you’d expect.”
- Goldman Sounds the Death Knell for High-Yield Savings Accounts (Bloomberg, 5/18/2020) Marcus by Goldman Sachs joins competitors in gradually moving interest rates closer to zero.
- New Shopify POS Merges In-Store and Online Sales (PYMNTS, 5/7/2020) Shopify is launching a “rebuilt and reimagined” omnichannel that will help retailers during the COVID-19 pandemic.
- Shopify Announces Major Product Launches and Updates at Virtual Event Reunite, Including Shopify Balance and Shop Pay Installments (Businesswire, 5/20/2020) Shopify announced new product launches at their first virtual event.
- Goldman’s March Towards Full Stack Wealth (Medium, 5/20/2020) Goldman Sachs to acquire Folio Financial for an undisclosed amount.
- NASA Scientists Detect Evidence of Parallel Universe Where Time Runs Backward (NY Post, 5/19/2020) If you are running late to your meetings, you’ll always be the first on there in this parallel universe.