This is a continuation of my previous post: Investing in Peer to Peer Loans
LendingClub suggest a minimum of 100 loans (of equal size) to escape the risk of your luck with individual loans causing very bad results. Based on this diversity the odds of avoiding a loss have been very good (though that obviously isn’t a guarantee of future performance), quote from their website (Nov 2015):
This chart, from LendingClub, shows a theoretical (not based on past performance) result. The basic idea is that as the portfolio ages, more loans will default and thus the portfolio return will decline. This contrasts with other investments (such as stocks) that will show fluctuating returns going up and down (over somewhat dramatically) over time.
For portfolios of personal loans diversity is very important to avoid the risk of getting a few loans that default destroying your portfolio return. For portfolios with fewer than 100 notes the negative returns are expected in 12.8% of the cases (obviously this is a factor of the total loans – with 99 loans it would be much less likely to be negative, with 5 it would be much more likely). I would say targeting at least 250 loans with none over .5% would be better than aiming at just 100 loans with none over 1% of portfolio.
There are several very useful sites that examine the past results of Lending Club loans and provide some suggestions for good filters to use in selecting loans. Good filters really amount to finding cases where Lending Club doesn’t do the greatest job of underwriting. So for example many say exclude loans from California to increase your portfolio return. While this may well be due to California loans being riskier really underwriting should take care of that by balancing out the risk v. return (so charging higher rates and/or being more stringent about taking such loans.
So I would expect Lending Club to adjust underwriting to take these results into account and thus make the filters go out of date. Of course this over simplifies things quite a bit. But the basic idea is that much of the value of filters is to take advantage of underwriting weaknesses.
This chart (for 36 month loans) is an extremely important one for investors in peer to peer loans. It shows the returns over the life of portfolios as the portfolio ages. And this chart (for LendingClub) shows the results for portfolios of loans issued each year. This is a critical tool to help keep track to see if underwriting quality is slipping.
Peer to peer lending has grown dramatically the last few years in the USA. The largest platforms are Lending Club (you get a $25 bonus if you sign up with this link – I don’t think I get anything?) and Prosper. I finally tried out Lending Club starting about 6 months ago. The idea is very simple, you buy fractional portions of personal loans. The loans are largely to consolidate debts and also for things such as a home improvement, major purchase, health care, etc.).
With each loan you may lend as little as $25. Lending Club (and Prosper) deal with all the underwriting, collecting payments etc.. Lending Club takes 1% of payments as a fee charged to the lenders (they also take fees from the borrowers).
Borrowers can make prepayments without penalty. Lending Club waives the 1% fee on prepayments made in the first year. This may seem a minor point, and it is really, but a bit less minor than I would have guessed. I have had 2% of loans prepaid with only an average of 3 months holding time so far – much higher than I would have guessed.
On each loan you receive the payments (less a 1% fee to Lending Club) as they are made each month. Those payments include principle and interest.
Lending Club provides you a calculated interest rate based on your actual portfolio. This is nice but it is a bit overstated in that they calculate the rate based only on invested funds. So funds that are not allocated to a loan (while they earn no interest) are not factored in to your return (though they actually reduce your return). And even once funds are allocated the actual loan can take quite some time to be issued. Some are issued within a day but also I have had many take weeks to issue (and some will fail to issue after weeks of sitting idle). I wouldn’t be surprised if Lending Club doesn’t start considering funds invested until the loan is issued (which again would inflate your reported return compared to a real return), but I am not sure how Lending Club factors it in.
Total nonfarm payroll employment increased by 271,000 in October, and the unemployment rate was essentially unchanged at 5.0%. Over the prior 12 months, employment growth had averaged 230,000 per month – which is quite an excellent result. We are still recovering from the job losses suffered during the great recession but even considering that the results are excellent.
As my recent post noted, adding 50,000 jobs a month is the new 150,000 in the USA due to demographic changes. That means job gains in the last year have added about 180,000 jobs per month above the 50,000 needed to accommodate growth due to demographic changes (a larger population of adults.
The change in total nonfarm payroll employment for August was revised from +136,000 to +153,000, and the change for September was revised from +142,000 to +137,000. With these revisions, employment gains in August and September combined were 12,000 more than previously reported.
Household Survey Data
Both the unemployment rate (5.0%) and the number of unemployed persons (7.9 million) were essentially unchanged in October. Over the past 12 months, the unemployment rate dropped by 70 basis (from 5.7%) and 1.1 million fewer people are listed as unemployed.
Among the major worker groups, the unemployment rates for adult men (4.7%), adult women (4.5%), teenagers (15.9%), whites (4.4%), blacks (9.2%), Asians (3.5%), and Hispanics (6.3%) showed little or no change in October.
The number of long-term unemployed (those jobless for 27 weeks or more) was essentially unchanged at 2.1 million in October and has shown little change since June. These individuals accounted for 26.8% of the unemployed in October.
|4||Exxon Mobil||USA||$342 billion|
|5||Berkshire Hathaway||USA||$340 billion|
|9||Wells Fargo||USA||$282 billion|
|10||Johnson & Johnson||USA||$281 billion|
Google and Amazon were star performers in the last 4 months with Google up $127 billion and Amazon increasing $96 billion moving Amazon from outside the top 20 into 8th place. Facebook increased in value by $64 billion and moved from the 18th largest market cap to 7th. The China market declined quite rapidly since June and the largest Chinese companies saw significant drops in market cap.
Industrial & Commercial Bank of China and China Mobile dropped from the top 10 (replaced by Facebook and Amazon). That results in USA companies holding the top 10 spots (the next 5 are either Chinese or Swiss).
The next ten most valuable companies:
|11||Industrial & Commercial Bank of China||China||$250 billion*|
|12||China Mobile||China||$247 billion|
|14||Petro China||China||$241 billion|
|16||JPMorgan Chase||USA||$241 billion|
|17||Hoffmann-La Roche||Switzerland||$231 billion|
|20||Procter & Gamble||USA||$210 billion|
Market capitalization shown are of the close of business October 30th, as shown on Google Finance.
The 11th to 20th most valuable companies includes 3 Chinese companies, 3 USA companies, 3 Swiss companies and 1 Japanese company. Alibaba, Tencent, China Construction Bank and Walmart dropped out of the top 20 (replaced by Amazon, Pfizer, Proctor & Gamble and Toyota). Alibaba remained above $200 in market cap making it the only company worth more than 200 billion that missed the cut. In the top 20 the USA gained 2 spots, China lost 3 and Japan gained 1.
The total value of the top 20 has barely changed since my June post on the top 20 most valuable companies in the world: from $6.046 trillion to $6.054 trillion. Since my October 2014 post of the 20 most valuable companies in the world the total value of the top 20 companies has risen from $5.722 trillion to $6.054 trillion, an increase of $332 billion. Several companies have been replaced in the last year to create the current top 20 list.
A few other companies of interest (based on their market capitalization):
Once upon a time in a land not so far away, if you wanted to start a business, you had to choose a city in which to settle–not just for the business but for yourself. A lot of thought went into figuring out where to set up your new company’s home base. Delaware and Nevada, for example, have been popular choices because of its business friendly regulations and corporate tax laws. Once you got your central location up and running you could think about expanding to multiple locations or turning your company into a franchise.
Those days are over. Sure, there are some who prefer to build businesses traditionally, but today thanks to advancements in technology and the rise of the internet and the ability to receive and send money online, even internationally, people can start a company anywhere and operate it from anywhere else (provided local incorporation laws do not require a specific length of time spent on site).
Migrants have long moved to a new country for work, and then transferred funds home. This has been nearly completely those migrating from poor countries (or poor areas in the countries) to rich countries. Now individuals from rich countries are taking advantage of low cost countries to lower their living expenses while running most of your day to day from…just about anywhere.
Businesses Can’t Really Be Nomadic, Can They?
It’s true: not every business is suited to a nomadic lifestyle. Independent retail shops, for example: though it is possible to oversee basic operations from wherever you are, until you have a full support staff you are going to be needed onsite. Local service businesses that specialize in trades like contracting, plumbing, electrics, etc. Those are difficult to operate via telecommute. Most other companies, however, can be adapted to a global marketplace and base of operations fairly easily.
I traveled for 4 years in SE Asia while operating my business. During that time my brother took a year to travel around the world with his family while running his business. He visited clients during his travels which took him through Brazil, Turkey, South Africa, India, Singapore, Australia and more. We met up for a week in Bali. There are challenges but there are great rewards also for businesses that allow you to travel while you work.
Which Businesses Are Best Suited to the Nomadic Lifestyle?
As previously stated, if you work hard enough at building your company and support team, you can run just about any sort of business from anywhere. That said, there are some companies and business types that lend themselves more easily to the nomadic lifestyle.
Chris Guillebeau covers a few of these businesses and the entrepreneurs who started them in his book, The $100 Startup. One entrepreneur, for example, runs a linguistics and translation business internationally. He loves languages and loves teaching so he moves from country to country, learning the local languages and then teaching them to tourists and expatriates who choose to move there. Guillebeau himself has turned his book into a tour, a conference (The World Domination Summit) and a series of Unconventional Guides. He travels all over the world and writes from wherever he happens to be at the time.
This chart shows that the percentage of millionaire families by highest education level is dramatically different by education level. The data is looking at USA family income for household headed by a person over 40. For high school dropouts, fewer than 1% are millionaires; all families it is about 5%; high school graduates about 6%; 4 year college degree about 22% and graduate or professional degree about 38%.
While the costs of higher education in the USA have become crazy the evidence still suggests education is highly correlated to income. Numerous studies still show that the investment in education pays a high return. Of course, simple correlation isn’t sufficient to make that judgement but in other studies they have attempted to use more accurate measures of the value of education to life long earnings.
Related: The Time to Payback the Investment in a College Education in the USA Today is Nearly as Low as Ever, Surprisingly – Looking at the Value of Different College Degrees – Engineering Graduates Earned a Return on Their Investment In Education of 21%
The blog post with the chart, Why Wealth Inequality Is Way More Complicated Than Just Rich and Poor has other very interesting data. Go read the full post.
Average isn’t a very good measure for economic wealth data, is is skewed horribly by the extremely wealthy, median isn’t a perfect measure but it is much better. The post includes a chart of average wealth by age which is interesting though I think the $ amounts are largely worthless (due to average being so pointless). The interesting point is there is a pretty straight line climb to a maximum at 62 and then a decline that is about as rapid as the climb in wealth.
That decline is slow for a bit, dropping, but slowly until about 70 when it drops fairly quickly. It isn’t an amazing result but still interesting. It would be nice to see this with median levels and then averaged over a 20 year period. The chart they show tells the results for some point in time (it isn’t indicated) but doesn’t give you an idea if this is a consistent result over time or something special about the measurement at the time.
They also do have a chart showing absolute wealth data as median and average to show how distorted an average is. For example, median wealth for whites 55-64 and above 65 is about $280,000 and the average for both is about $1,000,000.
Related: Highest Paying Fields at Mid Career in USA: Engineering, Science and Math – Wealthiest 1% Continue Dramatic Gains Compared to Everyone Else – Correlation is Not Causation: “Fat is Catching” Theory Exposed
European government debt has been sold at negative interest rates recently. The United States Treasury has now come as close to that as possible with 0% 3 month T-bills in the latest auction.
The incredible policies that have created such loose credit has the world so flooded with money searching for somewhere to go that 0% is seen as attractive. This excess cash is dangerous. It is a condition that makes bubbles inflate.
Low interest rates are good for businesses seeking capital to invest. These super low rates for so long are almost certainly creating much more debt for no good purpose. And likely even very bad purposes since cash is so cheap.
One thing I didn’t realize until last month was that while the USA Federal Reserve stopped pouring additional capital into the markets by buying billions of dollars in government every month they are not taking the interest and maturing securities and reducing the massive balance sheet they have. They are actually reinvesting the interest (so in fact increasing the debt load they carry) and buying more debt anytime debt instruments they hold come due.
The Fed should stop buying even more debt than they already hold. They should not reinvest income they receive. They should reduce their balance sheet by at least $1,500,000,000,000 before they consider buying new debt.
Unless the failure to address too-big-to-fail actions (and systems that allow such action) results in another great depression threat. And if that happens again they should not take action until people responsible are sitting in jail without the possibly of bail. The last bailout just resulted in transferring billions of dollars from retires and other savers to the pockets of those creating the crisis. Doing that again when we knew that was fairly likely without changing the practices of the too-big-to-fail banks. But I would guess we will just bail them out while they sit in one of the many castles their actions at the too-big-to-fail banks bought them and big showered with more cash in the bailout from the next crisis.
How to invest in these difficult times is not an easy question to answer. I would put more money in stocks for yield (real estate investment trusts, drug companies, dividend aristocrats), I would also keep cash even if it yields 0% and actually a new category for me – peer to peer lending (which I will write about soon). Recently many dividend stocks have been sold off quite a bit (and then on top of that drug stocks sold off) so they are a much better buy today than 4 months ago. Still nothing is easy in what I see as a market with much more risk than normal.
I am almost never a fan of long term debt. I would avoid it nearly completely today (if not completely). For people that are retired and living off their dividends and interest I may have some long term debt but I would have much more in cash and short term assets (even with the very low yields). Peer to peer lending has risks but given what the fed has done to savers I would take that risk to get the larger yields. The main risk I worry about is the underwriting risk – the economic risks are fairly well known, but it is very hard to tell if the lender starts doing a poor job of underwriting.
Related: The Fed Should Raise the Fed Funds Rate – Too-Big-to-Fail Bank Created Great Recession Cost Average USA Households $50,000 to $120,000 – Buffett Calls on Bank CEOs and Boards to be Held Responsible – Historical Stock Returns
The number of USA households spending more than 50% of their income on rent is expected to rise at least 11% to 13.1 million by 2025, according to new research by Harvard University’s Joint Center for Housing Studies and Enterprise Community Partners.
The findings suggest that even if trends in incomes and rents turn more favorable, a variety of demographic forces—including the rapid growth of minority and senior populations—will exert continued upward pressure on the number of severely cost-burdened renters.
Under the report’s base case scenario for 2015-2025, the number of severely burdened households aged 65-74 and those aged 75 and older rise by 42% (830,000 to 1.2 million) and 39% (890,000 to 1.2 million); the number of Hispanic households with severe renter burdens increases 27% (2.6 million to 3.4 million); and the number of severely burdened single-person households jumps by 12% (5.1 million to 5.7 million).
Enterprise Community Partners argues for more government action on affordable housing. I am worried about such efforts being done in a sensible way but I do agree with the concept of supporting affordable housing. I would use zoning to require affordable housing construction along with market rate housing.
Doing such things well requires a government that is not corrupt and fairly competent which isn’t so easy looking across the USA (unfortunately). An example of somewhere that does this fairly well is Arlington Country, Virginia (which also has a good non-profit focused on affordable housing). Good non-profits can play a vital part in affordable housing over the long term.
My comments on a post by Kiva about their decision to end the Kiva Zip (direct to people loans – no intermediary financial institution) program in Kenya.
I do think it is very important to retain an infrastructure for those people you got to try the new effort with, as I believe Kiva will. This has to be part of any innovation efforts – a budget to include unwinding the effort in a way that is in keeping with Kiva’s mission to help people. I strongly believe in efforts to avoid abandoning those who worked with you in general, but for those taking loans from Kiva it is much more important than normal.
Keep up the good work. And keep challenging Kiva to get better and not get complacent when things are not going as well as they should. I am happy to continue to lend to Kiva but I also am concerned that the focus on making a difference and making people’s lives better can be lost in the desire to grow.
The Curious Cats group on Kiva has made over $27,000 in loans to entrepreneurs around the world (the way Kiva works the groups, they don’t include Kiva Zip loans). You can join us. I believe in the model of micro-finance (Investing in the Poorest of the Poor [this one is grants instead of loans]), though I also believe we need more data on real experience of borrowers. Kiva Zip gives loans directly to people with a 0% interest rate. Normal Kiva loans have financial institutions (some of which are charities but they still have expenses) make the loans and Kiva lenders provide capital (at 0%) but the borrowers have to pay interest (the idea is they pay lower interest since the financial institution has a 0% cost of capital).
The USA economy is far from strong. The global economy seems even weaker. Inflation is not an imminent risk. Under such conditions the USA Federal Reserve adding gasoline to the economy via low interest rates makes sense.
The issue I see is that a .25% Fed Funds rate is adding gasoline to the economy via low interest rates. Many people are saying an increase is like taking away the gasoline and taking out a fire extinguisher. But it really isn’t. Raising the rate to .25% is slightly decrease the amount of gas you are adding to the fire. A .25% Federal Funds rate is pouring nearly as much gas on as you are able to but not quite the absolute most you are able to.
It is also true that the Fed bailing out the too-big-to-fail bankers and banks resulted in them not only opening up the gasoline as much as possible (taking rates to 0) they even went far beyond that with new methods of pouring on gasoline that hadn’t even been considered until the bankers’ risk-taking doomed the economy (and bankrupted their institutions – without government bailouts propping them up).
The Federal Reserve has finally turned off the massive extraordinary dumping of gasoline onto the economic fire (via quantitative easing). But they have kept not only dumping lots of gasoline on the economy but doing so to the absolute maximum possible via a 0% Fed Funds rate.
Arguing for slowing the amount of fuel you are dumping into the economy is not the same as saying you are constricting the economy. We have been put into a crazy global economic condition by the too-big-to-fail bankers and the massive amounts of government and personal debt taken out. So simple analogies are not effective in making policy.
The analogies can help explain what the intent and expectation of the policy is. It is true we have created a very tenuous economic foundation (and we haven’t in any way substantial way addressed the risk too-big-to-fail bankers can throw the global economy into and we still have massive debt problems). The main beneficiaries of the central banker’s policies the last nearly 10 years are too-big-to-fail bankers and those borrowing huge amounts of money.
Those suffering from the policy are savers and I fear those that have to cope with the aftermath of this massive intervention with likely bubbles (government debt, personal debt [including education debt in the USA, etc.]). The main reason I believe rates should be raised are to begin the path to stop transferring wealth from savers to too-big-to-fail bankers and those with massive debt problems.