We have reached the end of September and I had three days this week where no loans for sale on the secondary market reached my trading criteria. I’ve had one day per week where this happened, but three out of five is remarkable. It was an uneven week since I did purchase ten loans total during the other days. It is quite notable how many minimum loans are for sale (original purchase price was $25). I now have a large quantity of loans, but not a large amount of principle tied up.
I frequently do an analysis of how loans are performing. I worry about sudden changes in risk so I download the current state of every loan made and look at the risk profile for various parameters of the person requesting the loan. The results have been reasonably stable. Maybe you can extrapolate that and make an assertion the economy is doing well, but that isn’t where I want to go. Instead, I want to mention that I haven’t changed my buying profile. In other words, I won’t change the characteristics I look for just because I can’t find anything with my current criteria for sale or that I could possibly conclude the aggregate consumer is doing well. I stick with what I know because part of setting an acceptable risk profile is not changing it. The economy turns in cycles and not taking on excessive risk as the economy turns is the prudent action.
Instead of talking about the economy, I would like to mention I do not like where the Federal Reserve is turning. Chairperson Janet Yellen mentioned in a speech on Thursday the Fed may begin purchasing corporate bonds. She mentioned this in the context of noting the Fed is running out of government bonds to purchase within their original buy criteria. This is not where the Fed should be going. During the meeting at Jackson Hole, there was much talk about negative interest rates. This is also not a place where the Fed should be going.
It is beginning to reach the point where I need to be more vocal in my opposition to what the Fed is doing. We have gone past financial repression and are getting dangerously close to re-making markets and industries. When the Fed begins purchasing corporate bonds, they are explicitly saying who they want to succeed in the marketplace. When they set interest rates below zero, they are crippling banks, insurance companies, and pension funds. The institution is beginning to wield an out sized amount of power within the marketplace.
I was an avid believer in what the Federal Reserve did during the 1990s and 2000s. I have begun to switch to an opponent of everything they are doing. At this point of the cycle in the economy, they should be selling the $2.5 trillion in bonds they hold on their balance sheet (the size of the balance sheet should normalize back to where it was before the crisis which is 90% less than where it is now). For years the Fed followed the Taylor rule which says rates should be around 3%. Even if some economists are correct when they claim the Taylor rule is broken, LIBOR rates are at 0.90%, far above the Fed’s target of 0.25%. There needs to be a change in the way the marketplace functions and it needs to begin with a radical change in Federal Reserve behavior.