November 2016 Personal Income

Personal Income for November 2016 fell compared to October 2016. That’s not good, in case you were wondering.

The one-year rate of change 2.3%, down from 2.7% last month.

The annualized three-year rate of change is 3.2%, down from 3.4% last month.

The annualized five-year rate of change is 2.4%, the same as last month.

The annualized ten-year rate of change is 1.8%, the same as the prior two months.

Every Account Needs a Job

One of the consequences of having two jobs is a lack of time to spend reading. I subscribe to several free economic and investment newsletters. Thus, when the quarter ends, I spend some time catching up. It was yesterday afternoon when I read an essay by Ben Hunt of Epsilon Theory. He was writing on how every part of a portfolio needs a job. This was intriguing to me because I have been caught in the past with accounts trying to serve the same purpose.

My investing philosophy has evolved significantly over the years. I now have multiple accounts with distinct purposes. The latest account is with Lending Club. I had originally designated this account as a fixed income account, but I think that is changing slightly. I was surprised to see how quickly rates can change on the platform. I had assumed they would change as market rates change, but it appears they change with risk as well. Recently, there has been an increase in losses by investors. As a result, interest rates on new loans has increased. While I am pleased to see this reaction, I am forced to acknowledge the heightened risk in the investment. Because I am making a new investment each week, the possibility of changes in interest rates paid on principle has me considering this is no longer strictly a fixed income investment.

Instead, this is a counter cyclical investment. When the economy is doing poorly, interest rates on new investments will rise. When the economy is doing well, interest rates on new investments will fall. That should be the opposite of the two equity investment accounts I have, providing a level of stability to the overall portfolio. 

October 2016 CPI

When the October CPI numbers were released on Thursday, I thought it was curious how little attention they received on Bloomberg radio during my drive to work. Maybe because it was a report that came in exactly as expected, I thought. After collecting the data and doing a little bit of analysis, I’m not so sure.

Let’s start with the basics. The year over year change in the Consumer Price Index for October 2016 was 1.64%. The ten-year annualized change is 1.979%. These numbers are close enough to the Federal Reserve’s own 2% target that interest rates should be much closer to normal*. A rate hike in December is more than fully justified. Two rate hikes next year is below the minimum threshold — I would prefer to see four.

Inflationary pressures have been slowly building since May 2015. They peaked in May 2016 and have slowly been moving lower. For October, increases in inflation are seen in Housing, Apparel, Transportation, and Medical Care. Dropping off the list is Recreation and Other. In both cases, the rate of inflation is slowing. Food & Beverage and Education & Communication are in deflation. For the category of Food & Beverage, it has been in deflation for two consecutive months. This is the first for Education & Communication.

For the month of October, 69% of the index is seeing increasing inflation, 22% of the index is seeing deflation, and the remaining 9% is seeing a slowing rate of inflation. The sub-index that is experiencing increasing inflation has a year-over-year rate of 2.34%. This sub-index is on a four-month stretch where the rate is increasing at an increasing rate (from 0.95% to the current 2.34%).

The slowing inflation rate sub-index is slowing at a higher rate (0.06% last month to 0.98%). The deflation sub-index is also increasing from -0.60% to -0.28%.

What this tells me is inflationary pressures already exist in all three sub-indexes of the overall index. The Federal Reserve is still behind the curve and getting further behind.

* I know I have mentioned the concept of what constitutes normal for interest rates is elusive, but something close to 3% is justifiable.

Personal Income

I’ve started looking at a new economic series — real disposable personal income. Because the new Trump administration is likely to push through some significant tax policy changes, I want to start tracking this measure. I chose disposable because it is personal income less taxes. No other expenses are included.

The key point of following disposable income versus total income is to follow the combined affects of income increases and tax decreases. I really don’t care where the change comes from. I’m starting to follow this series now to establish a baseline.

Data comes from the Bureau of Economic Analysis at the end of each month. Thus, the month of September 2016 just became available two weeks ago. The one-year rate of change is 2.1% which is down from 3.3% in September 2015. The ten-year rate of change is 3.6% down from 4.1% in September 2015.

There are plenty of rumors regarding president-elect Trump’s campaign promises. Since we do not have a 2017 fiscal budget, the potential for another continuing resolution into January is possible. There is a possible path for the new administration to work with Congress to push through a reconciliation version of the 2017 budget that would include the tax promises from the campaign. This would hit the goal of getting it done within the first 100 days of the administration.

When I read that, I knew it was time to start watching this series. There could be some dramatic changes to disposable income coming in just a few short months.

Joining Lend Academy

Lend Academy is an interesting website where investors in Lending Club and Prosper get together and discuss issues. From my time on the Lending Club investor section the the forum, I have been impressed by the detail and sophistication of the analysis that has been presented. These people do not seem to be casual investors, but they are very serious about their investment and what they expect to achieve.

I recently received my October 2016 statement and walked through the XIRR calculation for the month. It was remarkable how few purchases I made during the month. It was especially so since nothing showed up on the screen during the last two weeks. I have two loans that have a status of “In Grace Period” and two loans that have a status of “Late”. Still, 92% of my loans by dollar amount have a status of “Current”.

The number of loans that have moved into a non-Current status has been the subject of a few posts on the Lend Academy forum. Some are speculating this could be the precursor of a recession. Others wonder if stacking is becoming more common (stacking is a situation where borrowers obtain money from multiple sites and either don’t pay at all or immediately go onto a payment plan). I don’t have an opinion on either, but I do worry about the resilience of borrowers if a slowdown in the economy is coming.

I opened my account in July. The XIRR calculation did not work well in the opening month so I discarded the result. For the month of October 2016, my XIRR is 4.80%. This is above August’s result but below September’s result. I do like this result since I am only 45% invested. If I was 100% invested in similar grades, I would have expected to see an approximate return of 9.60%. That would have been well above my target rate of 8%.

With the slowdown in the secondary market, I do not have much confidence in returns for November being much higher. With the grade composition likely being stable, the majority of the increase in returns will need to come from a higher investment percentage. That means continuing to purchase from the secondary market.

I did have a very curious situation arise during the month. On the first of November, I downloaded the notes from 2013 and ran a statistical analysis on the status of several characteristics of the loans. With the characteristic of “Purpose”, no individual item was statistically better than others. “Credit Card Refinancing” has been a stand out every month since I started in July. There have also been others that showed significant differences, but this is the first month where all of the “Purpose” types showed the statistically same outcomes.

It is far too early to consider using 2014 data. I just ran a test and 54% of the grade A loans are still open. That’s simply far too many to know the final percentage that will be Paid Off versus Charged Off.

I am certain there will be many more posts on the changes occurring in the Lending Club portfolio. Most of the knowledge I have about it will come from Lend Academy. The company will be releasing their quarterly results on Monday. With the stock price hovering around $5, I am hoping there will be good news. That price is a cut off point for some funds to invest. Maybe the price will go up and I can set aside immediate concerns about the financial viability of the company.