Beyond the Obvious: USD 13.1 Trillion Consumer Credit Market

Beyond the Obvious: USD 13.1 Trillion Consumer Credit Market

Conventional wisdom blends commonplace ideas and expert opinions and turns them into accepted truth. But conventional wisdom is not always right. 

Remember these so-called bits of wisdom—Stocks are risky. Work hard and beat the market. 
And you can never go wrong with real estate.

In the digital era, we coexist in the throes of disruption, which demand nimble thinking, respect for change, and real-time adaptability. Imagine business today if we had stuck with conventional wisdom—luminaries like Gates, Jobs, Bezos or Musk may have fallen to footnotes in the corporate annals.

Similarly, if you accept conventional wisdom in investing, you risk placing portfolios in mediocre markets, a danger zone where opportunities die, where yields evaporate, and where growth withers. Until now.

Thus far in our three-part blog series on disruptive technology, we’ve discussed artificial intelligence (A/I) and machine learning with its now proven capability to identify less obvious investment markets, namely alternative credit. 


In part three today, we revisit an overlooked investment opportunity: Consumer credit, an efficient asset class, and untapped 13 trillion market, with positive risk characteristics that shorten duration to 18 months, reduce volatility to 0.25 percent, and increase loss-adjusted yield to 7 to 9 percent.

 As an investment class, consumer credit has emerged slowly over this last decade to a somewhat bland reception. Conventional wisdom prevailed. Now, however, it is time for the clarion call. 

Pagaya’s proprietary A/I technology, Pulse, channels deep machine learning, orchestrated by an exceptional cadre of data scientists and engineers, to pinpoint and unlock sustainable investment value. When you augment your insights with Pulse, you enter an evidentiary data portal that continuously customizes, optimizes, and validates the foundation for logical investment decisions. In our opinion, Pulse is the single most important fulcrum to connect institutional investors with data complexity of consumer credit. 

Since 2009, the average consumer credit interest rate increased nearly 300 basis points, while BB yields decreased more than 800 basis points. But that’s only one small set of 1s and 0s across a limitless universe of numerical opportunities. Let’s take a moment to outline the current state of the consumer credit market on a micro/macro level:

Although absolute levels of consumer debt rose post-2008, average consumers are still healthy in terms of household obligations. Also, the percentage of disposable income is less today than in 1980 and 2009. 



Original source: Hvst.com

Consumers Carry Less Debt Today

Average Consumer Financially Stable

Original source: Hvst.com

Rex Nutting, Market Watch’s international commentary editor, sees consumer credit this way :

Original source: Hvst.com

The Alternative Asset Class for Perceptive Investors

As you know, private consumer credit layers muscle onto the United States economy. Most investors enter indirect exposure via securitized assets. And, here, they provide low-cost financing for financial institutions in highly rated mortgages, auto or credit card bonds. 

Notably, consumer credit expanded from $7.1 trillion 15 years ago to $13.1 trillion today. For example, online Marketplace Lending Platforms (MLPs) in the United States (originally known as peer-to-peer lending) debuted in 2006, giving investors access to the asset for the first time. 

Since that time, more than four million new loans have been issued online, totalling more than $50 billion in consumer credit. Also, as you know, two major lending platforms rose quickly to leadership: Lending Club at $35 billion in issued loans and Prosper at $12 billion-plus. Last year, fintech companies issued 38 percent of all U.S. personal loans, according to TransUnion. That’s up from 35 percent a year earlier and just 5 percent as recently as 2013.”

Reduce Risks, Improve Ratios

Pagaya asset managers firmly believe that consumer credit represents a highly valuable long-term spread asset for portfolio ownership. Once you become familiar with the Pagaya market approach, we also believe you will view consumer credit as a defensive asset class without the return compression of traditional asset classes. 

Consumer credit investment helps to generate worthwhile returns due to acceptable interest rate, credit and liquidity risk. Asset performance exhibits low-interest rate sensitivity with loss-adjusted yields of 7-9 percent, as mentioned earlier. In fact, as investment instruments, consumer credit provides comparable returns to high yield, again with less volatility and delivers similar returns to private credit with a better liquidity profile. 

Our premise bears repeating:  Long-term, consumer credit presents as an unexpectedly attractive asset to hold in a fixed income portfolio because, at this point in the cycle, consumer credit loans carry positive risk characteristics to shorten duration, reduce volatility, and increase yield. 

And, while the above statement may not constitute conventional wisdom today, our data points to its destiny to reach traditional status for those investors who see and act beyond the obvious today. 

Another immeasurable benefit awaits forward-thinking investors.

Today’s actions will help to finance economic growth for 2020 and beyond.