Alt Lending Macro watch: Jackson Hole 2020


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This week I am going to concentrate on what is happening when the worlds A list central bankers get together at Jackson Hole,

Banking Bigwigs Ignore impending disaster

Banking is basically a simple business and the fundamentals have never changed. When A.P. Gianinni started making loans to distressed entrepreneurs immediately after the 1906 earthquake which devastated the City he was sowing the seeds for the creation of the biggest bank in the world. That enterprise was made from a counter suspended by two barrels and a sign saying Bank of Italy later to become Bank of America. These loans were made largely on trust. Mr. Giannini knew his Italian immigrant customers and they knew him, he never looked back. So there it is: Banker makes loan, customer uses funds to do whatever he does, customer pays interest and principal back to banker. This has never changed since the time Shakespeare wrote the Merchant of Venice but the world has of course moved on in technological terms. Alt lending is nothing really knew apart from the use of software and external data to assess whether your client really does intend to pay you back or not. The software that drives digital lending has a huge amount of data to access and can or course process this incredibly quickly. But it is processing software and does not change the fundamentals. What I would like to hear about is the psychological work which is accompanying risk assessment. After all group psychology is determinable and ought to be a key factor.

This week I am going to concentrate on what is happening when the worlds A list central bankers get together at Jackson Hole, Wyoming. Thanks to COVID however the face to face meetings will not take place and will be replaced using communications technology. Without the immediacy of face to face contact and the lack of reporters you are unlikely to see too much about it but as Liam Halligan points out in his excellent article Jackson Hole 2020  is likely to be “Among the most important international meetings of my lifetime.” The reason for this is of course QE or printing money. Central Bankers have O’Ded on this since 2008 and never quite managed to ween themselves of it. It is now showing up on the radar as crazy things take place. The US economy is going to take a huge hit this year yet the Dow is at almost record highs? The same pattern has followed in the UK where the FTSE is also in the stratosphere. It does not take a rocket scientist to figure out that something is going badly awry. Nevertheless central banks everywhere seem clueless as to how they are going to carry on in a post QE world so expect more of the same.

But for the purpose of this piece I would like to indicate to the ALT finance group that Mr. Halligan is also pointing out that while asset values on big tech and so many other stocks are so inflated there is one sector that is languishing globally with valuations at a fraction of net asset value and this is the too big to fail banking sector. In particular he singles out the Eurozone with Deutsche Bank, Societe Generale and Credit Agricole all worthy of individual mention but the same syndrome applies to both UK, US and Chinese banks. The market is indicating that these banks are in fact Zombies and waiting for the inevitable collapse. Do not forget also that there are a lot of dependencies here which would bring Italian, Spanish and other sun belt banks into the fray. The challenge to the Central Bankers is will they force banks to disclose the real state of affairs within their opaque balance sheets recapitalise and restructure at the same time as wiping out their shareholders or is this something which can be kicked down the road. The politics of this will almost certainly mean more prevarication so I would not make any bets on firm action being taken. However the problem of inflated corporate asset and sovereign bond prices are now being felt in the real world and the risks are rising. A by product of both this and over zealous regulation is that a large part of the market is being starved of credit. I hear from Germany that there is a serious concern that the huge Mittelstand sector is facing a tightening of credit just when they need it most.

So is this the reason some of our banks here in the UK are tightening their lending policies and adopting more conservative criteria. If so it would be foolish of the alt bank lending sector not to take notice. It looks like we are all going to have to change tack somewhat. If I were in the sector I would start evaluating debt recovery application software. It might just be needed.  However across Europe defaults and bankruptcies will not be popular so don’t expect free reign.

Well now we have heard from Jerome Powell and there is nothing earth shattering to announce. so more of the same. With an election coming up I don’t think anyone expected anything else. Nevertheless the world is still in a parlous situation. The really big problems are not being addressed. Is there a way out of this. It doesn’t really look like it.

Howard Tolman is a well-known banker, technologist and entrepreneur in London,

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