Lending Club Blog

The Death of Equities and the Growth of Lending Club

Wondering which way the stock market is headed?

So are the experts. Bill Gross, the Founder and Co-Chief Investment Officer of PIMCO who’s also known as “The Bond King,” dropped a bomb on the market in his August 2012 Investment Outlook piece Cult Figures. In it, Gross stated that investors have little to look forward to in terms of stock market gains and that the future of bonds is even more dire.

So, what’s an investor to do with this information?


What The Bond King said

Every month, Gross’s firm, PIMCO, publishes Investment Outlook, a short opinion piece by Gross that talks about what he believes is happening in the markets. Gross manages the world’s largest bond fund—PIMCO’s $250 billion dollar Total Return Fund–and has become somewhat of an investing celebrity over the past few years. So when he talks, people listen.

In Cult Figures, Gross lays waste to what he refers to as the “cult of equities.” By that, he means the idea that since the stock market has averaged a 6.6% real return (the “Siegel constant”) over the past 100 years, investors should continue to expect similar returns in the future. Many pension funds, insurance companies, and endowments use this magic number in their forecasts.

Gross sees this view as a mistake:

Yet the 6.6% real return belied a commonsensical flaw much like that of a chain letter or yes—a Ponzi scheme.” (Investment Outlook, August 2012)

For the United States, a country with a GDP that has grown closer to 3.5% over the same 100 years, stock market returns in the 6% range seem too high. Given the near-term economic outlook, Gross now believes the cult of equities to be dying. (For an interesting retort, check out Wharton Professor Jeremy Siegel’s response to Gross.)

It is also worth noting what Gross says on the bond market.

To rectify this shortfall, he believes governments will re-inflate their way out of this mess—meaning, they’ll use the power of inflation to make it look like people’s investments have increased in value, when really all that happens is that their money will be worth less.


So, what if the cult of equities is dying?

If one of the most preeminent analysts believes investors should expect less from the stock and bond markets and “more” from inflation, what’s an investor to do? Investor sentiment had dropped to a 2-year low all by itself before Gross’s stock market death sentence.

If Gross’ predictions of low stock market and bond market returns are to be taken credibly (and by the way, Gross is a bond guy—his stock market predictions haven’t always been, well, ontarget), investors must either a) ratchet down their expectations and/or b) find a way to achieve those vaunted 6%+ returns without inflation eroding actual value.

The death of equities and the growth of Lending Club

Enter Lending Club, taking advantage of fundamental inefficiencies in the personal credit markets and leading The New York Times’ Ron Lieber to recently reconsider Lending Club investments for his “Financial Plan for the Truly Fed Up.”

Credit card companies often charge the same high interest rates to everyone, regardless of their personal credit history. In contrast, when a borrower with great credit applies for a loan via Lending Club, Lending Club presents a risk-based rate which is driven by the borrower’s personal credit history. The result is a lower interest rate for the individual and potentially more robust returns for investors, who can spread out small amounts of money over many loans.  Everyone wins.

Lending Club investments offer investors the potential for:

  • Solid returns: 93% of Lending Club investors with 800+ Notes purchased directly from Lending Club earn returns between 6% and 18%. [1]
  • Lower volatility: Lending Club notes have provided 20 consecutive quarters of positive returns.[2]
  • Range of Returns: Lending Club notes have provided a Net Annualized Return by grade between 5.80% for A grade Notes and 11.52% for G grade Notes. [3]
  • Flexibility of monthly cash flow: Investors receive monthly cash payments of principal and interest to reinvest or use as income.[4]

We don’t claim to know whether the cult of equities is dying or dead, but we can offer an alternative way to potentially get better returns. Lending Club can play a key role in long-term investors’ portfolios for years to come.




[1] Return calculations based on accounts that have invested in 800 or more unique borrowers. 800 Notes can be purchased with $20,000. All data as of July 24, 2012. The availability of Notes/unique borrowers is dependent on your investment criteria. There is no guarantee that you will be able to invest in 800 or more Notes/unique borrowers promptly, if at all. The foregoing is not directed to the specific investment objectives, financial situation, or investment needs of any particular person and should not be considered investment advice. You should consider reviewing the prospectus with a financial advisor prior to investing. Past performance is no guarantee of future results.

[2] Based on platform performance as of July 24, 2012.

[3] Based on platform performance as of July 24, 2012.

[4] Your election to receive principal and interest payments may affect your return.

This paper and its contents are for informational and educational purposes only. This paper does not constitute investment advice or a recommendation as to the suitability of any product or security to any specific individual. Before making any investment decision, you should consider (with or without the assistance of a financial and/or securities advisor) whether the investment is appropriate in light of your particular investment needs, objectives, and financial circumstances. Past performance results have inherent limitations as to their relevance and use as they ignore certain factors such as timing, liquidity, and the fact that economic and market conditions in the future may differ significantly from those of the past. The information contained herein is generally believed to be reliable, but no representation or warranty is given with respect to its accuracy or completeness. Nothing in this paper shall be considered a solicitation or offer to buy or sell any financial instrument or to offer or provide any investment advice or service to any person in any jurisdiction.

Past performance is no guarantee of future results.

Lending Club notes are issued pursuant to a prospectus on file with the SEC.

Wednesday, August 15th, 2012 at 12:36 am

Comments (10)

  1. Plasticman:

    At Last Lendingclub.com is almost equal to a Money Market Fund for
    Insurance Companies and Hedge Funds. Life Insurance is Based on
    Insurance companies investing in 30 year U.S. Government Bonds. How
    can they make a profit at less than3% interest returns. Voila!,
    Lendingclub.com with its 14day 60% funding loans can solve their
    profit problem by allowing them to also GO Short Term 60 days or
    less to increase their interest return by lending to our almost
    PRIME Borrower members that are certainly better than some
    countries like Greece and other Greece Wanabe countries. This
    tremendous boost in short term profits will close out most of our
    best quality borrower member loan requests! All that Lender Members
    like myself will have to do is to SPOT the BEST Borrowers and GET
    Get on EARLY! Q.E.D. Plasticman

    August 15th, 2012 at 10:26 am

  2. TBM:

    I have to strongly disagree, LendingClubs (LC) rates are mirages.
    Investors are have to rely on questionable information to make
    loans and inept collection methods when things go sour. If your
    happy making 1% then LC is the place for you.

    August 15th, 2012 at 6:11 pm

  3. TJ Lockshmit:

    The cult of equities is dying! The lending club is an extremely
    interesting alternative especially with returns being as high as

    August 16th, 2012 at 10:14 pm

  4. Next1:

    I think we are some ways away from a time where the average retail
    investor starts actively seeking out LC as an alternative to mutual
    funds etc (which are money black holes IMHO). BUt if LC actively
    seeks them out believe me they will come. It just makes sense and
    it give the average joe some control over his investments. The
    market is broken and rigged and people are desperate for an
    alternative. Seek them out and spread the word.

    August 16th, 2012 at 10:38 pm

  5. 2008 economic downturn has changed everything. Nobody likes
    equities anymore.

    August 31st, 2012 at 6:11 pm

  6. These days, stocks are doing poorly for most people. you invest
    some and end up losing more. Sometimes it seems like it’s not even
    worth investing because of the small returns. Thanks for sharing

    September 1st, 2012 at 5:56 am

  7. A Nolan:

    Agreed Plasticman!

    September 1st, 2012 at 8:34 am

  8. Pablo Galvan - Seo de Google:

    It looks like a very good investment… right now is a very
    important moment to make the rights decisions, this seems a secure
    option for part of your savings.

    September 4th, 2012 at 9:10 am

  9. Alex I.:

    Well money is so hard to predict. Gross obviously knows what the
    heck he’s talking about though. A 6.6% return is the average if you
    picked the right stocks, I think we just need to create a new
    financial system.

    September 7th, 2012 at 6:20 pm

  10. Len:

    Anyone else notice that the date that this blog article was
    published was august 15? On another note, I’ve been noticing that
    there seems to be some issues with the folio trading platform on
    lendingclub with one of the most frustrating being that many notes
    cancel before their expiration dates. Most are notes that I have
    repriced, which sets the expiration an additional 7 days but
    usually they cancel on the original (before they were repriced)
    date. Anyway you guys can fix that?

    September 9th, 2012 at 3:04 am


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