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%. 
- Lower volatility: Lending Club notes have provided 20 consecutive quarters of positive returns.
- 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. 
- Flexibility of monthly cash flow: Investors receive monthly cash payments of principal and interest to reinvest or use as income.
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.
 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.
 Based on platform performance as of July 24, 2012.
 Based on platform performance as of July 24, 2012.
 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