Greenlight Q1 letter; A dozen years of growth outperforming value; The predatory financial industry; Abusive debt collectors; Personal bankruptcies; PNC gives up revenue to tame overdraft fees; Funny story; Tough Mudder tomorrow
1) I always enjoy the insightful investor letters written by my friend David Einhorn of Greenlight Capital, and his first-quarter letter is no exception – you can read it here. Excerpt:
But for now, we believe inflation is only going one way – higher – and we are optimistic about our prospects. The wind is now at our backs. The economy is in full recovery mode. Household balance sheets are stronger than they have been in a long time and household income growth was up 13% in February compared to last year. And this is before the latest $1.9 trillion – with a "T" – pandemic relief stimulus. Corporate capital spending is booming. There are shortages and bottlenecks everywhere. Last month nearly one million jobs returned. There are signs of an emerging labor shortage.
As for the Fed, it fundamentally changed its framework last August. It no longer seems to care that monetary policy works with a lag. Actually, it has embraced an asymmetrical inflation policy: The Fed wants to be ahead of the curve on the downside to protect (the stock market and corporate bondholders) the economy. Behind the curve is fine on the way up no matter how frothy (the stock market) the recovery is. Now, it says it is only going to react to actual inflation that exceeds its 2% target for a period of time.
Furthermore, the Fed has indicated that it believes any abnormally high inflation will be transitory. We wonder, how will the Fed know? Do price increases come with a label that says "transitory"? Our sense is that no matter how hot inflation gets in the coming months, the Fed will continue with zero interest rates and large-scale asset purchases. After all, the U.S. Treasury has a lot of debt to sell and it isn't clear who, other than the Fed, can absorb the supply.
I found this chart from the letter particularly interesting – it certainly reflects my experience managing my hedge funds, where I strongly outperformed from 1999 through the global financial crisis, but consistently underperformed thereafter. (I became so frustrated and discouraged that I closed my funds in late 2017 – which turned out to be a blessing in disguise, as I love what I do now much more!)
2) I've spent quite a bit of time over the past two decades studying the myriad ways our financial system screws average people.
Think about it: Can you name even one financial product that hasn't been corrupted to a significant degree by all sorts of abuse? I can't. Mortgages, home equity lines of credit, auto loans, credit cards, overdraft fees, student debt, pawn shops, payday lenders, check cashers, time shares, rent-to-own stores, etc. – they've all had major scandals.
To be clear, there are many good financial products and there have been some improvements – for example, even though the housing market is white hot, I think the mortgage market has been largely cleaned up in the wake of the debacle that led to the global financial crisis. I recently experienced this personally when First Republic Bank (FRC), to its credit, put me through a very rigorous process before giving me a home equity line of credit.
But the financial industry still preys on millions of Americans, especially the most vulnerable ones.
One outcome is the rise of an enormous and scummy debt collection industry that uses every psychological trick to hound and harass people. One major player, privately held Sherman Financial Group, appears to be the worst of them all, as this Wall Street Journal article notes: Most Big Debt Collectors Backed Off During the Pandemic. One Pressed Ahead. Excerpt:
When COVID-19 hit the economy, most debt collectors gave borrowers a break, cutting back on lawsuits amid lockdowns, closed courts and loan-forbearance initiatives.
One of the biggest and least-known companies in the industry did the opposite.
Sherman Financial Group filed more lawsuits to squeeze cash from people behind on their credit-card bills. A Wall Street Journal analysis, based on the five state-court districts with searchable online records, showed Sherman had the largest year-over-year increase of any firm identified between last March 15 and Dec. 31 – up 52% from the year-earlier period, compared with a 24% decline in those districts for the industry as a whole.
Sherman, a privately held enterprise, through its subsidiaries filed 15,420 more debt-collection lawsuits in those districts than during the year-earlier period. Those courts serve 13% of the U.S. population.
In doing so, Sherman has cemented its reputation as a maverick in the industry. Since founding the company two decades ago, Sherman Chief Executive Ben Navarro has helped transform the once small and fragmented business of collecting old credit-card debt into a multibillion-dollar industry dominated by huge firms.
3) Another even worse outcome is that roughly 750,000 Americans filed for personal bankruptcy in each of the few years prior to the pandemic, as you can see in this chart from The Ascent:
Interestingly, while you might think all of the job loss and economic hardship caused by the pandemic would have caused a surge in personal bankruptcies over the past year, they've actually declined by 31% (so far anyway) thanks to stimulus checks and other government interventions, as you can see in this chart from the Wall Street Journal:
For those unfortunate Americans who do file for bankruptcy, however, you won't be surprised to learn that the system completely screws them at this stage as well, as this insightful segment on Last Week Tonight With John Oliver documents.
4) Every once in a while, however, there's some good news – here's an excerpt from the New York Times Dealbook last week:
PNC (PNC) gives up revenue to tame overdraft fees
PNC announced a move today to reduce its share of the $17 billion in overdraft fees that Americans pay every year. It's expected to cut customers' overdraft fees about 60%, and its own annual revenue by $125 million to $150 million. It comes as PNC prepares to close its deal with BBVA (BBVA), making it the country's fifth-largest retail bank.
Overdraft fees are paid largely by people who can least afford them. Eight percent of American families account for three-quarters of the fees, according to the Consumer Financial Protection Bureau. "Overdraft is an expensive fee they charge only on those people who run out of money that goes straight to short-term profits," said Aaron Klein, a senior fellow at the Brookings Institution.
"We weren't doing the best we could do by our clients," PNC's chief executive, William Demchak, told DealBook. Over the long term he expects that the move will help it gain market share. "In the short run, if it costs us 100 million bucks or something – so what?"
How it works: PNC's app will feature a "low cash mode." It sends alerts when an account is low, and when it goes negative the customer has at least 24 hours to fix it, including by reviewing pending payments and deciding which to prioritize.
"I think it will change the industry," Mr. Demchak said. For the largest banks to adopt a similar approach is a matter of technology – and desire. Overdraft fees help drive revenue: $35.61 per account annually for JPMorgan Chase (JPM) on the high end and $4.90 per account for Citi (C) on the low end, according to Mr. Klein. PNC fell in the middle, with $14.96 per account.
On Wednesday night – our last in Cape Town – my parents needed to grab a few things at the supermarket... So I pulled over and let them out while I sat in the car, reading in the dark on my phone.
About a minute later, I was startled when a woman pulled open the passenger door, leaned in, and started groping around the seat, saying, "Where is it? Where is it?"
Having just read earlier in the day that Cape Town has the 15th-highest murder rate of any city in the world (though in our bubble, we felt 100% safe), my heart was pounding. Was I being robbed? Did she have a gun or a knife? Should I jump out and run for it?
After what seemed like an eternity (but was probably only two seconds), I exclaimed, "What are you doing?!"
Now it was her turn to be startled! She looked up and replied, "Oh my God – I thought this was my car! I forgot my purse and was looking for it!"
She was very apologetic and we both had a good laugh...
(Note to self: Don't forget to lock the doors!)
6) After a 14-hour flight from Nairobi last night, I landed at JFK this morning and got off the plane at 8:11 a.m. I knew it was going to be tight to make a 9:10 a.m. flight out of LaGuardia, so I sprinted to customs and breezed right through thanks to Global Entry (a MUST if you do any international travel). I was in a taxi by 8:18, arrived at LaGuardia by 8:45, and ran to my (very distant, of course) gate, arriving at 8:52 - the last person to board. Piece a cake!
I'm flying to Atlanta to run the first Tough Mudder race of the season. It's my first since I ran the 24-hour World's Toughest Mudder in November 2019 (see my write-up here). If you're in the area, come brave the rain, watch or run the race, and say hi! A spectator pass is only $15.
Best regards,
Whitney