This AI-generated transcript has been lightly edited and condensed for formatting, but is no substitute for the actual recording, which you can access by clicking here. And don’t forget to sign up so you don’t miss the next one!
Sloane Ortel (00:10):
Welcome to the free money podcast. This is a pretty special episode, right Ashby?
Ashby Monk (00:16):
It is, we desperately need something. What do we need?
Sloane Ortel (00:20):
I think like people, a lot more people have been listening to our podcast since we started getting guests on. And so I think in this episode, we've basically gone. Let's do three guests.
Ashby Monk (00:30):
That's right. And the first two guests are gonna come and right off the bat here because they've both had birthdays and their dad agreed as part of their birthday present to put them on the free money podcast.
Sloane Ortel (00:44):
I'm so excited. This is going to be our best episode ever.
Ashby Monk (00:47):
Should I bring them over?
Sloane Ortel (00:47):
Speaker 2 (00:51):
I've got two kids, Henry and Beatrix Henry just turned 10. And B's birthday is today. B and Henry. Welcome to the free money podcast.
Beatrix and Henry Monk (01:02):
Sloane Ortel (01:06):
You guys are the stars of the show. What do you think of the free money podcast?
Henry Monk (01:10):
Well, I mean, it's pretty cool. Dad does all this stuff about... Isn't it like, you talk about the coronavirus and finance and stuff like that.
Ashby Monk (01:21):
We try to make, we try to make finance fun. What do you think? B.
Beatrix Monk (01:35):
I think I'm the same as henry.
Sloane Ortel (01:35):
What would you guys say that your dad actually does for a living?
Henry Monk (01:39):
I, I mean, he works to make finance fun and works to make the world better. Basically he works to make the world better.
Sloane Ortel (01:52):
That is like pretty on point. I think.
Ashby Monk (01:56):
I appreciate that guys. I'll be giving you gifts later for saying that.
Ashby Monk (02:01):
So Henry and Bea, happy birthday. You just both had these birthdays during the midst of the COVID. Well, we've got you here. How different do you think your birthday was this year as compared to last year? Henry? Why don't you start? And then B.
Henry Monk (02:30):
I think my birthday was bad and good this year. The bad part was that it was during the coronavirus, I couldn't have a sleepover or any playdates the past few weeks, or actually I think months.
Ashby Monk (02:40):
Yup, four months.
Henry Monk (02:43):
So it's been really hard to keep in contact with the people I love and are friends with. So that's a problem, but the good part is that I get lots and lots of iPad. I get to eat a lot of stuff I usually don't get to eat like snacks, gummy bears.
Ashby Monk (03:01):
So it's good and bad?
Henry Monk (03:01):
It's good and bad, yeah.
Sloane Ortel (03:01):
Gummi bears are great, I totally agree with that.
Ashby Monk (03:29):
Is there anything good that it's like different this year?
Henry Monk (03:31):
Well, one thing is that the coronavirus means we get a trampoline.
Ashby Monk (03:31):
Whoa. we got a trampoline? Legit! Who built it?
Henry Monk (03:31):
Henry Monk (03:31):
It was insane and we only had one near broken bone, which was by you.
Henry Monk (04:09):
Yeah I was jumping on the trampoline and it was incorrectly built.
Ashby Monk (04:09):
Oh man, well happy birthday. We'll have you back on the podcast next year on your birthday again. Hopefully not during COVID. Take care.
Henry Monk (04:24):
Ashby Monk (04:24):
So that was the kiddos. Oh my God. Now let's get on with the podcast.
Sloane Ortel (04:32):
I'm jealous of your trampoline. And that sounds pretty fun.
Ashby Monk (04:36):
It took like 12 tries to build it. They're serious projects. There's a wall going up the sides to prevent broken arms, but if your kid goes and bounces on it before you get the wall built, because he's so excited that the trampoline is almost done. If it happens to bounce off the edge of the trampoline, he'll almost break his arm. It kind of defeats the purpose of the wall. He jumped on it, he fell off. We had to take him to the ER.
Sloane Ortel (05:09):
I think I was reading on Reddit. There was like this thread about like, you know, what do people in your profession hate more than anything else? And one of the most upvoted comments was I'm a pediatrician and we hate Trampolines. But I think Henry nailed the theme for the show. The bad news. Good news.
Ashby Monk (05:31):
There is so much bad news. Yeah. You know, it's like with these crises, you are, you obviously have opportunities for remaking something or innovating. And, and with all these bad things going on in the world, who knows maybe there are some new and interesting things. Maybe not a trampoline level of good, you know, we did have one episode with Tom Baruch where he was like, this crisis is going to help us solve climate change. So who knows?
Sloane Ortel (06:01):
Yeah, exactly. I mean, I think, you know, part of the, part of the weirdness about like the, you know, the concept of uncertainty in economic dialogue is that like when have we ever had certainty, you know you know, like we had, you know, the clear, you know, there is no alternative narrative at one point to, you know, investing in risk assets. We had... I remember very well going to a bunch of conferences called investing in a low return world. Remember that?
Ashby Monk (06:32):
That was like just before the returns went through the roof. Right?
Sloane Ortel (06:35):
Yep, exactly. You know, so like, you know, we should probably examine the notion that there are, you know, there is ever some sort of certainty, but like, it feels particularly whipsaw-y right now. Cause like, and I don't know if this is just the bubble, right? Like I live in New York city, a quarter of New York city renters have not paid rent at all since March.
Ashby Monk (06:55):
Sloane Ortel (06:57):
Which is insane. Like, I mean, like there's literally a quote from a federal agency that says it would take something on the order of divine intervention to keep the situation from worsening. You know, which is like, I mean, separation of church and state, we can talk about that, but it's a heck of a quote. You know, and I'm like, and then there's like the BCG or the, I think the census Bureau actually found that like across the country, 13% of renters had no confidence that they would pay their rent or and only 20% have only slight confidence. So that's roughly the same number one in three you know, folks who, you know, have a rent payment coming up, don't know how they're going to make it. And then about half of people, according to BCG, like 58% of gen Z millennials, 46% of baby boomers are worried about their personal finances due to COVID like, that's a pretty bleak picture.
Ashby Monk (07:56):
Yeah, no. I mean, the fact that some of the listeners might not know this, but I started a company five years ago called long game co founded it with Lindsey, Holden and she's CEO. And the whole idea was to help people, you know, young people manage their finances and we witnessed a lot of the money coming out of the buffer accounts. We would provide buffer funds, basically personal sovereign wealth funds. You could call it. And, and money has been coming out and that's the bad news. We did see a huge uptake uptick around the stimulus. A lot of checks getting in long game. We perceived to be actually a good use of that since we provide these buffer funds. But the flip side of that negative story is the good story, which is a huge amount of engagement. So since COVID we've seen 30% more games played in long game, which is kind of astounding because we were already a highly engaging app in the app store, you know, like the average user on long game is playing a game a day.
Ashby Monk (09:06):
Well, since COVID, maybe people are staring at their phones more, whatever it is, young people are finally engaging in their finances. And so while we have this like terrible data around ability to repay rent or pay mortgages, maybe it's going to trigger, you know, higher levels of financial literacy or greater levels of interest in their own financial future. I'm not sure.
Sloane Ortel (09:31):
Yeah. I mean, I think that's fascinating. Like the, I mean, definitely there's some weight to the thesis that people are sitting on the couch and thus they want to play you know, the fun sorts of games that a long game has. But, but I think that really, there is a lot of attention being paid to, you know, these like fundamental, like how you're constructing your personal life sort of questions like that. I spent a bunch of time with a BCG report this morning that basically took the thesis that what's happened in China.
Sloane Ortel (10:05):
You know, like China is experiencing what the rest of the world is experiencing two months earlier. Right. they're opening up the, you know, so we can look to the Chinese consumer to tell us a little bit about what we might expect from the American consumer, from the European consumer and what they found. I mean, like, this is a shock, right? People are trading up to buy more fresh and organic food to buy more nice stuff for their households. You know, and they, half of them say, I can't wait to start traveling again. Yeah. Which, I mean, I'm certainly in that camp. I mean, I, I very much miss, you know,
Ashby Monk (10:43):
Maybe I don't miss like trips through Salt Lake City on my way to Chicago, but I definitely miss trips to Sydney or Melbourne where, you know, you're experiencing like a lot of really interesting meetings and things that just, you can't do over, over zoom calls with, yeah, exactly.
Sloane Ortel (11:06):
I mean, like, I think like so it's, you know, that's like, you know, that's hopeful, right? I had been worried at the outset of this thing that people were just gonna react to it by just basically being traumatized and shutting down. You know, so, but like with all of these like kind of cross cutting winds, like what's the macro narrative, you know?
Ashby Monk (11:28):
No, I agree. Like we can look at the world and we can see, you know, just in terms of like the birthdays I've had to like develop it's completely different than last year. Right.
Ashby Monk (11:42):
Beginning of this, like I was like, Holy crap, you got a haircut, by the way i'm wearing free money merch right now. I've got my new t-shirt OMG GOP WTF available at the free money atelier.
Sloane Ortel (12:01):
A link for that will of course be provided in the episode description. And you know, I've also got my top quintile snapback, right? Yeah.
Ashby Monk (12:11):
But I guess aside from plugging our atelier, is that so much is different. Right? Like my kids' birthdays are different. My experience working at Stanford is different. And so what does that mean for like the American consumer or the consumer in general? Like where are we and how, how are all these industries that rely on these consumers going to be affected? I that's like the big question. I think a lot of us are wondering.
Sloane Ortel (12:41):
And like for better or worse, when we say consumer, what we really mean is debtor.
Ashby Monk (12:48):
Because fifty percent of Americans are in debt.
Sloane Ortel (12:52):
Debt, service payments are about five, 6% of personal consumption expenditures. Right. And like that, that difference, it makes a huge, makes a huge difference in aggregate consumer spending. So let's call someone,
Ashby Monk (13:06):
Let's call my friend. Let's call Perry Rahbar Who's the CEO of dv01, which is an analytics platform. They're basically the top data and analytics company around lending personal lending. They're doing it all.
Sloane Ortel (13:27):
dvO1 is a great name too, Dollar Value of a Basis Point.
Ashby Monk (13:30):
Exactly. Perry. Hi buddy. Welcome to the free money podcast. My friend, thank you for for picking up the phone.
Perry Rahbar (13:41):
It's great to be here. How are we doing?
Ashby Monk (13:46):
We're doing good. So I was just, you know, what we've been talking about for like the first 10 minutes of the show here is like what, what is happening to be American consumer and specifically debtor through the COVID. And really, we just wanted to give you a call because we've seen some of the amazing reports you've been putting out through dv01 and also just the fact that your platform has unparalleled access to the data on why don't you jump in and ask our first question and then we'll get Perry telling us all the wisdom.
Sloane Ortel (14:21):
Yeah. We're hoping maybe you would have some sort of a narrative for this. I mean, like we're looking through this, this sort of good news, bad news situation where like boosted unemployment, that $600 extra benefit that comes through the pandemic unemployment insurance program. And you know, the PPP loan program are both likely to run out at the end of this month. And I mean, just for starters, sort of curious, like how much those programs have been supporting consumer debt payments and debt payments in general.
Perry Rahbar (14:50):
Yeah. Well, no one truly knows the answer to that. And that is the, I would say multi trillion dollar question. Right. it's definitely playing a role because if you would kind of, let's just say a year ago, describe the scenario that we would encounter through COVID and then ask people what would happen to consumers and how would they respond in their loans? You would have gotten some pretty draconian responses and I think what we've seen has been surprising to everyone, but then when you step back and think about it you know, it's not that surprising in the sense that going into this, if you, if you kind of go back to March, you know, people are starting to get tax refunds there. You know, then all of a sudden this happens, they're locked in their homes. They're not spending money on anything. They get a $1,200 check and then even if they do lose their jobs they're getting these unemployment benefits.
Perry Rahbar (15:50):
And, you know, when people have kind of kept up with their payments, for the most part, yes, people have asked for modifications. And so, you know, what we particularly focus on where we've done. A lot of our work is on consumer unsecured, which is probably the loan that people would have assumed going into this would be the first thing that people would stop paying. And what we saw was we saw that impairments, what we do describe as a combination of delinquencies and modification you know, peaked right around 15ish percent. And most of that being from modifications, not really from delinquencies and, you know, most of the modifications are payment deferrals. So, you know, skip this one month or skip two months or three months, you know, somewhere within that range. And what we've seen is so far people who've taken those kinds of payments referrals.
Perry Rahbar (16:39):
Let's say, you know, on the one month cohort, over 60% of them are current again. And over 40% of all modifications are paying again in current. Some of them have asked for, you know, they come off one mod, they'll ask for another extension and so forth. So, but you haven't seen delinquencies spikes yet. And that's what we're really, you know, waiting to see is, is, is how that plays out. And obviously the stimulus will have a huge factor to play in that. But you would have assumed that if you were a consumer and you were really scared that maybe you would start saving money and stop paying some of these loans sooner, I don't think people are just going into this totally blind and saying, I'll just pay these till I run out of money. So it's no one really knows.
Perry Rahbar (17:26):
And I think we're all waiting to see kind of like for us, the first report that we'll try to put out, or the first glimpse of it we'll have is probably the second week until August. Cause you know, then we'll have one week in August when the payments run out, the stimulus benefits run out. But really, I think we'll have a better picture of this by the end of August. And then I'll also, you know, if Congress comes together and they extend the benefits and then altogether, I think this could be avoided.
Ashby Monk (17:54):
So one of the things I heard you mentioned, consumer unsecure is kind of the one that you flagged as like the one that we should all be kind of tracking. That's kind of the purview, as far as I know, and you can correct me, the alternative lenders out there, lenders that didn't really exist during the last financial crisis you know, prosper lending club upgrade all these new, what were once thought of as peer to peer but really weren't lending platforms. Do you see anything particular about the alternative lending space that shake out as a result of this crisis, given that they're the new players.
Perry Rahbar (18:39):
I see a positive story for these cohort coming out of this crisis, which is, you know, and Ashby we've talked about this in the past, I mean, people were so skeptical of these originators, right? The idea of a consumer taking a loan out online with a company that's not their bank and no relationship to them, no loyalty to them. I, I think a lot of people in the capital markets crowd that were evaluating these loans for many years, were just very skeptical of the borrower's commitment to paying that loan if we descended upon some sort of economic uncertainty, they just figured people would walk away from these loans. Maybe there was a little cynicism held over from the financial crisis where people just walked away from mortgages and threw the keys back and so forth.
Perry Rahbar (19:24):
But that was kind of the assumption that these guys were never really recession tested. And I think the question is always kind of like the metric that we kind of keep in these reports that we're looking at to say, are we doing well? Are we doing poorly is really kind of how are these impairments again, the delinquencies post modification rate compare, like what percentage do we see total impairment? And how does that compare to unemployment? And so far the impairment in online lending consumer have tracked below unemployment and prior, you know, the expectation was going to be multiples of unemployment. So I think there are, you know, holding in fairly well. Again, now it could go off a cliff just based on the stimulus. But one of the things that we talk about is that there's not like some psychological difference between these loans because they're taking out online by a lending company.
Perry Rahbar (20:20):
That's not your bank where you just don't care about them and you walk away from that. So you're really, you know, they're being judged from a pure economic standpoint. And you know, the same way that you judge credit cards, auto loans or mortgages, right? It's not like you don't have the, the, there's kind of a weird kind of technical around who the originator is that might impair performance in a way that you can't really quantify from an economic standpoint. So I think that's a positive. So, you know, one of the things that investors kept on saying is these guys have never been recession tested. Now they have they've held up pretty well. They held up in line with the rest of the market, if you can actually, shockingly they've done better than non QM mortgages. So, you know, we also track non QM mortgages and we've seen a lot of non QM being stuff that doesn't qualify for Fannie Freddie, which is mostly going to self employed borrowers through, you know, alternative kind of documentation type, you know, not your traditional full-doc employer verified loan, right.
Perry Rahbar (21:19):
You know, this is alternative documentation using tax returns, bank statements, and so forth. And you know, we've seen impairments there close to 20%.
Sloane Ortel (21:30):
Wow. Wow. That's fascinating and great news for the asset class. I mean, definitely remember that cynicism super well, but i'm curious in terms of like moving further away from the aggregate view and looking at like individual borrower characteristics, have you seen anything significant emerge with like, for instance, people who own their homes versus people who don't or any other kind of meaningful splits on any other characteristic?
Perry Rahbar (21:57):
Yeah, there's been a few. I mean, one is that you know, the originators in their grading they're doing a pretty good job. And, and you could see that, you know, they are good predictors of risks for the most part FICO is still probably one of the strongest predictors of risks, which, you know, after all these years of bashing FICO it's held up pretty well.
Perry Rahbar (22:20):
Interestingly, what hasn't played a role is income. And that was another thing that we looked at in terms of the, of the performance of these loans, where people are talking about the stimulus check. Well, a lot of these, you know, when you look at some of these originators, the average income is above that threshold where you were getting, what was the threshold isn't in the seventies or 80,000 in income a year where you're getting the $1,200 check. So, you know, the actual stimulus probably wasn't a big driver of performance in this case, the average income was above that, but home ownership was a pretty good indicator of performance. So you know, what we've seen is that impairment in homeowners was three times less than renters. And they also, you know, when you go, when you look at where impairments peak and then the recovery.
Perry Rahbar (23:09):
So if anyone asks for a modification that owned a home, they kind of recovered quickly and fell like 200 basis points, 250 plus basis points from the top fairly quickly. And most of that, I mean, it makes sense when you step back and you think that if you own a home, you probably want to use this, this moment and the rate drop to refinance your home. It's the last thing you want to do is ding up your credit on a personal loan. And so with the modifications, you know, they're not reporting them to the Bureau, so you could afford to maybe skip a month or two, but then you don't want to actually go delinquent. So home ownership is definitely been an indicator of performance. There's definitely been a variation there from renters.
Ashby Monk (23:53):
It's fascinating. I'm just listening to you. The big question I have, which is a little bit off topic is more lending pre-covid vs post-covid lending activity. So I know that unsecured consumer from alternative platforms, but you've also built a huge program around mortgages. I'm just curious, one of the big things we've been talking about on this podcast is like how COVID is going to change the financial services industry. Do you see the loans or the mortgages coming out of financial services as being different in any way as compared to before?
Perry Rahbar (24:36):
Well so it's interesting. They're both affected in different ways. So I would say the thing about the consumer personal loan space is that it's extremely agile. So meaning, you know, these guys could shut off and turn back on very quickly. You know, there's not much machinery to get it up and running, right? It's really just about spending the money to acquire the customer.
Perry Rahbar (25:03):
And then it's purely a lending decision. And then, you know, the loan closes in a number of days. It's really more about do you have the end buyer of the loan to fund it? Because most of these originators online are our marketplaces. For the most part, they're not really balance sheeting these loans like some of the brick and mortar guys are. So, you know, for those guys, it's a, it's a function of performance and you know, where is the market in terms of taking on that risk right now? And I think there's not really a consensus. It hasn't totally shut off, but originations are down, you know, from where we were last year, you know, North of 60%. So it hasn't really turned on in some of them like, you know, I think lending club made it public. They, you know, in April, we're down 90% right down to nothing. And again, obviously it's a riskier loan.
Perry Rahbar (25:54):
When you, when you think about it and it's not collateralized, so there's a little bit more risk the mortgage world, it's a little bit of a different problem. So I think for the most part we'll be seeing that, you know, it was such a violent whiplash type injuries in the mortgage market where the case, it was like a hit and run. You know, the car got hit it's pretty much demolished. It needs a lot of work, but like you can't, you don't even know what hit you because everything repaired very quickly. So a lot of the mortgage market was funded from credit facilities, from wall street that were marked to market and there was crazy price action. When everyone kind of got margin calls, everyone shut off origination. Then once you shut off origination to get the whole machine warmed up again and ramped up and you start producing loans and you know, you get all the cause again, it's not like direct to consumer like these online lenders.
Perry Rahbar (26:47):
You're you're, you have conduits, you're a mortgage aggregator. You're buying from countless different originators. You have guidelines with all of them. You have pricing sheets with the pricing and the risk tolerance in the mortgage market is there. It's just that there just there's no product. And so all these non QM originators are slowly ramping back up. They got bruised, they lost a lot of capital. A lot of them were mortgage REITs that got crushed in the public markets. Right? If you go look at most of the mortgage REITs, their stocks are still at like, you know, down 60% from, from where they were. So there's a lot of market recovery. Well, at least from a pricing standpoint of where the bonds or the loans are traded it's pretty much back, but the whole machinery to kind of ramp up originations again, not there. So, I mean, that's actually bizarre to me that people are back close to old guidelines. You would have thought things would tighten up, but it was just a very tough thing to solve for, right. It wasn't actually a credit problem with the product. It was just the whole market got broken.
Sloane Ortel (27:51):
Crazy, fascinating like liquidity for new Richard and nations of these products. I mean I mean, is it really as simple as just, you know folks are being stressed and in other places, and so money's gone elsewhere. And you know, we sort of know a couple months is there anything like, I mean, folks who listen to this tend to be sort of asset owners, does this sort of imply an opportunity for them you know, in, in one space or another.
Perry Rahbar (28:20):
Actually, you know, the sad thing is, and I think this is what's frustrating a lot of people as the answer is no you know, things were distressed for two weeks and you had this like two to three week distress period that destroyed the whole, you know, or a mortgage origination machine and then left no real opportunity. So now you just have like an asset shortage with, you know, and then overlay the fact that the fed pumped as much money into the system that they have.
Perry Rahbar (28:47):
So like, people are pretty desperate for assets with no supply. And, and that's, that's, that's another bizarre feature of where we're at right now. And I think, you know, that's Don left pretty much everyone in the capital markets pretty burnt out. Like I talk to a lot of people in the mortgage world, then it's just kind of like a frustrating experience. You you're, you're back to where you were almost a couple of years ago where you're building up these programs again, you know, where we were in the mortgage market and the non-agency market in particular was, you know, there was a vibrant non-agency market finally that was going to probably pump out 20 plus billion in securitizations this year and maybe North of 50 billion next year. And then also now you just saw some of the rule changes from the CFPB around the QM rule and so forth, which would have been another positive tailwind for the market.
Perry Rahbar (29:39):
And then, you know, this whole thing happened. You had crazy whiplash and in three weeks, a lot of things that broken and now it's going to probably take till the end of the year for things to get back to somewhat normal, I would say still, probably way less than where they were. But no, but that's still a positive cause in the, in the, in the scariest moment, April you know, there was potential where a lot of these originators or non-bank originators or their mortgage REITs that were accumulating these mortgages and then issuing securitizations, you know, a lot of these guys were on the brink of going out of business. So that didn't happen. And then people were like, you know, this is the second time that this happened to this market in 10 years, people are gonna walk away from it. And you know, that's not happening either. I mean, deals have been done where people finally cleared loans off of their balance sheet, and you know, pricing wasn't horrible. And I think people were getting deals done, which is, you know, two months ago, you couldn't do anything. It's just been a crazy volatile rollercoaster run. And I think it's frustrating for a lot of people involved.
Ashby Monk (30:45):
I bet I had definitely, I think, yeah, The last question I have for you before we let you go is, you know, you, you built this company, you know, I'm sure people don't necessarily know your background as well as I do, but you were, you know, I'm a trader at bear Stearns and you went off to build this, this new company to bring data standards and kind of good governance to the wild West of lending, which was you know, the peer to peer lending space within the mortgage space. And I think the reason we really jive was this notion that like your type of platform could bring standards to this area that big longterm investors deploy capital in, and that kind of longterm capital slowing through into these assets is something that many of them want. They want these exposures, but they're just not getting, I'm curious if like, you know, you've been building this company for five years, You've like kind of dominated the data space. Are you seeing the big longterm investors moving in? Finally, like we talked about that diner four years ago in New York city, is this still not happening?
Perry Rahbar (31:59):
Well, I think you know, for us, it's a tale of two markets consumer and online lending is where we started and that's where, you know, I think we're an integral part of the market infrastructure. And I think, you know, for us at dv01 what's been really kind of awesome to watch is, you know, when we started the company, when I first spoke to you, I big part of the pitch was not repeating what happened in the financial crisis and really being there for the market when we hit another type of crisis like that. And as we kept going another year, another year away from the financial crisis, sometimes it did feel like the pitch was falling on deaf ears.
Perry Rahbar (32:39):
Cause people felt like it's impossible for something like that to happen again. And then this happened and it happened in a matter of weeks and flip the whole market upside down. What was really awesome for us is the response that we were able to put in place. And, you know, within, by the end of the March having performance data on what's going on in the consumer market, I think we played a big part in bringing transparency to that market and giving investors confidence in the asset class. And that asset class itself had attracted some of those investors. I would still love more of your crowd to get into the mortgage market and the consumer market and, you know, and dv01 playing a role in getting them comfortable with the data that's going to be available to them. So we've gone in, it's amazing to see how, how well in orderly, this has all been in consumer.
Perry Rahbar (33:27):
And again, so no, one's like, no, one's messing around with nonsense. They're thinking at a higher level about their macro view of what's going to happen to the consumer and not like, well, I can't understand how it's playing out in any of these bonds or loans and so forth cause I don't have the data. And like, that's just not even part of the question. Now you go to the other side where we operate in the mortgage market and it's a way more old school market. And you might even, I mean, common sense would say that those people should be more open to having us in cause they dealt with the crisis before and it didn't go so well. But, but that's where we hit some status quo. So, you know, whereas in online lending and consumer email, one has almost 98% penetration, in non QM mortgages.
Perry Rahbar (34:10):
We have 30 so far and it's a newer effort for us. So we're just kind of earlier on that path. But you know, there are, I mean we're uncovering so many reporting errors across trustees and servicers and mods not being reported properly and so forth. And it's like to a degree. And so, I mean, I, it's just like we're, we're making progress and it, and it's just amazing to me that actually the more mature markets, the one that's more backwards in terms of its reporting. And it's just more, more status quo. But I think I, we always say to all these guys is if you want the same investors that you've dealt with for the last 20 years, that's fine. It's just a smaller pool. But if you want to bring in bigger pools of capital, transparency is a big part of that.
Perry Rahbar (34:56):
I thought the consumer online lending guys did a great job of that by just saying here's all the performance status data to anyone that was interested and it plays a big role in making people feel comfortable. These markets are still structured products, still hasn't fully gotten rid of, you know, the, the Scarlet letter on his chest from the financial crisis by any means. So I think the data plays a big part of that. Are we fully there yet? No. but I think we've really proved how efficient a market could operate with the consumer market, which you would have thought in this environment as the market people would be running away from. But it's actually been fairly orderly.
Ashby Monk (35:37):
My life's work is, you know, is like trying to bring tech and data into like the most antiquated, conservative, bureaucratic organizations. And so it's great to hear that when an industry is an upstart, it can leapfrog and actually the data and technology power is kind of a next generation, you know, level of risk management, portfolio knowledge, attribution of returns and, and that you can get through crises. So it's kind of like it's making the case for all these other segments to kind of get their act together. Hopefully it's kind of amazing that like we were, you know, the sort of bear case on these online loans was that, you know, the platforms wouldn't be able to keep up with these established lending standards.
Perry Rahbar (36:24):
I mean, it's, I mean, it's easy to, you know, you can come into our platform and looking and consumer and understand what types of moms were made. How long were their durations, what the repayment looks like in the mortgage world. We're still spot checking every loan with the servicer. Find a loan. It didn't make a payment, not delinquent, but there's no modification reported. And it's like, it's obvious something happened. I mean, it's just crazy how there's still a lot of auditing and going on. And then you look at the trustee report and we know that number's wrong. And then, you know, but it's just, there's a certain level of apathy when it comes to these markets that have been operating a certain way for so long, no one, no one has that vested interest. This is something that we bond over all the time, you know, this type of work and trying to get these institutions takes a lot of persistence that takes a long time. And again, you know, you start to build momentum and you get there, but I think this has been great in terms of giving people a sense for what is possible, the reports that we put out and they're on our, on our website at dv01.co You could see, I mean, there's real time transparency into consumer behavior and that's not even something that's often possible.
Perry Rahbar (37:47):
I really applaud the online lenders for how they change their reporting standards and the data that they made available to vendors.
Ashby Monk (37:56):
All right. Well, thank you so much for giving us the details and sharing all the knowledge. So we'll let you go back in and August coming along, looking forward to that.
Perry Rahbar (38:14):
Thank you so much. Alright. Take care guys. Bye.
Ashby Monk (38:21):
Sloane Ortel (38:23):
More good news and more bad news. I love it.
Ashby Monk (38:25):
Well, isn't it. Isn't it awesome. First of all, he's just one of the smartest people I know and awesome to see the industries, the good data and the good tech and finance kind of doing the leapfrog thing. And for the listeners out there who would have thought that like the mortgages had good data or that the service providers and banks were doing a good job of like reporting on all the things associated with your mortgage. Like it's still so dysfunctional, you know, and people like Perry are trying to bring functionality to this dysfunction, but it's still really hard.
Sloane Ortel (39:06):
Yeah. I mean, like I was really surprised. I mean, like, this is a, you know, the ultimate anecdata, but like when I bought my car I was like, maybe I'll get a car loan. Let's see, you know, interest rates are low. And it turns out the underwrite car loans based on the year of your car. So like, like not based on your credit, it's based on like, you know, so I bought like a 2007 Toyota, which, you know, they said meant that I needed to pay like 1500 basis points a month.
Sloane Ortel (39:34):
So I went to an online platform and I got like, I got literally a, I mean, for the, I got like a weighted 2% for it.
Ashby Monk (39:42):
This is all part of like the new world of alternative data and alternative credit and how we, how we score individuals and businesses and houses. And, and it's like, most of the financial services industry is operating in like a 40 year old mindset when there's potential to just do things completely differently. And it's going to require like the kind of data architecture that Perry's building to give people a sense of like what's happening as a market. But once we have that, the hope is you can then build all these new models for understanding the consumer, the lender, the borrower, and, and build new pathways to, I dunno help people get the capital they need.
Sloane Ortel (40:30):
Yeah. I also really interesting that FICO is still going strong. Yeah. I mean like my, my sister's boyfriend writes about credit card points and how you can do cool things with them. So they're just got a new kitten and named it FICO.
Sloane Ortel (40:45):
And I was kinda like, I don't know. I mean, like maybe FICO will disrupted, but I'm glad to see that, you know, the kid, at least for the life of the kittens cycle will be around.
Ashby Monk (40:53):
Yeah. Well, good news, bad news, good news. Those alternative lending platforms. Maybe they're not so alternative after all.
Sloane Ortel (41:02):
Yeah, exactly. But, you know, I mean, with all that said.
Boop, boop, boop, boop.
Sloane Ortel (41:09):
It's time for Dear Ashby! This is the segment beloved listener where we ask questions of Dr. Ashby Monk. If you would like to ask one, just slide into our DMS or our emails, or if you don't have any of that handy, just email free money firstname.lastname@example.org. And we'll read your questions and then ask them, is that cool? I think so, right. Yeah. I mean, and you know, just while we're doing show business also, Hey, please leave us a review. That'd be nice too. But without further ado, wow. I'm really rhyming. Pretty good.
Ashby Monk (41:48):
So don't write the show beforehand. I've never looked at that series of rhymes and been like, Oh, that's going to work.
Sloane Ortel (41:56):
Oh yeah, that's it. I really flow. People love that.
Sloane Ortel (42:02):
So the first question is as yields fall, there's a growing discussion about swapping bonds for cash. So a lot of time investment portfolios of 60% stocks, 40% bonds and folks are saying like, Hey, what are we doing with these 40% bonds? Let's trade them out for cash. The questioner asks: is this bonkers?
Ashby Monk (42:24):
It can get you fired if you work at a pension plan. It can get you fired. Not because it's a bad idea, but because it means breaking from your peer group. Yeah. I don't think it's a bonkers idea from a pure investment perspective. You know, I don't see an upside in bonds right now. I don't know where they go from here. So moving into cash, which seems like it is immune to inflation. Like whatever we do to the money supply we'll just like print money and it just doesn't seem to affect consumer price index. Yeah. I saw it like a really funny tweet the other day. That was like one of those, those memes where it was the orange County chopper father yelling at each other back and forth about inflation. And it was so funny because they were talking about how inflation isn't showing up in CPI because we have this globalized world. So TV's are continuing to have like the price level come down. But if you look at financial assets, property, or education, that's where you're going to find huge amounts of inflation as these assets get bid up. And so maybe, maybe we are seeing inflation happening there, but it's not happening in cash.
Ashby Monk (43:47):
And so maybe cash is a great place to be. It's about a longterm investment strategy, but if you're looking at fixed income or cash, and you're trying to understand, like, what are my options, at least cash gives you liquidity - perfect liquidity - that you can then put to work in something else. So it's not bonkers it's would be painful to explain to your board why your performance was deviating so much from the peer group. So, you know, maybe for individuals it's fine, but I want, I don't expect to see a bunch of pension funds or sovereign funds doing it anytime soon, they'd have to change entire benchmarks and, and mandates.
Sloane Ortel (44:31):
Just to be clear for the listeners who are not huge nerds. The reason that one would want to do this is that the the price of a bond tends to fall as interest rates rise. Right? So interest rates now are at near historic lows. The assumption being that they might at some point revert to where they were. So were they to do that? You know, in you're holding cash, you would continue to have assets worth exactly what, you know, you had like, you'd have all this pile of cash. Whereas if you had a bond, you know, you might lose like 10% of the value for every 1% rise in interest rates or so.
Ashby Monk (45:05):
And if you're holding cash and all of a sudden inflation does hit, and you're worried the move is to raise interest rates, which then crushes your bond price. So you might as well just hold cash even if you're worried about inflation.
Sloane Ortel (45:21):
That's a good point. Yeah. I mean like, Hey, I'm selling all my stuff. I'm putting my cash in your mattress. That's a this next question is interesting. It's a guy it's a, you know, that, I think you must have a reputation for being in on some gossip. So have you heard anything new about the U S setting up a sovereign wealth fund? There's some discussion on the internet and I haven't seen this discussion actually. That's such a fun could be used to address inequality.
Ashby Monk (45:52):
I love this question because it blows people's minds in ways that they didn't expect here's the first mind blow. The first sovereign fund in the world was set up in the U S a day in 1845. It was in Texas. And I think it was called the Texas permanent school fund. And as a country, we already have more sovereign funds than any other country in the world. The last count we have 11, that's not, we call them permanent funds, Texas, Alabama, New Mexico, Wyoming, North Dakota Utah, Oregon, Louisiana, Montana. I might be forgetting one. But like those organizations were set up by States to manage either, you know, sub soil assets or or something, right. Dollar fund that was established in 1845 in Texas, I think was like a federal grant to Texas since we were actually gobbling up Texas. Not the question that this person is asking, which I think is a great question, which is like, could we have a national fund and could that national fund address inequality? And then once again, here's mind blowing. Like we do, it's called the social security trust fund has two point $6 trillion. And in theory, it exists to reduce inequality because it pays everybody in old age pension.
Ashby Monk (47:29):
Now it is suboptimal in the sense that all two point $6 trillion are invested in us treasuries rather well, he's got talking about how you'd rather have your money, cash, government bonds. But so it's not quite, I think, again, what this person is talking about. I think what this person is saying is could we take the social security trust fund, diversify the investment portfolio away from treasuries into other things? And could those diversified investment strategies be deployed domestically to alter inequality? And I've heard rumblings, but I've heard rumbling for 15 years. So this isn't the first set of grumbles. The rumbles will become more pronounced under abide administration and they will be under a Trump administration. So that, that's kind of an exciting prospect of having ministration. But like we've seen in other countries that these sovereign funds, if they're permitted to invest domestically, you know, they can do pretty interesting things, you know, in terms of catalyzing new industries I've written a whole series of papers on sovereign development funds that have the purpose of investing domestically to alter the mix of industries that the country relies on.
Ashby Monk (48:59):
Usually it's in a case where a country is totally reliant on, you know, fossil fuel or hydrocarbon based industries. And so they want to invest in new green industries. And so they have a whole series of mechanisms to do that. The short answer is, is possible. And I hear rumblings the longer answer is, you know, it would be pretty challenging to pull it off politically, but we can do, if we could do it politically, you could definitely do it. There's enough cases out there that like, we know how to design that vehicle and get it to achieve a rate of return. That's sufficient invest in domestic industries. Like we wouldn't even have to like build it from scratch, like there's blueprints that we could pull from.
Sloane Ortel (49:49):
So it wouldn't be like a technical problem. It would be a getting off the couch problem.
Ashby Monk (49:54):
Yeah. Yeah. Like getting Congress to agree that we need to diversify this. I don't think it's the kind of thing that's just, I actually don't know enough to say, like, could it be an executive order? Could it be a change in regulation or do we need legislation? It's like, those are different orders of difficulty.
Sloane Ortel (50:14):
But yeah, I mean, that would be, I mean, that'd be great crazy executive order. Let's sell $2.6 trillion of treasury bonds.
Ashby Monk (50:24):
We could start with point 6 trillion.
Sloane Ortel (50:27):
That's a lot of treasury bonds, but Hey, I mean, we can hope you know, remind the listener that it's usually 60% equities or other kinds of equity, risk assets and 40% bonds, not 100% bonds.
Ashby Monk (50:44):
Yeah. Well, we, I mean the critique is we use the social security trust fund to finance domestic programs.
Sloane Ortel (50:56):
Plug a hole in the budget. Exactly.
Ashby Monk (50:57):
And so even there, this may be the mind blowing moment. Number three, maybe it is actually by, by providing capital to the budget is already reducing any quality by providing public assistance in some way, shape or form.
Sloane Ortel (51:15):
You've gone full galaxy brain on me.
Ashby Monk (51:19):
Three full moments of sheer explosion.
Sloane Ortel (51:22):
That's pretty crazy. I never thought about it that way.
Sloane Ortel (51:32):
This last one, I mean, someone seems a little bit cynical: of all the sports that don't seem to be coming back, which do you miss the least?
New Speaker (51:39):
Oh, this is like, just try to get me in trouble with certain cohorts of listeners. Like imagine as a Canadian, if I said hockey somewhere in my mind, that was like, I don't really miss the hockey, but I can't say that because all my canadian friends would just crap on me. So I'm not going to say hockey. I think for me, I just think like the fight club that is MMA, you know, there was that whole fight club Island that got canceled. For me, it's like just watching people, pummel, each other is already like too gladiatorial, but having to like talk to my kids about like the insane beat downs that are like showing up on, you know, the sports channel or whatever, it's, it's too perverse for me. So I don't miss that, you know, I think it doesn't, to me it doesn't have like the history of boxing or karate or, or, you know, it's, it looks and feels agregious dudes beating each other.
Sloane Ortel (52:55):
It's literally bloodsport.
Ashby Monk (52:56):
it's like, you know, it ends when somebody's bleeding too much. And so there there's the part of me that's like, gosh, I'm glad I don't have to like constantly switch the channel when that's on. Which I found myself doing with two little kids a lot. And also like, I wonder, you know, these young people that get pulled into that if they're going to be harmed, like, you know, we all know football players suffer later in life and boxers suffer later in life. And like, those people are wearing helmets in one case and gloves and the other, you know, the MMA guys are just beating each other's ass with knees and fists and, you know, so there you go.
Sloane Ortel (53:39):
What, what about you? What, what about, so I'll flip this on its head. So the best news out of COVID for me in the sports arena is that ESPN has been actually launching the ocho. Which I don't know if you remember from Zoolander, but it's sort of like, you know, specific home for obscure sports, but they've actually been doing that. Yeah, I mean, I don't have cable you know, but I've heard reports that if you log onto ESPN on like a Sunday afternoon or something, they'll have, you know, kind of whatever sport beer pong, or like the, they have the the world stone skipping championships on not too long ago. Right. Like that is the kind of thing I want in my sports journalism. Right. Like really out there stuff.
Ashby Monk (54:31):
Yeah. I mean, I was pretty devastated, so I don't know if people saw this, but Stanford just shut down a bunch of sports.
Ashby Monk (54:38):
Did you see that news? I didn't know that it's not quite clear if it's COVID or what, but we're canceling 11 varsity sports.
Sloane Ortel (54:46):
Ashby Monk (54:49):
Gone at the end of 2021. And so we've got varsity athletes that, you know, maybe they're sophomores now that come junior year, the sport that they came to Stanford to play that socks. One of the sports they're canceling was the sport I did in college, which was rowing.
Sloane Ortel (55:08):
They're canceling rowing!!??!?!?
Ashby Monk (55:10):
Well, for men, they're not canceling, women's rowing, they're just pretty devastating. So I was a rower in college at Princeton and yeah, that's, that's painful, but you know, I mean,
Sloane Ortel (55:20)
I rode in high school and like, you know, there's just so much wrapped into like the idea of the institution and rowing, you know, it's wild that they're actually getting rid of that.
Ashby Monk (55:30)
Yeah. Yeah. Anyway, that's it. That's where we are with the sports.
Just think: the kids these days. Soon they won't even know how to row an eight.
Ashby Monk (55:46):
They won't know how to scull! They won't know their sweep from the portside.
Sloane Ortel (56:00):
All right. Well that about does it for us this this week. We love you very much dear listener. Yeah, we do. It's like, and it's, you know, it's a real love, it's the requited kind, not the unrequited kind.
Ashby Monk (56:11):
If you've listened all the way to the end to hear this, we do love you because you're probably one of our parents.
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