Blue Elephant Capital Management is an investment advisor based in Irvington New York with a specialty in working with companies that blend technology and finance. Founded by Ashees Jain and J.P. Marra in 2013, Blue Elephant focuses on short-term prime consumer loans issued by U.S.-based online lending platforms.
J.P. Marra has more than two decades worth of experience in finance, including 15 at Lehman Brothers, four at Bank of America and two with Nomura Securities.
Ashees Jain graduated from Cornell University’s S.C. Johnson Graduate School of Management. He served in Vice Presidencies with Barclays and Lehman Brothers in addition to additional stints at Nomura and Deloitte.
He has registered two patents, one for “Methods and Systems for Providing Partially Redeemable Offering Notes” and another for “Systems and Methods for Providing Embedded Receiver Notes” that he developed in concert with others. Mr. Jain will be speaking at the upcoming Lendit Conference in San Francisco.
Blue Elephant recently released their 2014 outlook for the P2P industry, which they expect to initiate $3.5 billion in total loan originations this year. Other trends to look for include:
1. P2P will benefit from the low delinquency rates that are forecast through the end of next year. A more stable economy and improving balance sheets are the main reasons.
2. Healthier consumer balance sheets should cause between a 75 and 100 basis point drop in loan yields while spreads will tighten in the higher yielding credit categories.
3. The current recovery will be stronger than many expect because of the unemployment rates, hourly earnings and the 10-year Treasury yield trajectory.
4. Tapering will test current equity and fixed income market valuations.
“The search for yield will continue even as the economy rounds a corner, so it is not surprising that alternative assets are being considered with more frequency,” said Mr. Jain in a news release.
Mr. Marra recently spent a few moments discussing Blue Elephant, the P2P industry, and the economic recovery.
What global economic sectors are you watching most closely, i.e. which ones do you believe will have the biggest impact on P2P moving forward?
While we think it is important to focus on a broad set of domestic and global macro-trends, at Blue Elephant we drill down most closely on the domestic labor market sector. We pay close attention to overall unemployment, payroll growth, labor participation, and real wage trends. We also closely track Consumer Credit to gauge trends that can affect things like overall consumer revolving default rates, household debt servicing, disposable income, for example.
Have people learned from the debt crisis? Are we any collectively wiser about personal financial management than we were 5 years ago?
We believe strongly that U.S. consumers have learned from the debt crisis – and for the most part are better personal financial managers today than they were pre-crisis. Certainly we’ve seen banks respond to the crisis by restricting the supply of credit to repair their own balance sheets.
But this credit vacuum has been greatly offset by a reduced demand from consumers, who have focused on repairing their own balance sheets and lowering their own debt service and financial obligations ratios.
We’re not seeing much growth in wages right now. Should inflation rise before and/or faster than real wages, how will that impact the P2P market?
While there is room for inflation to tick higher in coming years, we don’t see a scenario where it would be so far above trend that the result would be outsized default scenarios in the P2P markets.
A rise in inflation that is faster than a rise in real wages would have a negative impact on P2P market, because disposable incomes would be adversely affected. We don’t see any scenario where wages rise at a pace that’s faster pace than overall inflation, since the global labor supply continues to have a marginal effect on U.S. wages.
What makes you believe this recovery will be stronger than many think?
There is a lot to point to here. For starters, Fed policy going back to the crisis has been incredibly easy, allowing for outsized amounts of balance sheet repair at the bank, consumer, and corporate levels. Corporations, flush with record cash, will be increasingly pressured by shareholders to invest this stockpile.
Further, despite continued geopolitical noise from places like Russia and Middle East, the trend of developing and frontier economies joining the global marketplace at an increasingly rapid pace will have a profound effect on global growth and productivity in the coming years. And on the domestic front, technology and energy are two sectors that continue to be underestimated in terms of their role in forward job creation, productivity gains, and overall add to GDP in the coming years.
Many believe the markets have become addicted to the easy money associated with QE. How will the withdrawal period be? What will some of the adverse reactions be?
The Fed has been able to allow the U.S. financial system to deleverage much more quickly by using it own balance sheet to house assets. As this unwinds, it is unclear how the new shortfall in balance sheet gets reconciled. Our estimate is that rates across the U.S. fixed income markets will have to normalize rather quickly from their current levels.
Though this repricing will likely be swift and meaningful, the backdrop of global demand for U.S. fixed Income assets from Central Banks, banks, wealth funds, and others will help keep U.S. rates from reaching levels that could derail economic growth.
Given there will be increased global demand for U.S. fixed income assets at cheaper levels, we think the repricing from a Fed QE exit is likely no more than 100bps for longer-dated 10yr and 30yr Treasuries, and closer to 150 or even 200bps at the shorter end of the Treasury yield curve, where we envision more volatility and poorer supply/demand fundamentals given the Fed void.
Are the markets post-QE strong enough to handle equities should they begin a decline?
The U.S. equity markets have more than doubled over the past five years, and by many metrics are priced above their historical averages. With the Fed moving away from QE there is growing concern that the equity markets could trend significantly lower as investors start to price in a lower growth trajectory and even a potential falter in the recovery.
We believe there is a low probability of the recovery faltering at this stage in the economic cycle, even if QE comes to a halt sooner than markets anticipate. Against this backdrop, we see a scenario where significant gains post-QE in the U.S. equity markets are unlikely for a subsequent few years.
Significant declines would also be unlikely, given the economic backdrop as well as relative valuations. So you’re looking at a period of slight equity underperformance, which is not a bad scenario given the gains of the last five years.