Niall’s virtual diary archives – Sunday 22 March 2020

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Sunday 22 March 2020: 22:32. So it’s been a fun, fun, fun week on the Big Daddy of online supermarkets in subprime debt for retail investors Mintos, upon which I did a series of detailed virtual diary posts May – August 2019. As I said upon this virtual diary last August (emphasis added):

I don’t want to beat the dead horse much further, but I do want to close this post reminding readers that this is a risky investment. If a mutual fund on the stock market returned 16% per annum during a bull market, it achieves that because it is also able to lose 16% per annum during a bear market.

This variant of p2p lending that I have described has only upside, in normal times. Your money can only rise, or not rise, but never fall. But for this to work, during an economic downturn that means someone, somewhere, must foot the bill for rising bad debt. When their reserves exhaust, they’ll go bankrupt, and thus exhaust the reserves of their creditors, causing more bankruptcies, and so on. That’s what economic downturns do.

So be very careful here. Bankruptcy happens slowly, and then suddenly. Loan originators will look strong, and then suddenly go bang. So long as the ~16% returns will be more than the amount that you will lose when an originator goes bust, stick with Mintos. As soon as you believe that this may no longer be so, time to get out, and remember lots of other Mintos investors will be doing exactly the same i.e. there will be a run on Mintos, people will have to sell their loans with large discounts in order to shift them quickly.

Good luck!

That run on Mintos I predicted back then began earlier this week. I first noticed it around Wednesday (today is Sunday), which was a few days later than I should have, given hindsight. But I was busy at work and childcare and of course dealing with Covid virus quarantine etc etc etc and not really thinking about that we are entering the worst economic collapse since the Second World War. Yes, even worse than the previous worst economic collapse back in 2009, and a whole ton of people aren’t going to be able to make the payments on their loans now. Some of which will be resume payments after a few months, but another chunk of which will be defaulting with the whole loan lost. So of course investors are going to stampede for the exit door in all things investment related because (a) they need cash urgently, given their own loss of income and (b) panic.

Since Wednesday, it’s become so much fun. I’ve watched the discount rate on the Mintos secondary market (the amount people discount the loans they are selling in order to shift them) climb from 8% on Friday to 25% today. Yes, that’s right, people are taking a haircut of one quarter of their money to get it out now.

It gets even better again: people are selling dud loans i.e. ones within 30 days of having the capital repaid by the loan originator due to the buyback guarantee on dud loans for a 18% discount. Annualising that, that’s a > 700% return on your money if you buy up those loans and the loan originator does indeed buy them back at par within 30 days. That’s firesale pricing, people are so desperate to get out that they aren’t acting rationally.

Unless, of course, the loan originators don’t pay out on the buyback guarantee. And they’re going to see a very severe cash flow crunch in the next few weeks as most loans go late, and perhaps half eventually go bad.

I stopped the investment bots investing in any new loans earlier this week. Up until then, I saw the following monthly returns:

MonthAnnualised return for each month
November 201915.22%
December 201912.41%
January 202013.20%
February 202012.36%

So there had been a bit of a drop off in returns since November, mainly due to me diversifying my loan originators considerably to spread out risk, and I’m nicely split on a 2.8:1.8:1.4:1.3 ratio between my top four, all of which are mostly in Eastern Europe and thus within the EU (and thus, hopefully, highly likely to get EU financial bailout money). The reason, incidentally, that I did that was because the growth of the “Loans Funded” graph at went from exponential to linear growth in September 2019, and by November it looked to me that we’d reached a point of inflection on a logistic growth model. That’s clearly not going to happen now, that graph is obviously going to collapse next. Nobody wants to lend out new money in the worst recession since the Second World War.

After thinking about it this weekend, and weighing up factors and sticking my finger in the air, I’ve decided to take a punt on scalping the panic exiters. I’ve set up a single investment bot which will buy any dud loan with buyback guarantees within 30 days of buy back being sold on the secondary market from one of the A-rated loan originators also at the very top of the rankings at with a > 12.5% discount. That’s a mere ~400% annualised return rather than 700%, but given the large relative size of those loan originators in their home markets, I think it reasonably likely they’ll get bailed out by their governments all of whom are in the EU and can tap limitless ECB funding. That’s my bet, and we shall see how it pans out.

Though I know it will seem usurious to you readers to take advantage of fleeing Mintos investors in such a fashion, equally if I didn’t buy them out, they’d not be able to sell at all. Also, I’m fully and entirely expecting at least one of my loan originators to blow up, potentially locking up a quarter of my total investment for the twelve or eighteen months it’ll take to conclude bankruptcy proceedings, after which I should get back more than half of my investment. If my bet pays off, most of the losses on that now sunk investment (I cannot unwind any of my loan investments without taking a hefty haircut) ought to be made up from those usurious profits. If my bet doesn’t pay off, then it’s a lose-lose-lose across the board.

And that’s okay. I went in with my eyes open and fully understanding the risks involved. However, I’d like to close this post with asking readers to spare a thought for all those former Mintos investors currently losing a quarter of their investment, which is about two years of earnings on Mintos. As much as that’s the game we’re all playing here, that’s still real people losing real money with real effects upon real families. Food for thought!

#mintos #p2p-lending

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