Money Morning Article of the Week
by William Patalon, Money Morning
It was the spring of 1985, and I was in my second year as a reporter for The Record, a small weekly published in my home county an hour north of Baltimore.
A state-chartered thrift, Old Court Savings and Loan, failed – spotlighting all sorts of unseemly behavior about the institution’s insiders, as well as folks who “did business” with it. The collapse – which resulted in 35,000 depositors having their accounts frozen (some wouldn’t be paid back until the 1990s) and cost the state of Maryland millions of dollars – also highlighted the dark side of financial regulation.
For an aggressive cub reporter like me, the collapse was indoctrination by fire. I was introduced to the “land flip,” where a single piece of property was sold three or four times in a single day – with each transaction adding 50% or more to the land’s assessed “value.”
And I learned about the changing culture of the once-staid banking and thrift industries.
A Money-Making Noun
The lending business used to be a simple one – so simple, in fact, that it was said to be governed by the “3-6-3 rule.”
Here’s what that meant: During the four decades that spanned the 1950s through the 1980s, the lending industry was so stable that the standing joke was that bankers could take in deposits at 3%, lend the money out at 6% – and be out on the golf course by 3 p.m.
Deregulation turned the market on its head – especially with S&Ls. New rules let thrifts venture into commercial real-estate lending – even taking stakes in projects. And once-staid thrifts – originally created to finance home mortgages in their immediate communities – went global, advertising for deposits and attracting them by offering the highest possible rates (11.5%) on the “jumbo” certificates of deposit (CDs).
Money poured in, bolstering the risk the S&Ls faced.
In short, deregulation was a game-changer, an “agent of change” that altered the field of battle on which thrifts waged financial warfare.
Those game-changers come along more than you might expect. Shah Gilani, a retired hedge-fund manager and editor of the Capital Wave Forecast service here at Money Map Press, refers to these game-changers as “Market Disruptors.”
Don’t confuse this with “disruptive” technology – an adjective.
He’s talking about “Disruptors” – a noun – and each one an agent-of-change entity all to itself.
Disruptors come from every facet of life – economics, politics, weather, energy, education, finance, investing, and, of course, technology. And they are paradigm-shifting, rule-bending, playing field-altering catalysts, Shah told me during a long talk last week.
And while the Wall Street veteran employed a bit of wit as he talked, his main point was clear…
When Disruptors are present, profit opportunities are at their apex. According to Shah:
“Think about it, Bill: Disruptors are already changing how we communicate [smartphones]; how we date [Match.com, eHarmony]; how we mate [Tinder… or so I’ve heard]; what we eat [genetically modified and so-called “super foods”]; how we work [Monster.com, Jobr]; how we get heat, cooling, and light [fracking]; how we get around [Uber and Tesla]; how we get where we’re going [GPS] – and where we stay once we get there [Airbnb]. It’s exhilarating – but it’s daunting, too. What investors need to realize is that hidden behind each of these changes is a major opportunity to make money.”
That’s what prompted me to think back to the Old Court debacle and the S&L crisis of the mid-’80s.
You see, financial Disruptors have again struck the banking-and-lending sector.
In the 1980s, it was deregulation that “disrupted” this key part of the finance market.
This time around, it’s technology – the Internet – and the “crowdsourcing” mentality that’s creating an egalitarian, open-to-the-masses marketplace culture.
Lending has been opened up to the masses.
“William Shakespeare, in “Hamlet,” tells his audience:
‘Neither a borrower nor a lender be’ – in essence saying to avoid both borrowing and lending,”
Shah explained:
“But a new lending model has opened up a rare investment – one that offers high yields and capital-appreciation potential. Usually you pursue one or the other. But that underscores the opportunities that emerge when Disruptors work their magic.”
Two Developing Stories
One of the new models that has taken hold in banking is peer-to-peer (P2P) lending. You can join a P2P lending platform in minutes and start “funding” someone’s loan request with as little as $25.
The returns can be well above what you’d earn as a depositor – even after you factor in default risks. But, as Shah says, why lend money to strangers – sweating it out until they hopefully pay you back?
Shah said:
“The easy, safe way to play the new lending game is by buying stock in a Disruptor. These are publicly traded companies that act like banks – lending at high rates and passing the profits along to shareholders. And you can invest in them with a very small amount of money – meaning it’s very much an egalitarian investment.”
Egalitarian, maybe. But the masses have yet to really understand the powerful change that’s at hand – meaning you can get there first, and then go along for the ride when the “crowd” finally dumps in the stock-igniting liquidity that will follow.
“Goldman Sachs Group Inc. (NYSE: GS), the mega-investment bank, and Apollo Global Management LLC (NYSE: APO), the giant private equity (PE) firm, are two players in the new lending game that you can invest with,” he said. “Both Goldman and Apollo have publicly traded business-development companies (BDCs) that lend money to high-interest-paying borrowers, while avoiding cumbersome banking regulations. And because BDCs are required by law to pass along at least 90% of their net income to shareholders, investors enjoy fat returns, just like big-shot bankers.”
The Goldman BDC – Goldman Sachs BDC Inc. (NYSE: GSBD) – debuted on March 23 after its initial public offering (IPO). Apollo’s entrant – Apollo Investment Corp. (Nasdaq: AINV) – had its IPO back in 2004, Shah says.
The combination of high yields and the growth that will come with a newly disrupted market offers us the kind of investment one-two punch you rarely find. The Goldman BDC trades at about $21.50 and is expected to yield around 8.3%. And Apollo Investment, which trades at $7.70, yields 11%.
Shah told me:
“Periods of disruption cause uncertainty, which keeps the investment masses at bay. But if you’re an informed investor and have done your homework, as I know the folks here at Money Map Press do – the reality is that these periods of uncertainty also signal the opportunity for maximum profit. That profit may be on the ‘long’ side, or it may be on the ‘short’ side. Disruptors, you see, create new winners. And they also create losers. Some of those losers are the former market leaders, which have been unseated in the market change. Some of the losers are also new entrants – wannabes and pretenders that can’t cut it in the New Market Order.”
Shah’s investing mantra is a simple one:
“There’s always a place to make money – it may be on the long side, or it may be on the short side… but there’s always a place to make money.”
What Shah means is that the new winners are worth going long on – as in buying their shares and riding along for profit. But you can also cash in on the losers – by shorting their shares.
He said:
“Market disruptions allow you to make money both ways – that’s why I’m such a keen fan of paradigm-shifting markets. Here, however, we’ll keep it simple – at least for now – by going long on the two players we believe are positioned to profit: the BDCs of Goldman and Apollo.”
It’s a story line we’ll continue to follow for you.
