Post #89 by BenSolar on the Mechanical Investing board

Investment Strategies / Mechanical Investing

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Here's an article in the Washington Post which details how credit card delinquencies have been climbing to the highest level in almost decade. https://www.washingtonpost.com/business/2023/08/30...

The article discusses how a double whammy of inflation boosting prices plus interest rates boosting repayment costs has come to pinch the lower end of the economic spectrum causing a spike in late payments. It says consumer loan and auto loans delinquencies are also climbing rapidly, with sub-prime customers the worst off.

This is obviously germane to Upstart's business. They indicated in the discussion in the last earnings call that they have calibrated their expectations and loans for a more pessimistic economic scenario than was evident at that time. Looks like that was a good call.

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Thanks for sharing.

The personal savings rate is approaching all time lows. Another reason to temper
expectations.

Judging by job postings, Upstart is still gearing up the auto loan business.
Apparently they feel their financial footing is solid enough to weather
any headwinds the next few years.

Ears

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Upstart's UMI Index is still rising. At 1.71 as of July. Meaning they believe
the macroeconomy is causing default rates to be 71% higher than the long-run
average.

The Upstart Macro Index (UMI) estimates the impact of the macroeconomy
on credit losses for Upstart-powered unsecured personal loans. UMI is expressed
as a multiple of defaults relative to a static baseline due to macroeconomic
changes. For example, a UMI of 1.25 for a given month suggests that the macro
caused default rates to be 25% higher than the long-run average.

https://www.upstart.com/umi/

Ears

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I wonder how the UMI would have looked back in Great Recession 2007-2010 period. Have you seen any info about that?

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The UMI is new and proprietary to Upstart and they haven't backfilled beyond 2017.

There's a measure published by the Fed that is used in the UMI calculation and
is sort of an inverse proxy for the UMI. It goes back to 1960. It's called the
Personal Savings Rate. Although there was some increased volatility with this
measure in the 2007-2010 period, it was nothing like what we've experienced in
the last three years.

https://fred.stlouisfed.org/series/PSAVERT

Ears

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The savings rate spike during the pandemic is something to behold, eh? Helicopter money, aka 'Economic Impact Payments' ... a lot of which went right into savings the month after it hit the checking account.

Too bad Upstart doesn't publish a longer time series of the UMI. Not too much of interest happened between 2017 and now other than the pandemic, which was a crazy, unique period which it's hard to draw any conclusions from.

I have to think the macro-economic contribution toward risk of default was rather high in the 2007-2010 period, given the immense wave of defaults on home mortgages. I'd like to see how the UMI at that time compares to today.

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