We recently highlighted a damning report from the Cleveland Fed regarding Peer-to-Peer (P2P) lending. Now, the troubles of a P2P market leader could be signaling the rumblings of credit deflation in this sector.

Lending Club (symbol: LC) was founded in 2006 and floated at the end of 2014, amid much hoopla and a board consisting of established banking heavyweights. Its business model is traditional P2P, acting as an intermediary connecting borrowers and lenders in relatively small monetary amounts. At its first “investor day” last week, the company announced that its profits for this year and next will fall well below what analysts had been expecting. The company blamed specific issues, such as a tightening in its lending criteria, and made every effort to point out that demand for its services was still high. Well, it would, wouldn’t it?

We take a slightly different view. Rather than listen to management, who are biased to being bullish, we prefer to look at the share price to get an insight into the collective expectations for a company. Markets discount the future and so when a share price is going down, it usually preempts any disappointing news. What we generally tend to find is that there’s no smoke without fire. The chart below shows Lending Club’s share price. It had a brief blip up in its first three weeks of trading, but has been declining ever since. It is now down 85% since launch. What makes the chart compelling is that before last week’s earnings call, the share price was already telling us that something was wrong. The market had gapped down in May 2016, amidst an ethics scandal involving the founder and CEO, who was forced to resign. But the subsequent recovery in the share price could not surpass the level from which it gapped down. Four times it tried and failed, the most recent being in October this year. Before last week’s investor day, anyone willing to listen to the market, rather than management, would have suspected things weren’t quite right.

With the share price of a P2P market leader giving us a clear message, we must suspect that business conditions in the sector are wonky. There is, of course, a chance that the issues are company specific, but whilst this lead indicator remains under pressure, we view it as a sign that concerns over P2P, and how the sector will cope with a turn in the credit cycle, are manifest.

Lending Club

If Lending Club’s woes continue, it shouldn’t come as a shock. The price action of stocks usually foretells where something is not quite right with the company. Take a look at another deflationary tale from last week. Steinhoff International Holdings NV is a holding company for various global retail brands including Mattress Firm in the U.S.A, Conforama in France and Poundland in the UK. Last week, news emerged of an accounting scandal, and the share price collapsed as did the company’s bonds. Bankruptcy is a clear and present danger. And the company owes billions to banks, including Citi, HSBC and Investec. Credit deflation is in the air.

But look at our chart below. The share price of Steinhoff was in a clear downtrend since its 2016 peak. Yet again, the discounting nature of markets gave people willing to listen a lead indicator that something was not quite right. This episode reminds us of similar story back in 2001 – that of Enron. In that case too, the share price had been in decline for many months (with analysts still keeping their “buy” recommendations) before the “news” broke of one of the most flagrant accounting scandals in history, leading to subsequent credit deflation.


It is well worth bearing in mind that, when it comes to corporations, the one thing that does not lie is the share price.


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