Well known for his work in developing object-oriented programming and windowing graphical user interfaces, computer scientist Alan Kay spent time at Xerox PARC, Atari, Apple, Disney and Hewlett Packard — leaving an indelible mark on each organization. But perhaps he is best known for coining the phrase, “The best way to predict the future is to invent it.”
Being incapable of inventing, molding, or even having much of an influence on the future, I certainly don’t have a stronghold on predicting it. Several of my 2014 picks missed their marks completely, while others may have been a bit ahead of their time.
With 2014 firmly in the rearview mirror, let’s take a brief look back at my TOP picks for last year to see how I did.
My prediction that the economy would grow by no more than 2.5%, not the 3% as forecasted by the ELFF Economic Outlook and other pundits, was indeed correct. For all of 2014, the economy grew 2.4 percent compared to 2.2 percent in 2013. However, it doesn’t tell the rest of the story. First quarter economic growth in 2014 was negatively impacted by treacherous weather conditions throughout the country in February. According to the U.S. Department of Commerce – Bureau of Economic Analysis, the U.S. economy posted a decline of -2.1% in GDP for Q1, a gain of 4.6% in Q2, 5.0% in Q3 and 2.6% in Q4. The fourth quarter and annual estimate were posted this morning as I write this piece and are likely to be adjusted in the coming weeks.
My observation about the mid-term elections was spot on. America revolted and Democrats took the brunt of the beating. The 2016 presidential election should be very interesting, indeed. Currently, the web site http://2016.republican-candidates.org/ lists 10 registered or exploratory candidates and 55 other ‘possible candidates’, and these are only the Republicans!
Short-term interest rates stayed stable, and in many cases, actually declined. My prediction that rates would rise by no more than 100 basis points was off the mark, considerably.
My observations on the trending nature of public sentiment toward the acceptability of legalized cannabis, the long-term viability of social media, accelerated growth in merger and acquisition activities, insanely fierce pricing competition, and assessing leasing leaders as viable banking leaders were all accurate then and continue to be so today. But the bit about portfolio degradation attributable to funding sources accepting excessive residuals, unsavory documentation or ridiculous credit risks didn’t come to pass. As far as I know, portfolio quality continues to be very strong, hovering at 0.2% in the latest MLFI-25 report from the ELFA.
Asset-less financing continues to grow as software and services increasingly edge out hardware and traditionally tangible asset financing components. However, wearable technology has not made the inroads I expected. Despite Facebook’s purchase of Oculus in a $2 billion deal that closed in July, we’re still a good year away from any meaningful strides. Stay tuned!
So what about 2015? What will the future bring?
Trend: Community banks will continue to seek origination teams who can offer opportunities to increase asset growth through investment in leases and loans. Fully amortizing debt with a decent spread over the bank’s cost of funds is a much more attractive asset than untapped lines of credit earning a few basis points in non-usage fee. We have already seen a reinvigoration of Webster Bank, an acquisition investment by Bank of Ann Arbor, and the development of HVB Equipment Capital from Hudson Valley Bank. Expect more to come as others see the value of a healthy equipment finance portfolio.
Observation: The aging and greying of our industry is less relevant today than it once was. This one is tied to the trend above. The employment market is presently strong in our industry. When a community bank picks up a team of people to grow a portfolio, it generally creates a loss for the incumbent employer. With unemployment approaching 5% following a long drought period, during which wages were deflated and concepts like signing bonuses were foreign to most hiring authorities, times are changing. Today’s market is vastly improved. Opportunity exists for experienced, energetic leaders who have the ability to attract and retain talent. Age is much less of a factor than it was just two or three years ago. This is encouraging for old guys like me!
Prediction: The earliest the FOMC will raise rates in April or at the latest June. Concession will come when the Hawks and Doves capitulate and agree to modest increases over the remainder of the year, with increases following each of FOMC’s meetings in July, September, October and December. Driven by continued diminishing unemployment rates and hints of pending inflation, Wall Street will greet the rate increases positively. Look for a 1% to 1.25% Fed funds rate as we reach the end of 2015. Longer term, expect rate normalization.
Trend: Competition remains fierce with no letup in sight. Bloomberg News reported that the largest U.S. banks “have lowered their standards for some of the riskiest lending in a sign that weak underwriting is returning to levels seen before the 2008 financial crisis.” Today we are seeing banks stretching for volume and yield to improve margins and compete for a very limited amount of loan demand. It rings a familiar tone — very similar to the ramp up period from 2006 through 2007. For the second time in five years, I am reminded of Sergent Phil Esterhaus, the character played by Michael Conrad on Hill Street Blues, who always closed with the trademark line: “Let’s be careful out there.” History tends to repeat itself. Let’s not make the same mistakes we made in 2008.
Observation: Last year, I called “uncertainty” the “watch word” of the year. Without solid confidence in the economic outlook, businesses were unwilling to invest in expansion; particularly in capital goods. The University of Michigan Consumer Confidence Index ended the year at 93.6, compared to 82.5 a year earlier. New car sales were the strongest since 2006, despite millions of recalls. With a stronger sense of confidence and without the degree of uncertainty we’ve seen for several years, companies and individuals are taking the leap and spending again. Nevertheless, I expect a bit of a roller-coaster ride for stocks, bonds and oil prices throughout the year.
Prediction: Global economic weakness will tether U.S. economic growth in 2015. Despite the noticeable improvement reflected in recent U.S. GDP growth, it stands in stark contrast to some of the other major world economic powerhouses. Lack of demand is constraining economic growth in Europe. In its 2015 Economic Outlook published in November, the OECD predicted world GDP growth for 2015 to be 3.7%, led by the BRIICS economies at 5.4% growth and the U.S. at 3.1%. However, the group foresees only 1.1% for Europe and 0.8% for Japan. In the eurozone, Germany and France are propping up the weaker economies like Italy, Spain, Portugal, Ireland and Greece. Until the rest of the world sees measurable improvement in economic growth, the U.S. will be stuck in third gear, and will not reach its full potential until the rest of the world catches up.
Trend: The pay-per-use model is evolving and showing up everywhere. This trend will have a material impact on the finance and leasing business. Whether it is cloud services for storing data or hosting applications, or on-demand processing power enabled only when required, future purchases will rely more commonly on a pay-per-use model. As a city dweller, why own a car and pay for auto insurance when you rarely drive? Zipcar is the answer: convenient and readily available to you and to others nearby. We have been using the model for years in practical places like parking lots, hotels and cable/content providers. As this model evolves it will impact our industry, but the severity of the impact is hard to know this early in the game. I suggest we pay close attention to this trend.
Observation: Regulatory oversight may have had the unintended consequence of bridling growth and softening dips in the extended economic recovery. As Republicans take control of both the House and the Senate, former Representative Barney Frank is voicing concern over the preservation of his namesake legislation and the Consumer Financial Protection Bureau. But perhaps the long-term impact of added oversight is that lenders seek less risky business and settle for lighter rewards in return. The net effect is less dramatic highs and less painful lows. In hindsight, one might postulate that the regulatory oversight is actually beneficial to our industry.
Prediction: M&A activity will be fast and furious in 2015. Regional and community banks will merge. Their equipment finance and leasing divisions will combine. Winners will take the helm of the newly combined entity and losers may take their skills and sidekicks to a competitor. Expect little from the really big banks and lessors. They are less likely to be pursuing groups that are smaller than their existing platforms. However, watch the independents and the bolt-on divisions that may have been parts of previous acquisitions. Significant premiums will be paid for performing assets and strong origination teams. At year-end 2015 it will be fun to see who is still standing and which corporate logos show up on their business cards.
Confucius is credited with saying, “Real knowledge is to know the extent of one’s ignorance.” I must be getting smarter as I age because I am becoming fully aware of the extent of my ignorance. There is nothing serious about this annual exercise. It’s a fun way for me to throw opinions on the table and see what happens throughout the year. As always, I welcome any feedback at firstname.lastname@example.org.
Dexter Van Dango is a pen name for a real person who is a senior executive with more than 25 years of experience in the equipment leasing industry. A self-described portly, middle-aged, graying, balding leasing guy in the twilight of a mediocre career, Van Dango will provide occasional insight from the front lines via Monitor.