Upstart Holdings (NASDAQ: UPST) stock is up 16%. This is on the back of the flat CPI reading, along with many other financials and renewables stocks. The idea is that if inflation is down then interest rates will also come down and therefore so will capital intensive business activities increase. Which has a logic to it and is certainly true for some measure of inflation and over some period of time. Whether it’s true of this inflation number and right now is another matter. “The stock gains reflected expectations that the Fed may not need to raise interest rates again, after new data showed consumer price inflation slowed in October. The central bank has been increasing borrowing costs since March of last year in an attempt to rein in economic activity and slow the pace of price increases.”
Well, yes. “The consumer price index was flat in October from the previous month but increased 3.2% from a year ago. Both were below Wall Street estimates, sparking a major rally on Wall Street. Excluding volatile food and energy prices, the core CPI rose 0.2% and 4%, against the forecast of 0.3% and 4.1%. The annual rate was the smallest increase since September 2021.” Except the Fed doesn’t look at CPI but PCE. And it also doesn’t look at the general measure but at the core. Core inflation isn’t down to zero for the month. Therefore the likely impact on inflation rates is, well, not very much.
It’s also not entirely obvious that interest rates are going to go back to how they have been this past two decades. Rather more likely is that the Fed decides that 2 or 3% real rates - so, add inflation on target of 2% to get 4 or 5% Fed Funds rate - is about right. Which isn;t all that different from right now.
Upstart Holdings stock price from Google Finance
We talked about the recent results from Upstart Holdings: “Upstart Holdings (NASDAQ: UPST) stock is down 23% after and pre market on the basis of the announced results. Those results weren’t good, this is true, but what has had the greater effect is the forecast for the near future.” They were predicting that the current high interest rate environment was going to reduce mortgage origination.
We also looked before at the basic business model at Upstart: “Well, there is the one more little feature here. Upstart used to be just the platform. Providing the tech and taking a fee for it. Which is one business model. Another is that Upstart actually make the loans. Keep the lending decisions on its own books - hey, why let the banks make all the interest, right? And Upstart has been increasing its exposure here: “Will the company continue to utilize its balance sheet to retain more loans? Notably, Upstart's loans held on its balance sheet surged to $883M at the end of 2022, up from $143M at the end of 2021. It represented nearly 46% of its asset base,” Hmm, well, views will differ here. But are we really sure that the top of the credit cycle is really the place to be taking more credit risk onto the balance sheet? Of course, if the AI really works in selecting only the best credits then this won't be a problem. But does it?
We can’t say that we’re entirely sold on that idea.
