Thoughts From The Divide: Buy Now, Pay Later?

Last week, we raised the issue of US competition policy, partly because it has implications for stock prices, but also because of the impact on inflation. Oligopolies can set their margins, albeit at the cost of sales volumes, particularly when it’s hard to observe the “vig”. This week, we wanted to touch on financial conditions, because of the apparent disconnect between financial conditions, inflation and monetary policy. A few years back, TFTD noted that some prominent economists were arguing that we should view 3% as the new 2%.

This was obviously the line of least policy resistance – think of it as the least bad of a series of bad alternatives. The problem would be how to avoid spooking the bond markets, which might cause some to conclude that our Central Bank Emperors were not wearing any clothes.

Trump’s election, combined with a much higher debt-to-GDP ratio, has brought the related questions of Central Bank credibility and “independence” into sharp relief. How will we know if monetary policy is too accommodative, or financial conditions too loose? Well, one approach might be to take a leaf out of Powell’s book (the “Good Book”) and work on the basis that “ye shall know them by their works”. On that basis, the return of IPO’s is evidence that financial conditions have eased. A recent WSJ opinion piece characterized the US as a “Buy now, Pay Later Economy”, arguing that there were incipient signs of an emerging debt crisis everywhere. While we take issue with some aspects of the piece (serious credit card delinquencies are NOT near GFC levels), there was one point made in the piece which did strike a chord with us: the recent Klarna IPO.

For those of you who don’t finance your Chipotle burritos, Klarna is a popular “buy-now-pay-later” service that last week successfully IPO’d, raising the company $1.37 billion. Sorry, we misspoke: “Klarna is a global, AI-driven payments platform” serving 111mn consumers. Viewed through this lens, its $31bn market cap is much easier to explain. This was its second attempt to IPO: the first ran into the “Liberation Day” market volatility, forcing its bankers to put the offering on hold. On Thursday, Figure, a blockchain company and the Winkelvoss twins’ (Winkelvii?) Gemini, a crypto custodian and broker, has finally gone public through an IPO. IPOs have raised 53% more than over the same time frame in ’24: private equity is back, and PE partners (both limited and general) must be desperately looking forward to the end of their lock-up periods to finally extract their money.

This is not our first time around the block, and we assure you that the reopening of the IPO window is not usually considered a symptom of tight financial conditions. Perhaps we are a bit old-fashioned in thinking that this is even more true for IPOs of blockchain fintechs, crypto brokers and “buy-now-pay-later” consumer microlenders. You would be forgiven for thinking of this as “sour grapes”, but far from it. Unironically, some of us at MI2 are only too familiar with the “merits” of these companies.

Financial conditions have been loose, and are getting looser. Of course, there are pockets of weakness, but we now have 130bps of rate cuts priced over the next 12 months and rate markets celebrated the recent CPI data as confirming a September rate cut (that might have been the pop in unemployment claims). And yet, the headline CPI is significantly above the Fed’s 2% target, and core inflation is above 3%. And it’s by no means obvious that inflation will moderate on its own. Remember, it was just a few weeks ago that Powell announced the end of Flexible Average Inflation Targeting in Jackson Hole.

What are we to conclude? Perhaps it’s as simple as the Fed is no longer in charge of monetary policy, although we think the situation is a little more complicated. One alternative is that, yes, inflation is still high, but the real economy is beginning to show some weakness, and the Fed will prioritise the employment side of its mandate. Maybe. However, another approach might be to focus on their actions rather than their words. This would suggest that Blanchard won the argument: 3% is the new 2%, and the Fed just hasn’t summoned up the courage to tell us yet. After all, you don’t tell frogs that the water is going to get hotter if you want them to stay in the pot.

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