Goldilocks Is Hungry

blue bowl of porridge with spoon

The economy is too hot! The economy is too cold! The easiest story to write about crowdfunding and alternative finance  is the "something has changed, and it's all going wrong."  But Goldilocks is hungry. She's a growing girl, and she needs her porridge.

This week, the porridge is too hot. FT Adviser reports some new data from Hitachi Capital Partners that suggests the market for lending to SMEs is overheating.

"if credit losses rise" (says the article)  "there could be a return to the situation in 2008-2009 when lenders withdrew from the SME market and entrepreneurs struggled to find loans." 

Now, we aren't saying that you shouldn't take this seriously, and pay attention to the best evidence. It's the interpretaion of the evidence that worries. In particular, we get uncomfortable about the over-simplified interpretation of relatively small pieces of evidence.

For a comparison, imagine you were listening to the commentaryon a Formula 1 car race, and the main thing the commentator wanted to tell you was when one of the drivers had changed gear.  After a few minutes you would start to think "Rosberg and Hamilton  haven't got a clue! Why can't they just choose a gear, and stick to it?"

That would be ridiculous, of course, but it's also a surprisingly common way of reporting crowdfunding and peer-to-peer. We call it 'The Goldilocks Economy', because something is always bing reported as too hot, or too cold. 

Let's  describe the method, and see if our readers can spot the weakness.

Choose a variable that changes often. In a market that's growing and evolving, with plenty of new entrants, there are plenty of those to choose from. Gather your data, and analyse it to detect the most recent change in the variable. Then, imagine what the future would be like if you just projected that change carried on and on....

Can see the limitation in this line of analysis? We hope so. Especially since we're talking about funding small and medium sized businesses (SMEs). Funding SMEs is the equivalent of feeding growing children. We can argue all we like about the cokking pot, but the most important thing is that the porridge gets served, and the children are fed. 

SMEs need funding and the market is under capacity. It's also welcoming new entrants that don't all think in a herd the way that big insitutions do. We're not saying that you should ignore data when you have it.  But please be aware of naive, or careless interpretations. We need as many businesses as possible to get they deserve, and investors to enjoy fair returns.