Household Debt in the US

By Mark Bern, CFA

When we look at charts like the one below it is easy to become nervous about the implications.

However, that isn’t the whole story.  The economy has grown since 2007 and household have borrowed at much lower interest rates.  The St Louis Fed has a chart that look more encouraging.

As you can see, household debt compared to GDP (gross domestic product) is much lower.  And then, if we drill down some more, we can see that when we measure average interest payments by households relative to income the picture looks even better.

So, when you read that next story warning about how debt levels are now above levels in 2007 and trying to spread fear and anxiety of a repeat recession that is imminent, just pull up these charts again, take a deep breath, and relax.  It isn’t nearly as bad as it was then.

The same can be said about corporate debt.  Sure, corporations hold more debt today than in 2007, but the interest rate on that debt is far lower making the cost to service that debt much lower.  Interest rates are going higher and the picture will change over time but there really in no imminent threat posed by the larger debt amounts.  It’s the cost of debt that matters. 

Interest rates will rise some more but will probably remain below the levels of 2007.  As corporations need to roll over portions of current debt outstanding it will cost more.  But it will still be cheap from a historical perspective.

Companies that have too much debt are always in danger of failing.  Poor allocation of resources and excessive debt by managers usually leads to a bad ending.  That is why we stick with quality companies guided by superior management that knows how to efficiently allocate capital to generate strong free cash flow and consistently better results.  It pays to do the research that enables us to avoid most large losses, especially in today’s investing environment.

A good example of a company with consistently superior results is Jack Henry (JKHY).  Take a look at out quantitative chart below.

What you should notice is that the white line (Wall Street Price) stays very close to the yellow line (Main Street Price).  The Main Street Price is our estimate of fair value.  The Wall Street Price is the price at which the stock trades.  It is also important to note that the company has a strong record of consistently increasing value over the last ten years.  Quality and consistency.  Those are the traits we look for in stocks that we want to own.  The price at the end of 2009 was $20.34 and the price today is $158.44.  That works out to a gain of 679% compared to the SPDR S&P 500 ETF (SPY) gain of 158% over the same period.  High quality companies will always beat the average over the long term.  Quality plus patience go a long way in defining a successful investment strategy.