Macroeconomics is not a topic that many Americans are educated about, and even I struggle from time to time to really make sense of how things all fit together.
But it doesn’t take an MBA to understand the reason why America is puttering along, how we got here in the first place, and what that means for various stocks like Visa (NYSE:V), MasterCard (NYSE:MA), American Express (NYSE:AXP), and Discover Financial Services (NYSE:DFS).
“Neither a borrower nor a lender be, for a loan oft loses both itself and friend” — or so said William Shakespeare. Indeed, America and much of the world borrowed itself to growth. Countries and consumers alike loaded up on credit and spent the heck out of it over many, many years.
Take a look at this chart of household credit market debt from the St. Louis Fed:
This debt is measured in billions of dollars. Notice how the curve just kind of keeps going up? Notice how it really goes parabolic there beginning around 2002? Then look at the Y-axis. You read that right. Americans have run up $14 trillion in debt.
Now look at this chart of America’s GDP:
Notice anything familiar? (The chart looks exactly the same.)
Can I get an “Oh, no!”
What this means is that our nation’s ratio of debt to gross domestic product is about 100%. Can you guess other countries that have this ratio or higher? Here are a few (and you know the state of their respective economies): Zimbabwe, Japan, Greece, Lebanon, Iceland, Jamaica, Italy, Portugal and Ireland.
How many of those are experiencing sovereign debt problems, riots in the street and other assorted societal problems?
Hopefully you get the point: We borrowed our way to prosperity. Now the time has come to pay the Piper. And we are — in the form of paying down our debt.
Look at the first chart again, and you’ll see household debt is falling now. Americans are deleveraging. That means all that money that used to go to buying stuff to fuel the economy is now being used to pay off debt instead, which is one reason why the economy is so weak.
Which brings us to the question of credit card companies: Namely, is it time to short them?
Plastic Is Fine
The short answer is no.
If consumers are paying down their debt, it means they are likely still carrying balances, so the companies are earning hefty interest rate payments. Transactional revenue is likely to decline, but all of these companies have so many diverse revenue streams that they will be able to grow these businesses even if that occurs.
MasterCard, for example, has all kinds of transaction processing services, security products, connectivity services, consulting and research departments, compliance divisions (very big and important in the days of Dodd-Frank), prepaid products … the list goes on and on.
So I don’t think credit card names are ripe for shorting, and they might never be. It’s also difficult to short an oligarchy.
Does that mean one should consider buying?
Well, I think so, but only if we’re talking about the pure payment processors — Visa and MasterCard — which are growing at 20% annually.
Of course, they’re also trading at price-to-earnings ratios vastly in excess of that rate, so I’d wait for a big market correction before jumping in.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc., which brokers financing, strategic investments, and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.