Average Americans’ Net Worth and Interest Rates – 2019 Edition

Right now, the average wealth per adult in the United States is $403,974 and the median wealth per adult in the United States is $61,667 according to Credit Suisse’s Global Wealth Report. What I find most interesting is that $327,000 of the $403,974 total wealth, or approximately 81%, is in the form of what we call “financial wealth” or an asset that is capitalized.

In other words, this figure includes the capitalized value of small businesses across America. If you run a small paint company that earns $75,000 per year, and you could sell that business for $150,000, and you have $200,000 spread out in cash, stocks, and bonds, your net worth in the eyes of the United States government is $350,000 because the business you own is calculated based on its sale price rather than the owner earnings that it generates for your household.

It is a perfectly logical approach, but a painter is probably not used to thinking about the $6,250 per month that he earns painting as a $150,000 capitalized asset that is part of his household’s net worth like the 100 shares of Coca-Cola that are show $5,000 in his brokerage account. The painter is thinking perfectly logical. Someone who is a millionaire doesn’t have $1,000,000 sitting in a bank account somewhere–instead, about 81% of that value would be tied up in the form of a house or a small business that might make $150,000-$350,000 per year.

Why does this matter? I think it is going to have strong political ramifications in the years ahead. When interest rates are low (making credit cheap) and an economy is expanding, business capitalizations are at their highest point in a possible cycle. If interest rates rise, the painter’s business may only be worth $100,000 or $125,000. He could still be bringing in the same $6,250 per month, but suddenly, the U.S. government will regard him as $25,000 or $50,000 poorer.

The capitalized value of private businesses are generally at high multiples right now, and if the profits grow, a decline in the multiple will make it appear as though Americans are getting poorer when the businesses could be growing but the terms of valuing them are not.

Due to the rise in the capitalized value of businesses, the United States added 878,000 new millionaires over the course of the past year. This is the highest number of millionaires ever minted in a single year in U.S. history. While some of that may be a function of a higher population base, the previous record was 607,000 millionaires added in a single year (2017).

It is easy to get cocky when paper values of assets are increasing due to higher P/E ratio premiums being applied to nearly all businesses across the board. It requires a sense of history, humility, and total absence of recency bias to be cautious and not regard as permanent that which has come easy.

Personally, I think boom economies are the right time to position yourselves with higher than usual cash reserves rather than rushing every last available dollar into the market. And for the investments that do get made, it is also important to redouble one’s discipline in demanding a fair starting valuation. It is one thing to be willing to pay a fair price for an excellent business. It is folly to pay for a business that is great but clearly overvalued–Seeking Alpha is filled with people “throwing in the towel” and buying Beyond Meat stock because it keeps going up. When an adult calculates something to be worth x, he should not look at the stock price change from x to 2x to 4x and decide that 4x is the time to buy shares.

And finally, for those who do own small businesses or some other asset under their control that is capitalized, maintaining a focus on strengthening your business’ competitive business and growing profits is the time-honored defense against eventual P/E compression in the event of a sale of the business.

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