Obligations Of The Undead
Meanwhile, from the world of "zombies" and possibly unsustainable debt burdens...
The financial media (and various commentators prone to employing bombast in their analysis) are fond of stories about "zombie firms" for a very simple reason: People click on stories with the word "zombie" in the headline. Had I used "zombie" in the headline for this post, it would surely receive more traffic than it will with the headline I chose.
This goes back to the 'Tabloid Barons" article, which I strongly
https://heisenbergreport.com/wp-content/uploads/2020/11/TABLOIDSTAR-scaled.jpg
Worrying about zombies is so pre-GFC. There’s no way we’re going back to a period of Schumpeterian creative destruction. Maybe after a deflationary winter and a reset from a lower level, we can create an economy that is more pure toward the pedagogy. No one wants this.
It’s easy for me to sit in my Herman Miller knockoff all day and armchair what should have happened. That said, the GFC was pretty much the last, best opportunity our system had to get all Schumpeterian. And the finanical system almost cavitated. We’ll have to let the historians make the call on where it all went wrong.
Let’s face it, we can’t let them go under. Where would it stop? Or, sure, let them go under and let the Fed deposits funds in the accounts of pensions, life insurance companies, and all the Vanguard 401(k). And then more for the equity.
Zombie debt is not going to get paid back (roll it over forever) and there’s probably not going to be a debt jubilee (at least not any time soon). The only game in town is an economy frothing over with growth and a few years of 4-5% inflation. We better hope like heck it happens, or it’s stagnation city as far as the eye can see. Looking at our future, probably no way we get froth. Even the good inflation doesn’t seem so likely. America will be fortunate if we end up with a Japan-style outcome.
We’ve seen what happens when businesses close. People get unemployed quick. They don’t have income. They don’t spend. The living close. And on until there is some wisp of inflation years on. No one wants this.
Zombies are the dead walking but the alternative is far worse.
The Bloomberg article shows a pie chart “Over 500 firms in the Russell 3000 face interest coverage ratios below 1”.
But 189 of those are health care, and those are mostly small cap clinical stage biotechs and similar. 98 are technology and communications, and those are mostly small cap tech/internets. Coverage ratio < 1 is normal for both types of company. We can debate if investors should award that type of company valuations that get them into the R3000, but we shouldn’t suddenly freak out that a small cap biotech with no commercialized product is not making enough profit to cover interest.
Rewritten, the headline should be “over 200 firms . . .”
Some of the remaining 200-ish firms, especially the 60 in the energy sector, the 35 in the real estate sector, and some of the 78 in the consumer sector, will default. Let’s say as many as 100 of these firms ultimately default – that’d be 3% of the R3000 by ticker and I’d guess well under 1% by market cap. Some credit investors will learn they were engaged in a form of inadvertent private fiscal stimulus. So what?
Unless the defaulting companies are systemically important, or unless the defaults cause credit for sound firms to become much pricier, I am not sure why it matters much on a macro level.
Many of the older and “grander” members of this club not only continue to borrow to pay their interest but also to keep paying dividends.
XOM etc. A transfer of wealth from one type of investor to another. I am still unclear why it matters on a macro level.