Hoards of Zombie Companies Rising!
The coronavirus has ironically unmasked several uncomfortable truths about our financial markets. We’re hanging on a trillion dollars of corporate debt, for instance, which now has some investors barricading up for an infestation of so-called “zombie” companies.
The common thread among all “zombie” companies is unprofitability and general unproductiveness. These are companies up to their eyeballs in cheap debt that can survive only on planets with low-interest rates. It’s what keeps them going; the willingness of investors to bet on small hopes of multi-bagging fortune reversals.
The most high-profile example is Uber, the ride-hailing app. It fits the technical definition with a consistent interest coverage ratio of less than one for the past three years. It doesn’t have a profitable business model, and this needs to change or it needs acquiring unless it ceases to exist when rates rise.
Interestingly, the lockdown has created more zombies than it’s wiped out. The Federal Reserve plunged us into a world of terminally zero interest rates when markets started going into free fall. Deutsche Bank believes that by the time we re-raise, we’ll be killing off one-fifth of US companies, which are zombies. There go millions of jobs!
The natural reaction to millions of job losses is to lower rates even more, which is why we’re all trapped. It’s the strongest stimulus measure meant for when things go wrong. It’s supposed to help the affected to get back on their feet, not knock them off their feet.
Another point is that “low rates keep more unproductive firms alive, which ultimately lowers the long-run growth rate of the economy,” points out Torsten Slok from Deutsche Bank. “The trend is likely going to continue.”
The Invstr community needs to watch ratios closely, which have been discussed by users on the app like Roberto Barletti (@robbieb). It would also make sense to think about gold and hard assets. These balance out the inflationary effects of central banks’ other stimulus options, namely, quantitative easing. Time to go zombie-slaying!