Best of the Week
Most Popular
1. Gold Final Warning: Here Are the Stunning Implications of Plunging Gold Price - P_Radomski_CFA
2.Fed Balance Sheet QE4EVER - Stock Market Trend Forecast Analysis - Nadeem_Walayat
3.UK House Prices, Immigration, and Population Growth Mega Trend Forecast - Part1 - Nadeem_Walayat
4.Gold and Silver Precious Metals Pot Pourri - Rambus_Chartology
5.The Exponential Stocks Bull Market - Nadeem_Walayat
6.Yield Curve Inversion and the Stock Market 2019 - Nadeem_Walayat
7.America's 30 Blocks of Holes - James_Quinn
8.US Presidential Cycle and Stock Market Trend 2019 - Nadeem_Walayat
9.Dear Stocks Bull Market: Happy 10 Year Anniversary! - Troy_Bombardia
10.Britain's Demographic Time Bomb Has Gone Off! - Nadeem_Walayat
Last 7 days
Want To Earn A Safe 5% In Fixed Income? Buy Preferred Stocks - 24th April 19
Can Gold Price Rise Without a Rate Cut?  - 24th April 19
Silver’s Next Big Move - 24th April 19
How Can a College Student Invest Wisely? - 24th April 19
Prepare For Unknown Stock Market Price Action As New Highs Are Reached - 23rd April 19
Silver Plays a Small but Vital Role in Every Portfolio - 23rd April 19
Forecasting 2020s : Two Recessions, Higher Taxes, and Japan-Like Flat Markets - 23rd April 19
Gold and Silver Give Traders Another Buying Opportunity - 23rd April 19
Stock Market Pause Should Extend - 21st April 19
Why Gold Has Been the Second Best Asset Class for the Last 20 Years - 21st April 19
Could Taxing the Rich Solve Income Inequality? - 21st April 19
Stock Market Euphoria Stunts Gold - 20th April 19
Is Political Partisanship Killing America? - 20th April 19
Trump - They Were All Lying - 20th April 19
The Global Economy Looks Disturbingly Like Japan Before Its “Lost Decade” - 19th April 19
Growing Bird of Paradise Strelitzia Plants, Pruning and Flower Guide Over 4 Years - 19th April 19
S&P 500’s Downward Reversal or Just Profit-Taking Action? - 18th April 19
US Stock Markets Setting Up For Increased Volatility - 18th April 19
Intel Corporation (INTC) Bullish Structure Favors More Upside - 18th April 19
Low New Zealand Inflation Rate Increases Chance of a Rate Cut - 18th April 19
Online Grocery Shopping Will Go Mainstream as Soon as This Year - 17th April 19
America Dancing On The Crumbling Precipice - 17th April 19
Watch The Financial Sector For The Next Stock Market Topping Pattern - 17th April 19
How Central Bank Gold Buying is Undermining the US Dollar - 17th April 19
Income-Generating Business - 17th April 19
INSOMNIA 64 Birmingham NEC Car Parking Info - 17th April 19
Trump May Regret His Fed Takeover Attempt - 16th April 19
Downside Risk in Gold & Gold Stocks - 16th April 19
Stock Market Melt-Up or Roll Over?…A Look At Two Scenarios - 16th April 19
Is the Stock Market Making a Head and Shoulders Topping Pattern? - 16th April 19
Will Powell’s Dovish Turn Support Gold? - 15th April 19
If History Is Any Indication, Stocks Should Rally Until the Fall of 2020 - 15th April 19
Stocks Get Closer to Last Year’s Record High - 15th April 19
Oil Price May Be Setup For A Move Back to $50 - 15th April 19
Stock Market Ready For A Pause! - 15th April 19
Shopping for Bargain Souvenirs in Fethiye Tuesday Market - Turkey Holidays 2019 - 15th April 19
From US-Sino Talks to New Trade Wars, Weakening Global Economic Prospects - 14th April 19
Stock Market Indexes Race For The New All-Time High - 14th April 19
Why Gold Price Will “Just Explode… in the Blink of an Eye” - 14th April 19

Market Oracle FREE Newsletter

Top 10 AI Stocks Investing to Profit from the Machine Intelligence Mega-trend

The Fed Created an Economy of Zombies and Unicorns

Stock-Markets / US Federal Reserve Bank Apr 12, 2019 - 04:04 PM GMT

By: John_Mauldin

Stock-Markets

Central bankers have a well-worn playbook for handling recessions.

Cut interest rates, increase liquidity, and otherwise shove capital into the private sector. This helps businesses hire more workers and raise wages. Then gradually remove all the stimulus as growth recovers.

This playbook truly fell apart in 2008. The system had so much debt that adding yet more of it didn’t have the desired effect.


Even dropping short-term rates to zero didn’t help because it was creditworthiness, not interest costs, that kept people and businesses from borrowing.

The Bernanke Fed’s answer was quantitative easing. It had an effect but not the intended one.

Unintended Consequences

Instead of going to productive use, the new stimulus helped banks deleverage and public companies repurchase their own shares or simply buy their competition.

This pushed asset prices, i.e. the stock market, higher and made it appear recovery was underway. Unfortunately, the “recovery” was the slowest recovery on record.

All that cash eventually trickled through the economy to yield-starved investors, not people who would spend it on useful goods and services.

Why were they starving? Because the Fed was keeping rates low. They had little choice but to take more risk, which is what the Fed wanted them to do in the first place.

So they plunged money into venture capital, private equity, IPOs, emerging markets, and everything else they could find with potentially decent capital gains and/or yields.

The result was a massive wave of investment, some good and some, well, let’s just say based on hope and little else. And hope is not a solid investment strategy.

Some businesses that had good stories (the so-called unicorns) found themselves covered with cash from hopeful investors. These companies emulated the Amazon model by using money to buy growth without profit.

In the hopes of going public at some point and cashing in, they kept the game alive. Think Lyft. Investors wanted to believe the story they were investing in was true, so they watched and waited.

They’re still waiting. And here we are.

Zombie Companies

A 2018 study examined a database of 32,000 listed companies in 14 advanced economies to identify “zombie” businesses. By their broad definition, a company is a zombie if it is…

  • At least 10 years old, and
  • Had an interest coverage ratio below 1.0 for three consecutive years.

In other words, these companies weren’t making enough revenue to pay back their loans, much less cover their other expenses and earn a profit.

Note, these were not startup companies. All were at least 10 years old and still in business despite their inability to make any money.

A Bank of America Merrill Lynch study finds roughly the same thing: 13% of developed-country public companies can’t even cover their interest payments. They are either borrowing more cash to pay off previous loans, or issuing equity to hopeful (too hopeful) investors.

Now, there are perfectly understandable, human reasons for this.

Faced with a probable loss, lenders always face a temptation to “extend and pretend.” They convince themselves that another year or another quarter will let it turn into a sterling borrower who pays in full and on time.

And more often than not, the zombie company has a charismatic CEO or founder who can charm lenders.

While it’s easy to say these investors are making poor decisions, they’re not doing it in a vacuum. They’re trying to earn positive returns in a world where central bankers have made positive returns an endangered species.

This means everyone is operating with distorted information and incentives. We’re in a hall of mirrors, so no surprise some people crash into the glass.

None of this is “natural.” It’s not the free market gone wild. It is the result of a manipulated market. The manipulators are what went wild. Sadly, they’ve only just begun….

Get one of the world’s most widely read investment newsletters… free

Sharp macroeconomic analysis, big market calls, and shrewd predictions are all in a week’s work for visionary thinker and acclaimed financial expert John Mauldin. Since 2001, investors have turned to his Thoughts from the Frontline to be informed about what’s really going on in the economy. Join hundreds of thousands of readers, and get it free in your inbox every week.

John Mauldin Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules