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Featured Insight


All You Zombies 3.png

Ben T. Nicholson

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At a Glance

Interest rate suppression started in 1996. Since then upwards of $50t in excess valuations and $91t in debt has been incurred.

Inflation was always going to be a result of the toxic mix, and it would be present at the peak of the cycle.

As interest rates increase to fight inflation, more companies are becoming "zombies," not generating enough profit to cover debt service leading to more borrowing.

All you zombies show your faces,
All you people in the street,
All you sittin' in high places,
The pieces gonna fall on you!

- The Hooters

The graph above has been raising eyebrows recently, particularly in the wake of money printing, quantitative easing, and the massive US debt bubble. It is arguably one of the most important, if not most revealing, representations of today’s economy. The blue line shows the growth of US Net Worth (wealth), and the red line shows the growth of the US Gross Domestic Product (GDP). You will notice the lines bifurcate starting around 1996. What happened then? Arguably the beginning of the greatest credit expansion in US history as this was the start of interest rate suppression and the subsequent extended period of malinvestment resulting in upwards of $50 trillion in “excess” asset valuations and roughly $91 trillion in debt.

There is so much in the bifurcation that it is almost daunting to rationalize. Think massive stock buyback programs that gutted a company’s ability to backstop operational expenses during downturns. Think hedge funds using low-interest rate capital to invest in multiple negative profit companies with the expectation that if one hits, massive gains will cover the losses of the others. Think private equity absorbing razor-thin margin companies then stripping assets and overleveraging balance sheets with cheap debt. Think federal and state governments generating massive deficits and debt through spending programs, including Covid relief programs and the subsequent money printing. Or on a more granular level, until recently, think double-digit percentage house price, not value, increases due to supply and demand manipulations and real estate fund purchases, not a newly finished basement, added pool, or a new roof.


It is arguable that inflation was always going to be an inevitable result of this toxic mix, it was just a matter of when and how it would show up, and what the peak would look like. We have hit it and the Fed has little choice but to fight it even though it was their creation. And their primary tool, at least to try, is tightening rates. Perhaps they see it through the lens of history, reasonably thinking we can operate with a Fed Funds Rate around 6.5%-7%, or at a minimum 2% above inflation. From 1955 to 1996, the average rate was 6.23%. Since then? 2.27%. Now? 5%-5.25%. With that as a guide, there is room to go.

And so enter the resultant “zombie” companies. The use of “zombie” as an adjective to describe the walking dead of the corporate world is becoming more ominous. They are typically defined as “firms that are unable to generate enough profits to cover debt servicing costs and need to borrow to stay alive.” These firms are part of the malinvestment buildup. Despite studies in 2021, there is no quantifiable way to know how many are out there. Nevertheless, it was estimated that between 2015 and 2019, an average of 10% of public firms and 5% of private were Zombies. That was pre-Covid.

Now consider this - if those many companies were part of the walking dead prior to Covid, surviving with access to low interest-rate capital, it stands to reason that those that made it through Covid survived because of relief, not an operational improvement. Cash tends to hide inefficiencies. Some of those survivors are now starting to fall, as seen in the uptick in bankruptcies and liquidations, but an uptick is not necessarily a momentum shift. It is the zombies that have just gotten bitten or are still vulnerable, that will inevitably cause that dynamic. And with each interest rate increase, the Fed is sinking its teeth deep into more of their necks.

Dawn always follows the dark. After the meek zombies are washed out, companies will retrench with capital efficiency as productive entrepreneurs re-emerge. Until then, it is worth giving a nod to the undertakers and dig-up that buried business card in the back of the desk, especially if capital recovery is imperative. Odds are this is just the beginning of a wave of bankruptcies and liquidations as wealth realigns with the capacity to produce real goods and services.


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