Zombie Inc.Submitted by Atlas Indicators Investment Advisors on November 19th, 2020
Zombies are occasionally the subjects of fictional works. These undead, horror-related characters are found in books, music videos, movies, and video games. Often pathogens infect them, turning a once lively person into no more than an animated corporeal without other human essences. Once an individual transitions, they may become a vector of the disease for which there is no cure.
Corporations have similar traits to humans. Our Supreme Court ruled corporations are afforded political speech rights under the First Amendment in Citizens United vs. Federal Election Commission. Banks with over $50 billion in assets are required to have living wills. Can something so similar to humans become a zombie? In short, yes.
While modern zombie movies originated with the American film maker George A. Romero, the term “zombie company” has origins in Japan. During its Lost Decade which followed their asset price bubble bursting, weak firms needed to be supported with loans. Sound familiar? Eventually, there, new loans were made to keep rolling over earlier loans.
According to this article from Bloomberg, the zombie infection rate of corporations in America is growing. Hoping to stave off an accelerating downward spiral in the economy, the Federal Reserve injected cash into the financial system during the economic shutdown earlier this year. In doing so, the central bank created an interest rate environment that forced some investors to reach for yield by stretching into riskier bonds, purchasing the debts of companies which aren’t earning enough to cover their cost of borrowing. There are now over 500 firms in the U.S. not earning enough to meet interest payments, and they owe collectively $1.36 trillion, up about $1 trillion from the start of this year.
Zombies are depressing. They often represent deep fears, making “zombie companies” an apropos nickname. American culture identifies with efficiency and innovation. Firms struggling to service debt, however, are constrained in these two areas. Even those firms which overcome the disease tend to lack productivity and growth in subsequent years, keeping valuable resources like capital and employees from being deployed at other companies. Zombies on a screen can be turned off, but America’s economy probably won’t be able to do away with zombie corporations as easily. One solution would be to kill them off, but many are large household name companies that compliance won’t let me list (I tried, and they are worried our readers will take it as investment advice). The demise of these firms is hardly a palatable solution in our current job-starved environment.