Today we run a warning flag up our flagpole…
For we have detected “zombies.” Zombies?
Mr. Robert Burrows of BondVigilantes.com:
These zombies exist in a sort of twilit torpor between life and death.
Their condition resembles a coma — yet it is not precisely a coma.
It is more a guttering along… in a reduced, scarcely comatose existence.
Yet they refuse to die the death. They can scare up sufficient credit to keep the Grim Reaper and the devil at arm’s distance.
Thus they are zombies… neither alive nor dead… both alive and dead.
Zombies Thrive on Cheap Credit
They acquired their bizarre existence during the era of zero interest rates and infinite credit.
Cheap, nearly cost-free credit sustained them. They got while the getting was good.
Yet the getting is no longer good.
Interest rates have soared high above zero. And the cheap credit that sustained them is no longer cheap.
Now these zombies are on the move, destination Main Street:
Bloomberg has identified some 600 such creatures — or 20% of the United States’ largest publicly traded entities.
Zombies Rob the Future
Their very existence represents a larceny of the present and a larceny of the future.
They are devouring resources that might otherwise serve productive purpose.
Imagine for the moment that you inhabit a sane and parallel universe.
Imagine that the Federal Reserve let economic and financial systems run their natural course following the 2008 nastiness.
Interest rates would have likely gone soaring.
Many firms loaded to the gunwales with debt would have filed for bankruptcy under Chapter 11 of United States Code.
The grief — though acute — would have likely proven brief.
Sound business with deep roots within the soil would have endured.
Higher interest rates would have encouraged savings… and gradually re-amassed the capital stock.
From this capital stock the green shoots of future growth would have come thrusting.
Yet it was not to be.
Rather than letting the cleansing fire clear away the deadwood… the Federal Reserve intervened to preserve it.
This it did for years under zero or near-zero interest rate policy.
Yet artificially low interest rates rob the future to gratify the present.
They deprive the struggling saplings of their nourishment — nourishment that promises tomorrow’s growth.
How many future redwoods never came into being because these zombies robbed their nutrients?
The answer is many.
The Six Mandates of Sound Central Banking
Thus the Federal Reserve shattered the six mandates of sound central banking.
These are, as summarized by Wikipedia:
A word of explanation — perhaps — on “penalty rates”…
The central bank should charge interest rates above the market rate.
Else the central bank would be a lender of resort — not the lender of last resort.
A high rate further encourages debtors to retire their debts rapidly… to shake loose the heavy burden as soon as circumstances grant.
Yet what does the Federal Reserve’s actual record reveal?
Economist Thomas M. Humphrey is the author of Lender of Last Resort: What It Is, Whence It Came and Why the Fed Isn’t It.
This fellow argues that the Federal Reserve turned the six mandates of sound central banking upon their heads.
Its perverted mandates were — and are:
Thus the Federal Reserve took sound central banking and knocked it 180 degrees out of phase.
It has warred against all six mandates — and massively against mandates 1, 2, 3, 4 and 5.
It has proved incompetent at its profession.
Imagine a plumber who does not patch leaks but creates leaks… a doctor who does not mend bones but cracks bones… a head shrinker who does not shrink heads but expands heads.
Now you have the flavor of it.
Zombies Feed on Junk Bonds
What nutrients are sustaining these zombies at present?
The answer is largely high-yield bonds — junk bonds.
They have held up to date. Yet in the likely event of recession?
Deutsche Bank crackerjacks Jim Reid and Karthik Nagalingam hazard that defaults in junk bonds will near 12% — their historic highs.
Furthermore… as Barron’s notes:
Thus these zombies are in for a good hard shellacking… or so we hazard.
They are resilient, it is true — else they would not be zombies.
Yet they can be dispatched over the rainbow with the proper blow to the proper location.
Rising rates may represent that blow.
We are all for it. “Death to the zombies!” is our cry.
They have worked enough wreckage as is…
Send this article to a friend: