Feed the Zombies

Money printers go 'brrr ... ains'. 🧟 And that's okay.

Monetary expansion and lowering interest rates is often criticised for keeping alive zombie firms.

What are 'zombie' firms?

Unofficially, they're companies that have not been able to service their debt for three straight years.

Easier financing would allow some that would otherwise fail, to survive. This is often considered wasteful.

How big is the zombie problem?

Deutsche Bank estimated 2020 might see almost 20% of firms become zombies.

Run for the hills!

Not so fast.

Not all firms are equal. Your main street small retailer, suffering from online shopping and now lock-downs, is in vastly different shape to, say, Microsoft.

If 20% of the S&P 500 were zombies, they would form 2.5% - 8% of its market cap depending on whether you took those 100 names from the bottom or the middle (you wouldn't take it from the top.)

Forget the popular trope of zombie hordes overrunning humanity. Think instead of a minority population of diminutive un-dead. Zombie faeries, if you will. 

Aww, look at them Faer-bies, unable to support themselves, but just trying so gosh darn hard.

🧚

Aren't they still dangerous?

Short answer: maybe, but we know which firms are zombies, so just, like, don't invest in them, 'kay?

It's arguable that there are no zombies in the S&P 500 because while it is exposed to 'zombie industries' like oil, its profitability and capitalisation requirements weed out failing companies before they become zombies.

So you don't need the edginess of an apocalypse survivor to avoid zombies. Just carry on buying SPY/IVV.

⛺🏹

Studies on Japan's famous post-bubble zombies show many eventually rehabilitate, implying that it would be better to stop their creation rather than urge their starvation.

On the other hand, could they be good investments?

Over the long term, zombie stocks have only slightly under-performed the S&P 500. It's their far-higher volatility which primarily makes them less desirable.

At the same time, keeping the 2 million zombie company workers employed is a motivation for government support.

So they're not great investments, but they're not disastrous.

And despite becoming more numerous they're far from overbalancing the economy. 20% dead weight sounds bad to the point of declaring capitalism a wash until you realise that some of the most wondrous inventions of our time are far more wasteful. The most advanced experimental internal combustion engine is only 40% efficient. (This is of course a specious argument - not apples-for-apples. Nevertheless, it raises the question of how efficient economies can reasonably be.)

Then why is the narrative of monetary easing allowing zombie firms so compelling?

Because we've moralised natural selection.

'Survival of the fittest' has become a virtue, as has the corresponding 'demise of the unfit.' We think zombie companies should die. Instead, they are allowed to borrow to live another day, triggering our outrage that our leaders would defy natural law and reward the undeserving.

We forget that easy credit helps all firms.

"But it's about efficient allocation of resources."

Theoretically then, tighter credit would make investors more diligent and redirect their resources from loss-making ventures into profitable ones.

During the taper tantrums in 2013, the mere possibility of reduced bond buying by the Fed coincided with temporary declines in the Dow Jones Industrial Average, arguably containing the most prestigious companies on the stock market.

People didn't go, "Ooh, I'd better sell off those speculative small caps but keep my blue chips." Discernment went out the window and there was a brief rush to cash.

The only asset that is certain to benefit from tighter monetary policy is cash, and that's what I think this is really about.

Many who moan about monetary expansion use moral hazard - and our receptivity to such framing - to exaggerate the magnitude of the zombie problem. It's tempting to see them as being sore that they can't receive risk-free income just by parking their money in a bank account.

It's time to point out that many times on screen, the zombies were less of a problem than fellow humans.