Cheap debt has propped up “zombie” companies and here’s why that’s bad for the global economy
Every Wednesday, I talk about various topics related to investing. My goal is to help you boost your investment portfolio and improve your financial well-being in the long run. Today, let’s talk about corporate debt. Keep reading below to know why you should always be on the lookout for corporate debt.
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Cheap debt has propped up “zombie” companies and here’s why that’s bad for the global economy. For a better part of the decade, businesses gathered as much cheap credit as they could due to low interest rates. However, this resulted in a credit bubble propped up by “zombie” companies—businesses that make only enough money to continue operating and servicing their debt. Fast forward to 2024, the U.S. saw a huge refinancing wave, allowing companies to delay corporate debt deadlines. In fact, companies borrowed more than USD 600 billion in the first quarter of that year alone… the most in three decades. Unfortunately, not every business was fortunate enough, as some small and midsize enterprises turned to banks for refinancing rather than the public markets. Banks aren’t willing to lend as bond investors this year, as can be seen in rates that are several percentage points higher than the federal-funds interest rate. Businesses that borrowed from banks are operating from one debt payment to the next… and continued high interest rates aren’t helping. In short, corporate debt levels are on the rise not only in the U.S., but the rest of the world. Cheap Debt All Over
For the past 10 years or so, central banks around the globe have dropped interest rates. … and just like in the U.S., foreign corporations grabbed as much cheap debt as they could. This can be seen through corporate debt as a percentage of annual gross domestic product (GDP)—a useful signal in monitoring a country’s credit health.
For the U.S., corporate debt reached 80% in 2023. On the other hand, Japan’s debt went up to as high as 115% of its GDP. However, it is France that has the highest corporate debt of any major nation, at over 150%. As you can see, the U.S. isn’t the only nation with a “zombie” problem, as about 25% of South Korea’s companies are “zombies.” Meanwhile, of the nearly 2,000 Canadian companies with public data, 1,250 of them are “zombies.” Given these figures, it’s only safe to assume that the existence of “zombies” is a cause for concern… and so is their extinction. Even though “zombie” firms hurt economic efficiency and growth, and tie up capital and resources that could be used in more productive ways, simply closing them down isn’t a great solution to the problem. Why? It is because if “zombies” go under all at once, the unemployment rate could soar rapidly, as it is estimated that these businesses employ over 130 million worldwide. That’s definitely an outcome no country wants to deal with as it would be a disaster for the global economy. Stay Vigilant While not every company out there is buried in debt, healthy businesses could still get dragged down if “zombie” firms start to topple one by one. According to Rob Spivey, the Director of Research at Altimetry Financial Research and Valens Research, it’s better to let “zombies” go under than let them go on indefinitely. This is because the sooner a “zombie” dies, the easier and faster it is for a strong and healthy company to take its place. That said, should such an event occur, it is bound to shock investors in the short term. The bottom line? Be careful in investing in markets that have lots of “zombie” firms, even if that includes the U.S.… because once a bankruptcy bonanza starts, no economy will be safe. IN CASE YOU MISSED IT: AI has ushered in the biggest tech mania since the 1990s and has created 500,000 new millionaires—roughly 587 per day—since the launch of ChatGPT in late 2022. In fact, Nvidia is already up more than 783% in the past two years and recently, the S&P 500 made a new all-time high, driven mostly by AI stocks. While this may sound like good news, the world elite are already preparing for an AI crisis that could trigger a major catastrophe in the stock market. When this crisis happens, it could impact your money—whether you own AI stocks or not. If you want to protect yourself from this impending crisis, watch the replay of Professor Joel Litman’s most recent AI Panic Summit. During the summit, Professor Litman discussed everything you need to know about the impending turmoil on AI stocks and what you can do to avoid massive losses and seize huge gains. Click this link to watch the replay. This is completely free of charge. Hope you’ll take the time to check it out! Hope you’ve found this week’s insights interesting and helpful. Stay tuned for next Wednesday’s The Independent Investor! Michael Hartnett is the Managing Director and Chief Investment Strategist at BofA Global Research, a wholly owned subsidiary of Bank of America (BAC) Corporation. Learn more about one way to cure the economy in next week’s article! |
