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Old 10-05-2018, 07:19 AM   #1
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Zombie apocalypse isn't what you were expecting

Originally Posted by Nomi Prins :
...
In its recent quarterly report, the BIS warned that low rates have catalyzed an increase in the number of “zombie” firms. The number of such firms has now risen to an all-time high.

Zombie firms are companies “that are at least 10 years old, yet are unable to cover their debt service costs from profits.” Their prospects for future growth aren’t so hot either.

According to the BIS, these zombies are still piling on debt and sucking money out of the real economy. Zombies “took on more debt and disposed of fewer assets after 2000.” This behavior accelerated after the financial crisis because of low interest rates.

The problem is that once a company becomes a “zombie” it tends to stay a zombie. That phenomenon is only getting worse. The BIS disclosed that “whereas in the late 1980s zombie firms had a 60% chance of staying in that condition the following year, the probability reached 85% in 2016.”

Zombies created from an influx of central bank money aren’t good long-term investments. It’s one thing for a company to take on debt to grow, but it is another to take on debt simply to re-pay other debt.

When the debt bomb finally detonates, it’s the rest of us who will suffer. Because of the collusion that’s gone on and continues to go on among the world’s main central banks, that problem is now an international one.
...
https://dailyreckoning.com/worlds-mo...-zombie-alert/
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Old 10-05-2018, 09:00 AM   #2
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This can be 'fixed'

Larger companies unable to pay or roll over their debt will get their needs met by that countries 'bad bank'

Smaller companies ....... well we need to show em how to run a business

Reckon on Fannie Mae, Freddie Mac, and a whole raft of US oil companies already in this situation or heading that way.

Possibly a different approach to companies with foreign debt ?
Be interesting to see what China gov does when lots of US$ based Chinese debt is in default.

You gonna reposess my factory ?
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Old 10-05-2018, 04:43 PM   #3
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Well I guess I never considered the "zombie" apocalypse as being actual zombies in the tv/movie sense of zombies, but when some big SHTF event happens leaving masses of unprepared people & even some prepared people who lost most everything walking around trying to find food, shelter, etc. Also huge masses of trouble makers like the antifa thugs burning cities around the whole country maybe more. This sounds basically like forecasting a potential depressions which considering the self-sufficiency (or lack thereof) level of most Americans today (especially the younger ones) it could look like the walking dead if things crashed big & hard.
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Old 10-08-2018, 06:48 AM   #4
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Originally Posted by rblong2us View Post:
This can be 'fixed'
...
I'm not so sure. It seems like we've crossed the Rubicon with respect to letting bad bets (Zombie firms) fail. Banks are too fragile and systemic risk is too high to let the markets work like they should (to absorb the losses of debts that can't be repaid). So we're on this path of slowly bleeding out until we fall unconscious.
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Old 10-10-2018, 08:29 AM   #5
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Quote :
...
After 35 years in the making, the bond bubble would be the biggest ever. Companies, governments and even mortgages via securitisation are all financing themselves via bonds.

The trouble is, interest rates can’t really go much lower. They can go higher though. And that spells trouble in bond markets and elsewhere.

The Australian Financial Review (AFR) reported on what the consequences look like in Australia in terms you can understand:
Quote :
PIMCO warns that rising mortgage costs will increase mortgage payments from 38 per cent of pre-tax income to close to 48 per cent, near its worst level over the past two decades.
Interest rate shocks are a shocker, as Aussies might say.

Further AFR articles have the headlines “Developers squeal over apartment price slump” and “6700 apartment projects blacklisted for loans”.

But it’s not just Australian debt markets that are tightening. Bloomberg reports “European Bond Market Falls Victim to Volatility as Third Sale in a Week Pulled”. An Austrian, a German and a Bahraini firm all pulled their bond sales.

Bond yields around the world spiked recently thanks to Italy, the Federal Reserve chairman saying he wants to hike rates much further, and the Bank of Japan winding down its stimulus.

If bonds are in a bubble, it may have just popped.
...
https://www.capitalandconflict.com/c...nd-vigilantes/

Quote :
Canada’s economy is in the throes of a zombie outbreak and it’s threatening to devour the country’s productivity.

That, more or less, is the conclusion of a new report from Deloitte, which found that at least 16 per cent of publicly traded firms here could be classified as “zombies” — defined as mature firms more than 10 years old that lack sufficient revenue to cover interest payments on their debt.
...
https://montrealgazette.com/news/eco...4-7b739c403604

Quote :
Following Turkey’s failed coup attempt in July 2016, President Recep Tayyip Erdogan imposed a state of emergency, curtailing not only political but also economic freedoms, including a ban on corporate bankruptcies. When the Turkish government lifted the state of emergency two years later, it naturally led to fears of a bankruptcy surge. The Turkish lira’s meltdown in August, contributing to a 40 percent devaluation of the currency this year alone, has exacerbated such fears. Erdogan’s response has been to allow companies to exclude foreign currency losses from bankruptcy calculations, which risks creating a “zombie economy” to complement Turkey’s already lifeless democracy.
...
https://warontherocks.com/2018/10/tu...-every-corner/

The Fed wants to continue raising rates. We live in interesting times.
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Old 10-10-2018, 11:38 AM   #6
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The fact that they have a holy war going on at their southern border & mass migration through their country as all those military age males women & children seek to convert Europe into moslem theocracies make a new life for themselves as they obligingly blow up the infidels & rape the women assimilate to their new nations culture isn't really helping matters. Even though we all know it's just a mass wave of islamic peaceniks, some trouble makers from somewhere (probably the west) have gotten in & are creating additional problems for the govt.
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Old 10-12-2018, 02:08 PM   #7
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The zombie Apocalypse will be when the rest of the world stops buying our debt and we try and monetize our way out of trouble, ALA Venezuela. That's when it happens. Triple digit inflation and rampant poverty. Those without "hard currency" such as long term storage foods, gold and silver, guns and ammo, fuel, etc. will become "zombies", wandering around in a sort of dazed shamble, waiting for the government help that never comes. It won't be until the whole thing crashes down around the world, and something new rises form the ashes that things begin to get better.

Fiat currency has to die and be replaced by hard currency of barter before we can return to true stability. When the US stops being able to "consume" the worlds production like a starving raccoon, it all comes to a screaming halt. All those Bangladeshi textile workers return to their huts to starve, just as half of Indonesia and China do. It all collapses in a fucking heap. There you have it; Zombie Apocalypse.
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Old 10-12-2018, 08:17 PM   #8
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Originally Posted by ancona View Post:
The zombie Apocalypse will be when the rest of the world stops buying our debt ...
It seems inconceivable that this could come to pass, but damn if the neoconservatives aren't taking it as a personal challenge. I'm reminded of that scene in Robin Williams' horrible Popeye movie where the tax man is taxing everything imaginable before Popeye finally gets fed up and rebels. Sanctions, sanctions, swift. Sanctions, sanctions, swift.

I don't think I posted about it yet, but the business with this Khashoggi guy that the Saudi's purportedly assassinated in their embassy in Turkey on the order of the crown prince could end up being a significant inflection point in the US-Saudi relationship and consequently, the petrodollar.

Edit: The rest of the Khashoggi discussion was moved to a new thread: https://www.pmbug.com/forum/f9/khash...rodollar-3857/
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Old 10-24-2018, 07:02 AM   #9
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Quote :
...
Companies are borrowing money to buy back shares at absurd valuations.

In the US, close to 15% of the companies in the S&P 500 only survive because they can roll over their debt. For discussion, please see Rise of the Zombie Corporations: Percentage Keeps Increasing, BIS Explains Why.

I expect a junk bond crash and that will take equities lower with it.
...
https://moneymaven.io/mishtalk/econo...EKxlWOjxlG-xQ/
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Old 11-02-2018, 09:16 AM   #10
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From the glass half empty department...:
Quote :
BBB-rated bonds are just one notch above junk (also called high-yield).

Fallen angels are bonds that slip from BBB to junk.

... during recessions. All the investment grade bond funds have to dump the fallen angels straight into illiquid markets with few takers.

Half of the corporate bond universe is BBB-rated.
...
When the junk bond market does blow, it is nearly guaranteed to take equities with it. That's the scary thing about the recent equity selloff.

The junk bond market selloff has barely started and so has the accompanying stock market decline.
https://moneymaven.io/mishtalk/econo...kKjik2eqMocnQ/
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Old 11-07-2018, 09:04 AM   #11
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Quote :
After quitting his job at a $7 billion hedge fund to go it alone three years ago, Adam Schwartz happened upon a short so certain he built a notional position amounting to half his fledgling firm’s assets on it.

He’s been borrowing shares and stockpiling bearish options on exchange-traded funds that track major credit indexes, confident that a blow-up in fixed income will hit these passive vehicles the hardest.

Schwartz reckons it’s only a matter of time before rising rates choke off financing for highly leveraged companies, spurring a wave of bond defaults.

But running a hedge fund with mostly his own cash has given the 39-year-old freedom to bet on more extreme scenarios, like the one where credit ETFs -- which have vaulted to prominence promising liquidity comparable to stocks -- perish in the bloodbath.
...
More: https://www.bloomberg.com/news/artic...t-etfs-crumble
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Old 11-14-2018, 08:48 AM   #12
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I found a SeekingAlpha post that provides a link to a copy of the original BIS report.

BIS report: https://www.bis.org/publ/qtrpdf/r_qt1809g.pdf

Source: https://seekingalpha.com/article/422...l-bulls-coffin
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Old 12-11-2018, 08:31 AM   #13
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China wants to deal with it's zombies. The western world is still sleeping on this issue.
Quote :
China will encourage "zombie" firms that still retain "business value" to restructure and woo strategic investors to cut debt to reasonable levels, the state planner said on Tuesday.

As part of its efforts to curb soaring corporate debt and tackle price-sapping capacity gluts in sectors such as steel and coal, China has promised to improve bankruptcy procedures and allow vast numbers of loss-making "zombie" companies to close.

But Beijing has also sought to ensure a smooth exit for hundreds of insolvent enterprises in a bid to avoid unemployment and political instability in struggling industrial regions.

"It is necessary to carry out these tasks in an orderly manner, effectively prevent moral hazards such as debt defaults and the loss of state assets, and ensure social stability," the National Development and Reform Commission (NDRC) said in new guidelines published on its website.

The NDRC ordered local governments to prepare lists of "zombie" firms within three months. The firms will be encouraged to secure agreements with their creditors and draw up restructuring plans within six months.

Firms that meet the conditions for immediate bankruptcy and liquidation will be eliminated, it said.
...
https://money.usnews.com/investing/n...to-restructure
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Old 01-10-2019, 09:09 AM   #14
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This is from May, 2018 - roughly five months before the BIS report mentioned in the OP of this thread:
Quote :
With corporate debt hitting its highest levels since before the financial crisis, Moody's is warning that substantial trouble is ahead for junk bonds when the next downturn hits.

The ratings agency said low interest rates and investor appetite for yield has pushed companies into issuing mounds of debt that offer comparatively low levels of protection for investors. While the near-term outlook for credit is "benign," that won't be the case when economic conditions worsen.

The "prolonged environment of low growth and low interest rates has been a catalyst for striking changes in nonfinancial corporate credit quality," Mariarosa Verde, Moody's senior credit officer, said in a report. "The record number of highly leveraged companies has set the stage for a particularly large wave of defaults when the next period of broad economic stress eventually arrives."

Though the current default rate is just 3 percent for speculative-grade credit, that has been predicated on favorable conditions that may not last.

Since 2009, the level of global nonfinancial companies rated as speculative, or junk, has surged by 58 percent, to the highest ever, with 40 percent rated B1 or lower, the point that Moody's considers "highly speculative," as opposed to "non-investment grade speculative."
...
Lower-rated companies have managed to keep their defaults below the historical average even though their credit metrics are "deeply stretched," Verde added.

"This extended period of benign credit conditions has helped many weak, highly leveraged companies to avoid default," she wrote. "These companies are poised to default when credit conditions eventually become more difficult."
https://www.cnbc.com/2018/05/25/mood...-defaults.html

Rickards says:
Quote :
...
The danger is that when the next downturn comes, many corporations will be unable to service their debt. Defaults will spread throughout the system like a deadly contagion, and the damage will be enormous.
...
If default rates are only 10% — a conservative assumption — this corporate debt fiasco will be at least six times larger than the subprime losses in 2007-08.
...
https://dailyreckoning.com/heres-whe...crisis-starts/

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Old 04-18-2019, 07:08 AM   #15
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Quote :
...
The last “Minsky Moment” came from subprime mortgages.

Those are getting problematic again, but I think today’s bigger risk is corporate debt, especially high-yield bonds.

Corporate debt is now at a level that has not ended well in past cycles. Here’s a chart from Dave Rosenberg of Gluskin Sheff:



The debt/GDP ratio could go higher still, but I think not much more. Whenever it falls, lenders (including bond fund and ETF investors) will want to sell.

Then comes the hard part: to whom?

Unprecedented Liquidity Crisis

You see, it’s not just borrowers who’ve gotten used to easy credit. Many lenders assume they can exit at a moment’s notice.

We have two related problems here:
  • Corporate debt issuance, especially high-yield debt, has exploded since 2009.
  • Tighter regulations discouraged banks from making markets in corporate and high-yield debt.

Both are problems, but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major banks’ market-making abilities by around 90 percent.

For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap.

The problem is they are not true market makers. Nothing requires them to hold inventory or to buy when you want to sell.

That means all the bids can “magically” disappear just when you need them most.

In a bear market, you sell what you can, not what you want to. The picture will not be pretty.

To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with borrowed money. They were confident that low interest rates and defaults would keep risks manageable.

In fact, according to S&P Global Market Watch, 77% of corporate bonds that are leveraged are what’s known as “covenant-lite.”

Put simply, the borrower doesn’t have to repay by conventional means. Sometimes they can even force the lender to take on more debt.

As the economy enters recession, many companies will lose their ability to service debt. Normally, this would be the borrowers’ problem, but covenant-lite lenders took it on themselves.

Another problem is that much of the at least $2-T in bond ETF and mutual funds isn’t owned by long-term investors who hold to maturity.

When the herd of investors calls up to redeem, there will be no bids for the “bad” bonds. But funds are required to pay redemptions, so they’ll have to sell their “good” bonds.

Remaining investors will be stuck with an increasingly poor-quality portfolio, which will drop even faster.

Those of us with a little gray hair have seen this before, but I think the coming crisis is biblical in proportion.
http://www.silverbearcafe.com/private/03.19/broke.html
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Old 05-03-2019, 08:26 AM   #16
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Interesting reading here:
Quote :
Europe’s productivity problem is partly due to the rise of zombie firms that crowd out growth opportunities for others. This column explores the tendency for weak banks to evergreen loans to zombie firms to avoid realising losses on their balance sheet. ...
https://voxeu.org/article/zombie-fir...-restructuring
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Old 05-09-2019, 09:49 AM   #17
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Quote :
... Gundlach, whose DoubleLine has $130 billion in assets under management.

Gundlach — sometimes known as the "bond king" — also flagged trouble in the corporate bond market, which got "dragged down" in the "economic mess that we're in."

"The corporate bond market is so much worse today than it was in 2006," he said.

Among Gundlach's concerns: a corporate bond market that has tripled in size, and a BBB-rated bond market that is now bigger than the junk-bond market. Using leverage ratios alone, "45%, not just of the BBB but the entire corporate bond market would be junk right now," he said, citing figures from Morgan Stanley.

A recession or downturn could "spark" a wave of downgrades from investment grade bonds into junk bonds, he said.
...
More: https://www.cnbc.com/2019/05/07/bond...f-control.html
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Old 07-18-2019, 11:00 AM   #18
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* Bloomberg News delved into 50 of the biggest corporate acquisitions over the last five years, and found more than half of the acquiring companies pushed their leverage to levels typical of junk-rated peers. But those companies, which have almost $1 trillion of debt, have been allowed to maintain investment-grade ratings by Moody’s Investors Service and S&P Global Ratings.

* This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market, Bloomberg Barclays index data show.
...
More: https://moneymaven.io/mishtalk/econo...EaueKaY2sMLBQ/

^^^ Definitely a glass half empty commentary. I'll be in my bunker...
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