Zombie Alert!

Zombies Heading for Main Street [The Daily Reckoning] October 18, 2023 [WEBSITE]( | [UNSUBSCRIBE]( Zombie Alert! - Zombie alert!... - How zombies make us poorer… - The Fed’s violated the six mandates of sound central banking… Annapolis, Maryland [Brian Maher] BRIAN MAHER Dear Reader, Today we run a warning flag up our flagpole... For we have detected “zombies.” Zombies? Mr. Robert Burrows of BondVigilantes.com: Zombie firms are essentially companies that exist on borrowed time. They struggle to generate enough profits to cover their debt obligations, yet manage to stay afloat thanks to lenient borrowing conditions. The prolonged period of ultra-low interest rates following the 2008 financial crisis played a significant role in sustaining these firms, allowing them to refinance their debts at favorable terms. As a result, many of these entities have been able to continue operating, albeit with weakened balance sheets and limited growth prospects. 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. Mr. Burrows: One of the key factors enabling zombie firms to survive has been the availability of cheap credit. As central banks increase interest rates in response to improving economic conditions and/or inflation, the environment that has sustained these firms has shifted dramatically. Higher interest rates will lead to increased borrowing costs for these entities, potentially pushing some of them over the brink and into insolvency. Now these zombies are on the move, destination Main Street: The persistence of zombie firms has implications beyond individual company struggles. These entities tie up resources that could otherwise be invested in more productive and innovative ventures. Resources such as labor, capital and market share are effectively locked within these stagnant firms, inhibiting the overall efficiency of the economy. This phenomenon can contribute to sluggish economic growth, reduced job creation and a less dynamic business landscape. Bloomberg has identified some 600 such creatures — or 20% of the United States’ largest publicly traded entities. [This Simple Chart]( [Financial Fallout Expected]( “Please head to your nearest economic shelter” - Former Pentagon Advisor What you’re about to see is a [disturbing new message]( from Jim Rickards. One that references a biblical warning made nearly 4,000 years ago. And points to an [economic nuke]( set to hit the markets just a few short weeks from now… If you’re worried about the state of the U.S. economy, and the strength of the U.S. dollar… [I suggest you watch this message now…]( Then head to your nearest financial fallout shelter. Because once this crisis hits…it will already be too late. [Click here to view.]( [LEARN MORE]( 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: (1) protect the money stock instead of saving individual institutions; (2) rescue solvent institutions only; (3) let insolvent institutions default; (4) charge penalty rates; (5) require good collateral; and (6) announce the conditions before a crisis so that the market knows exactly what to expect. 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? [Biden’s 2024 Presidential Run Doomed To Fail – Thanks To New Inflation Surge?]( [This Simple Chart]( Biden has given America its worst inflation crisis in over 43 years. But if you think the worst of inflation is over, think again… [A deadly new “Second Wave” of inflation is coming – one which could send the price of food, gasoline, housing and more skyrocketing much higher than they are today.]( Will this new crisis mean Biden’s 2024 Presidential run is doomed to fail? [Click here now to see my urgent warning.]( [LEARN MORE]( 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: (1) “Emphasis on credit (loans) as opposed to money,” (2) “taking junk collateral,” (3) “charging subsidy rates,” (4) “rescuing insolvent firms too big and interconnected to fail,” (5) “extension of loan repayment deadlines,” (6) “no pre-announced commitment. 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? Look out. 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: The Federal Reserve has committed to keep interest rates “high for longer,” which should cause the U.S. economy to weaken — and weaken highly indebted companies, leading to more defaults by these speculative-grade borrowers over the next year. 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… Regards, [Brian Maher] Brian Maher Managing Editor, The Daily Reckoning Editor’s note: While the world is distracted by Israel and Hamas… Ukraine and Russia… and China and Taiwan… Jim Rickards is warning that there’s another [“war”]( just around the corner that NOBODY is talking about. Except Jim, that is. [And as Jim explains here, this war directly affects YOU.]( As you’ll see, it even has biblical connotations. This crisis will have rippling consequences Jim fears will cause financial tragedy for millions of unprepared American citizens. [Click here to learn exactly how to prepare and protect yourself while there’s still time.]( Thank you for reading The Daily Reckoning! We greatly value your questions and comments. Please send all feedback to [feedback@dailyreckoning.com.](mailto:dr@dailyreckoning.com) [Brian Maher] [Brian Maher]( is the Daily Reckoning's Managing Editor. Before signing on to Agora Financial, he was an independent researcher and writer who covered economics, politics and international affairs. His work has appeared in the Asia Times and other news outlets around the world. He holds a Master's degree in Defense & Strategic Studies. [Paradigm]( ☰ ⊗ [ARCHIVE]( [ABOUT]( [Contact Us]( © 2023 Paradigm Press, LLC. 808 Saint Paul Street, Baltimore MD 21202. By submitting your email address, you consent to Paradigm Press, LLC. delivering daily email issues and advertisements. To end your The Daily Reckoning e-mail subscription and associated external offers sent from The Daily Reckoning, feel free to [click here.]( Please note: the mailbox associated with this email address is not monitored, so do not reply to this message. We welcome comments or suggestions at feedback@dailyreckoning.com. This address is for feedback only. For questions about your account or to speak with customer service, [contact us here]( or call (844)-731-0984. 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