Escape From The Zombie Economy

This is not surprising. Easy money and artificially low-interest rates have suppressed the “destruction” of Schumpeter’s “creative destruction” in the United States, as they did in Japan after 1990. The only difference is that U.S. banks did not receive “guidance” from the Ministry of Finance as they did in Japan from 1990 to 1998, but the maintenance of artificially low-interest rates for a quarter-century has had the same effect. Moreover, as monetary policy has grown more extreme since 2010 the probability of permanent zombification has steadily increased so that now there are very few companies escaping from zombie status. I would guess that events since 2017 may have reversed this trend during the brief more sensible monetary policy of 2018, but that the intensification of funny money since that date, and the 2020 pandemic, have made things very much worse.

So who are these zombies? Some of them are in old industries, which have been disguising their zombiehood by an insane indulgence in stock buybacks. Companies like Boeing (NYSE: BA) and McDonald's (NYSE: MCD) have now bought back so much stock that they have no book net worth. That in itself is a statement that they can find no attractive investments that meet their capital “hurdle rate” – in effect, they are liquidating themselves. For Boeing, if not for McDonald's, that liquidation may now not be far distant, as they are only able to continue borrowing thanks to the indulgence of the banks and the over-liquid capital markets – a situation very like that of Japan’s zombie companies of the early 1990s.

The giants of the tech sector and those that work there are now doubtless thinking complacently at this point that their policy of “move fast and break things” prevents them from falling into the zombie category. Not so. Many tech companies, such as Uber (NYSE: UBER), Lyft (Nasdaq: LYFT), AirBNB (Nasdaq: ABNB), and Snowflake (NYSE: SNOW) have never made a profit and show no sign of ever doing so. However high their stock market valuation, they are clear zombies, fit only to be liquidated. Even the mighty Tesla (Nasdaq: TSLA) with its $620 billion market capitalization, only occasionally makes money and has a return on equity of only 5% — a zombie until very recently, it only barely escapes zombification today and could easily fall back into it.

If the likely forthcoming Biden administration’s plans are put into effect, zombification will only increase. As more and more money is pushed towards “clean energy” and “climate change” sectors, that money will form new pools of zombification, as it did in the solar panel and wind energy sectors under President Obama. The stench of putrefaction in the U.S. economy will grow ever stronger, its capacity for growth and innovation progressively weaker, as infinite resources are devoted to the dead at the expense of the living. This effect extends not only to the zombie companies themselves but to the people working for them. More or less by definition, jobs for zombie companies are “bullshit jobs” in the terminology of David Graeber’s 2018 book, that do not add economic value and destroy the work and creativity of those undertaking them.

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(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of "sell" recommendations put ...

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