EC Stocks Rise As Zombie Companies Proliferate

The continuation of this phony bull market and the ersatz economy is predicated on borrowing costs staying at a record low levels forever. This is despite the fact that the level of debt is unsurpassed and growing higher each day. This is the same condition as the real estate bust of 2008: 1.5 trillion dollars’ worth of US Mortgage debt was owed by borrowers who couldn't pay back the loans once home prices stopped rising and interest rates began to rise. Only this time around it is going to be much worse: over $5 trillion worth of corporate debt will most likely become insolvent once the economy stalls and zombie corporations get shut out of the credit markets due to spiking borrowing costs.

In the interim, it is ok to dance on top of these bubbles; but only if you have a robust model that gives enough warning ahead of time to sprint towards the extremely narrow emergency exit. Otherwise, you will buy and hold, and dollar cost average your account to penury. If you doubt, that just ask the Japanese in 1989 how holding on to stocks worked out.

Up until now, the day of reckoning has been held in abeyance by central banks’ willingness to drop borrowing costs to near nothing and by engaging in perpetual QE. But this strategy only works for a while. Now that money has been offered around the globe for virtually free and for a very long time, there isn’t much central banks can do to thwart the next recession outside of dropping money from helicopters (a.k.a. direct debt monetization or hyperinflation)--but that won’t happen until the next collapse is in full free-fall. Modeling this dynamic will be crucial for investors’ success.

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Michael Pento is the President and Founder of Pento Portfolio Strategies, produces the weekly podcast called,  more

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Moon Kil Woong 4 months ago Contributor's comment

Stocks aren't overvalued if rates and inflation remain very low, especially if the Federal Reserve eases more. That said, what is bad is the fact we have artificially low rates and rates are going lower not higher. When we do hit a recession, it will get nasty fast.

Leslie Miriam 4 months ago Member's comment

So sure a recession is coming? I feel like people always say that. Seems like fear mongering to me.

Moon Kil Woong 1 month ago Contributor's comment

It is not fear mongering. It is inevitable like winter time if the world spins around the sun. It is an economic fact. The issue is that this can be artificially delayed by a variety of means, monetary stimulus, fiscal stimulus, regulatory measures, etc. The problem is, if you already used up these measures you are left with little to fight the downturn when it comes.

What is sad is we are already hitting the bottom of the barrel even though we weren't in a recession. This is why we are playing with zirp and quantitive easing. It is despicable. Such measures should be used for us when we are in an actual downturn.

Gary Anderson 4 months ago Contributor's comment

The Fed is trying to engineer a recession proof economy. If nominal interest rates go negative it may be more difficult to do so. And real interest rates are negative and may be starting to lose ground.

Gary Anderson 4 months ago Contributor's comment

And this is a sober warning, the biggest bubble is the corporate debt of zombie companies.

Beating Buffett 4 months ago Member's comment

Yes, very sobering.

Gary Anderson 4 months ago Contributor's comment

Jamie Dimon said he would not buy a negative interest bond unless forced to! The Fed has to stand its ground against Trump's negative nightmare.