Janet Yellen’s Trash-Talking 😊
Treasury Secretary Janet Yellen has been trash-talking recently, telling the world that soft landing/no recession skeptics are now “eating their words…”
Crude Oil Prices Crash!
Unfortunately for Janet, the crude oil markets didn’t get the memo, as oil prices just fell below $70 per barrel – despite supply cuts and Janet’s promises of a roaring economy.
Oil prices are a great recession and inflation indicator, as they reflect the market’s expectations for future demand (oil prices rise if the economy/demand is expected to grow) and goods prices overall are heavily influenced by oil prices, given that oil goes into everything including transportation costs.
Today’s low oil prices will soon be reflected in much lower gas prices too, almost ensuring lower inflation readings… and lower interest rates (as bond investors focus heavily on inflation).
So, Janet may have spoken too soon… (today’s news about a softening labor market drives home this point even more).
Way Too Many Zombie Companies – Uh Oh…
A zombie company is a financially distressed company that makes just enough money to cover its bills and service its debt, but not enough to pay off its debt or grow.
They are a huge concern because there are more of them now than ever before in history. They are not only a huge drag on the economy, but they present a huge risk as well.
According to a Deutsche Bank study, only 1% of companies were zombies in 1997, but 25% of them were in 2020 – and the problem is no doubt much worse today.
Zombies are huge drags on the economy because they deploy resources so inefficiently – and thus slow down entire economies.
There are so many more zombies now because we have had such low interest rates; zombies have been able to borrow to stay alive for over a decade but are now literally addicted to debt.
Massive government bailouts (like the “TARP” program after 2008) have exacerbated the problem too.
Famous past and present zombies include: Sears, JCPenney, Toys “R” Us, iHeartMedia, GE, Bed Bath & Beyond, and Mattel.
THIS IS WHAT MAKES ZOMBIES SO SCARY: The gig is up, and the companies employ hundreds of thousands of people in the aggregate.
The gig is up because ultra low interest rates and cheap money are no longer available, and banks are reluctant to lend in any case – because they do not believe Janet Yellen.
Hence, a recession could easily push all of these companies out of business – sending thousands, if not millions, to the unemployment line.
I should add that there are huge numbers of zombies overseas too, particularly in Korea and China – so the problem is worldwide, making it that much more serious.
A massive increase in unemployment would of course result in much lower rates, but too many unemployed could put a damper on everything, including housing prices (no matter how low rates get).
