Interest Rate Zombies

Politicians refer to it as, ‘putting the rubbish out’.

Meaning, if a negative media release has to go out, it’s usually done on a Friday evening when most people are at the local boozer and not watching the news.

This Moowsletter isn’t devious but you’ll probably wish you didn’t see it.

Since interest rates went up on Tuesday, some within the commentariat have suggested a heap of people will be in trouble if rates go to 2.5% by the end of the year.

So, will it really be that bad?

Maybe, but only if you believed the cardigans at the Reserve Bank who said rates wouldn’t go up until 2024.

Make no mistake, Reserve Bank boss Phillip Lowe should be impeached for luring borrowers into thinking rates would remain lower for longer. It was never, ever, going to happen and it’s a disgrace he even suggested it.

In any case, let’s put a few things into perspective.

Firstly, only one third of the property market have a mortgage, while another third have their house paid off, and the other third rent.

Therefore, the only group I’m concerned about are those who got sucked in by FOMO (fear of missing out) during 2021.

You were warned! Manic markets never last.

The big winners out of this will be the wannabe buyers who stared FOMO in the face but didn’t yield to it.

They’re now on the sidelines enjoying some JOMO – the joy of missing out.

Fortunately, the JOMOs are sitting on a heap of cash so they’ll eventually put a floor underneath this market, but not before it drops, possibly back to pre-pandemic levels.

I wouldn’t say the property market is doomed, but I would definitely say some buyers are.

Specifically, I’m talking about the ones who believed money would remain cheap for years to come and that anything with a roof on it never goes down in value.

That’s the good rubbish out of the way. #councilcleanup

Here’s the bad rubbish…

Right now, approximately one-fifth of the 3,000 largest publicly traded companies in the US are considered ‘zombie firms’ because they’re not making enough money to cover their interest expenses. [1]

That’s 600 of the largest 3,000 companies who are in the mud.

It’s akin to living off your credit card but you don’t have enough money to make the minimum monthly repayments.

Unfortunately, the Fed’s recent interest rate hikes, and record inflation, may be enough to push a wave of these companies from zombie to cemetery.

Which immediately raises two more questions…

Who are the lenders financing these businesses?

And who are their suppliers (and soon to be creditors)?

Fortunately, most of the loans for these firms come from the junk bond market which means the banks shouldn’t have too much exposure.

However, their suppliers which include other listed companies, could get knocked around a bit.

When I first spoke about inflation and interest rates in March 2021, I was criticized for being too negative. And maybe I was.

Well guess what?

There’s more.

We’re now heading into the final phase of the post-pandemic bubble, defaults.

And if my read is right, we’ll need a whopping big dumpster to clean up the mess.

Have a great weekend!

Adam

[1] Bloomberg.

Back paddock: when things go wrong, don’t go with it – Glenn Stearns, founder of Stearns Lending and cancer survivor.