Global Pandemic and Zombies
Posted on Tuesday, February 18th, 2020
The market may very well ignore it as a onetime problem but debts need to be paid and there is a large amount of debt needing to be rolled over in the next 24 months. Companies have taken on debt and used it buy back corporate stock. They may have painted themselves into a corner. Never be forced to do something. The corona virus may be what they didn’t see coming. – Blackthorn Blog Post 2/10/2020
We take that a bit further this week as the rest of 2020 will depend on how central banks respond to the weakening of the global economy and the possibility of a global pandemic. The virus is sending China’s economy into a tailspin. Typically, that would impact global bond markets and, in particular, the high yield market, as corporate cash flow dries up and defaults begin to appear.
Will markets see the danger as supply lines are cut off and manufacturers suspend production? Will companies begin to have cash flow problems as debts become due? Will central bankers flood the system with even more cash to circumvent the issues of cash flow and the virus? Markets seem to be betting that central banks will come to the rescue. Central banks may see the virus as a onetime problem that could launch the world into a global recession. It is not banker’s job to stop recessions but they might try. It is whether they try and with what fervor that projects the rise or fall of markets in 2020.
Scott Minerd from Guggenheim had this to say on the bond market last week.
“Covid-19 is just one example of exogenous events that could prick the bubble” that is lurking in the corporate bond market.
He warns: “we are either moving into a completely new paradigm, or the speculative energy in the market is incredibly out of control. I think it is the latter. I have said before that we have entered the silly season, but I stand corrected. We are in the ludicrous season.”
Have we entered a paradigm where debt laden companies can never fail? Easy money flooding the markets is why markets continue to head higher. The market perceives that companies can never die. It used to be, back in the good old days pre 2009, that cash flow was the lifeblood of any company. If your cash flows didn’t keep up with your debt payments you withered and died – bankruptcy. Today you can just march on forever. Companies like Tesla, LYFT and UBER just keep burning cash and banks will lend to you. Boeing didn’t sell any airplanes in January. Zero! That is the first time that has happened since 1962! Yet Boeing went out and easily raised $12 billion in fresh capital to get thru its 727 Max crisis. There is no risk. Companies can never die with monetary policy this loose and rates this low. Problem is you end up with zombie companies that don’t add to society or the economy. China would be in big trouble if it didn’t have an endless supply of capital. Don’t they have a supply of endless capital? I guess we will find out.
As a side note – from last week’s blog post.
The corona virus is having an impact on global GDP. Supply chains are being disrupted. If this goes on through next week companies will begin to report problems.
As we write Apple is reporting that they are rescinding their guidance for the quarter which they just announced three weeks ago. This is due to uncertainties surrounding the virus in China which is impacting consumer demand as well as production. They will not be the last company to withdraw guidance.
I think we aspire less to foresee the future and more to be a great contingency planner… you can respond very fast to what’s happening because you thought through all the possibilities, – Lloyd Blankfein
A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty. – Winston Churchill
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Disclosure: This blog is informational and is not a recommendation to buy or sell anything. If you are thinking about investing consider the risk. Everyone’s financial situation is different. Consult your financial advisor.