Are you prepared for the economic impact of the looming zombie apocalypse? The answer to this question has become increasingly relevant as we witness stock markets heading for a hard landing, consumers depleting their savings and running out of credit, corporate earnings on the decline and zombie corporations set to default in a massive wave this year. Get ready, because the economic repercussions of zombie corporations are about to hit hard.
Economic Impact of Zombie Company Defaults
The stock market has been on a wild ride over the last 12 months, and many investors are wondering what the future holds. With corporate profit margins getting squeezed and earnings heading down, many companies are starting to struggle to stay afloat. The economic landscape is about to get more unpredictable.
But corporate earnings are supposedly strong, right?
Stories of U. S. corporations “hoarding cash” are commonplace.
“In recent years, the rise in cash held by U.S. companies has been dramatic, skyrocketing from $1.6 trillion in 2000 to about $5.8 trillion today. This trend has concerned investors, who would prefer to see the money either put to productive use or returned to them in the form of dividends.”
Of course, they go on to argue that this is proof that corporations should “pay their fair share” of taxes:
So in a new study, researchers set out to determine how much of the trend toward cash-hoarding could be explained by these two competing theories. Their analysis reveals that, for the bulk of the increase, it all comes down to taxes.
But as the interview below with Stephanie Pomboy makes clear, that figure is an illusion anyway. 90% of that cash hoard sits in a handful of the top companies. Almost half of the companies in the S&P 500 are actually cash strapped and likely another half of those qualify as Zombie Companies.
One thing is clear: zombie companies are heading for mass defaults, and this could have a massive impact on the economy.
To understand what this means, it’s important to look at the state of the economy. A significant portion of the economy is built on debt and, unfortunately, a large portion of that debt is held by companies with no real earning potential. These companies are known as ‘zombie companies’ and, if they are unable to pay their debts, the economic impact could be severe.
If these zombie companies fail to pay their debts, it could cause a chain reaction of defaults. This could potentially trigger a market crash, as investors pull their money out of the stock market in order to avoid losses. It could also cause a ripple effect throughout the economy, as other companies that rely on the zombie companies for services or materials could find themselves in difficult financial situations.
As if all of this isn’t bad enough, it could also lead to a collapse in the value of the U.S. dollar and other global currency markets. Many of these zombie companies are often considered ‘safe’ investments, and their failure could cause a shift in the perceived safety of the markets.
The consequences of zombie corporations mass defaults are serious, and the potential impact could be far-reaching.
Now is a good time to take a hard look at your holdings and make sure the underlying companies have the a solid source of cash flow and little to no debt, otherwise they (and you) could be in for a swift and painful world of hurt.
Stock Market Heading for a Hard Landing
The Federal Reserve has been hiking rates aggressively and the stock market is heading for a hard landing. As corporate earnings fail to meet expectations, the interest payments are due to reset at the new, higher rates – some 2 to 2.5x the previous interest payments.
It’s no secret that some of the biggest companies in the world are facing significant debt. Several zombie corporations are at risk of bankruptcy, and there’s a growing fear that these companies may trigger a mass default. The situation could be catastrophic, as the ripple effect could spread across the entire economy.
Consumers Out of Savings and Tapped Out on Credit
Record inflation has depleted consumer savings, and forced them to carry higher levels of credit card debt. Now the interest rate on that debt is rising, which will likely cause consumer credit defaults. Even if consumers don’t default, this leaves them with less disposable cash, which in term leads to falling corporate earnings.
This situation is made far worse by the fact that many of the zombie corporations took advantage of the record low interest rates in the lead up to the spike in inflation. This led to an increase in their debt levels.
The consequences of these actions are already beginning to show, with increased defaults and bankruptcies among consumers and corporations.
Corporate Earnings Decline
The corporate earnings decline is the most threatening economic trend that business and finance communities are facing today. It is the result of a perfect storm of economic factors – inflation, rising interest rates, staggering debt levels and an overall economic collapse. This decline in corporate earnings could result in a wave of zombie businesses and massive defaults which could have a crushing economic impact on the global economy.
The economic impact of this decline in corporate earnings could be devastating. Companies will experience reduced liquidity, leading to layoffs and bankruptcies. This in turn will lead to increased unemployment and reduced consumer spending further, dragging down the economy. Government debt will skyrocket as governments try to prop up their economies through stimulus packages, but this could also result in a further decline in the value of the currency.
In the short term, businesses can prepare for the decline in corporate earnings by cutting costs and reducing expenses wherever possible. This will help reduce the risk of default and increase the company’s chances of survival.
Zombie Corporations Heading for Mass Defaults
As the post-pandemic global economic recovery continues to struggle pressure is mounting on “zombie” corporations. There is a looming threat of a mass corporate defaults that could send shockwaves throughout the stock market and trigger a far more devastating economic collapse.
These “zombie” companies, many of which are large and well-known, are being kept alive by debt – debt that they can’t pay back, and debt that may soon lead to their downfall. These companies are over-leveraged, weighed down by unsustainable debt and high interest payments, and are unable to generate enough revenues to cover their costs. As their share prices stagnate and their corporate earnings continue to slide, investors are becoming increasingly concerned that these companies may soon face a corporate death spiral.
The situation is made even more precarious by the fact that many of these companies are holding debt that comes due within the next few months, and without a substantial injection of capital they could face imminent default.
The stock market could quickly plunge into a bear market, with companies slashing dividends and prices plummeting. As investor confidence evaporates and money begins to leave the stock market, the entire global economy could be pushed towards an economic collapse.
Preparing for the Economic Impact of Zombie Corporations
The economic effects of zombie corporations are real, and the potential for a mass default should give everyone pause. While it’s true that the stock market has been surging throughout January, it’s also true that businesses are struggling to stay afloat amid rising debt and a tapering of corporate earnings. Companies across the country have taken out loans to stay afloat, and many of them are now considered “zombie” corporations, which are companies with debt that exceed their market capitalization.
In the face of a potential zombie corporation mass default, preparation is key. Pay attention to your investments. Make sure you don’t have any high fliers that relied on cheap debt to fuel their rising stock price. Put stop losses in and consider trimming any speculative holdings you may have.
Stephanie Pomboy Makes the Case
Here’s an interview with the incomparable Stephanie Pomboy and Adam Taggart of Wealthion. She makes the case for a hard landing and why you should fasten your seat belt.
About the Author
My name is Michael. My background is in technology, not finance.
What this means is that my head isn’t filled with high-flying, new-economy financial theory nonsense that universities pump out these days to justify the absurdity of wall street.
What I lack in letters following my name I make up for in experience. 20 years of active investing experience – counting 3 (as of March, 2020) bubbles and subsequent busts, to be exact.
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