The Coming Mass Killing of Zombies
We are in the middle of a slow motion debt crisis. We lurch from one crisis to the next. And we are far from over for this debt crisis. In fact, we are long way from the worst of the problem and from the end of the rolling crises.
The 2008 debt crisis was caused by poor government banking and accounting policies added to too easy Fed policy. Those policies induced consumers in the US and Europe and other countries to take on waaay too much debt to buy houses. Those poor policies created a massive debt bubble as these consumers borrowed trillions of dollars to buy houses. But, when the Fed raised interest rates and certain accounting standards were changed, the debt bubble burst and the led to the Great Recession, the worst recession since the Great Depression.
Then the Federal government raised taxes in the midst of this Great Recession and created the slowest recovery from a recession in US history.
But consumers retrenched. They paid off trillions of dollars of debt or were foreclosed on so their debt burdens have been dramatically reduced.
But companies and governments have taken their place. I’ll talk about government debt in the future but want to concentrate on corporate debt now.
The chart shows what percent of the Russell 2000 companies are zombies. A zombie company is defined as a company that is not making enough money to pay either interest nor principle on their debt. They are technically bankrupt but haven’t been forced to declare bankruptcy.
You can see that the number of zombies is moving swiftly higher and now represents 24% of the Russell 2000! That’s about 500 companies in the index! And the chart is months old!
So it is likely the situation is much worse as the Fed keeps raising rates, bank lending standards are tightening, and the economy slows. All of these factors increase the number of zombies.
So what will happen?
The confluence of Fed tightening and slower economy will increase the number of zombies. We are already at a crisis point just waiting for the trigger event to cause this zombie house of cards to crumble. Typically, the trigger event is that interest rates get high enough and banks don’t roll over loans due to tightening lending standards. So one weak zombie is killed and then it spreads into a panic of selling of those zombie stocks.
We haven’t seen that yet though the bank crisis this year is a form of a zombie debt crisis but centered only in a few banks.
A banking crisis can be contained easier than a zombie corporate crisis because the Fed can just hand banks money but it is harder to do that for corporations particularly small companies.
So we know what the trigger event will be but we don’t know when interest rates or lending standards will reach the tipping point. I suspect that Fed Funds at 6% would probably do it.
How do we make money from this coming crisis?
The first way is to short stocks with zombie balance sheets. It’s too early to do that now but you should be assembling your watchlist of stocks to short.
Another possible strategy is to buy puts on those stocks to reduce the pressure to time the short sell correctly.
I think this zombie crisis will be big enough to affect the stock and corporate bond markets as well.
The ideal way to follow my trades on making money in the coming zombie debt apocolipse is to join my Stock Navigator program which I reveal all my trades.
Click here to get more info and apply for a seat.