The Zombies Are Finally Being Culled!

One of the adverse effects of extraordinary low interest rates and quantitative easing policies is that it has enabled a lot of zombie companies to stay in business. While this has kept open many companies that should have gone under it has also meant a lot of excess capacity. Keeping the zombies alive hits even the healthy companies. This is certainly not healthy for the long run health of an economy. The good news is that the zombie companies are finally getting culled as the number of corporate defaults has been increasing rapid during 2016. A bad company tends to remain a bad company far more often than not, as interest rates rise then even more zombies will go out of business. The following graphic illustrates the rise in corporate defaults especially in the US. A lot of the companies are concentrated in the energy and commodity space where the price falls in the last couple of years have been significant. There are of course plenty of zombies operating in China so I expect a rise in corporate defaults in emerging markets to increase significantly during the next year or two as global interest rates rise.