6/27/20 Mike Swanson on America’s ‘Zombie Firms’

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I am the Director of the Libertarian Institute, Editorial Director of Antiwar.com, author of the book Fool's Errand, Time to End the War in Afghanistan, and I've recorded more than 5,000 interviews going back to 2003, all of which are available at scotthorton.org.
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All right, you guys on the line, I've got the great Mike Swanson, why he wrote The War State all about the Truman, Eisenhower and Kennedy years there and the rise of the military industrial complex after World War II.
Have you read that?
Man, it's great.
Oh yeah, also, he's a former hedge fund manager and very successful guy on Wall Street and now he gives investment advice at wallstreetwindow.com.
He, of course, is a sponsor of this show and has great stuff to say about money issues all the time.
Welcome back.
How are you doing, Mike?
Oh, I'm doing great, Scott.
How are you?
I'm doing okay.
I'm a little bit worried about the future of the country, to be perfectly honest with you.
I think when the Washington Post is talking like Mark Thornton that I should be really worried and they did.
I sent you this piece.
I'm sure you probably saw it anyway.
The Washington Post says, here's one more economic problem the government's response to the virus has unleashed, zombie firms, troubling rise in number of U.S. companies that can't make enough profit to cover debt payments.
So obviously the thesis of the story here is the lockdown, among other things, the virus itself and other economic pressures and whatever, have resulted in these massive bankruptcies.
But importantly for this issue here is, should be bankruptcies, would be bankruptcies, but instead these companies are being kept afloat by artificial bank credit expansion.
What do you know about that, Mike Swanson?
Well, quite a bit, actually.
Good, say it all right now, I'm listening.
Well, I was debating how much I should say.
All of it.
But OK, the article, it's a good article and, you know, I know we're in a strange moment in the economy and everything.
We all feel it.
An article points out that there's all these companies, let me see the exact number here, because it's a massive one in five publicly traded U.S. companies they claim is a zombie meaning that they have massive debts.
And if they weren't being helped, which the government is now doing, you know, not simply through these stimulus programs, but the Federal Reserve is buying corporate bonds, individual bonds, something that no other central bank has ever done.
And these moves keep these companies alive, in which if they weren't happening, they would simply go bankrupt.
And the argument in this post article you sent me is that this can have long term economic costs because what it's doing is misallocating capital.
You know, we're keeping these zombie companies alive.
Maybe if they vanished, more efficient companies would take their place or the money going to them could go to something better.
And, you know, similar arguments have been made more articulately than I can do by other guests you've had, such as Bob Murphy in the past or David Stockman and so forth.
But I think that this is actually almost what the entire economy is at the moment.
I mean, this says one out of five.
But firms, however, I don't think this is just something happening as a result of the lockdowns and the economic situation we're in, but is a legacy of the past decade, at least, of the Federal Reserve keeping interest rates so low, it created a bubble in the corporate bond market.
Of course, the Treasury bond market, too.
And when everything went down in March, the stock market fell over 33 percent.
The most alarming thing is that the bond market froze and essentially locked up and the Federal Reserve announced, oh, endless quantitative easing to prevent that from continuing.
And they succeeded in preventing the Treasury bond market and the corporate bond market from completely collapsing.
But the end result, as I would suggest, is where we are now, which this article is indicative of.
But I just want to tell one quick story when I said I know a lot about this.
I am very lucky because in 2008, when the stock market crashed, I made some money shorting the market, but I didn't know what to do in 2010-11.
And I took a large portion of my money and invested it in a real life business.
It was a chain of body shops that me and a couple of people got started.
And I only had an interest in a few of them.
And they grew, though, to almost 20 body shops regionally.
And last year, they got bought out by a private equity company that paid, let's say, twice what we paid or my partners are paying for these stores.
They would run to a city or wherever and buy a body shop that's already in business from someone who wants to retire, give them, let's say, three to four times earnings.
Well, the chain got bought by twice that.
And then within a few months, got flipped to another company that paid even more.
That company most likely used debt to do all these purchases, and they're a giant private equity company.
And I've been told that every single one of their businesses that they now own is losing money because of the economy.
But the point of this story is that over the past 10 years, these sort of private equity things have been going on all over the country.
And the regular stocks you see in the stock market, they have also borrowed massive amounts of money to buy back their stocks, and debt is on their balance sheet.
So all these problems of huge debt is why the bond market locked up in March and why now I would say we have a zombie economy sitting in front of us.
Well, and I mean, this is the thing, right?
All you Austrians been saying that, boy, we got a big bubble and it's been 12 years and we're due for a poppin.
And then here comes the virus and the lockdown.
Talk about popping a bubble now.
I don't know how deep of a depression we're in.
I think the numbers are something like 50 million people unemployed.
And that's according to the way they count them, which must undercount them.
I mean, if you're like Kang and Kodos in orbit and you're looking down at the United States and our economy and its medium term future here, what are you looking at?
How bad is it really?
Well, this is, you know, yeah, I think so.
The official unemployment rate is, I believe it's 14.7 percent.
That was the May unemployment rate.
Now, that unemployment rate has a little anomaly in it in which they're doing something strange.
There's a segment of millions of people that they're claiming aren't unemployed because they lost their job.
Then they got it back.
Then they lost it again.
And that adds 3 percent to it about.
So let's just say it's around 17 percent.
And I have told people over the years, just friends, that if we ever get to 20 percent employment, that is when we would start to see protests and social turmoil.
And obviously we're seeing that or have.
And when that started happening, I went and looked back and thought, well, maybe by 20 percent idea is wrong.
Actually, during the 1800s, there are several times where unemployment was over 13 percent.
And that was considered a depression.
And there were there was social turmoil.
For example, in 1877, there was a giant railroad strike.
So 13 percent unemployment is enough to cause social stress, not you know, you don't need to be over 20 or up to 30 or something as far as what's going to happen with the economy or where we're at.
When the market stock market was rallying sharply in April and May, there are a lot of people out there claiming we were going to have a V-shaped recovery, meaning that when the economy opened back up, everything would just boom and be back to normal, essentially.
I didn't believe that was going to happen because I thought these debt problems were going to just prevent it, basically, and also that the virus itself probably would cause enough people to remain cautious.
But more the debt problem is my main concern.
However, that seems to now be happening that the boom that we saw for a couple of weeks on this reopening, it appears to be running out of steam already.
One proxy I'm using is what's going on in Las Vegas and the casinos there opened up about six weeks ago and saw a lot of people return the first weekend driving from California and locals.
And now the reporting of these casinos is that's all dropped off, not just this week when the news is the virus is now creating more headlines, but starting two or three weeks ago, it just dropped off.
And a lot of these high roller people have not returned to the casinos.
They're evidently staying at home and saving their money or whatever they're doing.
And I just think that's a metaphor for the whole economy.
However, I don't think that means we're about to see an economic crash because we already did in March and April.
I don't think we're going to get to 30 percent or 40 percent employment.
And the Federal Reserve itself, they're claiming that by the end of the year, the economy will shrink 6.5 percent and then grow 5 percent next year.
That would suggest that the economy is kind of just going to be like it is now for the foreseeable future.
And we're just going to muddle around.
I think that's the most likely scenario.
And that also kind of fits into the metaphor of zombie companies, you know, this economy that's just kind of moving around in the dark and not really booming, but not getting dramatically worse than it already is.
I think that's really what the story is going to be for maybe the next year.
Oh, the next year, man.
I thought you were going to say, yeah, you know, the rest of the decade.
Well, the big question is what happens after that.
So there's an article, I sent you a link to it, and it's behind a firewall, but it's in the current issue of Foreign Affairs, and the article is the title of The Age of Magic Money, and it's advocating for all these Federal Reserve programs and more government spending and stimulus.
The government spent $1.3 trillion in 2008, or the Fed did as the QE bailout, and I think Obama spent about a trillion in 2009, and now we're talking multiples of that already that just this year.
And the article claims, well, you know, yeah, the problem would be if this causes the dollar to crash and people to worry about government spending and a debt crisis with the government debt, but that didn't happen in 2008, it's not happening now, so therefore we're in the Age of Magic Money and we just got to keep spending the money, and the article even says we need to take advantage of the moment to do more public investments, do things to soften inequality and so forth.
But I'm not advocating for that, I'm just saying what they're saying, but the remarkable thing about it is they make an argument at the end that no one can predict when we'll be able to stop doing this.
They say the future, I'm reading it, the future is uncertain and contingent, a different kind of prediction seems safe.
If inflation does break out, the choice of a handful of individuals will determine whether finance goes over the precipice.
And they claim that in the past, the Federal Reserve was able to hike interest rates to prevent inflation running out of control, Paul Volcker did it, and Chester Martin under Harry Truman did it.
So they seem to be saying we just can keep doing this.
And what was the national debt when Paul Volcker did that, half a trillion dollars?
Yeah, yeah, yeah, exactly.
And the national debt now is, what, $28 or something?
Yeah.
In other words, if they raise interest rates like that, the national government would be bankrupt immediately, because they wouldn't be able to pay interest on the debt at all.
Or they could just abolish the entire military and even that wouldn't do it, probably, right?
Not at this moment.
So I mean, I know when I talked with you when this all started, and I think it was, our interview was in April, I cited this Ray Dalio book, Big Debt Crises, and that's the roadmap I think this is heading to, and he studied, it's like a reference book going through a hundred of these things.
And basically- Wait, say the name and the author again?
So, Ray Dalio, D-A-I, excuse me, D-A-L-I-O, Big Debt Crises.
Cool.
And- For the show notes there, everybody.
Yeah, to make a long story short, basically, we're probably going to see the economy continue to act like, be like it is.
And then when it does truly bottom out and go up into a, what's the word, a growth phase that's going to last, not just a simple bounce, that's when the inflation would start, the dollar will probably go down, and so forth, and that would probably continue for several years.
Basically, it's, and we've seen that sort of thing happen in other countries, most lucidly in Turkey over the past couple of years.
It happened in Russia twice, Russia had a crisis like that, I think in 2016 it was.
Basically, the bottom line is, you have a lot of inflation for a couple of years, along with economic growth, the currency goes down, and that process inflates away all these big debt loads as it plays out, and then the Fed can raise rates and go back to put us on a more normal path.
Sort of like the 1970s, that's kind of what happened then, but this would be a more extreme version of that.
So my feeling is we're in this strange stasis moment, culturally, politically, and economically, even with the financial markets this year, and it's just something we're living through.
And the economy's weird, I mean, there's so many people without jobs, but yet at the same time they're getting, or have gotten stimulus checks to help them.
Well, 1,200 bucks, I mean, that's in and out.
That's not even a month's rent for a lot of people, you know?
You can't get a one-bedroom apartment for 1,200 bucks in Austin.
So yeah, I mean, I guess the $600 for some people getting the unemployment, but that's hardly everybody.
No, it isn't.
And I don't have, you know, I wish I had the article you sent me.
I read stuff like this, I wish I had a solution or a support.
Well, so let me play the Federal Reserve's advocate here for a second.
I think that my community college teachers would have said that, hey man, a soft landing is better than the hardest crash.
You know, Wile E. Coyote at the bottom of the cliff, and trying to scrape yourself up from way the hell down there is a lot harder.
And so yes, this causes these dislocations.
It's almost like flattening the curve of the peak of the crash, right?
So, okay, recovery will take longer, but we're not going to go to the absolute depths of the worst depression.
That's what they would say.
Maybe.
Well, unfortunately, at this point, I think they might be right, you know?
But by having that mentality since, let's say, 1991, when they started bailing out Mexico and these couple other third world countries, and then in 98, they bailed out the hedge fund.
And ever since, you know, they've done this over and over again.
I would say if they hadn't been doing this over and over again, we wouldn't be where we are.
And I think in 2008, that argument was exaggerated.
You know, they didn't have to bail out all these banks.
They could have let some of them go under and then let small regional banks that didn't have these problems replace them in some way.
But now I think the argument may be correct.
And the reason why is because that 2008 crisis was a Wall Street bank crisis.
But they put all those bad debts onto the Treasury balance sheet.
So now it's not simply, you know, corporations or banks with the big debts, but the U.S. government itself.
And when the bond market locked up in March, the Treasury bond market locked up.
And now, you know, the bond market is destroyed as a rational investment.
And I say that because if I go buy a 10-year Treasury bond right now, the yield I get is 0.68.
I don't even make a percent.
I don't make anything.
Why would I buy that?
It's completely crazy.
And that rate is there because of what the Federal Reserve is doing.
And, you know, if they stop doing that, it'll probably crash overnight.
Everything, the stock market, the bond market, everything.
But the result is we don't have a real economic free market system of any degree at all.
And the Federal Reserve is doing things, you know, has made it so interest rates not only are too low, but absolutely have no rational investment sense at all.
They just don't.
So how do you invest in that environment?
You just, it's very difficult to do so.
And how do you have a free market economy when the government is bailing out companies at will without telling you who they're bailing out?
And the Federal Reserve is buying debt.
Yeah.
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You know, in our kind of all other things being equal here, we're not just talking about a regular old crash.
We're talking about this government enforced lockdown that has just decimated certain many sectors of the economy that we're only, I guess, beginning to take the temperature all that.
I bet though, if, if you speak line graph, then David Stockman's articles where he reproduces all these charts from the federal reserve and so forth would give you nightmares, man.
Well the thing about the economy, and one of the reasons I mentioned this personal thing of having these, you know, being involved in some body shops that got bought, the private equity company that owns them now, they own, they're one of the largest in the country and they own things such as Planet Fitness, Past Blue Ribbon.
And I've been told, you know, that almost every single one of the companies they owned is losing money.
So just, you know, I don't, the thing about the lockdowns in April or early May, I was speaking with someone locally that's on the board of directors of one of the banks, of a local regional bank, and at the time I thought the lockdowns would end in July or June.
That's what some of the health officials were saying and articles were kind of making a case for that.
Donald Trump actually, in some of his first press conferences about this, hinted at that, that the lockdowns might end to July and things would return to normal in August.
And this person, a friend of mine, was basically telling me a bunch of stories that implied that they would have to end very soon because of the economic pressures that they were creating.
Yeah.
I mean, that was why I thought they wouldn't last even through April, or, I mean, I thought they'd last through the end of April, I guess, was the original chart, too, for the downside of the curve.
And I thought, you know, look, big business rules this country, and I could see them accepting four weeks mandatory vacation for everybody, okay, fine, but they're not going to tolerate any more than that.
And then I was wrong.
They put up with a whole extra month in that, so.
And to all of our detriment, too, obviously.
So if the listener doesn't like lockdowns, I would suggest no matter what happens with the virus, they won't return again the way they were here at the start of them.
Yep.
I said that all along, too.
Once you relax them once, you're not ever going to be able to do that again.
That was your one shot at it, to build more hospital beds or get more ventilators or whatever it was that you need, but you're not going to be able to do that again.
It's a big country, 330 million people, and if you've ever flown on a plane from one end of it to another, or even better yet, driven from one side of it to another, one coast to the other, eh, it was an empire even before the Spanish-American War.
It's humongous, so.
It's unenforceable.
It's just crazy to try it without Chinese-level totalitarianism, which we won't accept, so.
So here we are.
Yeah.
And things are looking bad right now.
I mean, cases are up, up, up here in Texas, and I think, you know, in my county, in my neighborhood, hopefully nothing more specific than that, but anyway.
Well, what I've been keeping an eye on is not the number of cases, because they are doing more testing, so obviously there will be more cases, but the number of hospitalizations and the deaths.
Yeah, it's the hospitalizations.
I live in Virginia, and we're doing fine, I would say, but North Carolina, the hospitalizations are going straight up.
They're doing it the same in South Carolina and Florida, and so it is.
But you wonder, is this something that will just move, you know, instead of these big waves up and down, and there were three of them, right, in the Spanish flu, if instead this will just be like a rolling situation where, say, it dies out where you live in a few weeks, and then it appears in Montana or somewhere, you know.
Yeah, who knows.
Yeah, who knows.
I was hoping that Texas sun would come and murder the SOB by now, but it hadn't yet.
But the Texas sun will murder an SOB, so why not a virus, you know?
Yeah.
It's a thing to behold.
It's one of the wonders of the world, the Texas sun.
If that can't protect us from a virus, what can?
And I'm so sorry I'm late.
We gotta go, Mike, but thank you so much for your time again on the show, man.
Always great to talk to you, bud.
You too.
Great talking with you.
Okay, guys, check out the great Mike Swanson.
He's at wallstreetwindow.com, wallstreetwindow.com, and check out his great book, The War State.
The Scott Horton Show, anti-war radio, can be heard on KPFK 90.7 FM in L.A., APSradio.com, antiwar.com, scotthorton.org, and libertarianinstitute.org.