A chilling resemblance to the Dot Com bubble has emerged as the percentage of zombie firms within the Russell 3000 index reaches alarming levels. Zombie firms, akin to the undead, stagger along, unable to settle their debts, surviving only through the benevolence of creditors and the low-interest-rate environment. This resurgence to Dot Com era figures paints a grim picture for the economy.
Zombie firms are not merely an economic curiosity; they pose a genuine threat. Incapable of turning a profit and struggling to meet interest payments on existing debts, these undead entities drag down economic vitality. The looming specter of a high-interest environment spells doom for these already beleaguered companies. The question now is not whether they will succumb, but when.
Adding to the crisis narrative, the odds of these firms escaping their financial quagmire appear statistically dismal. Comparisons with the pre-2008 crisis era reveal unsettling parallels, particularly in the leverage of owner’s equity in real estate. The current levels, reaching historic highs, mirror the precarious situation that preceded the last major financial meltdown. As the world braces for a turbulent economic landscape, the warning signs are becoming increasingly difficult to ignore.
The coming high interest environment is going to kill these already undead companies.
Additionally, the probabilities of getting out of that slump are statistically really low: pic.twitter.com/y3tU6AwYyT
— Phoenix Capital (@PhoenixCapitalH) January 1, 2024
The run-up to that 2008 crisis was also unusual in how much home equity lending was going on.
Home equity loans outstanding are way down in absolute terms, and are at the lowest since the late 1980s as a percentage of real estate value. pic.twitter.com/XuhIPhN5Ye
— Lyn Alden (@LynAldenContact) January 1, 2024