When money is cheap/low-yielding, the masses tend to borrow and overspend while investment capital is ploughed into dumb, counter-productive things.
With money virtually free for a decade, a historic era of financial madness has ensued.
Zombie companies and Ponzi schemes are similar in that neither generates enough cash flow to meet their commitments. They can only continue so long as they can attract more feckless lenders and investors. As rates rise and asset bubbles burst, feckless funds run low, and the unsustainable finally comes to a crashing halt. See: Missed payments, rising interest rates, put ‘buy now, pay later, to the test.’
What’s refreshing about the implosion phase is that math, prudence and self-discipline come back into vogue, and more people are willing to call out naked Emporers. It’s started. Private equity is one area that’s particularly ripe for sober review, see Parts of Private Equity look like a Ponzi, Amundi CIO:
Some parts of the private-equity market are beginning to resemble a Ponzi scheme, according to Amundi SA’s chief investment officer.
Vincent Mortier said in a virtual press briefing Wednesday that the volume of money raised in recent years by private-equity houses had driven up valuations and incentivized firms to buy assets from one another at inflated prices…
“The vast majority of deals are currently done between private equity players, “ Mortier said. “One private equity player will sell to another one who is happy to pay a high price because they have attracted a lot of investors.”
“That ability to sell to peers has enabled firms to avoid marking down the value of the assets they own despite a broader selloff in public markets.“When you know you are able to exit your stake to another private equity house for a multiple of, let’s say, 20, 25 or 30 times earnings, of course you won’t mark down your book,” Mortier said. “That’s why I’m talking about a Ponzi because it’s a circular thing.”
Also, see SPACS are warning they may go bust WSJ May 27, 2022:
“The SPAC boom brought a wave of companies to the public markets, promising years of rapid growth and profits to investors. Two years since the boom began, many of these companies are already warning they may go bust.”
Credit strategist Mike Green explains in the segment below that 25% (about 700) of the Russell 3000 companies are zombies that cannot keep afloat without a constant supply of new cheap credit–something that’s increasingly scarce as rates rise and credit conditions tighten.
Does the road to a recession begin in the small caps?
That’s where Simplify Asset Management Chief Strategist Mike Green is looking. Hear his take on why an index full of “zombie companies” is putting the economy at risk: pic.twitter.com/oFZjN4psJN
— CNBC’s Fast Money (@CNBCFastMoney) June 1, 2022
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