Zombie Companies Live!… (cont.)
People see that corporate profits are up, way up. So they wonder, How can there be zombie companies out there if corporate profits are up so much?
The answer is in the “rate” of profit, which had been growing since the crisis. But now we see profit rates slowing down. Robert Lenzner of Forbes wrote in April of this year that “4 of 5 corporations are warning of a negative trend in profits”.
Excerpts from his article…
“That 14% corporate profit rate– you see–is to some extent the unusual result of the Fed maintaining interest rates at near zero. At zero, at 2%, corporations can borrow money to do their business and still report very solid profits, thank you very much. And yes, if interest rates go still lower, profits might temporarily move slightly higher– all the while increasing your downside risk at the certain to happen reversion to the mean of corporate profits.”
As the upward trend in profit rates reverses, zombie companies will be brought into the light. These zombie companies fed off of the business expansion, as profit rates were rising after the crisis. They generate a profit which is less than the market average for profit rates. When profit rates revert back to the mean, these zombie companies start losing money. As they struggle, they drag down other companies.
Monetary policy is protecting these less profitable companies from being replaced by more efficient operations. When the eventual recession hits, it will be deeper as more zombie companies will be cleaned out… unless monetary policy and fiscal policy comes to their rescue.
In the video you linked to in the previous post on this subject, Bill Emmott, former editor of The Economist magazine, discusses the likely long-term impact of the coordinated effort by Central Banks to pump their economies with liquidity with Royal Fidelity’s Joe Euteneuer. However at no point in the video do Emmott or Euteneuer ever mention QE.
Emmott mentions that zombie companies were a problem in Japan in the late 1990s and are a problem in Europe today. But Japan did not do QE until 2001, and as the ECB has repeatedly stressed, the eurozone has never done, nor do they any plans to do QE.
A good proxy for QE is the expansion of the monetary base. Since August 2008, the month before large scale expansion in the monetary base began in the US, the monetary base has expanded by 288% in the US:
http://research.stlouisfed.org/fred2/series/SBASENS
but by only 41% in the eurozone:
http://sdw.ecb.europa.eu/quickview.do?node=2018802&SERIES_KEY=123.ILM.M.U2.C.LT01.Z5.EUR
The fact that zombie companies may be a problem in the eurozone and not the US is supported by the fact that among the 12 eurozone nations for which such figures are easily obtained, corporate insolvencies reached record levels in Belgium, Ireland, Italy, Luxembourg, Portugal and Spain in 2012 Page 3:
http://www.creditreform.cz/fileadmin/user_upload/CR-International/local_documents/cz/Presseartikel/Corporate_insolvencies_in_Europe_201213.pdf
And they increased in Austria, Finland and the Netherlands from 2011 to 2012 .
In contrast business bankruptcies fell from 60,837 in 2009 to 40,075 in 2012 or by over a third in the US:
http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2009/1209_f2.pdf
http://www.uscourts.gov/uscourts/Statistics/BankruptcyStatistics/BankruptcyFilings/2012/1212_f2.pdf
Corporate leverage (the sum of loans and debt securities as a percent of GDP in the financial corporate and non-financial corporate sectors) peaked at 233% of GDP in 2009Q2 and has only fallen to 229% of GDP in 2013Q1 in the eurozone :
http://sdw.ecb.europa.eu/browse.do?node=2019184
In contrast corporate leverage as a percent of GDP has plunged from 200% of GDP in 2009Q1 to 162% of GDP in 2013Q1 in the US:
http://research.stlouisfed.org/fred2/graph/?graph_id=131821&category_id=0
So in contrast to your claim, zombie companies are most prevelant where QE is nonexistent and are far less common where QE has actually been done.
Comparing corporate profits between the US and the eurozone presents problems since the US uses the National Income and Product Account (NIPA) standards and the rest of the advanced world uses System of National Accounts (SNA) standards.The easiest thing to do is to compare corporate net operating surplus (NOS) under SNA standards. This is equal to corporate profits plus corporate net interest income, corporate business current transfers (net) and the current surplus of government enterprises.
Here is corporate NOS adjusted for the GDP implicit price deflator for the US:
http://research.stlouisfed.org/fred2/graph/?graph_id=132178&category_id=0
In the first quarter of 2013 it surpassed its previous record set in 2006Q3.
Non-financial and financial corporate NOS for the eurozone can be found here:
http://sdw.ecb.europa.eu/quickview.do?node=SEARCHRESULTS&q=nonfinancial+net+operating+surplus&SERIES_KEY=158.IEAQ.Q.I6.N.V.B2A3N.Z.S11.A1.S.1.X.E.Z
http://sdw.ecb.europa.eu/quickview.do?node=SEARCHRESULTS&q=financial+net+operating+surplus&SERIES_KEY=158.IEAQ.Q.I6.N.V.B2A3N.Z.S12.A1.S.1.X.E.Z
Seasonally adjusted (easy with the appropriate software) and adjusted for the GDP implicit price deflator, the corporate NOS set its all time record in 2007Q4. In 2013Q1 it was 22% below peak and has been trending downward since 2010Q4.
So once again, corporate NOS is well below previous peak and is trending downward in the currency area that has never done QE, and is setting new records in the currency area that has done QE.