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.