The Fed has created more zombie companies than any zombie apocalypse. The late great George Romero has nothing on the Fed. We are praying, crossing fingers and toes that the Fed will end QE and not support Government-led corporate bailouts with its money printing ability. Wishful thinking? Maybe. However, if nobody pushes back on the Fed (and Treasury), private markets will forever be lost and our Central Bank’s influence on the capital markets will continue to grow. That would be an undesirable outcome, especially given that the Fed is already the biggest player in the capital markets, far bigger than any time in our history.
A signal that the Fed is doing the right thing will be if the Central Bank continues to tighten monetary policy even as mid-sized and large companies fail. Newsflash – if you can’t become profitable while a public company you have no business being a publicly-traded company.
Similarly, companies that gorged on cheap debt in order to buy back stock believing that the risk free rate would forever be at zero ought to lead a default parade in 2023 as outstanding debt rolls over at higher rates. The higher interest expense will be too great for some companies to bear, forcing defaults or equity sales in order to remain compliant with debt covenants (it is not pleasant to sell equity when you are forced to do so).
Too many unprofitable companies went public over the past dozen years – only able to do so because the Fed held interest rates close to zero while it was pumping billions of Dollars per month into the Treasury and Agency security markets (i.e. “QE”). It seems that 80% of companies that have come out of Silicon Valley over the past 20 years are unprofitable – thank the Fed. You may also thank the Fed for the SPAC bubble, the EV bubble, the Crypto bubble, the NFT bubble, the Housing bubble, the Commodity bubble the Technology stock bubble and the VC and PE bubbles to name a few – all of which blossomed in 2021.
Equities became the flavor of the day (or should we say decade) coming out of the Great Recession. Technology stocks did particularly well as investors fell in love with recurring revenue models and investment themes they did not understand such as “Analytics”, “Big Data”, “Cloud” and “AI”.
ETFs, index funds and passive investment vehicles became increasingly popular with investors as robust due diligence practices, active management and high fees fell out of favor. Why operate active funds with high expenses when we can sell low-cost passive products? After all, stocks only go up (cough, cough). This was essentially the thought process of every large asset manager over the past decade. Thank the Fed for this as well.
I get it. How difficult was it to buy equity with leverage when you know the Fed is underwriting your deal? That was basically the playbook for retail investors, hedge funds and private equity investors over the past decade and in particular since 2020. Those days are over – at least temporarily. Here’s hoping that sanity has returned to the capital markets on a permanent basis.