I think about how the situation with zombie companies will develop. We haven't seen bankruptcies yet. If the rate is high for a while (even without a further increase) the zombies may fall. At the same time, some sectors (technology, biotechnology ...) may collapse (panic) against the backdrop of a slight decline in the broad market (possible option).
How do you think this will affect the market? How probable is this?).
Hi Alex, you’re talking a little about worst case scenario. If we take a period of time that would most resemble that case, it would be ‘similar’ to 1980’s Japan.
We do have Zombie company’s that are burdened with debt and over a period of time with high interest rates, they will default. This would be a credit super cycle as the wave of defaults would essentially create a contagion that eventually couldn’t be controlled. Unemployment would rise, banks would default and that would be the end of America’s 100+ year dominance and standing in the global economy.
We can assume that the Federal Reserve simply won’t let that happen. This tells us two things:
1.) The “neutral rate” toward tight monetary policy is significantly lower
2.) Any time spent in restrictive territory can only be temporary as the cascade effect of “higher for longer” will truly start to take form.
This is such an improbable scenario that we shouldn’t factor it into our outlook. Our focus should always be on runaway inflation because remember, if we don’t have inflation the Fed is our friend and debt (borrowing) will be cheaper over time.
The biggest risk to our economy today and for the next 100 years will be hyper inflation (because the credit super cycle can’t happen) much like what happened to Rome and the collapse of their empire.
Great input, glad to read your well thought through and documented contrarian view. Keep it up!
Thanks for following along Miguel! Appreciate the kind words 👊🏼
Thanks a lot, Dillon!
I think about how the situation with zombie companies will develop. We haven't seen bankruptcies yet. If the rate is high for a while (even without a further increase) the zombies may fall. At the same time, some sectors (technology, biotechnology ...) may collapse (panic) against the backdrop of a slight decline in the broad market (possible option).
How do you think this will affect the market? How probable is this?).
Hi Alex, you’re talking a little about worst case scenario. If we take a period of time that would most resemble that case, it would be ‘similar’ to 1980’s Japan.
We do have Zombie company’s that are burdened with debt and over a period of time with high interest rates, they will default. This would be a credit super cycle as the wave of defaults would essentially create a contagion that eventually couldn’t be controlled. Unemployment would rise, banks would default and that would be the end of America’s 100+ year dominance and standing in the global economy.
We can assume that the Federal Reserve simply won’t let that happen. This tells us two things:
1.) The “neutral rate” toward tight monetary policy is significantly lower
2.) Any time spent in restrictive territory can only be temporary as the cascade effect of “higher for longer” will truly start to take form.
This is such an improbable scenario that we shouldn’t factor it into our outlook. Our focus should always be on runaway inflation because remember, if we don’t have inflation the Fed is our friend and debt (borrowing) will be cheaper over time.
The biggest risk to our economy today and for the next 100 years will be hyper inflation (because the credit super cycle can’t happen) much like what happened to Rome and the collapse of their empire.
Thanks Dillon
But every crisis brings something new, doesn't it?
However, a little panic in the stock market does not hurt)))))
Great read Dillon, as always. Good luck on the tests and very much looking forward to seeing the community grow. The future is exciting.
Thanks Ed! Looking forward to what the future is going to bring!