"The Big Short" and zombie firms

DH and I watched the movie, “The Big Short,” last night. Somehow I hadn’t gotten around to it after all these years. (Amazon Prime Video.)

I found the movie riveting. The script, acting and editing were designed to increase the excitement of a potentially dull subject, the subprime mortgage and derivatives market before the 2008 financial crisis. Frankly, I can’t imagine how the average person would be able to understand the movie – it reminded me of a movie that was incomprehensible to DH since he hadn’t previously read the book (“The Girl With The Dragon Tattoo.”)

“The Big Short” reminded me of how Mike Shedlock (who founded this board which he named after himself, “Mishedlo”) continually discussed the worsening conditions in the mortgage marketplace in 2004-2007 since he had worked at a bank and understood the fundamentals. Mish saw this coming years in advance. I owe him a lot in his generous sharing of his experience and understanding.

“The Big Short” movie reminded me of “the big one that got away” in my own investing history. During those years, there were two or three companies which issued portfolio insurance. Their stocks were highly valued. I remember thinking, “If this disaster plays out the way Mish thinks it will, there’s no way that these portfolio insurance companies will be able to pay off their customers. They will go bankrupt.” I had the idea of shorting the portfolio insurance companies but I didn’t know how to do it. During the crisis, they did indeed go bankrupt and their stock prices plunged to zero. Meanwhile, I played it safe.

“The Big Short” is relevant to the time we are living through right now.

While I was watching, I had the same feeling as I did when thinking about the portfolio insurance companies. Except this time I got the feeling about zombie companies.

The Federal Reserve is laser-focused on consumer price inflation. In the same way that they ignored the problem of subprime mortgages in 2004-2007, I think they may be ignoring the problem of how rising interest rates will impact zombie companies.

The root cause of zombie companies is the financialization of business due to the ultra-low interest rates maintained by the Fed for the past 20 years. (cf. “The Lords of Easy Money.”)

Like the meme “House prices always go up,” a similar meme of “Interest rates always go down” was fundamental to implementing this business strategy. In fact, a typical moderate to weak-rated company would have been pretty correct in assuming this.

The long-term chart shows that corporate bond yields usually rise during a recession, especially if there is also a crisis at the same time. But companies are carrying far more debt now than they were in 2008 since they have used ultra-cheap money to buy back stock shares.

Corporate bond yields have more than doubled in less than a year. If inflation doesn’t subside quickly the Fed could hold rates high for a fairly extended period. Zombies could begin to default in large numbers.

The Fed would be caught between a rock and a hard place. Their mandate is price stability. They are specifically forbidden to buy any debt weaker than AAA by law (except in an emergency like Covid, which took an act of Congress). Would they abandon their tightening campaign to bail out the zombies which they fostered by their ZIRP in the first place?

I don’t think so. But it’s hard to say.



Of course they would. The “JCs” have insurance against being accountable for their actions: their employees, who they hold hostage, until the government caves and bails the “JCs” out.



It is not going to be that deep a recession probably.

We are in a period where only the baby boomers are feeling the pain. The younger generations all got better jobs, raised their prices and are profiting more, and/or on top of promotions.

As the millennials would say if they ever get around to a completely racist film, “frankly my dear I don’t give a damn”. The plan to have cheap labor in the nursing home is gone. We are totally out manned.

Note poll takers only call landlines. For the last x number of years after the fact, “how did we get it so wrong”? Millennials, Xers and Zs rarely have landlines.

People on this board need to pay attention to that rather than hearing only themselves pontificate or become a boring unworthy critic.

Goldman says there is nothing to worry. To see the light one merely needs to apply appropriate (rather generous?) filters:

Zombie companies are typically defined as firms that haven’t produced enough profit to service their debts (also known as an interest coverage ratio below one) for three straight years. Based on that definition, some 13% of companies based in the U.S. could be considered examples of the living dead.

But that metric captures a swath of enterprises, typically technology companies, that are high growth firms, according to Goldman Sachs Research analysts Michael Puempel and Ben Shumway. … Goldman Sachs Research accounted for this by only including firms whose equity underperformed the S&P 500 Index of U.S. equities by at least 5% in each of the past two years.
With that filter in place, the number of so-called zombies shrinks to less than 4% of U.S. companies, accounting for around $200 billion of net debt.

In Europe, I expect a wave of companies in difficulties in the near- to medium term over stifling energy prices.

Then again, in Europe, we have zombie countries in addition to zombie companies.



Totally agree on the Europe part of that. The Europeans need to recapitalize. There is a great deal of wasted capital.

America needs to completely retool.

No longer true. Strategies are more diverse these days.


I have seen the online polls that get the lower ratings from 538. Some of them are more skewed than others. Then they depend on which market they are testing.

There is another level to polling. The entire exercise is a practice in misinforming the public. The polls are paid for very purposeful results.

The “reputations” of the polltakers is spread as “excellent”. But every time…“we got it totally wrong. We need to understand why”.

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Polling in general has gotten a lot more difficult, starting with the landline issue. There has been a shift away from people being willing to answer surveys for a variety of reasons and every likelihood that such attitudes are not symmetrically distributed.



Leads me back to paying for polls is part of spreading information in a very choreographed manner.

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LOLOLOLOL. I’ve stopped answering most of the company prompted “we provided a service, so give us a review” surveys.

Here’s one instance where I complete the survey: I get my Toyota serviced at the dealership, it’s under guarantee.
I want to continue to get good service. Completing the survey supports me getting good service… How?

The tech’s job performance review, bonus, etc, relies in part on surveys marked “excellent”.

I see this as FAKE metrics: if I give bad survey marks, I get labeled as “bad customer” and will, in the future, get bad service. Sorta like a customer who is a bad tipper, gets labeled such, and in turn gets bad service.

In this case, though, the tech is held hostage. If I give a bad survey, the tech gets some sort of “punishment”. IDK what the punishment is, but all the techs subtly remind me each time, that they need “excellent”.

The company, in this case Toyota, COERCES a “good/excellent” review, which then goes into the official record, and FAKE inflates the reputation of the company.

I dont trust any of the company produced stats about “customer satisfaction”.

For google “reviews”… less than 50 reviews, I deeply discount it. If the number of reviewers is over 50… ok. But I prefer over 200 at a minimum. Over 1000 and I give the reviews more trust.


Btw, the tech is a middleperson between me and the actual mechsnic. I never interact with the mechanic.
This tech always does a good job. Giving him/her “excellent” marks is easy.
I have no idea if the mechanic did a good job.