The Zombies Are Coming

Ed D'Agostino
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August 4, 2023
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Zombie companies need cheap money to survive. Cheap money is a thing of the past, and casualties are piling up. Yellow trucking is the latest victim.

Yellow followed a familiar script: borrow money to fund growth, and compete on price. That business model fails when interest rates rise quickly. As debt-burdened, low-cost providers get squeezed by higher rates, more will fail. The irony is that culling weak companies may actually be inflationary—a knock-on effect the Fed will not welcome.

My guest this week is a Mauldin Economics favorite—Barry Habib of Highway.ai. Barry is concerned about the Fed’s approach to data. He fears it is looking for clues in the rear-view mirror.

Looking ahead and extrapolating trends would give the Fed a better perspective and less incentive to raise rates.

One glaring example of this is housing, which has a huge weighting in the way the CPI is calculated. But housing inflation is based on rents and not home prices. Rents have dropped over the past year, and the supply of new units set to hit the market could keep rent increases in check.

There are a lot of variables in the real estate market that influence the relationship between rates and prices, and Barry and I cover them in our conversation, including:

How the “long and lagging” effect of interest rate hikes could lead to trouble.
The staggering number of publicly traded zombie companies and why their demise could be inflationary.
Why progress on inflation will slow, and the role of housing in the CPI.
Why housing prices will not come down.
The outlook for interest and mortgage rates.
How over $100 billion in new government bond issuance could affect interest rates.

You can see our conversation on YouTube by clicking the image below.

A full transcript of our conversation is available here.

More information about Barry and his excellent mortgage and real estate research can be found here.

Next week I’ll be back with a conversation on US/China relations. Is the exporting of fentanyl to the US part of China’s master plan? Allison Fedirka and I will discuss that and other geopolitical concerns.

I hope you’ll follow me on Twitter @EdDAgostino.

Best regards,

Ed D’Agostino
Publisher & COO