Game of Trades: US Economy Just Hit a Massive Debt Wall
The past year has seen the fastest rise in interest rates in over 40 years. This big shift has rapidly changed expectations for the economy and corporate performance. For most investors, that’s meant navigating a bear market.
However, corporate America in general has more to worry about than a slowing economy from rising interest rates. That’s because debt that was accrued during the era of zero percent yields is about to come due.
Refinancing that debt could mean significantly higher interest rates. Given the strains in the banking system right now, it could mean a company is unable to refinance. That could lead to a surge in bankruptcies.
Businesses that were generally unprofitable, but cash flowed, were able to make payments when debt costs were low. These so-called “zombie companies” could be about to get crushed in the next 12-18 months.
Now, there are signs that this process has started to play out over the past few months. And it’s likely to get worse.
Why? In short, the current interest rate set by the Federal Reserve still remains well under the current rate of inflation. That means monetary policy hasn’t tightened enough yet.
Fortunately for investors, most “zombie firms” are smaller and not publicly-traded. But any fears will hit heavily indebted publicly-traded companies hard if things look like they’re about to spiral out of control. And that could lead to another market drop.