Central banks are creating a horde of zombie investors

Ruchir Sharma, chief global strategist at Morgan Stanley Investment Management, wrote a provocative op-ed in the New York Times last weekend. Titled “When Dead Companies Don’t Die,” it argues that unprecedented monetary stimulus from global central banks created a “fat and slow” world, dominated by large companies and plagued by a swarm of “zombie firms” — those that should be out of business but survive because of rock-bottom borrowing costs. I would add that central bankers are creating a horde of zombie investors as well.
By now, bond markets have adjusted to the unabashedly dovish shift from European Central Bank President Mario Draghi and Federal Reserve Chair Jerome Powell. In the US, benchmark 10-year Treasury yields fell below 2 percent for the first time since Donald Trump was elected president, and some Wall Street strategists expect it’ll reach a record low around this time in 2020. Across the Atlantic, 10-year German bund yields plumbed new lows of negative 0.33 percent, French 10-year yields hit zero for the first time, and the entire yield curve in Denmark was on the cusp of turning negative.
With any sort of risk-free yield largely zapped worldwide on the prospect of further monetary easing, is it any surprise what happened next? Investors turned to the tried-and-true playbook of grabbing anything risky. No matter that the global recovery has lasted nearly a de-cade, trade concerns abound and central banks see economic weakness — the S&P 500 Index promptly rose to a record high as investors mindlessly plowed in. And in a more specific example highlighted by my Bloomb-erg Opinion colleagues Marcus Ashworth and Elisa Ma- rtinuzzi, bond buyers were all-too-eager to snap up subordinated Greek bank debt from Piraeus Bank SA, which tapped European capital markets for first time since the financial crisis. “The offer would have been unthinkable a year ago,” they wrote.
Are these really characteristics of healthy financial ma-rkets? It hardly seems ideal that individual investors, pe-nsions and insurers are eff-ectively forced into owning lower-rated bonds, equities or even alternative assets li-ke timber to meet return targets. In fact, that sounds like the textbook definition of a bubble. But as Sharma points out, permanently easy policy aims to create an environment in which those bubbles can’t pop.
“Government stimulus programs were conceived as a way to revive economies in recession, not to keep growth alive indefinitely. A world without recessions may sound like progress, but recessions can be like forest fires, purging the economy of dead brush so that new shoots can grow. Lately, the cycle of regeneration has been suspended, as governments douse the first flicker of a coming recession with buckets of easy money and new spending. Now experiments in permanent stimulus are sapping the process of creative destruction at the heart of any capitalist system and breeding oversize zombies faster than start-ups.
To assume that central banks can hold next recession at bay indefinitely represents a dangerous comp- lacency.” Time and again, market watchers will warn credit cycle is on the verge of turning. “The future looks pretty bleak,” Bob Michele, JPMorgan Asset Management’s head of global fixed income, said this week as he advocated selling into high-yield rallies. “We have probably the riskiest credit market that we have ever had,” Scott Mather, chief investme-nt officer of US core strategies at Pacific Investment Management Co., said. Morningstar Inc. just suspended its rating on a fund owned by French bank Natixis SA because of concerns about the “liquidity and appropriateness” of some corporate bond holdings, adding to jitters about a broader liquidity mismatch in the money-management industry.
It’s hard to take this fretting too seriously when central banks persistently come to the rescue. What’s more, in many ways it’s in the best interest of all involved not to get too worked up about those risks. US households and nonprofits had a combined net worth of $109 trillion in the first quarter of 2019, a record, according to Fed data. Dig a bit deeper, and it’s clear that a surge in the value of their equity holdings plays a crucial role. They directly owned $17.5 trillion of stocks, which represents 110 percent of their disposable personal income.

—Bloomberg

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.