The undesirable (though certainly not unexpected) effects of the Fed’s interest rate and bond-buying policies are increasingly a prime topic of discussion within the restructuring industry, and the subject is beginning to break out now into major news media as well. At the core of the issue, really, is the question, What is the long-term value of keeping companies alive with easy new money when in a normal market they would require immediate restructuring? But while the “interest rates have nowhere to go but up” camp seems ready to start celebrating already (“conventional analyst wisdom” on the Street looks for a close to 4% 30-year treasury rate next year, for example), others are cautioning not to count your interest-rate-hike chickens before they hatch.
Nothing captures the feeling of angst and desperation of the truly disaffected youth, thoroughly dissatisfied with the state of affairs in the world, quite like the punk music of the late ‘70s and early ‘80s. When we think of the Fed—that privately held joint venture of the nation’s (and some of the world’s) most powerful banks—in relation to this specific brand of angst, we generally think of them as part of the establishment to be blamed and rebelled against. But central bankers have angst too, and if we were to imagine today’s Fed (and, actually, the central banks of most developed nations) coming back as old punk rockers, we might very well see them as the Los Angeles rockabilly punk band X, shouting out the refrains of their 1978 classic breakout underground song “We’re Desperate” (Last night everything broke . . . ). The desperation part of its song (We’re desperate) speaks for itself in the unprecedented policies it has employed. What we probably haven’t been hearing enough of, however, is the rest of that chorus lyric — the Get used to it part.
A recent foxbusiness.com article by Elizabeth MacDonald (“Zombie Land, U.S.A.”) points out that the Fed’s “temporary fix” policies (which are old enough to be in first grade now) are effectively putting the horse before the cart. The goal is to get a healthy economy, but a healthy economy can only flourish when fundamental problems are addressed as they arise—illnesses must be treated, toxins must be purged, broken bones must be put in casts, etc. Rather than slapping on band aids, or in worst case scenarios animating lifeless bodies with electricity, we must put those companies that can no longer function as they are through the restructuring process so that they can go forward with a clean (or at least cleaner) bill of health, or, in some cases, go the way of the dodo bird so that those better adapted to the environment can thrive and further benefit the economy as a whole. Instead, we have many “walking dead” companies out there disturbing the economic landscape—and it is today’s interest rates that are the brains upon which these zombie companies feed.
Daniel Druger and Liz McCormick write in Bloomberg that current bond yields are actually not so far out of line with the norm, given the general economy’s fundamentals. Everyone knows that the high Volcker-period interest rates (employed to restrain runaway inflation) were way outside of standard expectations, but we haven’t lived long enough (in fact, neither have most of our grandparents) to become familiar with long periods of low-low interest rates. To better grasp fair market interest rates, Druger and McCormick suggest that we really take a hard look at the primary driver that supports higher rates—inflationary fears. And inflation does not live in a vacuum—it is intimately linked with (true) economic and wage growth, all of which have been on a general downward trajectory since the early ‘80s (which also, coincidentally, marked the end of the true punk scene).
The moral of the story is, don’t expect higher interest rates to swoop down and save the day when there’s no signs of real wage growth (especially with many of today’s new jobs being lower-paying ones) and when the demand for household savings (another higher-rate indicator) still remains terribly low.
These economic fundamentals, of course, have only served as a general backdrop upon which Fed policy-making decisions since 2008 have been predicated; the chief focus has been on putting out fires. The derivatives bubble, mortgage crisis, and your various other garden-variety too-big-to-fail banking and corporate fiascos had to be prioritized by the Fed and its business partner the U.S. government. They have become (ironically to the “We’re Desperate” song) the Landlord, landlord, landlord cleaning up the mess, i.e., throwing their own resources (that is, of course, throwing our future tax dollars, what to speak of the value of our savings undiluted by more money-printing) at the myriad of problems they view as critical to keeping the entire banking industry out of a deep restructuring. (Our whole [economic] life is a mess.) Ask yourself if these wild card issues have been thoroughly addressed, and what the impact of a higher-interest-rate/higher-bankruptcy-volume (equity wipe-out) environment would have on the banks, and the “liquidity trap” corner we have been painted into becomes quite clear.
Any move out of the effective 0% Federal Funds rate has got to be seen as a good sign — the patient is at least thinking about going to see the doctor. Meanwhile, the Fed will no doubt continue to try to prevent waking up again to find that Last night everything broke (including Coca-Cola and a Motorola kitchen). When feelings of rate-hike exuberance do finally appear, they will be tempered by the continuing risk of corporate blow-ups which could act as wider market catalysts, as well as the fact that any upward move in rates is likely to face a market push back due to basic economic forces that are merely trying to find the natural, fairly valued, low-interest rate that is dictated by current demand, monetary velocity, and other inescapable realities, all pressing downward until a true growth in productivity returns.
It’s kiss or kill.
Brad Daniel is a Director at BMC Group, an information management firm specializing in financial and legal transaction support. He has 25 years of restructuring experience, with a broad exposure to all aspects of bankruptcy case administration and reorganized-company/trustee support. His expertise in both bankruptcy legal matters as well as systems integration and rapid application development…
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