The Journal also reports that China is not targeting goods that aren’t currently subject to tariffs... exports like Boeing jetliners and U.S. crude oil. Of course, President Trump was less than thrilled by any of this... He replied with yet another barrage of tweets in response. “China should not retaliate-will only get worse!” he wrote in one. “I say openly to President Xi & all of my many friends in China that China will be hurt very badly if you don’t make a deal because companies will be forced to leave China for other countries. Too expensive to buy in China. You had a great deal, almost completed, & you backed out!” he said in another. Unfortunately, there wasn’t any late-day reprieve for stocks after this latest spat. The benchmark S&P 500 Index fell 2.4% that day (Monday, May 13), its worst one-day decline since January. Now, it’s worth noting that neither of these measures have actually taken effect just yet... The U.S. tariffs were applied to goods leaving China beginning May 10. The first of these items won’t arrive in our country until a couple of weeks after that. Meanwhile, China’s retaliatory tariffs don’t take effect until June 1... So there is technically still time for a resolution to be reached. We certainly hope that further escalation can be avoided. But given the events we’ve seen to date, we aren’t holding our breaths. We suspect this situation – and the resulting market volatility – could get worse before it gets better.
Return of the living debt...
Today, there are more “zombie” companies in corporate America than ever before... A zombie company is a company that doesn’t make enough money to even pay for the interest on its debt. It has no hope of ever paying off its debt. They are the “walking dead” of the American economy. The only thing keeping them alive is banks with low lending standards that are willing to extend them credit. This practice is known as “extend and pretend” because the banks are willfully ignorant to the fact that these loans can’t all possibly be repaid. Without the banks rolling over (or refinancing) their debt, these companies would cease to exist. According to a study by the Bank of International Settlements (“BIS”), the number of zombie firms has increased sixfold since the mid-1980s, and one in six U.S. companies is now a zombie. Imagine how many zombies there would be if companies had to pay reasonable interest rates... or if the economy hadn’t been humming along. The number would likely be much higher. If banks suddenly denied credit to the zombies, a tidal wave of American companies would go bankrupt. The result would be skyrocketing default rates... massive credit losses... bond investors rushing for the exits... and the economy grinding to a halt. “Extend and pretend” is propping up the entire U.S. economy, but this game can’t go on forever... When this debt does go bad – and it will – investors will be left holding the bag.
American Consequences
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