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The corporate zombie apocalypse

Good morning! A slight hiccup has already emerged in ScoMo's plan to replace Australia's 'hard' international borders, i.e. hotel quarantine, with home isolation on arrival. It turns out the State's aren't sold.

Western Australia's Premier Mark McGowan said he would "need a lot of convincing to move away from (hotel quarantine) for anyone but the most compassionate cases". Similarly, Victoria's Health Minister Martin Foley said his state had "no plans to move towards a home quarantine system at the moment".

Ah well, it was a good plan for a day. Next up is a another plan (no more targets, remember) to vaccinate 6 million Australians in the final 12 weeks of the year, presumably once the Pfizer doses show up. Given how well the government planned and executed the initial rollout, we won't be holding our breath...

Market Wrap

A very Chinese recovery

Daily % change

AUD/USD

77.6

0.3%

10Y Bond

1.70

2.0%

ASX200

7,066

0.0%

Brent (bbl)

67.1

0.5%

Gold (oz)

1,770

-0.6%

Iron ore (t)

177.2

2.9%

Bitcoin

56,247

-0.2%

Note: Brent oil, gold bullion and iron ore prices are the second futures contract.

The ASX200 inched up two points or 0.03% yesterday to be within 1% of its all-time high of 7,139, set prior to the pandemic on 21 Feb 2020. Not so fortunate was the US S&P500, which fell 0.53% – pulled down by the likes of Tesla (-3.4%), following a fatal car crash in Texas on Saturday (when no one was in the driver's seat) and the unveiling of a slew of new competitors at the Shanghai Auto Show.

Green stimulus: Two Australian lithium players are joining forces, with Orocobre and Galaxy to merge creating a roughly $A4 billion company – or the world's 5th largest lithium miner. Galaxy has a hard rock spodumene mine in Australia (Mt Cattlin in WA) but the real benefits of the merger will be seen in Argentina, where both companies are developing lithium brine operations.

A Chinese recovery: The value of Japan's exports in March increased 16.1% from a year ago, led by cars, plastics and non-ferrous metals. However, all data releases during this period need to be treated with some caution – this time last year was peak lockdown in many countries, as evidenced by Japan's exports to China surging 37.2% (China was effectively out of action in March 2020).


Econ Wrap

Stagflation and the corporate zombie apocalypse

A dramatic title, sure, but there's a lot to cover. First is an article by Nouriel Roubini, which argues:

"The problem today is that we are recovering from a negative aggregate supply shock. As such, overly loose monetary and fiscal policies could indeed lead to inflation or, worse, stagflation (high inflation alongside a recession)."

A valid point: We've been saying the same thing. The pandemic was a supply shock treated as a demand shock. There is a very real risk of inflation this time around and it's already evident in asset prices (unlike after the global financial crisis, where there was signifiant asset price deflation).

That brings us to yesterday's second article by Stephen Bartholomeusz, which warns of "an invasion of corporate zombies":

"The expansive monetary policy framework and the access to ample ultra-low-cost credit provided lifelines for companies that otherwise would probably have failed. The pandemic, and the massively increased supply of even lower-cost credit, will now add a new layer of zombies on top of those that pre-dated it."

We were warned: The Bank for International Settlements (BIS) was warning about zombie companies before the pandemic – by its reckoning, the proportion of zombies in developed economy listed markets was about 15% in 2017, up from only 4% prior to the global financial crisis.

  • The BIS defines a zombie as an unprofitable firm with low stock market valuation. They are smaller, less productive, more leveraged and invest less in physical and intangible capital than their healthy counterparts.

A lethal combination: When you combine inflation (or stagflation) with a legion of corporate zombies you have the recipe for a depression. Central banks are playing a dangerous game – if they're wrong about inflation being "transitory", driven by "temporary factors", then they will very soon only have two options: raise interest rates and risk blowing up the zombie army, or live with very high rates of inflation (and all of the negative consequences that entails).


The Wrap Up

  • Twelve of Europe's top football clubs announced they were launching a breakaway Super League. FIFA and UEFA condemned the plans, saying any club or player involved would be banned, including from the World Cup.
  • One month after ending a state of emergency, Tokyo's governor "instructed officials to consider a state of emergency as an option to contain infection numbers that rose over the weekend to the highest in more than two months". The Tokyo Olympics are just 95 days away...
  • The COVID-19 test positivity rate in Delhi, India, is now over 30%. India is recording nearly 300,000 positive cases every day.
  • Li Bo, the deputy governor of the People's Bank of China, said Bitcoin is a legitimate "investment alternative" and that the goal of the digital yuan "is not to replace the US dollar or any other international currency, our goal is to allow the market to choose and to facilitate international trade and investment."
  • Toyota showcased a concept of its electric RAV4 alternative at the Shanghai Auto Show, dubbed the bZ4X, due to be released in Australia in 2022-23. Look out, Tesla.

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