Joye pulls no punches amid soaring bankruptcies, low productivity and the zombie apocalypse

They say that to be forewarned is to be forearmed. 

That is, if you know about a problem or situation in advance, you will better be able to deal with it when you need to. 

If that's the case, then no one could ever accuse Coolabah's Christopher Joye of not being forearmed. 

Joye has big ideas, strong opinions and makes bold claims, all of which are backed up by evidence, data, and reasoned argument. 

In this wide-ranging Expert Insights interview talking all things macro, Joye highlights the issue with rising bankruptcies, the eroding savings buffer and what it means moving forward, and the problem of low labour productivity. He also shares his view on the RBA and its policy. 

But perhaps his most telling comments are regarding the rise of zombie companies, something Joye has written about before on Livewire. 

"Zombies are a huge issue. On our research, the share of listed firms globally that we can call zombies has risen from about 5% of companies a decade ago to double that. In fact, 10 to 15% of all firms today", says Joye. 

Joye goes on to add that Zombies are companies that don't have enough income to service the interest repayments on their debt, and most of them will be wiped out if rates stay high for long, which is Coolabah's central case.

Please note that this interview took place on 13 September, 2023

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Edited Transcript 

LW: You have forecast the worst default cycle since the GFC and the 1991 recession, what evidence leads you to that conclusion?

So we are basically seeing that bankruptcies in the US this year to date are already the highest since 2010. 

In Australia, insolvencies have soared and they're the highest since 2015 and '16. We're seeing that focused on commercial real estate, construction and residential developers, and construction insolvencies are the worst on record. 

Finally, we're also seeing a big increase in home loan delinquencies, but only amongst non-bank lenders who are financing people who can't get loans from banks. 

It's interesting that on bank balance sheets, there's no evidence at all of any material increase in delinquencies. Most of that credit risk has really shifted after the GFC from the banks to non-bank lenders.

LW: How drastic is the labour productivity problem and if you were running the country, how would you fix it?

So labour productivity has been very poor. It's at its lowest level in decades. It's running at negative 3.5% year-on-year.

The big issue is businesses have too many people for the products that they're supplying, and that shows up in record low or near record low jobless rates, which are near their 1970s nadir.

You really see it in businesses like Twitter, where Elon Musk waltzed in and sacked 80% of the workforce, but he's still able to produce the same service. 

Labour productivity is defined as output per hour worked, and the best solution in the short term will unfortunately be increasing unemployment and forcing businesses to shed staff. 

And that's what central banks are trying to achieve because the jobless rate currently is well below estimates of full employment, and that's putting upward pressure on wages.

So the worry with poor labour productivity is that it's driving a huge increase in unit wage cost growth. Unit wages are wages, less productivity, and they're running at almost 8% a year. And to get inflation back to the RBA's target of 2 to 3%, we need to have unit wage cost growth at around 2.5% a year. And this unit wage cost problem is seen all around the world. Unit wages are actually the variable that central banks use most of the time to forecast future inflation.

So the labour productivity problem is actually driving a unit wage problem that is in turn driving an inflation problem. 

The RBA's cash rate is at 4.1%. They estimate that neutral or normal is 3.8%. So they're barely above neutral on their own estimates. Policy is not restrictive according to their own research. This is very different to the rest of the world. The Fed's at 5.25 to 5.5% and neutral is 2.6%. In Europe, they're at 4.3%, probably going to mid to high fours, and their neutral estimate is around 2.9%. So we see central banks with much higher interest rates than what we have here in Australia. The Canadians are at 5%, the Brits are at 5.25% and heading north. The Americans, again, are at 5.25 to 5.5%, and the New Zealanders are also at 5.5%, yet Australia's at 4.1%.

LW: You’ve been vocal on the RBA and its policy. In your opinion, how far off the mark is the central bank right now?

Historically, our cash rate has averaged about 1.6% or 1.6 percentage points above the Fed funds rate. So this is an unusual situation. 

The RBA seems very anxious about threatening the jobs market and the employment gains that they've secured by having the cash rate near zero. 

But the risk is inflation stays higher for longer, and it's worrying that the RBA is not forecasting that inflation will return to 2.5% until 2026. That's many years away.

LW: You’ve written extensively about zombie firms. How big is this problem and what will the consequences be for investors?

Zombies are a huge issue. 

On our research, the share of listed firms globally that we can call zombies has risen from about 5% of companies a decade ago to double that. In fact, 10 to 15% of all firms today.

Zombies are companies that don't have enough income to service the interest repayments on their debt, and most of them will be wiped out if rates stay high for long, which is our central case.

What's worrying is that 10 to 15% of all listed firms that are zombies is based on their FY22 data. If we ran it today, it'd be materially higher again. 

LW: The consumer savings buffer has kept the economy afloat to this point. Is that coming to an end?

These savings buffers are incredible. We've never seen them before. 

They came about because we shut down communities in the pandemic. And then we also gave them record cash gifts through fiscal policy and obviously the lowest interest rates in history through monetary policy. 

We estimate that the buffers in Australia are among the biggest in the world and worth 20% of annual income. 

The Fed has recently confirmed those numbers, and we estimate that the Aussie buffers will not be exhausted until late next year.

It's very different in the US where they're quickly eroding their buffers and they'll be depleted on our numbers later this year. But what the buffers do, is they allow households to resist this hiking cycle. 

Recall that the RBA estimates that 15 to 20% of all Aussie borrowers right now don't have enough income to pay the interest on their debts. So they're being bailed out by these buffers, but, of course, they can't last forever. 

And once the buffers are fully exhausted, we will likely see an even larger default cycle that will fundamentally threaten those riskier lenders that are financing both zombie companies and zombie households.