In a recent column, Bloomberg columnist John Authers asked “Wherefore the lack of inflationary pressure? The most coherent explanation stems from the effect low rates have in dampening the capitalist process of creative destruction. Simply put, low rates allow those companies that would normally fail to survive and stay in business. That means that capital is wasted and growth remains far below what it ought to be otherwise.”
By day, I manage a portfolio of dividend-paying, dividend-growing companies that are supposed to get killed by raising rates. While that has not happened, I actually want to see long rates rise, meaningfully, for exactly Authers’ reason. Our companies are well capitalized, profitable, and make everyday sundries: diapers and Doritos, monthly phone bills and utility bills, the gas refill, the prescription refill, etc. They are not at all cashflow-free zombies or fly-by-night operations.
But they have to compete in the market place and in the capital markets with companies that can only exist in a low-rate scenario in which debt costs are held in check (for those that have debt) or equity risk premium expectations are artificially low for the .com and social media darlings. For the last 10 years, it has been a great party for the zombies.
Should the 10-year finally get unstuck (for whatever reason), yes, common wisdom has it that the share prices of the dividend payers will suffer, at least initially. But what about the zombies? Their fate will be far, far worse. And that will be a good thing, as the capitalist process of creative destruction (and creation) will get back to normal.