16 May 2023
Ever since the Global Financial Crash of 2008/9, some commentators have worried that there are too many “zombie” companies that are unable to make a profit or even a self-sustaining cash flow, but which are being kept alive by the availability of cheap credit. The argument goes that in a truly capitalist world, the unviable would die and their market share would be swallowed up by companies more deserving of success.
It must be said that in today’s world, where the political centre is so far left of where it used to be, many people would approve of the use of public money to help struggling businesses. Let’s face it, there is no use of public money incapable of attracting support from someone.
UBER
But the extent to which “zombie” businesses have become established household names is quite astonishing. The Oscar arguably goes to Uber which most people would regard as the epitome of a disruptive (a horribly overused word) success. Uber’s IPO price in 2019 was $45 and today it trades at $38. In the last five years it has made operating losses of $22.2 billion on revenues of $85.9 billion. In aggregate it has lost 25 cents for every dollar of fare.
The fact that the share price is still as high as $38 tells us that Uber is well funded. Its fixed borrowings mature from 2025 to 2029 and it pays an interest rate of c.7% on average. Maybe that’s all fine. Many, many people are happy and trusting customers and have no doubt been delighted to be subsidised at the expense of Uber shareholders and creditors.
Yet, how about the taxi drivers and cab companies that have been forced out of business by Uber’s comprehensive yet (so far) financially unsustainable service? This disruption of the taxi world is not an unmitigated boon.
OCADO
Back in the UK, how lucky we were during Covid lockdowns to have Ocado bringing groceries to the doors of the sheltering furloughed classes. Householders pinned notes to their front doors saying “Dear delivery driver. Please leave the package in the porch, ring the front door bell for five seconds and then retreat back to the world of the contagious”. Or something like that.
Certainly Ocado shareholders thought that Christmas, far from being cancelled, was happening every day. Ocado’s share price was 1064p in February 2019 and 2800p (+160%) in September 2020.
Sadly, Ocado shares are now just 438p. The thing is, Ocado appears to be incapable of making money. In 2022, it lost £500 million, a 20% negative margin on its revenues. Since 2007 it has lost a total of £1080m and has kept going with the help of £1375 million raised from its shareholders in three capital increases.
I have no idea what mistakes, if any, Ocado has made. But it seems remarkable that such a financial disappointment has retained the support of its backers. In the 2022 annual report there is a heading:
Investors. Why we value them.
Our current and potential investors ensure our continued access to the capital that enables us to pursue our strategic objectives. In order to continue our growth and promote investor confidence it is important to maintain regular and constructive dialogue to communicate our strategy and business objectives.
And wouldn’t you know it? Ocado investors are keen as anything to hear about Ocado’s ESG practices.
ZOMBIES AS PUBLIC GOODS
I am in no doubt that many people believe that the existence of Uber and Ocado makes the world a better place – the two of them almost exemplify a lifestyle. If investors and lenders are making bad decisions and essentially funding public goods, this sounds like a hybrid capitalism that many people would applaud.
We are well used to this sort of thing or think we are. The internet was based on being free to use and, as it has matured into being a business model, the cost is charged mainly in the irritation of being spammed with advertising. It could be argued that Uber and Ocado are Google and Facebook on wheels with the qualification that the latter were more or less inventing services previously unknown and consequently thitherto unwanted while the former have been “disruptive” to the world as it was.
But this doesn’t really sound sustainable. Hybrid capitalism is like modern monetary theory or “People’s QE”. They depend on the assumption that the invoice will be deferred indefinitely.
HYBRID CAPITALISM WORKS UNTIL IT DOESN’T
The recent and continuing demise of regional US banks is because they were willing participants in a ruse to buy and hold low yielding government bonds to maturity. This allowed the state to borrow ludicrously cheaply (no doubt, for the greater good) while it financed endless lockdowns and, latterly, subsidies for supposedly renewable energy. Regulators assured these banks that they could sit on a pile of negative assets that would not need to be marked to market.
Unfortunately, once markets got wind of this, traditional capitalist instincts kicked in again. Money runs away very fast once the merest possibility of insolvency is sniffed.
Every liability that is treated as if it will never need to be met should be treated with great caution.
In the UK that means the QE “emergency” funding that lasted for thirteen years.
In June 2008 UK public debt was £600 billion. By March 2020, following the global financial crisis, it had risen to £1815 billion. Now, having responded to Covid by paying everyone to hide (and use Ocado) it is £2530 billion.
The interest bill in the last financial year was £115 billion. On top of that, the government owes the Bank of England well over £100 billion for the losses on the expensive gilts it bought in the QE years. This bill rises as bond yields go up.
To say that there is no public debate about this is the understatement of our times. Political comment on news and discussion shows is confined to a single topic; namely, how much extra public subsidy can be directed to the cause favoured by whoever is speaking at the time.
No cause speaks with a louder voice than the climate change bandwagon. It exults in the idea that its importance outranks any financial considerations. Those who ask how much this is going to cost (and who is going to pay) just “do not get it”. Financial irresponsibility is effectively virtue signalling.
I regret to say that capitalism is not broken. Something has to give but it won’t be the fact that if borrowing and spending is not paid for then default and bankruptcy follow. At present we are experimenting with inflation, an efficient way to erode savings and debase state liabilities. It is perhaps to their credit that government and central bank officials are able to promise with a straight face to curb inflation.
Inflation is government default by stealth – the bankruptcy will likely be reserved for the electorate as the real value of the assets owned by the population quietly but steadily erodes.