Charles Schwab strategist Liz Ann Sonders believes that a recession in the United States is inevitable as the Federal Reserve’s policy tightening exposes more of the “cheap money” era’s zombie companies, according to Business Insider. The liquidity boost is already declining, which should reveal weaker players in the market.
During the pandemic, many companies either managed to stay afloat or had the opportunity to grow and thrive in an environment of high liquidity and practically zero interest rates. However, the US Federal Reserve’s monetary policy and the recent banking crisis mark the end of a decade of cheap money and tighten credit conditions.
If we look at the recent bankruptcy of Silicon Valley Bank, which caused concerns about the stability of the financial system and then led to the collapse of other regional banks in the United States and later CS in Europe, it becomes clear that these problems are just the tip of the iceberg.
“I don’t think this situation is similar to 2008, but it is a symbol of the end of the era of ‘cheap money’,” said Sonders. She believes that cases like the collapse of SVB will happen again.
“There were many companies, startups, and zombies that were able to survive or grow and thrive in this environment of high liquidity and almost zero interest rates,” Sonders said. “Those days are over, and I think the consequences are still ahead.”
Normally, an increase in the Fed’s interest rate leads to something breaking, and the bankruptcy of banks affects the tightening of lending conditions. For example, bankrupt Swiss bank Credit Suisse (SIX: CSGN) was bought by UBS, and the downgrading of several regional banks in the United States triggered a crisis in confidence in the banking system. Even the overall volume of loans decreased in March, reflecting tightening credit policies and worsening financial prospects.