You Have Been K’ed

At many businesses, there is a running joke that 25% of the people do 75% of the work. After working at a number of companies over my career, this does not seem to be a joke. In fact, my experience has been that it is more the norm than the exception.

But that is not the point of this missive. Rather, it has to do with the current state of the economy and its prospects. Without providing a bunch of mind-numbing statistics, I want to demonstrate that the current “recovery” is “K-shaped”, and this does not bode well for millions of people.

What does being “K-ed” mean?

From the beginning of a recession to its recovery, analysts use the terms
– V-shaped –> sharp recession followed by a quick recovery
– U-shaped –> slowly building economic downturn followed by a weak recovery
– W-shaped –> a “double-dip” recession.

The current economic environment is different. There is no doubt that C-19 resulted in a sharp downturn in economic activity, massive layoffs, and a plunge in the stock market. When the economy started to reopen, employment gains were significant but still well below prior levels, the unemployment rate declined from 14% to around 11%, and the stock market had an unprecedented rally. After the C-19 cases and deaths exploded, employment gains diminished, new unemployment claims went back over 1 million per week, and the overall economy seems neither expanding or contracting.

This is very misleading.

Obviously, I am not the first person to recognize this, but in effect, there are two economies right now. For general discussion purposes, I would argue that perhaps 75% of the U.S. households are basically unaffected by the crisis. They merely substituted working from home for their offices, but their jobs were not severely impacted. The stock market rebound to new highs certainly reflects this lack of impact. The Federal Reserve has promoted this by dramatic intervention in the financial markets to drive down both short and long-term interest rates. This has made things like car loans and mortgages incredibly inexpensive to finance. However, it also makes investors really hesitant to invest in bonds at such low interest rates. Why buy a 10-year Treasury note at 0.70% interest when you can buy Exxon stock and get a 7% dividend. Therefore, for the 75% this economy has resulted in fewer dinners out, limited vacations, and that is about it. The ascending part of the “K” is for them.

Who represents the descending part of the “K”? Again, I am not going to provide statistics, but you can get to 25% pretty easily. The unemployment rate is around 11%. Now add in those who are no longer looking for jobs (not counted as unemployed), workers who have taken outright pay-cuts, and those working fewer hours than they would like. Take away the $600 unemployment benefit increase and the fact that many “furloughed” employees are likely to lose their jobs, and 25% seems like a low-ball number. Just ask the 19,000 employees at American Airline and other airlines who will lose their jobs at the end of September without additional government support.

For these households, you have been “K-ed”, shown by the declining leg of the “K”.

Those with capital, corporations and households, are winning big. For example, many small oil producers were heavily indebted and are going bankrupt. Larger oil companies can buy their assets at depressed prices. Serious mortgage delinquencies, defined as 90+ days late on their payments, will very likely result in foreclosures. People will lose their homes. However, private equity firms and individual investors will buy these homes at distressed prices, rent them out for a period of time and then sell them, or just do any repairs and sell them now because buyer demand is strong.

For the 75% the biggest problem is avoiding getting sick from C-19.

For the remaining 25%, you have been “K-ed”.

I hope that you vote.

Post was originally written on August 28, 2020

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