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As a planet, we have been going through quite the shit year, to say the least. What started off as a strange-sounding disease being reported out of Asia has spun into a worldwide pandemic, a stock market plunge, and a worldwide recession.
Through it all, economists and politicians (and one in particular) have been predicting an economic recovery, but the nature and “shape” of that recovery has been up for endless debate. Will it be a miraculous rapid V shaped recovery, as the President keeps crowing? Will it be a protacted U shape? Or maybe the math-nerdy Reverse Radical shape, in which the economy rebounds but stays depressed afterwards?
Apparently, none of them. Instead, we are getting a K shaped recovery.
How Can an Economic Recovery Be K Shaped?
That was my first question upon hearing this. No matter what metric you’re looking at, whether it’s unemployment, GDP, or the stock market, how in the Hell can the chart look like a K? That’s literally not how charts work!
In a “typical” recession (if there is even such a thing), some unexpected factor smacks into the economy sending it into a tailspin, and pretty much everyone suffers. Maybe not to the exact same extent, but nobody ends up profiting from it (except, I guess, bankruptcy lawyers I guess). 2008/2009 is a classic example of this type of recession. Almost everyone, from Wall Street stockbrokers to schoolteachers got screwed over.
This recession is different, in that instead of every group getting pulled in at least the same direction, this recession has bifurcated the economy into two groups: One that’s getting screwed six ways from Sunday and another who’s actually seeming to come out ahead.
The “K” in a K-shaped recovery refers to this reality of two groups. One group is seemingly recovering and even making money in this pandemic (the upper arm of the K) and the other group is getting left further and further behind (the lower arm of the K).
So…this is a unique situation. In fact, searching back throughout past recessions I haven’t found any mention of a K shaped recovery until now. It’s quite possible this term was coined just for this pandemic.
So who are these 2 groups, and who’s in them?
Who’s Coming Out Ahead?
It might seem counter-intuitive that anyone’s getting ahead right now, but it is happening. And it’s not just the uber-wealthy, it’s everyday folks that you might be part of your friends or family. Who are these people, and why have they managed to escape the misery that has affected so many?
This is not a comprehensive list, but based on my own observations, so as always take with a grain of salt.
Remote Workers
When I say remote workers, I don’t mean people who were already working remote jobs. Instead, by remote workers I mean everyone who’s jobs were able to become remote.
The technology sector is probably the biggest example of this. Tech has been traditionally loathe to allow their workers to work remotely, fearing a loss of productivity as people slack off in their underwear, or a lack of creativity as people aren’t able to collaborate as effectively over Zoom. But now they’ve been forced to embrace working from home, and have been pleasantly surprised to find that neither bad thing has happened.
Other sectors like finance have experienced this too, so not only have these workers not had their jobs impacted, they no longer have to commute into work, thereby actually increasing productivity. Meanwhile the companies are asking why they’re paying for expensive downtown skyscrapers when they could instead redirect that money into other things, so they’ve benefitted from it as well.
Digital Nomads
Similar to the above, digital nomads are the ultimate remote workers, and being one myself, I’ve been surprised by how little this has affected my ability to earn income. I mean, in the middle of March all our advertisers did pull out in a panic, so our blog’s income did plunge for a bit, but since then it’s come back stronger than ever.
And our initial fear that being unable to travel would force us to blow our budget has turned out not to pass. With rents plunging (more on that in a bit) and landlords subsizding our rent (thanks guys!), we’ve managed to somehow bring our cost of living down to Eastern European levels, all while living in one of the most expensive cities in North America!
Stock Investors
While the last recession in 2008/2009 disproportionately whacked big multi-national corporations, this time the opposite has happened. Those big multi-national corporations with highly redundant supply chains and the ability to manage their workforce remotely have thrived. Coupled with unprecented stimulus in the form of rock-bottom interest rates and quantitative easing, stock markets briefly plunged sharply in March before rampaping ahead, recovering what they’ve lost, and them some.
A curious factoid about this recession is that it features the shortest bear market on record, swinging from a -20% drop in March to a +20% gain in April. Technically, the stock market has began it’s next bull market run, which couldn’t be more divorced from the reality that millions of people in the real world are facing wondering how to pay their rent.
The FIRE People
And if there’s one group of people who has seemingly weathered this pandemic better than anyone, it’s the FIRE people.
Initially, we were inundated with calls from breathless reporters wondering if the stock market crash would bring an end to the FIRE movement. Those calls have now stopped, because not only is the FIRE community doing just fine, it’s thriving in this environment.
After all, if you don’t need your job anymore, who cares if you get let go? And if the bulk of your net worth is invested in the stock market, you got to benefit from all the stimulative measures that Trump used to prop up the economy.
Rather than this recession causing us to doubt our decision to leave behind our jobs five years ago, it just affirmed that relying on a steady job to last you for 20+ years is a terrible idea. Even before the pandemic jobs weren’t stable, and now? Entire industries are stuck at home unable to work through no fault of their own.
Passive income is the only thing you can rely on when shit hits the fan, and this pandemic proved that correct in spades.
Who’s Getting Left Behind?
So now we’ve talked about some of the people doing well in the pandemic, how about the people who aren’t doing so well?
Again, this is not a comprehensive list, just my own observations.
In-Person Non-Essential Workers
Of all the groups affected, this one is the largest and most hurt by the pandemic. These are the millions upon millions of workers in fields that, unfortunately, aren’t able to be made remote and were not protected by “essential worker” status.
This group includes such diverse industries like restaurants, travel, and entertainment, and before anyone thinks of blaming these people for being in so-called low-wage low-skilled industries, note that even dentist offices have been shut down as well in some areas.
Nobody can predict which industries get slammed during each recession. Last time it was the bankers in 2008/2009, and the time before that it was Silicon Valley during the dot-com bust.
But unfortunately, this time around, these groups of workers have seen their jobs completely decimated and we still have no idea when things will come back to normal. These guys are definitely on the bottom half of the K.
Small Businesses
And just as badly hit are the small neighborhood businesses that employ a lot of these workers. These are the book stores, the barber shops, and the restaurants that were already operating on razor-thin margins when times were good. Now, with social distancing limits on their customers at best, or an outright shutdown (like we’re re-experiencing in Ontario) at worst, the hits just keep on coming for this group with no end in sight.
It’s estimated that without further government assistance, up to 50% of independently-owned restaurants could go out of business by the end of the year.
Landlords
When it comes to landlords, I have somewhat mixed sympathies. On one hand, nobody wanted a worldwide pandemic, and jobless tenants coupled with limits on evictions coupled with the Keep Your Rent movement urging outright class warfare is…not ideal for anyone.
And with mortgage deferrals coming to an end in September, landlords are now seeing their investment properties turn deeply cash-flow-negative. This is causing rents in major cities to drop precipitously, which is great for renters, but if too many landlords panic and decide to sell their units, it could lead to a glut of real estate over-supply.
Because that’s what we need on top of all this. A housing crash.
People With Debt
And finally, the people who always get screwed the most no matter which recession it is, are people who have lots and lots of debt.
We are sitting at an historic era of near-zero interest rates. And as I’ve written about before, that makes now the best time to refinance your debt to bring your monthly payments down. The last thing anyone should be doing is going “now’s a good time to load up on even more debt.”
But that’s exactly what a frustratingly high number of people have done. Facing record unemployment and a rampaging virus, Home Boners have decided that somehow, in an environment where you can’t even have open houses properly, now was the time to buy a bigger house.
The effect on household finances has been catastrophic. In a recent national survey, 50% of all millennials regret the amount of debt they’ve put themselves in. 47% of all Canadians are $200 a month away from being insolvent. 25% of Canadians are already insolvent.
Some groups got hit by the recession train through no fault of their own. These people stepped onto the tracks voluntarily.
The Wealth Divide is Getting Worse
Every recession hurts poorer people worse than wealthier people, but the divide this time is so stark that we had to come up with a new letter to describe this one.
And the end result of all of this will be a widening of the wealth gap. Rich people will keep getting richer while other people fall further and further behind.
And don’t get me wrong, that’s fine that money creates money. That’s kind of how capitalism works. But if too much wealth accumulates in too few hands while everybody else languishes at the bottom, that’s not good either.
That’s why we keep writing this blog (and why we wrote our book). Financial illiteracy isn’t just bad, it’s downright dangerous. It causes people to ignore the stock market because they don’t understand it, or worse, go into debt in the middle of a pandemic. And when something like this once-in-a-generation thing happens, those people get crushed by a system unable or unwilling to care about you.
But if everyone understood that jobs aren’t forever, that all debt is bad, and how to create a passive income, there would be a lot more people on the top half of the K than the bottom half.
What do you think? Any groups I’m missing that are faring well or particularly poorly during this recession? Let’s hear it in the comments below!
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I never know what K shape recovery was either. Thank you for clarifying. As a blogger, I am one of the people who is benefiting.
Among those who may be left behind are those who believe the stock market and the economy are the same thing.
(Spoiler alert: They are not. I should know. I’m “Exhibit A”).
That ties in with the lack of financial literacy you allude to in your posts; along with the abovementioned that people ignore the stock market because they don’t understand it. This is, of course, MHO. Feel free to disagree.
Women are getting hit disproportionately in this pandemic. I read that in either August or September (can’t remember which), almost 900k women left the workforce & possibly 2 million more women could be on their way out. – according to the Lean In : McInsey annual study that recently was published.
Thank you for bringing this up, I didn’t know about this, but it makes sense. My guess is because so many kids are home from school now & many women have gotten pregnant during quarantine. When School and/or childcare is closed down, someone has to stay home with the kid(s), and women are still the primary caregivers. It’s unfortunate that women are having to choose between career & family life.
You’re right, women are still the primary caregivers, not only for school-aged & younger children, but also for parents & elders of the family, too. I’m in my 40s and it’s pretty common to hear my colleagues in their 40s & 50s taking care of their parents & in-laws PLUS their own kids.
Also, the majority of the industries impacted such as airline, retail & restaurant have a high percentage of women.
The report is insightful. Definitely worth browsing:
https://womenintheworkplace.com/
I wonder how different we’d be taking this if the stock market did stay depressed like it was in the Spring, along with where the economy more generally is.
The stimulus has certainly kept stock market indexes high, especially as tech companies lead the way and have been further boosted by a remote/digital shift since we’re all working from home and social distancing.
I don’t think a K recovery is anything new. It’s just someone made it trendy in the last couple months, that’s all. If it was something new, you wouldn’t have seen those protests against the 1% under the Occupy Wall Street banner. That was in 2011. Same during the dot.com era. Same in the late 80s when housing crashed.
I think you almost got it right with your article. You talked about all the various groups that have suffered whereas there are really only two distinct groups. There are the financially literate and then you have the financially illiterate.
The financially literate know what they need to do to avoid the worst of a downturn as well as profit from it. The financially illiterate, except for the few who decide to become financially literate, are toast no matter which way you want to analyze it. You can hand them the solution that will solve their financial problems. If they don’t want to accept the solution however, then they are hopelessly screwed.
Well said!
Extreme oversimplification. Why are these people financially illiterate? Because they had to put food on the table, lack of parents, addictions, abusive relationships, health/disability, unexpected deaths, etc etc. It’s hard to empathize, but, there are societal reasons for poverty that extend way beyond bad individual decision making.
Yoda said it best:
https://www.youtube.com/watch?v=BQ4yd2W50No
There is no try. Eat or be eaten. I’m hungry. What do you taste like? Sour?
I think that’s a bit of an oversimplification but generally correct. One can know the solution and be implementing it and still end up being screwed. But yes, usually those people who keep doing the right things do better than those who don’t. Of course, there are no guarantees. But behavior still matters a great deal.
The stock market is not out of the woods yet. It could crash and there are a handful of tech companies propping up the stock market. There’s so much volatility everywhere and anything could happen.
Losers: anyone with health issues. If you’re obese, diabetic, asthmatic, or just old and frail, coronavirus is drawn to you like a tornado to a mobile home park, and the results are pretty similar as well.
eh, this starts to sound political. I’m certainly not a trump supporter or a republican but the reality is that pre-pandemic (in Feb) the USA had the lowest unemployment and highest avg wage numbers EVER for black and hispanic Americans. You never heard that story though but this is all objective data from govt sources that you can google for yourself. So now that things have been bad, I’ve literally read 100’s of articles like this one. most of them are political. Much of the “recovery” has to do with re-opening industries and things will get back on track. But yes obviously if you have a “white collar” desk job that you can do remotely you are less impacted than if you have a grocery story, small shop, work in travel or other hospitality areas, etc. Once things start to open up, things will keep rebounding quickly….
I was in construction during the last recession in 2008. I got burned. I said never again and went back to school and ended up working as a registered nurse. I would say this recession I’m in the top part of the K since I learned from my previous mistakes and followed the FIRE movement since 2014
Man this is the kind of thing I love to see! People seeing where they can improve , taking the action, and seeing success. Congratulations!
I think what a lot of people lack is that “never again” type of fighting spirit. You have to be mad as hell, believe you can do something about it, and then implement those behavioral changes before things get better. But that “never again” decision is crucial.
Biden is coming and this K might turn into a V, but it might take a while until he undo what DT did.
And if the economy derails a bit that’s fine too..As Collins says a crash is always a great opportunity to buy cheap and maybe 4% rule will apply once again with CAPE lower!
Let’s hope not! Socialism doesn’t work nor does having a corrupt do nothing racist like Biden as President!
Trump loves this country. He’s the best President we’ve ever had! He’s not a politician, and gets shit accomplished.
How in good conscious can you vote for a senile, socialist do-nothing-47 year career politician!
Wake up!
If I wanted to live in a socialist country with high taxes I’d move to Venezuela or China.
Trump is the “father” North America has lacked for decades and has the liberal antifa blm loving fools coming unhinged! Stock up on Kleenex on Nov. 3rd for the tears!
Trump will be reelected! Americans are sick of the Democrats! They spew hatred for this country! THEY created the ghettos and haven’t done SHIT for minorities!
Thanks for sharing. Did not know what a K shape recovery was. Financial illiteracy is one of the biggest dangers we face, and it saddens me that we do not teach basic financial planning in high schools and colleges. So many young adults make poor financial decisions at this stage of their lives that take a long time to recover from. My children are at that stage, and I am teaching them constantly and they are thankfully listening.
I’m an academic (PhD, i.e. 10ish years of study post high school) teaching at a top state university in the US and what’s been most interesting to me is that my colleagues who are not FI or close to FI, or don’t have super crystal clear (per HR standards) covid risk factors, have been forced to teach F2F at least some of the time. Next semester, they’ll have to teach F2F nearly every day (we’re in a super red state with an anti-science buffoon governor). But because I’m FI, I’ve been able to negotiate no teaching for the foreseeable future (my job includes an administrative portion that I can do remotely). It’s been very interesting to see how some of my colleagues, not known for small egos, are discovering that they’re not so special after all. I feel really awful for some of them, especially the younger ones who haven’t had a chance to accumulate savings yet. I thank my lucky stars to be FI every single day.
As an American white-collar professional who lives and teaches English as a Foreign Language in Taipei, Taiwan, the pandemic has actually been good for me (although I don’t want to come across as “HOORAY for the pandemic!”, of course). Delaying the start dates for university semesters allowed Professor Dan to close the loop on other (online) teaching sources and it increased my income. I’ve also been able to attend two Translation and Interpretation conventions–network, gain professional knowledge, and get Continuing Education credits to help me renew my Texas LCI license–without flying to the USA, arranging for a substitute teacher, etc. I know that this isn’t the case for everybody in the workforce, though.
Dan V
Licensed Court Interpreter # 315 (Spanish-English, Texas), Master designation
I thought this was a good overall analysis. It’s frustrating that so many financial writers (Dave Ramsey, Suze Orman, etc.) and blogs like yours haven’t been able to move the needle as far as people being more prudent about financial issues.
It has been interesting as a mom who is able to work remotely but has a young child and elderly parents to care for. I made it work for 4 months but was exhausted and out of patience so have taken some leave time. I am FI so looking for a buyout package after the budget drops next month, fingers crossed 😊👧🏻
Just watched your interview on Canadian Finance Summit. Awesome job and thanks for doing that. I have new respect for how you have forged your own path and some of your insights into the psychological aspects of your journey.
My FI journey was different as I had a job I enjoyed but I can definitely relate to adjusting to feeling lilke I need to accomplish (check box) the next thing. Still working on it two years into FI but it’s getting better.
Good explanation on the K recovery. Always wondered what they meant. Thankful that I am FI with solid passive income. All the best.
Weird thing this K shaped recovery. I’m 37 and this is the first recession since the .com bust that hasn’t set me back…yet. I’m luckily on the upper part of the K.
The construction industry has been impacted big time, but the impact is delayed. Jobs that have started before the pandemic are ongoing because of the money involved, but all the new ones are being pushed back. It takes roughly 2 years from inception to ground breaking on commercial projects (highrises/retail/campuses)…and sooo many jobs have been pushed back a year or canceled outright. But my stock investments are doing swell!
I think sooner or later this “half” recovery needs to become a full one, or the suffering bottom half, that makes up the foundation of our economy, will cause the building to collapse.
Unless, you are part of the academic group which is responsible for the well being of a country or the world as a whole, don’t pay attention to the K, V, W or U. It is a waste of your brain cells power.
For the last 20 years, I have experienced 3 economic downturns, 2001, 2009 and 2020.
With the first 2 recessions, instead of wasting time reading bad news, I doubled in the efforts and find better jobs. Most of my peers will just sit around and wait for the better days before taking any actions.
With the current pandemic, again, instead of sitting around and wait for the world to get better, I put in additional efforts to reallocate my real estate investment. In five years, I will find out if the pay day worth my time.
Every single one of you is rewarded with the same tomorrow as the 1%. Tomorrow is determined by what you do today!
If Trump gets reelected White Supremacy will increase. There will be more riots because of systematic racism. Because of Trump, people of color will disproportionately be effected by COVID. He will continue to blame China for the virus. Hopefully America will wake up before it’s too late.
“we have been going through quite the shit year” – I agree, there is nothing to add here …
In the US, we currently live in an economy, not a society unfortunately. We’ll see come election day whether or not Americans want that to change and try to lift up those on the bottom of the ‘K’ or leave them under the bus.
I’m actually really excited about the future. Think about it: being able to work for a Silicon Valley company, home based from Michigan? The rents are insane in many places and this can actually help the tech firms attracting the entry level talent.
I have been remote since 2010, so I haven’t been hit hard, although we are losing a renter at the end of this month, and we couldn’t show the place to any new potential tenant because the old one got Covid… we are ok. The property is all cash, and the bills are low, so at the end of the day, we don’t worry too much. Others have been hit much worse.
2020 has been a disappointment for me. Working in aviation and having invested fairly heavily in getting a higher-paying job also in aviation, both my income stream and my aspirations have been stopped dead in their tracks for the foreseeable future. I’ve also had very little luck finding another job, despite a management degree, auto mechanics diploma, speaking three languages, and working steadily for the past 12 years. Of all the applications I put out, the only answer I’ve gotten to date is to deliver mail on call for $21/hr and no benefits.
That’s the bad news. The good news is that I’d had enough money put aside that any reduction in spending I’ve made has mostly been voluntary so far. The cars are paid off, the mortgage still gets paid, CERB and EI have reduced my cash bleed, my modest portfolio has recovered aside from my airline stock, and my spouse’s work-from-home gig goes on like normal. I spent the summer outside working on our deck, swimming in our pool, we hosted a couple of socially distanced get-togethers for our friends who live mostly in the city, and going flying to finish getting my private pilot’s license (expensive, currently unnecessary, but I’d gotten far enough that I was committed to finishing it). At the time I didn’t know that this pandemic would go on for as long as it has, so I really enjoyed my summer off. Overall, I’ve fared better than many of my former colleagues who’d spent every dollar they made.
At the moment the future doesn’t look entirely rosy; I don’t like my job prospects and it looks unlikely that I’ll find anything that pays the income I was enjoying prepandemic. But life goes on, and it’s still pretty good.
I agree that the recovery is K-shaped. Some people are doping very well during the pandemic and others are hurting.