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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.
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.
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!
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.
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.
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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