So 2019 really was the ideal time to start a
youtube channel focused on economics because the months since this channel has taken off
have not exactly had many dry news days. The economic impacts of the coronavirus
have been felt far and wide and we have covered these problems in-depth in
a handful of videos on this channel. But the logical question that most
people are asking is what comes next? Disasters happen and they are never
pleasant but part of being a nation, a business or even an individual is being able to
deal with adversity and come out the other side. Because of this people are expecting a
recovery of sorts, and it seems like the only point of contention will be what letter
of the alphabet this recovery will represent. You have likely heard of a v-shaped recovery,
so-called because it would reflect a sharp decline in the financial markets and then
a sharp recovery making the shape of a V. Other speculations include a w shaped
recovery where we will see 1 recovery then another decline as the effects
of government stimulus and relief packages wear off only to be followed
by another genuine recovery later on. Pretty much at this point, if a
letter has some kind of topography, alphabet obsessed economists
have used it in a prediction. Of course, the big issue with this is
that nobody can really predict the future so that means until this whole thing plays
out we really won’t know for certain. But that doesn’t mean that these predictions
are simply the result of economists desperately trying to justify their existence in an
increasingly thin difficult job market either. In fact policies and procedures should be
put in place by governments to appropriately deal with any one of these types of
recoveries, if and when they happen. But amongst all of this, there is one type of
recovery that we should all be very afraid of, one that is not getting nearly as much
airtime and one that is actually being hurt by a lot of current policies
and that is a K shaped recovery. What’s more, is that this type of recovery
is not a hypothetical or a speculation, it is happening right now before our eyes,
and that shouldn’t come as a surprise. It was actually the same type of
recovery we experienced after 2008, so perhaps predicting anything different
is the real farfetched reality here. But as always we need to look at a few things to really understand what this
K shaped recovery looks like. So what even is a K shaped recovery? What are the forces that are driving it? How should governments, businesses,
and individuals plan for it? And while we are having fun speculating What will the K mean for
our economies in the future? ADD INTRO Now a v or u or w shaper recovery is pretty
easy to understand. Just put the letter over the top of the dow jones industrial average
price chart and hey presto predictions made. But the eagle-eyed amongst
you might have realized that K doesn’t really work for this its
got too many lil squiggly bits. Sooo What is a K shaped recovery? A k shaped recovery starts out the save as any other recovery profile. With
some kind of economic decline. The largest quarterly drop in
GDP growth in recorded history and swelling unemployment figures
should fill in for that pretty nicely. Now as for the actual recovery part of
a K shaped recovery that splits into two just like the letter, with one portion of
the economy going back to or even exceeding past prosperity and another portion of
the economy continuing to fall behind. Now in this case the divide between
these two portions of the economy are wealthy asset owners and
big businesses in one category, and then regular wage earners and small business
owners in the second category. Shocking I know. This is already starting to happen and the results
are clear. The S&P 500 grew to its highest level ever in the same month that the overall
economy recorded those record losses. American billionaires have added a staggering 637
billion dollars to their collective net worth, while unemployment has spiked into double digits. Now the reason this is happening is that
financial markets that drive the wealth of most American billionaires
are planning for the long term. Investors know that eventually, this health
crisis will have to come to an end and at that time the businesses that they own will be
there and ready to start turning a profit again. So long as their companies survive
through a year or so of slower business they will come out the other end all the same. The chances of them actually making it though
have been massively improved by generous government stimulus and record low-interest
rates, which means even businesses whose core operations may have been impacted
are feeling pretty flush with cash. What’s more is that this
is the worst-case scenario. for a lot of businesses like Amazon,
and Uber, the idea of a world avoiding shopping centers and public transport
has been a massive short term win. Now unfortunately the average world
citizen does not have the luxury of making financial plays over the years or decades they have to put food on the table today,
which without a job can be extremely hard. Sure government support is there but
for most households, it will not come fast enough or provide enough income to
support their day to day living expenses. This means that those families
will have to do one of two things. One cut back on living expenses, and no we are not talking about giving up a morning
Starbucks, and Disney plus subscription, we are talking about deciding whether or not
to pay for electricity bills or groceries. Now the second option is that they
can start to dig into their assets. Now given that more than 70% of
American adults have less than $1,000 in savings these might not
be the assets you think of. People will have to sell homes, cars, and other
personal belongings. In the off chance that they have retirement savings it might mean
smashing open that piggy bank prematurely. The Australian government has allowed its citizen’s early access to
their retirement savings. This policy allowed people economically
impacted to access up to 20 thousand dollar that would have otherwise been locked
away from them until the age of 65. Now in the short term this was fine, it allowed people to make their
next mortgage or rent payment. But a majority of people accessing
this cash were younger families that had decades left of potential compounding
over the course of their working lives. 20 thousand dollars today may keep food on the
table a roof over the head and the lights on, but it means forgoing hundreds of
thousands of dollars at retirement. Now it’s difficult to comment on this
being a good policy or a bad policy. Even the cushiest retirement probably doesn’t mean
much if your young family is out on the streets. But what this does show is that
a downturn hurts everybody, but the true devastation is not felt
in weeks or months of scary headlines, it is felt, compounded over a lifetime
by those who couldn’t weather the storm. Now the Australian example looks
at people who were fortunate enough to actually have retirement savings. For some people, the solution will be
accruing debt. Racking up credit cards, personal loans and maybe refinancing their
home, if they are lucky enough to own one. For these families, they will wish
they were missing out on compound interest because it is going to be
hurting them in the other direction, with loan payments that might
go on for years after crisis. One other thing to keep in mind amongst
all of this, is that this will not simply be those with means riding things out
while everybody else gets pushed under. This chaos will actually present
a great opportunity for those in the top part of this K shaped recovery. The 2008 financial crisis presented a very
similar situation to the one we are in now, all be it far more watered down. In the wake of that crisis, people were able to capitalize by buying
up distressed properties and companies. Blackstone is a private equity company that today
is one of the largest residential landlord in the united states thanks to the 30,000 homes they
purchased out of foreclosure in the wake of 2008. Blackstone in a recent letter to their
shareholders detailing their 2020 Q2 performance they made note of the fact that
they had $156 billion dollars in “Dry Powder”. Dry powder is a fancy finance term for cash or
cash equivalents that is ready to be invested. What this means is that they are poised ready to
snap up some bargains as soon as they go on sale, be that in the form of cheap houses from
forced sales, loans to households trying to stay afloat or simply shares in a market
that seems oblivious to the wider economy. Blackstone is just one example of this,
lots of seriously wealthy institutions and individuals have been hoarding
alot of cash for exactly this reason. Now capitalizing on economic misfortune feels bad,
but realistically businesses do this all the time, they are entities designed to run an
efficient market. If they see a asset priced below value they but it, if they see
an asset priced above value they sell it. It’s just that in the midst of an
economic downturn this mechanical process can seem a bit hmmm scrooge mcducky. But for the businesses that can do it, good
on em, it’s a sign of solid asset management. What is also solid company management are the
plans that are not so secretly being worked on for after the recovery. We will actually do a video on this topic
in much more detail in the next few weeks but for now, there are billions of people around
the world who are now working from home full time. This has been a big technical
challenge for a lot of businesses but necessity is the mother of invention
and a lot of companies have made that leap. With the realization that almost all
professional office-based work can be done from home comes the realization that almost all professional office-based work
can be done from Manilla or Mumbai. Ok, doom and gloom aside big picture it sounds
like there should be some steps to take to avoid the special k becoming a regular occurrence
that hits developed nations every 10 years. So how do we Avoid the K This is something that is ultimately going
to come down to governments and individuals. If businesses can make money off misfortune
they are going to make that money, but it should be the role of governments
to avoid this as much as possible, and to be honest, for people to take a
bit of personal responsibility as well. On a national or even a global level
downturns see a peak in inequality. Now regardless of your opinions on wealth
inequality, even the most hardcore fat cats would probably agree that this divide
should be driven by some people getting richer during the good times, rather than most
people becoming poorer during the bad times. So something needs to be put
in place to account for this. Now countercyclical fiscal stimulus
in the form of government grants, welfare cheques, business
loans and tax cuts are great. But its actually only half of the solution and
if anything it is the least important half. Fiscal policy has two modes,
expansionary and contractionary. Exapnsionary fiscal policy
is what we are seeing now. The government trying to prop up the
economy by pumping money into it, but they almost always fail at flipping the
switch back over to contractionary fiscal policy. Contractionary fiscal policy involves taxing
more and giving less government money away. Which are not exactly wining campaign slogans, so governments are often times
alot slower to adopt this. Now despite what even most economists think, contractionary fiscal policy isn’t used to
save up a pool of money during the good times. Sure it certainly can that buuuuttt
I mean a lot of developed governments have completely given up on the dream of
a surplus in the next million years or so… No the real motivation of
contractionary fiscal policy is to get people used to living in a world
where cash doesn’t necessarily come easy. Taxes are high and less government
spending means that on average people will be bringing in less money. Of course since this is only done
during times of economic prosperity, the overall health of the economy will
more than makeup for this, but nobody, not businesses, municipalities nor individuals
will be lulled into a sense of complacency. This might just sound like it is starving the
economy of oxygen, and it kind of is in a sense. To really stretch the analogy, world-class
athletes will often train in high altitude environments to get used to exercising with
thinner oxygen. That means when game day comes the thick air of see level gives them a new boost
of energy beyond what they have trained with. Contractionary fiscal policy is
training the economy for tough times. But cmon, welcome to the modern western world,
nobody want’s to put effort in anymore. So if you want to prepare for this you
are going to have to do it yourself. Now on an individual level everybody knows
the solution. Live below your means and save. There is a great adage is that a
healthy economy is like high tide, everybody gets to frolic
in the ocean and have fun. But as soon as that tide goes out you get
to see who wasn’t wearing any pants, or put basically who was living beyond their means. People can get away with living paycheque to
paycheque for a long time during economic booms, but if they find themselves pantless at low
tide, it is already too late for them. They have lived beyond their means and
now they are going to pay for it. Now one of the issues here is that the
means of the average American household doesn’t pay for the lifestyle that people
expect of the average American household. If you think of middle america you will probably
think of a 4 bedroom 3 bathroom house, 2 cars, a holiday every year, and maybe a few toys
paid for by 1 and a half working adults. The thing is though, even
two average full-time jobs don’t pay for that kind of lifestyle
in most areas of America anymore. But since that standard of living is the
assumption people continue to fall into it. The Overspent American is a book by the
economist Juliet School that chronicles the way that the American dream
has increasingly moved upscale while simultaneously everyday costs of living
have risen and wages have remained stagnant. This isn’t a uniquely american problem either, most developed western nations are
dealing with a very similar predicament. So even though everybody
knows the solution deep down. Live below your means and have an emergency
fund, not a lot of people are willing to do it. Compare this reality to nations that actually do
have a high savings rate, china, korea, signapore. In these countries, you will find
things like multigenerational housing is commonplace, where families will have up
to 4 generations living in the same household, with parents working and grandparents
looking after the children. Now this is obviously hugely financially
beneficial because not only are housing costs reduced but so too are things
like utilities, spending on furniture, land rates, and household upkeep all while
having childcare built into the package. All of this said living with
your parents past the age of 25 in most western nations still
carries a bit of a stigma with it. Final Thoughts The K is coming and it is going
to be more devastating to a lot of households than a response
by the same name in a text… The shape of the recovery on average might
not matter much for a majority of people, if they are already sunk. Times of crisis are times of opportunity but its
important to have the discussion about whether this opportunity should come in the form of
taking advantage of distressed households. Now it is easy to shrug this distress off as
the result people living beyond their means but as we have seen that has
become increasingly easy to do. Outside of everything it should go without
saying that you probably want to be on the right side of that K, and to be
there you need to make good investments.
