In the early days of 2009 following the Great Financial Crisis, I received an extremely silly email from a booker for a television program who asked: "What single letter would you use to predict the recovery?"
My response noted there were 26 letters that humans could use to form words and even sentences to express complex thoughts. I explained that it was wrong to dumb down something as intricate as the economy to a letter of the alphabet or some other symbol. The correct thing to do was to use prior recoveries as a historical guide while acknowledging our inability to accurately forecast the future. Why, we could even add numbers to those words, explaining probabilistic assessments and possible future outcomes that are so superior to predictions!
The US economy faces an uncertain future.Credit:Bloomberg
The email I received back was priceless: "So, no letter?"
I was reminded of this exchange courtesy of the many recent debates and discussions about the potential for "U" and "V" and "L" and "W" shaped recoveries. My favourite is the "Nike swoosh" recovery, which may very well be a letter somewhere in the Milky Way galaxy, but here on Earth represents instead the triumph of brand marketing rather than an alphanumeric example.
The letter "K" has become more popular of late in discussions about the outlook for the economy. If you were to describe the 11th letter in the English alphabet to someone who has never seen it, you would note that it is distinguished by a bold vertical line, from the midpoint of which begins two rightward traversing lines, one slanting 45 degrees upward from the horizontal, and the other 45 degrees downward.
This description of the economy fairly captures the two separate paths of the recovery. The line heading upward symbolises those parts of the economy that have benefited from pandemic: Technology (Apple, Alphabet, Microsoft), general merchandise retailers (Target, Walmart), entertainment (Netflix Inc., Walt Disney Co., YouTube), Biotech and Pharmaceuticals (Moderna, Johnson & Johnson & Johnson, Merck & Co., Pfizer, AstraZeneca) work from home firms (Slack Technologies, Zoom Video Communications) and online retailers (Amazon.com, Shopify.).
The pandemic and lockdown have only a bad situation even worse. Both income and wealth distribution has become so lopsided that even its most ardent critics underestimate how disproportionate it is in America
The line heading downward symbolises, well, pretty much everyone else. We see this reflected in how various S&P 500 Index sector funds have performed. Technology (Technology Select Sector SPDR Fund), Communications (Communication Services Select Sector SPDR Fund), and Consumer Discretionary (Consumer Discretionary Select Sector SPDR Fund) are up 31.6 per cent, 18.4 per cent, and 16.9 per cent. The three worst performing broad sectors, Energy (Energy Select Sector SPDR Fund), Financials (Financial Select Sector SPDR Fund), and Utilities (Utilities Select Sector SPDR Fund) are down 40.3 per cent, 18.7 per cent, and 8.2 per cent.
As much as I despise the "single letter" silliness, it's a reminder of a truth about the economy: Over the past four decades, the US has become a nation that has seen the benefits of economic growth, productivity and innovation accruing to fewer and fewer people. Once a nation of "Haves" and "Have Nots," we are now a nation of "Haves," "Have Nots," and "Have Much More." The last category has left the first two in the dust.
This is no longer a debate. A few cranks on the extreme right may pretend it's not true, but the data is overwhelming. The portion of national income received by workers fell from 64.5 per cent percent in 1974 to 56.8 per cent more recently. The pandemic and lockdown have only a bad situation even worse. Both income and wealth distribution has become so lopsided that even its most ardent critics underestimate how disproportionate it is in America (as well as much of the rest of world).
The more important question facing economists, investors, policymakers – and in about 60 days, voters – is simply this: Have the past 40 years of income and wealth inequality become structural elements of our economy? Can this problem be fixed with modest tweaks to the tax laws and safety net (preexisting condition coverage, Medicaid, etc.) Or, has something fundamentally broken in the American economy requiring substantial changes to address?
We have discussed this repeatedly since the post-financial crisis recovery began in 2009. That recovery was very lumpy and unevenly distributed. The key wage drivers were determined by the industry you worked in, your geographic location and your level of education. If you were in the right sector near a successful city with a college or graduate degree, you did quite well. The rest of the labour force mostly struggled.
And that was before the pandemic. If you disliked how the last economic expansion unfolded, you are going to really hate the next one, as the economic divide has become even steeper. All of the factors affecting wages and employment are now more pronounced. Economically, there has never been a worse time to be high school dropout in America. Workers with more education simply have lower unemployment rates, according to the Bureau of Labour Statistics. They also earn more money. This gulf is likely to widen even further in the future.
I am forced to admit that the letter "K" captures the coming recovery in its simplest form.
Ritholtz is a Bloomberg Opinion columnist. He is chairman and chief investment officer of Ritholtz Wealth Management, and was previously chief market strategist at Maxim Group. He is the author of "Bailout Nation."
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