THERE has been a lot of chatter about the K-shaped economy.
A yawning gap exists between high earners who are spending and growing their wealth, and low-income households who have to live from hand to mouth.
The K-shaped economy may also be evident at the corporate level, in which rich companies expand rapidly, while smaller businesses struggle to pay their bills.
Many consumer-facing businesses have been highlighting what they see as a bifurcated economy.
Airlines, for instance, have talked about a growing demand for seats at the front of the plane, while some budget airlines have faced problems attracting passengers.
Fast-food restaurants have been forced to introduce more affordable items into their menus, while many fine-dining restaurants appear to be unaffected.
The K-shaped economy has not been lost on the US Federal Reserve.
Last year, it said many consumers at the lower end are struggling, and that they are buying less and shifting to lower-cost products.
At the top of the consumption pyramid, people are spending freely. How can an economy that is running piping hot at one end and stone cold on the other meet the needs of the people in the middle?
The shape of things to come
Could what we are witnessing be a delayed aftershock from COVID-19?
After the pandemic-induced economic slowdown, there was speculation that the recovery could be V, U, L or even W-shaped. But it is looking increasingly likely that the global economy is experiencing an awkward K-shaped recovery.
A V-shaped recovery implies that an economic downturn is followed by a sharp recovery.
In an U-shaped recovery, an economy bumps along the bottom for a while following a downturn, before it recovers sharply.
In an L-shaped recovery, an economy never fully gets back to its former glory. With a W-shaped recovery, an economy rebounds, then shrinks before recovering again.
But a K-shaped recovery can pose all kinds of problems.
At a superficial level, we may think that any economic recovery is better than no recovery at all. What is more, from a macroeconomic level, a country can even appear to be in quite good health.
But this can be masking some serious problems not only at the corporate level, but also at the social level.
This is because wealthier households are currently believed to be the main drivers of consumer spending. Less wealthy consumers, on the other hand, are struggling to survive; they are living from one pay cheque to another.
From top to bottom
The post-pandemic economic recovery is far from over, even though it has been a full six years.
Everything may appear to be fine when we look at the top-level gross domestic product numbers.
But they do not quite tell the whole story. As investors, we need to know which companies are on the upward stroke of the “K”, and which ones are struggling on the downward leg.
Some industries are clearly enjoying strong growth in output, while others are experiencing declining activity.
We have, for instance, seen some types of asset values rise, while others have fallen. Some segments of society are seeing increasing wealth and income, but others are losing ground.
Businesses, therefore, need to be more nuanced in dealing with growing income inequality. The smart ones are those that have worked out what a K-shaped recovery means for them, and how they can develop strategies that cater to both.
Effectively, what we are dealing with is economic growth and recession to the point of depression, simultaneously.
It is hard
Investing is easy if we know whether we are experiencing economic growth or recession. It is also easy for a central bank to implement monetary policy under those clear-cut conditions.
But it can be a lot harder when economic conditions are fuzzy.
Additionally, investing can become more complicated when new technologies such as artificial intelligence could upend older technologies and industries. It can even result in creative destruction within an economy.
The key to investing in these conditions is to admit that we just do not know what can happen.
We have no idea whether central banks will tighten monetary policy to rein in inflation, or sit on their hands because they are worried about recession.
Meanwhile, governments could put in place fiscal measures to ease the burden of long-suffering households, which can be inflationary.
Regardless of what may happen in global economies, it is important to stay invested for the long term.
Warren Buffett once said: “I’ve never bought a stock or sold a stock based on what the Fed is going to do. And if the Fed chairman should whisper in my ear exactly what he’s going to do tomorrow, it wouldn’t change anything I’m going to do today.”
Investing should never be about second-guessing what may happen.
I have no idea whether the K-shaped economy is real or a figment of some economist’s fertile imagination. I have no advanced knowledge of whether AI will be a peach of an investment or just another technological lemon.
For me, investment should be about buying a portfolio of diversified shares in good companies that will be able to reward us over the long term.
As an income investor, I am continually buying rising income – at a discount if I can, at a premium if I must. But I am always buying income in the knowledge that rising dividends is the best antidote to persistent inflation.
Central banks will do whatever they think is right for their economy. As private investors, we need to do what is right for us.
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