In past one year, ‘K’ has emerged as one of the most popular letters in economic jargon. Unlike past economic crisis when ‘R’ (recession and recovery) and ‘D’ (depression and deflation) were popular letters, this time a multitude of dichotomy created by pandemic is subject of popular narrative. In fact, I believe that these dichotomy in various trends was always present, but the pandemic has just exacerbated these, making them look more prominent.
In past few months, a ‘K’ shaped movement has been reported in
many segments. For example, consider the following –
(a) The developed
world, China and few other emerging economies appear to have mostly recovered
from the pandemic shock; whereas numerous emerging and underdeveloped economies
are still struggling to emerge from the pandemic related losses.
(b) Another
manifestation of ‘K’ shaped movement is seen in the price movement. While the
Purchasers’ prices (wholesale inflation) have seen sharp surge in past one
year, consumer prices have not matched yet.
(c) The bond yields
have also moved in a ‘K’ fashion over past one year. The gap between US 2yr and
US 10yr treasury yields has increased from ~50bps to ~150bps over past one
year.
(d) The wealth and
income of people has also shown a ‘K’ tendency. While the top echelon of the
society have accumulated record amount of wealth in past year; the millions who
were just coming out of poverty have slipped back and many who were struggling
to come out are even worse now. Numerous smaller business and self-employed
people are staring at deep abyss of uncertainty and hardship, while many new
unicorns are emerging from new technologies and newer ways of doing business.
In stock markets also, sector wise ‘K’ shaped performance is
clearly visible. While consumers have underperformed materially, cyclicals are
their running to their decadal highs. The dilemma for small investors is what
strategy they should follow!
