What caught my eye this week.

Most people have given up on a V-shaped recovery. The concept of a U-shaped one is positively passé.

As for the Swoosh – please!

Nope, the latest red hot letter to explain the state we’re in comes with the K-shaped recovery.

As Barry Ritholz rather reluctantly explained this week:

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 symbolizes those parts of the economy that have benefited from pandemic […]

The line heading downward symbolizes, well, pretty much everyone else.

Here’s an illustration from the US Chamber of Commerce:

Source: US Chamber of Commerce

Does it apply to us, too?

Many Monevator readers are richer than they were in January. We’ve retained our jobs, spent less due to being locked-in, and may also have seen our US-heavy portfolios rise, especially if we’ve some bonds and gold, too.

At the same time, other Britons caught in the wrong place when the music stopped – particularly those who fell outside of the safety nets, such as directors of the wrong limited companies – have been hit hard.

Ritholz sees the K-recovery as a continuation of wider trends:

Over the past four decades, the U.S. 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.

Here’s an example of the K-shaped recovery applied to the US workforce by The Washington Post, cited by econlife:

OK Computer (says no)

Here in the UK I’d say we’ve only seen the ghost of a K-shaped recovery so far.

Government support and the generous furlough scheme curbed – or at least delayed – the lived impact of the UK’s brutal GDP collapse.

While we have plenty of rich individuals who are doing alright, sector wise we don’t have a vast tech industry that can benefit from the upper leg of the K. At the same time, the Eat Out to Help Out scheme may have helped the K’s lower leg look kinkier for the hospitality sector.

Not wildly convincing.

Ultimately the letter K will probably prove about as useful as the letters that preceded it in predicting what will happen next.

Which, to my mind, is not very useful at all!

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What caught my eye this week.

Remember Child Trust Funds, the more generous precursor of the Junior ISA?

I wouldn’t blame you for forgetting. Those halcyon days of 2005 when Gordon Brown felt able to hand the parents of three-year old children £500 towards their future almost feels like science-fiction now, post the financial crisis, post-austerity, post-Brexit, and mid-pandemic.

Nevertheless hand parents £500 to tax efficiently invest for their kids Brown did. And with the first Child Trust Fund (CTF) recipients turning 18 this year, next month will see small fortunes unlocked across the land.

Indeed the investment platform EQi says that while its average client’s CTF balance is £6,500, a few lucky mini-moguls are sitting on CTFs worth £200,000!

Parents could have topped up that initial £500 from the government with a massive £55,000 over the years, and presumably some did to generate these six-figure fortunes.

Either that or we have some new mini-Buffetts coming up…

The kids are alright

The average account is of course much smaller – there are an estimated 6.3 million CTFs in existence, holding perhaps £6bn in total. Of these EQi reckons 420,000 are about to mature, which sees the kids gain control of the purse strings.

No doubt second hand car salesmen, guitar vendors, nail salon owners, and lululemon store managers are all licking their lips at an imminent windfall.

But it’s worth stressing to any suddenly-minted teens within earshot that you don’t need to spend the money just because you’re 18.

A CTF automatically becomes a standard tax-free ISA at 18. And unless they’re spending the money on a house deposit or perhaps on education, that’s what most should do. Young people are already plenty rich without throwing money at them.

Maybe sit them in front of a compound interest calculator? Even EQi’s middling £6,500 balance could be worth over a quarter of a million pounds by the time a child reaches 65 – if left to compound tax-free with an assumed growth rate of 8%.

A kid with £25,000 or so in their CTF could in theory have a shot at becoming a (nominal) millionaire pensioner without saving another penny!

Of course, kids are kids. Heck, many adults are kids. Most of the money – an estimated £2.4bn this year alone, according to EQi – will probably be spent without too much soul searching.

But if you are blessed with a child who will read the Financial Times with you1, then do peruse its take on how to deal with this good problem to have. At the least, as the article warns, don’t even think about protecting little Jonny or Jemima from themselves:

For any parents thinking of not telling their children about their investment pot, Tim Stovold, head of tax at Moore Kingston Smith, notes:

“Parents planning not to pass on the good news until their teenagers hit the sensible years should be aware that HMRC has provided a tool to allow children to check whether a nest egg awaits them — even if their parents don’t tell them.”

Have a great (wet and chilly) bank holiday weekend.

Are your kids (or you) in the money on the back of a maturing CTF? Share your plans for the loot in the comments below.

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1. Congratulations! You’ve unlocked the Monevator Gold Star Parenting award. [↩]

What caught my eye this week.

Markets are routinely being described as having lost the plot in 2020. To me it feels more like it’s the economy – at least the UK economy – that is having a Wile E. Coyote moment.

We know the virus and lockdown knocked economic activity for six. The bald statistics are diabolical. Yet nearly everyone I know is in the same state. Existential dislocation, with a dash of economic suspended animation. But not even metaphorically out on the streets.

Life still feels strange. Our worlds have shrunk. Most of us haven’t seen elderly relatives since February or March. Many of us haven’t been into an office for months. Some are back in quarantine after an ill-judged jaunt abroad. A few spent this week watching their kids’ prefabricated A-Level ‘results’ and futures yo-yo around. All low-level distressing.

But there have been few job losses to-date. So far in my circle it’s only a few of the self-employed and small business owners that have obviously suffered. That’s bad enough of course, but the statistics point to worse to come when the Government support wears off.

Just look over the Atlantic. America’s brutal labour market has taken few prisoners – the unemployment rate was 11.1% as of the end of June. In contrast, despite a 20% contraction in GDP, the UK’s unemployment rate was just 3.9% at the same time. This cannot hold.

Bank of America wonks – quoted this week by Josh Brown – reckon the world just posted its worst period for economic growth in modern times. They have Britain vying for the wooden spoon:

(Click to make it look even worse)

I am a deliberately optimistic person when it comes to the economy and the stock market – not least because the opposite reflex gets so many into trouble and is ruinous for long-term returns.

But boy is it a struggle right now.

London tubes remain near empty outside of rush hour. Shops are frequented but hardly packed. Obviously there’s a lot of activity happening online, but there’s a cost to disruption and displacement.

Tourism and entertainment is in tatters. I’ve Eaten Out to Help Out four or five times now, but to be honest it’s mostly as a taxpayer trying to at least get my share of the petty cash fund while it’s being pissed away in the pub. The unlisted restaurants I’ve invested in say things are better than they expected, but only because of generous government support. And that is due to (and must, eventually) run out.

By way of balance, The Bank of England was more positive last week. Economist Andy Haldane sounded optimistic last week, writing:

 ‘The foundations for an economic recovery – a rapid one – are already in place, hiding in plain sight. Economic activity in the UK is not falling like stone, in fact it has now been rising for more than three months, sooner than anyone expected. It has also recovered far faster than anyone expected.’

But I’m not so sure. Of course we’ll recover – relatively speaking – from a 20% GDP blow, but it seems inevitable only in the same way that a boxer who’s down but not out looks like a champ for stumbling back up onto his feet. If he’s still swaying around like a drunk then your money remains on the other guy.

Some of those who argued for swifter, harder and longer lasting lockdowns predicted a very speedy bounceback when the mandated quarantines ended. A contradiction I saw in their posture was they were often also at the more Covid-phobic end of the spectrum. I think we’re seeing now this inherent conflict play out.

A chunk of the populace remains terrified. Social distancing remains sensible for the rest of us. My girlfriend and I are the only people I ever see under-60 using those hand sanitisers in the shops, but given how quiet the shops are many more phobic people are presumably still bleaching their Amazon deliveries at home. The young are castigated by a segment of society if they so much as raise a pint glass to the idea of getting on with life without a plexiglass screen between them, yet we also expect the economy to bounce back? Not going to happen.

Remember it only takes a few percentage points of economic activity to go from good growth to recession. Tourism and travel alone is worth 7-11% of UK GDP, depending on how you break it down. Switch off half that sector and you have a recession.

Yes, it’s much more complicated than that – offsets abound – but you get the point. HSBC does, predicting this week the UK economy will shrink by 10.3% in 2020 and only post 6.2% growth in 2021. That would leave our economy 4-5% smaller at the end of 2021 than it was at the end of 2019.

Still, it could be worse. We could have failed to negotiate prosperous future economic arrangements with our largest trading partner. As opposed to merely looking on the cusp of doing so, according to Bloomberg:

British and EU officials now talk privately about the prospect of there being no deal. That’s a marked shift in mood from even a month ago when, despite the tough rhetoric in public, people close to the negotiations remained fairly positive.

It’s an outcome that would lead to a complete rupture in cooperation between the two sides in areas from aviation to security and leave businesses and consumers grappling with the return of tariffs and quotas for the first time in a generation.

The good news for most Monevator readers is we have well-diversified global portfolios dominated by strong companies that can thrive when the weaker players are swept away.

The bad news is our friends and family could be among the weaker players. As blogger Ermine says, it looks like winter is coming:

A lot of people are going to lose a lot of jobs in the next few months and a lot of businesses are going to go down, and landlords will evict a lot of tenants.

Fair enough, they aren’t represented on the markets, but they are represented on the streets of our towns and cities.

So I’m still not convinced that this isn’t going to go titsup in a big way.

The ray of hope for me is that I’m fairly optimistic we’ve seen the worst of the virus in the UK. I can’t prove it, and respect the opposite point of view, but to me a second full-on UK lockdown looks unlikely.

But unfortunately we had the first and we have to pay for it.

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