My friend Michael Drury, a fellow camper, a GIC colleague, and a skilled economist, wrote on January 23:
Now, the K-shaped economy has been used as the explanation of outsized spending, as the wealthy tap unrealized capital gains to spend in excess of reported income. However, the stock market — while quite strong — has not seen an accelerating accumulation of wealth to explain a record low savings rate. Moreover, the most worrying reading in this month’s personal income report was nonfarm proprietors’ income — which was unchanged, and up at just a 2.7% annual rate over the past three months. Indeed, asset-based income (rental income, dividends, and interest) was up at an even more anemic 2.1% annual rate over the three months. With the income for the well-off barely exceeding inflation, we wonder how long the K-shaped argument will persist?
(“Weekly Economic Update,” Volume 117, Number 4 (January 23 email) | McVean Trading)
As I see it, Mike is asking the correct and profound economic (hence financial) question as we enter this highly problematic 2026.
I have written in the past about the attack on 18% of the US economy coming from RFK Jr. and his henchmen. And we are witnessing results in various metrics of public health. The measles explosion is a current case study; we will have more on that in a future commentary.
And I have written about the lack of growth in the demographics of our country and the stagnation in labor force size due to the policy changes in immigration. The latest events only exacerbate that result as the recession risk rises because of violent behavior. Remember, about two thirds of the American economy is driven by consumer spending, and it is now under attack. And not just in Minnesota.
Mike Drury added this perspective in his Jan 23rd commentary:
A quick thought about the K-shaped economy. Moody’s says that the top 20% of consumers now account for 59% of all spending (consumer outlays, which include consumption, interest payments, and transfers for charity). That is obviously higher than the 54% in 2019 just ahead of Covid – but the same distance ahead from 2012, when the most recent uptrend began with the outperformance of stocks, as interest rates were artificially held down (note the reversal in 2018 as the Fed began raising rates). Moreover, the K widened sharply in the second half of the 1990s as well on stock outperformance – only to be followed by a retreat in the early 2000s and a drop to 53% in the midst of the Great Financial Crisis. In both the late 1990s internet boom and the current Covid/AI episode, the top 20% saw their spending rise at over 8%, while the bottom saw spending rise at 4.4%. Now, 4.4% is typically not a bad pace – when there is 2% inflation. So, the real gripe is that inflation ran much hotter over the past six years – but that was due to government fiscal policy, not a stock market generated differential in spending power.
In any case, the spread between the top 20% and the rest of the US has been persistent since 1995 – and the spending gap has widened from 50%/50% to 59%/41%. In actual annual rates, over the 30 years, that means the top 20% saw spending rise 5.5% and the bottom 80% at 4.2%, with the total of 4.9%. Mitigating that 1.3% spread is the fact that more of high-income spending is on services, where the inflation rate is typically 2% higher than for commodities. Still, that leaves the top 20% outperforming the rest by a solid 1% — which is kind of the way capitalism works.
The period from 2000 to 2008, when the K was in a modest reversal, was hardly a time that most American should want to repeat. The 9/11 attack resulted in a very insular US, as we retreated from leadership of the global economy, and focused on national security. The EU, especially the newly formed Euro Area, were significant competitors for global influence – and possibly reserve currency. The US stock market plunged, and then barely recovered its previous peak, before falling again in the Great Financial Crisis. The dollar was in a monotonic decline, making European and Japanese imports more expensive – leading to a growing dependence on China as the new cheapest alternative (rather than Mexico).
Bottom line, there are too many echoes of that period in the global economic environment today. I would much prefer a further widening of the K, with heavy innovation and investment leading to productivity (not pet rocks), and global investors desire to be in the US market (currently 2/3 of global capitalization) — rather than another episode of deficit spending led by defense. A K may not be a desirable economic reality for those on the lower leg – but there has not been a V while the K was widening – and that is a much more important victory for all.
Kotok View
I agree with Mike’s preference for innovation, for investment leading to productivity, and for making the US market attractive for investors. At the same time, I do not wish the downward leg of the K on anybody. There’s too much suffering going on — and it’s deepening. Do we Americans want to have to have a K-shaped economy that is ever-widening? Is that the only way to have “heavy innovation and investment leading to productivity”? Is that what it takes for us inspire global investors’ desire to be in the US market (which stands currently at 2/3 of global capitalization)? Is it possible to advocate for those things without advocating for the continuing impoverishment of most people (the majority)?
It’s that downward leg that I find problematic and a growing risk. For one thing, 20% of the population, or 10% or whatever it is, can’t consume enough to help support an entire economy. An economy would have to be based on something other than broad-based consumption for such a system. And we must ask ourselves if we would like to be living under that alternate system. For me, the answer to that profound question is a resounding NO!
We are not necessarily destined to get our preferences. It has become necessary to increase defense spending by hundreds of billions of dollars in annual expenditures. In my opinion, there is no hope for any federal budget balance or even a return to a 3% annual federal deficit run rate. My best guess is we’re headed for 6%–7% federal deficits and maybe worse than that if we get a recession. I expect that, without a recession, the outlook to get inflation under 2% is a remote probability. And the tariffs are still not resolved, and the bite from them is still an unknown. The only thing we know about tariffs is that the level in 2026 is a lot higher than it was in the 1930s during the Smoot-Hawley period.
Cumberland Advisors has released an in-depth annual outlook for 2026. Readers may find it here:
“2026 Cumberland Advisors Markets Outlook,”
https://www.cumber.com/market-commentary/2026-cumberland-advisors-markets-outlook
My portion is at the end.
Additional Reading
“Michael Drury [bio]” | McVean Trading,
https://www.mcvean.com/michaeldrury“Is the US economy as hot as Donald Trump thinks?” | Financial Times,
https://www.ft.com/content/e3bdd4de-690d-4e19-865b-622354fca8c7“Yes, you’re paying for Trump’s tariffs, and the price is going up” | LA Times,
https://www.latimes.com/business/story/2026-01-21/youre-paying-for-trumps-tariffs-and-the-price-is-going-up“Exclusive: Amazon plans thousands more corporate job cuts next week, sources say” | Reuters,
https://www.reuters.com/business/world-at-work/amazon-plans-thousands-more-corporate-job-cuts-next-week-sources-say-2026-01-22/“The Daily Feather — Washington Crossed the Delaware Upstream” | The Daily Feather, from Danielle DiMartino Booth,
https://dimartinobooth.substack.com/p/the-daily-feather-washington-crossed
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