Unhedged – "Is the K-Shaped Economy Real?"

Podcast: Unhedged (Financial Times & Pushkin Industries)
Episode Date: November 13, 2025
Hosts: Katie Martin (FT Markets Columnist, London), Robert Armstrong (Unhedged Newsletter, NY)

Episode Overview

This episode tackles the much-discussed "K-shaped economy": the idea that, post-pandemic, economic recovery and growth have split along lines of wealth, with affluent individuals and major stocks (especially tech) surging ahead (the upward leg of the "K") while lower-income individuals and other market segments lag behind (the downward leg). Katie and Rob separate fact from narrative, considering whether this idea holds up under scrutiny, and what it really means for consumers, companies, and policy.

Key Discussion Points & Insights

1. What Is the K-Shaped Economy?

• The "K-shaped recovery" refers to a dramatic divergence:
  • The rich get richer and continue spending (and certain stocks soar)
  • Those on lower incomes or less successful sectors struggle or stagnate
• The metaphor is fashionable in both media and central banker circles.

[00:36] Rob Armstrong:
"It's this idea that one group of people—no prizes here for guessing, that's rich people—are holding up the economy. That's the pointy up bit of the K. While poorer people are scrimping and saving. That's the downward sloping bit."

2. Is It Really New?

• Pre-existing Wealth Inequality:
  • 96–98% of US wealth is held by the top half; the bottom half has "almost nothing."
  • This inequality is long-standing, not a sudden phenomenon.

[04:20] Katie Martin:
"If you look, the Fed studies this stuff very carefully and has something called the distributional counts that lay out the facts. But basically somewhere between 96, 98% of the wealth is owned by the people on the top half of the wealth spectrum. So basically half the people have all the money and the other half have almost nothing."

• Yet, companies report sharp divergence in consumer behavior:
  • Higher-end consumers keep spending; lower-income consumers cut back.

3. Confusing Data and Economic Contradictions

• Job Market vs. Economic Growth:
  • Unemployment is low, but job creation has slowed.
  • GDP continues to grow robustly, but new job openings are falling.
  • Consumer sentiment data: US consumers see a 23% chance of losing their job in the next five years, a record-high statistic (99th percentile since 1997).

[05:57] Rob Armstrong:
"People have an unusually high level of insecurity about their job and yet stock markets are just like, wahey, party time. So it's like something is wrong with this picture."

• This confusion feeds the K-shaped narrative, as people and markets try to reconcile conflicting data.

4. Is the Narrative Overblown?

• The K-shaped story is compelling, but is it oversimplifying?
• Not all companies' reports about stressed low-income consumers are reliable or unselfish narratives.
  • Executives might favor the K-shaped story to excuse poor performance.

[15:07] Katie Martin:
"I'm not saying these guys are making this story up. All I'm saying is you can see why an executive might lean into the K shape narrative rather than leaning into our product is not very popular."

5. Challenging the Wealth Effect Thesis

• Some economists and analysts (e.g., Dario Perkins of TS Lombard, Don White of Absolute Strategy Research) call out "wealth effect" explanations as unsubstantiated.
  • The rich, when richer, invest more than they spend (“low marginal propensity to consume”).
  • If spending were locked up with the rich, growth should be lower, not higher.

[11:32] Katie Martin:
"Everybody knows that the very rich, when you give them more money, they just invest it like they're consuming as hard as they can always ... their marginal propensity to consume is very low."

[14:48] Pushkin:
"But that's a story that a corporation can tell about why they didn't have a great quarter. That is not self-incriminating."

6. Psychology and Consumer Sentiment

• Much might come down to perceptions:
  • Post-pandemic, workers felt empowered (2022–2023); now, their optimism has faded.
  • Consumer caution may be as much about confidence and outlook as statistics.

[09:05] Katie Martin:
"It's not that things are so bad now, but that sense that the kind of deal between labor and management, as it were, had changed has faded and we're kind of back to the old days. And that may be weighing on people's psychology."

7. Markets, Policy, and Political Reality

• For markets, consumer confidence and job insecurity matter, but these aren't unprecedented concerns.
• For central banks (especially the Federal Reserve), their mandates mean they remain focused on unemployment and inflation, not directly on inequality—even though all policy has political implications.

[16:39] Katie Martin:
"If the rate of inflation is above target like it is now, and the rate of unemployment is still reasonably low, then if they were to say, look, poor people are suffering, we have to change our policy package here, they would be sort of exceeding their mandate."

• Political Relevance:
  • Both major US parties address affordability/inequality, even if markets and the Fed don't.
  • Policies like tariffs, direct checks, and affordability programs respond to these issues.

Notable Quotes & Memorable Moments

• On the Narrative Machine:
  [06:31] Katie Martin:
  "I think part of the reason that the K shaped economy narrative has taken on so much momentum is that we are in an objectively confusing economy..."

• On Wealth Effect Skeptics:
  [10:49] Pushkin:
  "So yeah, there are people who are calling BS on this whole K shaped economy thing ... [Dario Perkins] said everyone in financial media is talking about wealth effects as a reason for the K shaped economy. Fact check. True."

• Corporate Spin:
  [15:07] Katie Martin:
  "...it's a lot easier story to tell than, well, actually we've been kind of letting things slip generally around here and we had a bad quarter and we screwed up in various ways."

• On Political Overlap:
  [19:05] Katie Martin:
  "The stuff we're talking to today, whether or not it's relevant to markets and how, you can be damn sure it's relevant to every politician."

• Running for President?:
  [19:28] Pushkin (joking):
  "Listeners, I don't know if you agree, but what I'm getting here is Rob Armstrong's going to run for President. Ladies and gentlemen, you heard it here first."

Timestamps for Key Segments

• Definition & Framing of K-Shaped Economy: [00:36]–[02:00]
• Pre-existing Inequality & Corporate Narratives: [04:20]–[05:56]
• Job Market Paradoxes: [05:57]–[07:42]
• Role of Psychology/Consumer Perceptions: [09:05]–[10:48]
• Skepticism from Economists/Analysts: [10:49]–[13:40]
• Distinguishing Two K-Shape Claims: [13:40]–[15:37]
• What Does It Mean for Policy? [16:39]–[19:28]
• Political Relevance & Party Responses: [19:05]–[19:28]

Long Short (Segment Recap)

• [20:51] Katie Martin: Long passive investing; points out how even elite hedge funds underperform index funds over time.
• [22:10] Pushkin: Short Lloyds using employees' personal data for pay negotiations, finding it disturbing and unfair.

Conclusion

Katie and Rob ultimately argue that while inequality is real and parts of consumer behavior confirm a split, the current K-shaped narrative may be overstated or misapplied. The truly new aspect may be the shifting perceptions and uncertainty among households, not hard economic divergence. For markets and the Fed, the consequences are limited, but for politicians, these dynamics are increasingly central.

Summary by: Unhedged Podcast Summarizer | Financial Times & Pushkin Industries