There’s a lot more to the stock market’s slide than Trump and trade wars

Something is wrong with the global economy. It’s not functioning as it “should,” or traditionally has. Actually, the world economy seems downright dysfunctional. This distortion relative to past norms reminds me of the skewed, tragi-comedic worldview of Garp in John Irving’s best-selling 1978 novel “The World According to Garp,” about a man born out of wedlock to a feminist icon.
The U.S. economy, meanwhile, is showing some signs of similarly unusual behavior, but it doesn’t appear as abnormal as the rest of the global economy — so far. I am using the objective meaning of the word “abnormal” without drawing any subjective implications just yet. In other words, for investors, the world is what it is. Our investment conclusions must be derived based on how it is, not on how it ought to be.

It’s possible that many of the abnormalities are related to President Donald Trump’s escalating trade wars . The rest of the world is more dependent on exports, particularly to the U.S., than the U.S. is on exports to the rest of the world. By disrupting U.S. trade relations with the rest of the world, Trump does more economic damage over there than over here.
Still, I’m not convinced that it’s all about Trump. Many overseas economies seem to have lost their dynamism in recent years. One possible explanation is that demographic profiles have turned increasingly geriatric around the world, led by Europe, Japan, and China (See Fig. 1, Fig. 2, Fig. 3, and Fig. 4).
As I’ve discussed on numerous occasions, fertility rates have fallen below population replacement rates around the world, particularly in these three important regional and national economies (See Fig. 5, Fig. 6, Fig. 7, and Fig. 8). China’s government exacerbated the situation with its one-child policy from 1979 through 2015.
Furthermore, almost everywhere, people are living longer. That is also making demographic profiles more geriatric around the world, which is putting pressure on governments to borrow more and accumulate more debt to provide retirement support programs for their rapidly increasing cohort of senior citizens. Such government borrowing and mounting government debt are weighing on economic growth. In the past, debt financed government spending and tax cuts stimulated economic growth. That no longer seems to be the case.
The major central banks have joined in to help by providing ultra-easy monetary policies. They claim that their mandate is to avert deflation and to maintain inflation at around 2.0%. In addition, they are hoping that their policies will stimulate more economic growth. They’ve been struggling to do so for more than 10 years. Yet inflation remains mostly below their 2.0% target and economic growth remains lackluster at best. Actually, over the past year and a half or so, economic growth has been slowing around the world despite monetary and fiscal stimulus.