Opinion | Can Trump keep the US stock market bubble from popping as the world economy slows?

The US president has so far managed to keep the market buoyant by offering economic hope to calm nerves. As China’s economy continues to slow, and more multinationals begin to feel the pain, the tipping point may not be too far off

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Published: 1:00am, 26 Aug 2019Updated: 1:00am, 26 Aug 2019

It is now clear that no deal is likely in the US-China trade war. As the rivalry morphs into a cold war, the close economic ties between the two are simply untenable. However, US President Donald Trump is still talking up a deal, if not this year, then in 2020. He is trying to keep the US stock market bubble afloat. If the market stays up, he is likely to be re-elected. If not, it is “Adios, Trump”.

The US market has gone through another convulsion over recession prospects. Both the market and Trump thought that a Fed rate cut would revive the market. It may have had the opposite effect. The Fed’s move has only magnified the recession fear. Why would the Fed cut rates otherwise?

As the US unemployment rate is still at a historical low, the recession fear may seem odd. But, now is not a normal time. After the 2008 global financial crisis, the global economy has come back with more debt and more asset bubbles. In a bubble economy, recession is a self-fulfilling expectation.

The property bubble in China and the stock bubble in the US have led the global economy since 2008. The US stock market surpassed 100 per cent of GDP in 1996 for the first time in history and was above 150 per cent at the recent peak. The cyclically adjusted price-to-earnings ratio (Cape) recently went over 30. It would appear that the US stock market was 50 per cent hot air based on historical valuation metrics.

The market bubble pumped up the value of Amercia’s US$30 trillion pension assets, which still has a shortfall of US$3-4 trillion. Like Trump said, if the market pops, Americans could kiss their pensions goodbye. As baby boomers are retiring en masse, massive pension shortfalls will surely lead to recession and even political turmoil.

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