Stocks have prospered while the world has
plunged into disorder, an economist says. “Keep calm and carry on” may be the best
investors can do.
·
Market
Resilience Despite Crises:
o Global stock markets continue to boom
despite wars, political unrest, trade conflicts and institutional breakdowns.
o The Dow Jones Industrial Average recently
crossed 50,000, reflecting strong investor optimism.
·
Investor
Psychology:
o Markets thrive as long as investors
believe profits can be made.
o Strategy suggested: “Keep calm and carry
on” — but remain cautious about sudden reversals.
·
Eswar
Prasad’s Warning:
o Economist Eswar S. Prasad describes a global “doom loop” where
economic, political and social crises reinforce one another.
o His book, The Doom Loop: Why the World Economic
Order Is Spiraling Into Disorder, outlines the breakdown of the global
economic order.
·
Globalization
Under Strain:
o Institutions such as the International Monetary Fund, World
Bank, World Trade Organization, and United Nations are weakening.
o The free trade system is fragmenting into
trade wars and tariff conflicts.
·
U.S.–China
Rivalry:
o The United States and China remain the
primary economic superpowers.
o Growing tensions over trade, Taiwan Strait
and South China Sea raise geopolitical risks.
o Risk of global division into competing
blocs led by the two powers.
·
Tariffs
and Policy Shifts:
o Tariffs increasingly used by President Donald Trump as tools of leverage beyond trade issues.
o Economists describe this approach as
historically unprecedented in U.S. trade policy.
·
Ongoing
Conflicts and Security Risks:
o Russia–Ukraine war continues.
o Nuclear arms control frameworks have
weakened.
o Rising military tensions and proliferation
concerns globally.
·
Tech
and A.I. Fueling Optimism:
o U.S. technology firms posting strong
profits and investing heavily in artificial intelligence.
o Strategist Edward Yardeni forecasts the Dow could reach 70,000 by
2029, citing productivity gains from A.I.
o “Roaring 2020s” narrative supports bullish
sentiment.
·
Dollar
Dominance:
o Despite challenges, the U.S. dollar
remains the dominant global currency.
o Some countries are attempting to diversify
away from it.
·
Cautionary
Note for Investors:
o Markets often appear calm before major
downturns (e.g., 2007–09 financial crisis).
o Experts advise diversification, including
bonds and cash, especially for short-term needs.
o Underlying institutional fragility and
political polarization pose long-term risks.
·
Overall
Outlook:
o Financial markets are strong for now, but
systemic vulnerabilities persist.
o Investors may prosper in the short term,
yet structural global instability could eventually affect market stability.
The
world sometimes seems to be lurching into a state of permanent crisis, but no matter.
Despite occasional setbacks, the stock market is booming.
This
dissonance between real-world distress and glorious financial wealth is a permanent
feature of the markets, not a bug. Markets have prospered through civil unrest,
pandemic, glaring racial inequality, recession, severe unemployment, tattered alliances,
tariff conflicts and outright war. To set off a boom, all that’s needed are enough
people believing they can make money.
Plenty
of people believe that now. The Dow rose above 50,000 this month, and Wall Street
is bullish. Ignoring world crises is a smart strategy for investors — until, at
some point, the markets themselves fall into crisis.
“At
a time like this, the best investors may be able to do is keep calm and carry on,”
said Eswar S. Prasad, an economist at Cornell and the Brookings Institution. Carry
on, but be prepared for reversals. Don’t forget that there is danger lurking.
For
the last few years, Professor Prasad has immersed himself in studying global danger.
He has come out with an ambitious book that provides an up-to-date model for the
toxic mix of economic, social and political disruption afflicting the world. The
book is called “The Doom Loop: Why the World Economic Order Is Spiraling Into Disorder.” We chatted about these problems for
a couple of hours recently. The book isn’t cheerful reading. We had a disturbing
and mind-bending conversation.
Surveying the Havoc
How
bad is the current situation? I don’t want to ruin your day, but this chat didn’t
help mine.
Booming
financial markets aside, Professor Prasad said, major world problems are feeding
one another in a vicious circle. He calls this social, political and economic vortex
a “doom loop.”
If
it helps, remember your gains in the fabulous stock market before considering the
disconcerting global backdrop.
A
former International Monetary Fund official, Professor Prasad talked about the battered
trend known as globalization. A system of free trade and commerce and global supply
chains that knitted much of the world together, it lifted the status of desperately
poor people in countries like India and China, but caused hardship in industrial
regions of countries like France, Germany, Britain, Italy, Japan and the United
States.
That
already looks like the distant past. In no small part because of President Trump,
Professor Prasad said, the system “is being shredded.” So are multilateral institutions
that had worked to ensure some degree of world peace and stability. I would include
the I.M.F., the World Bank, the World Trade Organization and the United Nations
in that list.
At
the same time, he said, political turmoil in many countries is fueling a breakdown in global economic and political relations.
For example, the Trump administration’s widening immigration crackdown, which has
kindled domestic unrest, is often seen in other countries as an integral part of
“America First” policies that are shattering illusions of global cohesion. And anti-immigrant
sentiment is rife in other countries.
“This
is all part of the doom loop,” he said.
The
war between Russia and Ukraine grinds on. The last nuclear arms control treaty between
Russia and the United States has expired. China is rushing to acquire a bigger arsenal,
Europe is discussing the creation of its own larger deterrent force, and countless
smaller powers are grasping for nuclear arms, if they don’t already have them. The
possibility of direct conflict between the United States and China in the Strait
of Taiwan or the South China Sea can’t be ruled out.
Follow the Money
Professor
Prasad sees the economy as the ultimate source of power. Therefore, the United States
and China are superpowers, in his view. Russia, with an economy ranked smaller than
Brazil’s, is not. It remains a potent military force, however, endangering much
of Europe and retaining the capacity to wreak destruction anywhere on the planet.
Traditional U.S. allies in Europe — and, indeed, on all other continents — have
been forced to realize that they can’t count unconditionally on a Trump-led United
States.
Thanks
largely to the Trump tariffs, the old free trade system is devolving into a series
of incipient trade wars, inflaming other conflicts. Mr. Trump is using tariffs to
inflict punishment — or reward acquiescence — on issues unrelated to trade itself.
Greenland, immigration, the flow of drugs: When countries oppose the president’s
demands, he imposes more tariffs. Douglas Irwin, a Dartmouth economist who is an
expert on the history of trade, told me in a phone conversation that using tariffs
this way “is just extraordinary in U.S. history.”
In
our conversation, Professor Prasad, who, like me, is an old China hand, said China
shared responsibility for the breakdown in global commercial relations. It is causing
immense harm by flooding the world with more exports than most countries can easily
absorb, he said. China has long needed to tilt its economy toward domestic consumption
— which would make it less reliant on aggressive exports for growth — but has been
unable or unwilling to do so.
China’s
internal repression, its increasingly autocratic leadership, and its often punitive international aid and trade terms make its economic
and political model unpalatable to many countries. But today, Professor Prasad said,
the United States is no paragon, either.
There’s
a looming danger that the United States and China will slice much of the world into
blocs, with middle and smaller powers forced to navigate as best they can between
the superpowers. The world outlook depicted in “The Doom Loop” is overwhelmingly
bleak.
And Yet, Those Markets!
Still,
for investors, there is the cheering reality that many markets have been splendid.
Big
tech companies in the United States are churning out enormous profits while spending
staggering sums on the development of artificial intelligence. Investors may be
worried, but they are thriving.
After
the Dow Jones industrial average reached 50,000 for the first time last Friday,
Edward Yardeni, an economist and strategist with a bullish bent, reiterated that
he expected the Dow to reach 70,000 — a 40 percent gain — by 2029. Mr. Yardeni has
been talking for a long time about, as he puts it, the “Roaring 2020s stock market.”
A.I. will increase productivity throughout the economy and generate broad-based
earnings improvements, he said, and that will keep the bull market going.
Many
stock markets elsewhere are outperforming the market in the United States. The falling
dollar has helped to bolster international returns — especially, but not solely,
for those investing in dollars. Professor Prasad, an expert on the dollar, expects
that the U.S. currency, for better and for worse, will remain the dominant means
of global exchange, though many other countries are trying to avoid it. Despite
problems lately in speculative markets like commodities and cryptocurrency, the
global financial system so far is holding steady.
Even
so, Professor Prasad said, complacency would be unwise. “There’s real trouble right
now,” he said, even if it’s not showing up in portfolio returns.
“We
are seeing that the institutions are getting shredded,” he said. “We are seeing
domestic politics becoming even more polarized and infected in a way that is having
a very negative effect on geopolitics as well.”
Financial
markets were calm in the years leading up to the great financial crisis and recession
of December 2007 through June 2009. The doom loop now, he said, may well plague
the markets later.
So
don’t relax too much, Professor Prasad said. “I think that it is a good time, when
things appear to be good, to worry a little more about all these unfavorable dynamics lurking under the surface.” He shrugged,
with a rueful grin. “This is cheerful stuff, no?”
Well,
no. It’s depressing to contemplate, but the world is in a difficult place. I think
it’s worth pondering all of this carefully. For investors, it makes sense, as I’ve
been writing, to buffer your stock holdings with bonds and cash if you are likely
to need your money soon.
In
a review of “The Doom Loop,” The Economist praised the book’s sweeping analytical
power but said it came up short on solutions. That was true of my conversation with
Professor Prasad, as well, but I don’t fault him. Without major political shifts,
it’s hard to see how to turn around the global situation. Ordinary people will need
to try to protect themselves as institutions fray.