Making sense of the stock rout puzzle

THE stock market movements of the last one month are puzzling.

Take the China explanation. A collapse of growth in China would indeed be a world-changing event. But there is just no evidence of such a collapse. At most, there is suggestive evidence of a mild slowdown, and even that is far from certain.

The mechanical effects of such a mild decrease on the US economy should - by all accounts, and all the models we have - be limited. Trade channels are limited (US exports to China represent less than 2 per cent of GDP), and so are financial linkages. The main effect of a slowdown in China would be through lower commodity prices, which should help rather than hurt the US.