Artificially inflated Ponzi schemes don’t correct, they collapse

The last couple of interest rate hikes in the U.S. had an unusual short-term effect on the stock market — the markets went up on both the rumour and the news.

Normally, by placing a higher value on cash and savings, there would be a flight away from leverage and speculation, resulting in a correction in the market.  However, that never happened as the DOW and S&P marched to record highs without even flinching.

Now with predictions from Goldman Sachs that four more interest rate hikes are expected in 2018 based on unemployment and inflation figures tailored to make prior financial policies look great, there should be a higher likelihood of a correction due to the higher cost of owning debt.

The fact that the past few rate hikes coincided with irrational market moves has much to do with psychology and less to do with economic fundamentals. The falsified employment statistics and inflation numbers, coupled with Trump’s ability to persuade Wall Street that everything is great (despite him saying everything was a bubble prior to his election) are both contributing to the debt-fueled hysteria.

Bubbles are fueled by irrational “buy now or be priced out forever” mentalities. When that psychological switch flips, don’t expect a correction, expect a complete collapse of a market that was running on hot air.  There will be a realization that debt plus interest severely outweighs actual economic growth, both in the commercial sector and even moreso in the Canadian housing sector.  Aside: one thing is sure to happen in Canada — collapse of the loonie or collapse of the housing bubble, depending whether the Bank of Canada follows suit with the Federal Reserve.

Once people realize taking on massive debt is bad for financial health, expect the reversal away from a leverage-based, speculatively valued market to a market based more on fundamentals.

In other words, expect a collapse and not a correction.

The raising of rates by a mere 1% may flip that psychological switch. In that case, the Trump administration has a scapegoat — the Fed — to blame any market collapse by alleging they are not acting in the best interests of Americans (he’s right though, the Fed has never been acting in the interest of Americans which is why the rates were so low to begin with). Expect the U.S. government to psychologically prime everyone if it wants to avoid any blame on a pending market reversal.

A planned or unplanned black swan event that the state and mainstream media can pile on is the most convenient way to keep Keynesian theory blameless while letting real market forces momentarily take over. After much of the artificiality in the market has been reversed, the governments can continue their spending sprees and the central banks can continue their rate manipulation. The power of the state can continue to grow through their usual persuasion tactics, and then we simply move on to the next cycle of Keynesian debt-fueled Ponzi schemes.

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