Investors are living from the greatest of all treasures, which is Hope

Rising prices in the stock market show that the recession is coming.

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The federal reserve bank started increasing interest rates almost a year ago. Now with the average rate at 3.8%, the Fed waits for the medicine to take effect.

From a factual point of view, the real interest rate is currently at roughly – 7 %.

Many companies, especially in highly leveraged industries like tech or housing, are reducing investment and are thinking about job cuts. Job cuts These two words alone mean the rates must fall. At least, that is what many hope for and why we currently see a rising stock market.

Classic economics: wages rise until the recession hits

From a traditional point of view, the analysis that we currently have high inflation and, in many regions, due to unfavorable demographics, a labor shortage should lead to an anticipation of rising wages and the onset of the dreaded wage-price spiral.

Wages will rise, which will lead to an average price increase and that to another wage rise.

This cycle can only be stopped by firing enough workers to cool down the market.

But why should a company fire its workers? There are two ways to cool down the job market, extreme events (corona and war) or via market control mechanisms.

The control mechanism means regulating the money supply. Setting it to infinite will lead to a labor shortage. Only allowing free cash flow to pay for work and drying up the funding will reduce labor in the short term.

In the long term, this is not necessarily the case, as is predicted by communism. We will all have work and high productivity without debt and free money. At least, that’s what I heard.

Enter politics.

Emotions drive politicians.

In this game, many people undoubtedly have to lose something. Workers will lose their job and the security of high wages. Investors will lose invested money. Bosses lose their companies.

Politicians know that all these events lead to unrest in the population and limit their ability to remain in power. In Europe, the ECB has been reluctant to raise rates. Potentially due to respect for politicians in many countries.

Investors are living from the greatest of all treasures, which is Hope

Emotions have another effect on investors.

As an investor, we will likely use the money when invested, or the company will be worthless. Or we lose money when we sell our shares for a lower price than we pay.

The rational approach will be to ask if there is a better investment that we could currently have. We should accept our loss and invest the remaining money in the other company.

However, many people are afraid to lose money. Both options are inadequate.

There also remains the third option. The stock can go up and people will become more prosperous. We should all buy some more, as it goes up.

This behavior is explained by prospect theory. When people face almost certain losses, they become risk-seeking. They favor small probabilities of potential gains.

That is what is currently happening.