Correction

Yesterday, the Dow Jones Industrial Average was declared in “correction.” This was after the index lost over a thousand points during the trading day. This was the second time the index fell that much in one week. The stock market is considered in “correction” when it loses 10% of its value.

Over the past two weeks, the New York stock exchange has been on a roller coaster ride, shedding value massively one day and partially recovering the next. Because of that, the equities markets in Europe and Asia were thrown into yet another episode of US-induced volatility. Trillions of dollars in share value evaporated.

A “correction” in share prices is normally considered a healthy event. It checks the possible overvaluation of markets that are sometimes carried away by unwarranted sentiments. It provides a reality check on whether prices truly reflect real value.

Normally, developments in the stock markets reflect the state of things in the real economy. In the case of the New York bear market we saw the past few days, however, we sense a certain disconnect.

The downturn happens at a time when the US economy is showing signs of strength. Unemployment descended to record levels. Growth prospects are strong. Because of pro-rich tax measures introduced by the Trump administration, corporate profitability is expected to spike.

But the US economy has been on steroids. Those steroids may be withdrawn soon in the form of interest rate hikes to curb inflation.

If interest rates are hiked, the US government will have to accept heavy penalties. Trump’s economic policies are expected to produce record deficits. Those, in turn, will force record public borrowing. The borrowing will be charged higher rates under a regime of more expensive financing costs.

After the 2008 global financial meltdown sparked by poor regulation of the big banks, the US and many other governments adopted what were euphemistically called “stimulus measures.” These measures included dropping interest rates to near-zero and massive government purchases of assets from the banks. Money was made cheap and plentiful.

The objective of this strategy was to avert the recession caused by the financial meltdown becoming a full-blown depression. It was supposed to be a short-term emergency undertaking.

More than 8 years after the financial crisis, however, the measures were still in place. Governments still held large amounts of assets in their portfolios. Interest rates remained low. Only moderate economic expansion in the mature economies prevented an inflationary spiral from happening.

As growth picks up in the US, the peril of inflation has reared its ugly head. The low unemployment rate translated into upward pressures on wages. The overvalued dollar does not at all reflect the fact the US owes trillions in debt. Those debts will spike even more because of Trump’s tax package.

When the pro-rich tax package (the only major piece of legislation passed during the Trump administration) was passed, there was a mad rush to buy stocks. The New York stock exchange broke through the roof. Investors expected not only more robust valuations of corporate shares but also fatter dividends.

Greed was the order of the day, just as it was before the crash of 2008.

Donald Trump himself, ignorant of the larger dynamics of his own economy, talked up the stock market. He mistakenly took it that the rise in stock prices was a positive comment on his leadership. While the market was inexplicably rising, Trump wallowed in what he imagined was a personal triumph. No other American president ever tried influencing the market with words.

When stock prices began dropping, Trump declared the market mistaken. As the drop continued, he kept silent about it.

After the initial euphoria over the Trump tax package (basically donating a trillion dollars to the corporations), investors realized the final consequence of it all: a massive deficit that would force the US into more debt.

The debate over deficits and debts is precisely what held up the vote on the spending bill in the US Congress. This has led to the second shutdown of the US government in a month.

Even as the US Fed is now headed by a man handpicked by Trump, it seems inevitable that interest rates will be jacked up.  This is necessary to stem the surge in inflation, abetted by the present administration’s mindless foray into larger deficits and more debt.

The unbendable rule in finance is that if interest rates rise, asset prices drop.

The US government now has to unwind the assets it hoarded during the stimulus period to minimize losses arising from inevitable interest rate hikes. That adds to a sense of short-selling engulfing the market.

The pricing down of assets in general includes the pricing down of equities. This is the larger reason why share prices are dropping even before upward adjustments in interest rates happen.

We are in an ironic situation. The more good news there is about the US economy, the more the selloff in stocks are likely to happen.

This is because growth in the American economy can only mean one thing: inflation. In turn, this leads to only one other thing: higher interest rates.

The rest of the world can only watch the rollercoaster that is the New York stock exchange reflect on their home markets. No one seems to be setting the directions here. Certainly not Donald Trump who does not seem to fully grasp what is going on.

And while the New York stock exchange teeters on the edge, Trump is somewhere else fiddling.