The melt-up

Most of the Chicken Littles in the comments section whine, moan and cluck about a meltdown just around the corner.

But what if they’re wrong. Maybe we should worry more about a melt-up.

After all, look what’s happened to asset values. The Toronto stock market has gained a worrisome 20.5% in the last nine months. It just crossed to 30,000 mark for the first time. American markets are less frothy, but have also roared ahead in 2025.

Gold has been ridiculous, surging as the US$ weakened – which is one reason Bay Street has soared (the market has a significant mining component). And we all know about real estate. House prices have moderated because of weak buyer demand, but that now appears to be changing. Fast.

In short, assets have been plumping even as incomes remain flat, household and public debt rises in a scary way. There are more billionaires than every before, largely because the assets control are swelling in market value. All this has led to a historic and ever-widening wealth gap. People with assets are having a moment. People without are growing hostile. Just another reason society – especially in the States – is polarized as never before.

And let’s remember this wild increase in the value of investment assets has happened when inflation is tame, even benign and cuddly. At just 2%, low inflation has opened the door to a big shift in policy which now seems destined to hammer down interest rates. Meanwhile the impact of a nine-fold increase in American trade tariffs has been far more muted than anyone expected.

Both the Fed and the Bank of Canada sliced the cost of money this month. Our guys will be doing it again at the end of October, maybe once more in December, and almost for sure once or twice in the new year. The Fed is on track, say economists, for five rate decreases before settling into a neutral range.

Then there’s Trump. He wants the equivalent of 11 more quarter-point rate cuts in the US, which would push monetary policy back into the Covid era. As you know, he’s been trying to take control of the Fed’s board of governors and in May, when chair Jerome Powell’s term is up, the crazy president to the south of us will probably have his hand on the big lever.

So what could happen?

Stocks go nuts. The American dollar falls more, pushing ours higher. Safe-haven assets like bullion benefit. And you know what pandemic-priced mortgages did for real estate prices. Yep, maybe a melt-up.

BMO economist Benjamine Reitzes worries about that. “If the Fed continues to cut rates as the market anticipates,” he warns, “we could be in store for a melt-up in risk assets.” Mr. Bond Market would not be happy. Central bankers would have blown it.

Here is his logic:

A seemingly healthy economy, still-above target inflation, record-high equity markets and credit spreads at multi-decade tights don’t scream the need for lower rates and more liquidity. Indeed, the strength in U.S. consumption is being driven by the wealthiest households who are no doubt benefitting from rising wealth.

A further series of rate cuts risks broadening that positive momentum. Risk assets would likely welcome firmer growth, driving prices ever higher and credit spreads ever tighter. While that might look like an attractive outcome, it would come at a time when inflation remains meaningfully above target.

Running the economy hot would plant the seeds of a renewed inflation spike at a time when consumers and markets are only just moving on from the 2021-23 inflation spike. Combined with a still-wide fiscal deficit, there’s a non-trivial risk that the bond market could come under serious pressure, which would impact the outlook for growth and asset prices.

Call it the Icarus Factor. The risk is that cheap money, discounted mortgages, low-cost loans and leverage will fuel borrowing, buying, spending and demand. We all get greedy. FOMO everywhere. A flight too lose to the sun.

That, the economist warns, can be the prelude to a sharp and stark return to reality. Asset prices correct. Markets sell-off. Economic activity reverses as things suddenly look stupidly over-priced, no matter how inexpensive a loan gets. “This isn’t the base case,” Reitzes says, “but a risk worth keeping an eye on.”

So, will those in charge of central banks be prudent, as they have been to date, or buckle under political pressure and open the floodgates? After all, it’s tempting. An easy, quick way to paper over debt, finance a spendy government, sooth a trade war, goose equities, revive a housing market or throw a cannister of gas on the economy, making leaders look good.

The orange guy is on that path. Be aware.

About the picture: “Submitted to stave off the cat photos,” writes Lloyd. “Ziggy loves retrieving Frisbees and balls. We are in Parksville for a few days where the low tide  exposes massive stretches of beach. Thanks for your continuing generous advice on things financial and otherwise and being objectively critical and accepting of all things political. As I’m sure you have come to terms with, you are not going to change the minds of the KoolAid drinkers but at the same time do not have to give them a pulpit or megaphone.  On Ziggy’s part – she could care less.”

To be in touch or send a picture of your beast, email to ‘garth@garth.ca’.

Source: https://www.greaterfool.ca/2025/09/30/the-melt-up-2/