Speculation Runs Wild: Why Investors Still Bet Big Despite Higher Interest Rates

State Support, Market Psychology, and the Risk of Moral Hazard

The persistence of rampant speculation in financial markets, despite the apparent end of ultra-loose monetary policies, is a phenomenon that demands closer scrutiny. While the era of near-zero interest rates concluded in 2022, speculative activities have not only persisted but intensified, particularly in sectors like artificial intelligence (AI), meme stocks, and cryptocurrencies. This raises a critical question: Why are investors still engaging in high-risk speculation when money is no longer free?

The Illusion of Tightening: Why Speculation Continues

One plausible explanation is that the foundational elements of the easy money era—government interventions, central bank support, and a culture of bailouts—remain largely intact. Although central banks, particularly the US Federal Reserve, have raised interest rates to combat inflation, the belief that markets will always be backstopped by state intervention has not disappeared.

The "buy the f***ing dips" (BTFD) mentality, a phrase that epitomises speculative confidence, remains alive and well. Every time markets falter, retail and institutional investors alike rush in to accumulate positions, assuming that the government and central banks will not allow significant corrections. This is particularly evident in the US, where fiscal stimulus, corporate bailouts, and regulatory easing continue to flood liquidity into the system despite rate hikes.

Even with higher borrowing costs, risk appetite remains elevated. Investors are piling into leveraged exchange-traded funds (ETFs), speculative tech stocks like Nvidia, and even obscure meme coins with names like "Fartcoin." Such behaviour would typically indicate an abundance of cheap money, yet it persists even with tightening monetary conditions.

The UK’s Financial Reforms: A Parallel Trend

The UK is witnessing a similar push toward market deregulation. The Financial Conduct Authority (FCA) has proposed easing restrictions on private companies, allowing them to sell shares to professional investors without adhering to stringent market abuse regulations. This is aimed at increasing market liquidity and attracting listings to London, which has struggled to compete with New York in recent years.

Simultaneously, the Bank of England is planning to reduce regulatory burdens on UK banks and insurers. This includes slashing reporting requirements, softening capital requirements, and introducing mechanisms that allow insurers to invest in riskier assets without prior approval. While regulators insist that these changes will not lead to a “race to the bottom,” they undeniably shift the risk-reward calculus in favour of speculation.

State Support and the Moral Hazard Problem

One of the key issues fueling this speculative frenzy is moral hazard—the idea that market participants take excessive risks because they believe they will be bailed out if things go wrong. This has been ingrained in the financial system since the first major US bank bailout in 1984 and reinforced during every subsequent crisis, from the 2008 financial meltdown to the 2023 Silicon Valley Bank rescue.

During the pandemic, central banks injected trillions into the global financial system, and much of this liquidity remains sloshing around. Even after the Federal Reserve began tightening, government stimulus and fiscal spending stayed elevated, leaving excess cash in the hands of corporations and households. This liquidity has continued to fuel stock buybacks and speculative investments, reinforcing the perception that risk-taking will always be rewarded.

The market’s resilience to shocks only strengthens this mindset. When AI stocks wobbled on concerns over Chinese competition or when Trump’s tariff policies briefly rattled equities, investors doubled down instead of retreating. Four of the five biggest days of retail buying this decade have occurred in the past five weeks—an extraordinary sign of risk appetite.

The Breaking Point: When Does the Speculative Cycle End?

For now, the speculative fervour continues unabated, but it will not last forever. There are two primary catalysts that could break the cycle:

1. Higher Borrowing Costs Become Unavoidable – If inflation proves stickier than expected, central banks may be forced to keep rates higher for longer or even raise them further. While speculative excess has survived the first wave of rate hikes, a sustained period of expensive money could eventually curb risk-taking.

2. A Fiscal Crisis or Credit Event – If government spending is curtailed due to rising debt levels, or if a major financial institution collapses in a way that cannot be easily backstopped, the assumption of unlimited state support may finally be challenged. A liquidity squeeze or systemic default could trigger a true re-pricing of risk assets.

MY OUTLOOK: A Cautionary Note on Speculation

In my view, while speculation is an inherent part of financial markets, the current environment is heavily distorted by artificial safety nets. Investors are emboldened by the idea that losses will always be limited by government intervention, but history shows that market complacency often leads to painful corrections.

The UK’s shift toward deregulation may boost market activity in the short term, but it also raises concerns about systemic risks. If the balance between financial innovation and prudential oversight is not carefully managed, the seeds of the next financial crisis could already be sown.

Ultimately, while BTFD remains the dominant market psychology, investors would be wise to question how long this game can continue. When the next shock arrives, the safety net may not be as secure as many assume.