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It’s safe to say that the global economy is in pretty bad shape right now: the vast majority of economists think we’re on the brink of recession. But US markets don’t seem to care. Stocks closed their best week since mid-June last Friday and continued this rally through Monday.
So what gives? A decade of free money flowing from the Federal Reserve to the banks has created two economies, says Nomi Prins, former CEO of Goldman Sachs and author of “Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever”. Wealthy Americans and corporations directly benefited from years of low rates, which kept money in businesses and stocks high while Main Street suffered from decelerating wages and little support. Prins says we are now dealing with a “permanent distortion”, where market behavior and economic prosperity have nothing to do with each other.
What is happening: The stock market has always been unpredictable. Analysts and economists try to predict or apply some type of rational explanation to market movements, but the reality is that it is often guesswork (strong, educated guesses, but still guesses).
This has become increasingly evident in the super weird and volatile markets we see today. Federal Reserve officials have made it clear that they do not plan to back away from their policy of aggressive rate hikes to fight persistent inflation. Economic data is grim and CEOs, economists and global organizations are sounding the alarm about an impending recession.
But markets, which have taken a beating this year, are again at multi-month highs. Trying to apply economic logic to stock markets has become pointless, Prins told me in a recent interview.
Other mandate: The Federal Reserve has a mandate to control unemployment and prices, but the Fed’s unofficial third mandate is to stimulate markets, Prins said. “We’ve seen that over the past 14 years,” she added. Beginning in 2008, interest rates for overnight bank borrowing in the United States were set low, near zero, and Fed officials pursued aggressive monetary easing, where they pumped money into the financial system by buying Treasury securities from the US government. This created a pervasive idea in the world of finance that the stock market would go up no matter what, she explained.
Most of this stimulus flowed up into the markets and not out into the economy as a whole and created a world where investors became dependent on the Fed while the economy as a whole sank. suffered, Prins said.
The credibility problem: When the Federal Reserve began raising rates earlier this year, officials made it public how important their credibility was to successfully reducing inflation rates. If the Fed is to succeed, they said, Americans should believe that the central bank is resolute in its fight to lower prices.
But investors don’t believe it, says Prins. That’s why they continually seem to think a policy change is imminent, even when the Fed says it isn’t. They understand, says Prins, that eventually the Fed will return to its long-term policy of helping the markets.
Meanwhile, she says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, through rising mortgage and lending rates and a slowing market. employment.
Recession predictions are a dime a dozen these days, but some are more serious than others. Like this: Nearly two-thirds of business economists think the United States is already in a recession or will be in the next 12 months, according to the latest survey from the National Association for Business Economics.
More than half of NABE respondents said they think there is more than a 50% chance America will experience a recession in the next year, with 11% saying they think the nation in was already one, according to the survey published on Monday, reports my colleague. Alicia Wallace.
Despite a strong recovery from the Covid-19 pandemic, the US economy has been weighed down by a period of historically high inflation that has lasted for months. The Federal Reserve stepped up its efforts to rein in high prices through a series of blockbuster interest rate hikes.
The context of high inflation has led to Price hikes by companies – 52% of respondents said the prices charged by their companies had risen in the third quarter – but the latest survey indicates that some prices are starting to come down. A total of 9% of respondents said prices were down, the highest share reported since January 2021.
The survey also showed that the cost of materials during the third quarter was at its lowest level since April 2021.
Shortages of raw materials and labor continue to hamper business operations, according to the survey. The proportion of respondents reporting shortages remained near record highs.
Rishi Sunak, Britain’s third prime minister in seven weeks, will face the enormous challenge of projecting stability after a period of historic political and financial chaos. But his other task – guiding the country through a recession – is about to be equally daunting, reports my colleague Julia Horowitz.
Sunak said on Monday it was “his top priority to bring our party and our country together” in the face of a “deep economic challenge”.
Sunak campaigned for the post over the summer with promises to help households cope with the rising cost of living, which is prompting many to cut spending. He said he would cut taxes, but only once price pressures eased.
Yet the economic outlook has deteriorated sharply since then, not least due to market turmoil triggered by Truss’ now scrapped plan to cut taxes as soon as possible and boost government borrowing.
Investors will be watching closely over the next few weeks for clues to Sunak’s plans to turn things around.
▸ Coca-Cola (KO), UPS (UPS), Raytheon (RTN), Twitter (TWTR) and GE (GE) release their third quarter results before the bell.
▸ Microsoft (MSFT), Alphabet (GOOG), Visa (V), Spotify (SPOT) and Chipotle (CMG) report third quarter results after market close.
More: The Conference Board is scheduled to release October Consumer Confidence, which measures the level of consumer confidence in the economy as of 10 a.m. ET.
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