It’s safe to say that the global economy is in a pretty bad place right now: The vast majority of economists think we’re on the brink of recession. But US markets don’t seem to mind. Stocks closed out their best week since mid-June last Friday and continued that rally into Monday.
So what gives? A decade of free-flowing money from the Federal Reserve to banks has created two economies, argues Nomi Prins, a former managing director at Goldman Sachs and author of “Permanent Distortion: How the Financial Markets Abandoned the Real Economy Forever.” Wealthy Americans and corporations benefited directly from years of low rates, which kept money flowing into 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’s happening: The stock market has always been unpredictable. Analysts and economists try to prognosticate or apply some type of rational explanation to market moves, but the reality of it is that it’s often conjecture (strong, educated guesses but still guesses).
That’s become increasingly apparent in the super strange, volatile markets we’re seeing today. Federal Reserve officials have clearly stated that they have no plans to pivot away from their policy of aggressive rate hikes to fight persistent inflation. Economic data is bleak and CEOs, economists and global organizations are ringing the alarm bells about imminent recession.
But markets, which have taken quite a beating this year, are at multi-month highs again. It’s become pointless to try to apply economic rationale to stock markets, Prins told me in a recent interview.
Another mandate: The Federal Reserve is mandated to keep unemployment and prices in check, but the third unofficial mandate of the Fed is to boost markets, said Prins. “We’ve seen that over the last 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 an aggressive monetary easing policy, where they infused money into the financial system by purchasing Treasury securities from the US Government. That created a pervasive idea in the finance world that the stock market would go up no matter what, she explained.
The bulk of this stimulus flowed upwards into markets and not outward into the economy at large and created a world where investors became dependent on the Fed while the larger economy suffered, said Prins.
The credibility problem: When the Federal Reserve began raising rates earlier this year, officials publicly explained how important their credibility is to successfully lowering inflation rates. If the Fed is to succeed, they said, Americans would need to believe that the central bank is steadfast in its fight to bring down prices.
But investors don’t believe it, says Prins. That’s why they continuously appear to think a policy pivot is coming even when the Fed says it isn’t. They understand, says Prins, that eventually the Fed will return to its long-term policy of aiding markets.
Meanwhile, she says, it’s Main Street, not Wall Street, that’s feeling the brunt of these interest rate hikes, through increased mortgage and borrowing rates and a slowing jobs market.
More ominous predictions
Recession predictions are a dime a dozen these days, but some are more serious than others. Like this one: Almost two-thirds of corporate economists believe the United States is already in a recession or will be within the next 12 months, according to the latest survey from the National Association for Business Economics.
More than half the NABE respondents said they believed there was a more than 50% likelihood of America experiencing a recession within the next year, with 11% saying they believed the nation was already in one, according to the survey released Monday, reports my colleague Alicia Wallace.
Despite a robust recovery from the Covid-19 pandemic, the US economy has been weighed down by a months-long bout of historically high inflation. The Federal Reserve has stepped up its efforts to tamp down high prices via a series of blockbuster interest rate hikes.

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