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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 agree. Stocks closed their best week since mid-June last Friday and continued into Monday.

So what gives? A decade of free money flowing from the Federal Reserve to banks has created two economies, says Nomi Prins, former managing director at Goldman Sachs and author of “Permanent Distortion: How 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 accelerating wages. and a little support. Prins says we are now dealing with a “permanent distortions,” 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 proclaim or apply some kind of rational explanation to market movements, but the reality is that it is often conjecture (a strong educated guess but still a guess).

That is becoming more and more evident in the extremely strange, volatile markets we are seeing today. Federal Reserve officials have made it clear that they have no plans to abandon their policy of aggressive rate hikes to combat persistent inflation. Economic data is bleak and CEOs, economists and global organizations are calling for an imminent recession.

But the markets are coming off multi-month highs, which have taken a big hit this year. It’s no use trying to apply economic reasoning to stock markets now, Prins told me in a recent interview.

Another mandate: The Federal Reserve has a mandate to keep unemployment and prices under control, but the Fed’s third unofficial mandate is to boost markets, Prins said. “We’ve seen that for the last 14 years,” she said. Beginning in 2008, interest rates on overnight bank loans in the United States were set low, close to zero, and Fed officials pursued an aggressive policy of monetary easing, where they infused money into the financial system by purchasing Treasury securities from the US Government . That created a pervasive idea in the financial world that the stock market would go up no matter what, she explained.

Most of this stimulus flowed up into markets and not out into the wider economy and created a world where investors relied on the Fed while the larger economy suffered, Prins said.

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 succeeds, they said, Americans would have to believe that the central bank is steadfast in its fight to reduce prices.

But investors don’t believe it, says Prins. That’s why they keep thinking a policy pivot is coming even when the Fed says it isn’t. They understand, says Prins, that the Fed will return to its long-term policy of helping markets.

Meanwhile, she says, Main Street, not Wall Street, is feeling the brunt of these interest rate hikes, through rising mortgage and lending rates and a shrinking job market.

Recession predictions are a dime a dozen these days, but some are more serious than others. Like this one: Nearly two-thirds of corporate economists believe the United States is already in a recession or will be in a recession within the next 12 months, according to the latest survey by the National Association for Business Economics.

More than half of NABE respondents said they believed there was a greater than 50% chance America would experience a recession within the next year, with 11% saying they believed the nation was in one, according to the survey was released on Monday, reports my colleague Alicia Wallace.

Despite a strong recovery from the Covid-19 pandemic, the US economy has been mired in months of historically high inflation. The Federal Reserve has stepped up its efforts to reduce high prices through a series of large increases in interest rates.

The result is a high inflationary environment price increases by companies – 52% of respondents said the prices charged by their businesses had risen in the third quarter – but the latest survey shows that some prices are starting to come down. 9% of respondents indicated that prices were falling, the largest share reported since January 2021.

The survey also showed that the cost of materials during the third quarter was at the lowest level since April 2021.

Shortages of raw materials and labor continue to hamper business operations, according to the survey. The share of respondents reporting shortages remained close to record levels.

Rishi Sunak, Britain’s third prime minister in seven weeks, will face the enormous challenge of predicting stability after a period of historic political and financial market chaos. But his other task — shepherding the country through a recession — is close to as daunting, reports my colleague Julia Horowitz.

Sunak said Monday that it was his “highest priority to bring our party and our country together” in the face of a “deep economic challenge.”

Sunak campaigned for the job over the summer with promises to help families cope with the rising cost of living, which is causing many to pull back on spending. He said he would cut taxes, but so far reduce price pressures.

But the economic outlook has deteriorated significantly since then — not least because of the market turmoil caused by Truss’s now-abandoned plan to cut taxes as soon as possible and borrow to strengthen the government.

Investors will be watching closely in the coming weeks for hints about Sunak’s plans to turn things around.

▸ Coca-Cola (KO), UPS (UPS), Raytheon (RTN), Twitter (TWTR) and GE (GE) report third-quarter earnings before the bell.

▸ Microsoft (MSFT), Alphabet (GOOG), Visa (V), Spotify (SPOT) and Chipotle (CMG) report third quarter earnings after the market close.

Plus: The Conference Board is expected to release October’s Consumer Confidence that measures the level of confidence consumers have in the economy at 10 a.m. ET.



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