Thursday, March 22, 2007


To begin, kudos to the Bernanke Fed as it took an important step yesterday in decoupling itself from the Greenspan bubblenomics era by rightfully stressing the need to focus on inflation (and by default excess liquidity). And, in the process, the Fed continues the global central banker strategy of draining liquidity from the system.

However, given the likelihood that earnings growth will decelerate to low single digits, US real GDP growth seems heads to the sub 2% level, and inflationary pressures remain stubbornly sticky, it is remarkable, to say the least, that equity investors would celebrate such a scenario in the context of central bank tightening.

Investment Strategy Implications

If anyone needed proof that the equity markets are liquidity driven, yesterday provided it - in spades.

Maybe my good friend Jason Trennert is right. Maybe we will experience a market melt-up. And perhaps he has it correct to suggest that private equity capital will be a major player in the melt-up.

Yet, if investors acknowledge that this Fed is as data dependent as it says it is, and if one believes that the equity markets are an important source of information, then yesterday’s equity-booyah is unlikely to be ignored by Bernanke and Company. With the economy precariously balanced between the rock of stagflation and the hard place of excess liquidity, yesterday’s loud equity hurrah may be premature.

No comments: