A Cause for Celebration?

Exactly one year from today (8/8/08) the world will celebrate the start of the Olympics in Beijing. Yesterday, the equity markets celebrated….what?

Did the equity markets celebrate the reality that central bank power has diminished over the past several years thanks to globalization and financial innovation? Perhaps it celebrated the end of easy money, preemption, and the Greenspan put and a new era of market discipline and a more holistic approach to monetary policy? Or maybe it rejoiced in the fact that over the next twelve months close to $1 trillion of mortgage debt will reset to higher levels thereby further impacting US consumer spending power, not to mention the default rate of an already troubled housing market?

Investment Strategy Implications

In time, I am confident that investors will come to appreciate that we are in a new monetary regime – one that does not use preemption and easy money as its first reaction to a crisis – just as investors came to appreciate the extent and consequences of excess liquidity (or as it goes by its more commonly heard phrase “risk re-pricing”). And with that appreciation will no doubt come the recognition that the opportunities and risks in a dynamic global economy lie not in the powers that were but in the powers to be*.

It’s a brave new world. The Bernanke Fed gets it. Investors will...eventually.

*Another way of saying leadership change.