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The winds of change are about to blow upon investment markets. And while persistent complacency will likely cause many investors to build walls in trying to resist this change, those that are currently adjusting their sails stand to benefit most from the coming transformation.

It appears increasingly likely that Larry Summers will be appointed the next Chairman of the Federal Reserve once Ben Bernanke completes his current term in January 2014. An official announcement by President Obama is expected sometime over the coming weeks, but the fact that some in the president's inner circle are suggesting Summers will soon be appointed coupled with the fact that leading contender and current Fed Vice Chair Janet Yellen is talking down her chances suggest that it is only a matter of time at this point.

The importance of this appointment for financial markets and the global economy cannot be understated. The role of Fed Chairman is arguably the most powerful position in the world. For in one individual is concentrated not only the full command of the global reserve currency, but also the unencumbered freedom to carry out monetary policy without any of the checks and balances that characterize the normal legislative process on the fiscal policy side. Put more simply, the Fed Chairman can pretty much do whatever he wants, whenever he wants and without having to consult anyone other than his Open Market Committee that almost always falls in line with the Chairman. Moreover, unlike the U.S. presidency, the Fed Chairman is not subject to term limits. For example, Alan Greenspan was Chairman of the Fed for nearly 20 years before he finally decided to retire in 2006. In short, the Fed Chairman has the potential to effectively become the king of the global money supply.

The importance of monetary policy on financial markets has also been profound in recent years. Since the outbreak of the financial crisis, the U.S. Federal Reserve has expanded its balance sheet dramatically. And this has had a direct impact on inflating asset prices including the stock market (NYSEARCA:SPY), which has moved higher with each marginal dollar added to the Fed's balance sheet and languished otherwise.

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So what exactly are the implications of Larry Summers being appointed Fed Chairman? It potentially signals a generational shift in the way monetary policy will be carried out going forward. And the resulting change is not one that is likely to be supportive of stocks anywhere close to the way it has been over the past few decades.

To explore this point in more detail, it is worthwhile to reflect on the Fed over recent history. One of the most notable aspects of today's investment markets is the explicit faith that so many investors have in the Federal Reserve and their ability to successfully guide the U.S. economy through monetary policy. But exactly upon what foundation is this faith based? After all, the current monetary system characterized by the dollar being backed by nothing other than the full faith and credit of the U.S. government has been in place for only 42 years following the collapse of Bretton Woods in 1971. This relatively short period of time in the context of financial market history makes it extremely difficult to draw any firm conclusions about the sustainability of this current model. Instead, given the many changes in the international monetary system that we have seen over the centuries, the default expectation should instead tilt toward the potential for further transformations in the years ahead. And the fact that the currencies tied to many of the world's leading developed economies such as the U.S. Dollar (NYSEARCA:UUP), the Japanese Yen (NYSEARCA:FXY), the British Pound (NYSEARCA:FXB) and the Swiss Franc (NYSEARCA:FXF) have been managed most aggressively in response to the recent financial crisis suggests that the current model may be put to the test in the coming years. This alone is a major downside risk for financial markets including stocks, as currency volatility breeds great uncertainty.

A single school of thought has dominated monetary policy over the last few decades. Since 1971, only five individuals have presided as Chairman of the Federal Reserve. And over the last 26 years, there have been only two. In August 1987, Alan Greenspan assumed control of the Fed, and it was almost immediately that he transformed the course of monetary policy and financial markets for the next few decades. Only a few months after his appointment on October 1987, the stock market plunged into crisis with a -22% correction, the largest one-day decline in its history. In response to the turmoil, the Fed under Greenspan's leadership definitively declared "its readiness to serve as a source of liquidity to support the economic and financial system." The stock market stabilized and rebounded as a result, and so was born the "Greenspan put".

The "Greenspan put" fostered the expectation among investors that the Federal Reserve will do whatever it takes to support the stock market the moment trouble arises. Over the next two decades, the markets faced a variety of challenges including the savings and loan crisis, the Gulf War, the Asian contagion, the collapse of Long-Term Capital Management (LTCM), the bursting of the technology bubble, the terrorist attacks of 9/11 and the second Gulf War. And in each instance, the Fed intervened with easy monetary policy in order to mute the negative economic impacts of these episodes and support stock prices. And this support has resulted in persistently higher than normal stock valuations along with an increasing hubris among investors that as long as the Fed exists one can safely buy the dips and ride the next rally higher regardless of the underlying risks.

The "Greenspan put" eventually became the "Bernanke put". When Chairman Ben Bernanke assumed control of the Fed in January 2006, he continued many of the same policies first put in place by his predecessor. While he has certainly done a great deal to foster more policy communications and FOMC consensus building, his underlying policies have continued to emphasize trying to neutralize economic cycles and support the stock market at all costs.

This unwavering monetary policy approach over the last quarter of a century has come with increasing consequences. In a normal environment throughout history, the U.S. economy moves with a steady rhythm. For just over three years on average, the economy would expand. Then for just under a year on average, it would enter into recession before entering into a new growth phase. These recessionary periods were positive and important, as they allowed the economy to work off the excesses accumulated during the previous expansionary phase in setting the stage for the next period of growth. But starting with Chairman Greenspan in the mid 1980s and continuing with Chairman Bernanke through today, the Federal Reserve through its monetary policy actions have tried to defy the normal economic cycle and the laws of nature for that matter. By not allowing the U.S. to enter fully into recession in 1986, 1990, 1994, 1998, 2001-02 and 2006, in many cases skipping these recessions entirely, it caused the economy to amass excesses that never had the opportunity to be worked off along the way. And it has been the accumulation of these excesses over more than two decades that ultimately led to the financial crisis in 2008 and the ongoing challenges we are facing today. For an economy will eventually overpower policy makers and find a way to cleanse itself. And the longer policy makers try to resist this process, the more profound the final corrective process will be.

All of this brings us to today and the implications of Larry Summers being appointed as Chairman of the Federal Reserve. It appears that President Obama may not be pleased with the job done by Chairman Bernanke. The President's remarks in June about Bernanke to Charlie Rose on PBS that "he's already stayed a lot longer than he wanted or he was supposed to" suggest as much. For although the Chairman has more than quadrupled the size of the Fed's balance sheet since the outbreak of the financial crisis in late 2008 in rescuing the global financial system, monetary policy actions over the last few years has resulted in growth that has been sluggish at best and soaring stock market that has yielded little if any pass through benefits to the broader economy. While it could be clearly argued that vast shortcomings on the fiscal policy side from both political parties has resulted in a far greater drag economic growth, this does not appear to be the way the President is seeing it.

President Obama is likely signaling a dramatic change in the course of monetary policy by appointing Larry Summers to lead the Fed. If the president wanted to continue the direction of monetary policy first established by Chairman Greenspan and continued by Chairman Bernanke, the obvious choice would be for him to appoint current Vice Chair Janet Yellen. But the fact that the president is apparently bypassing the historic opportunity to appoint a supremely qualified person to become the first female to lead the Federal Reserve by selecting Mr. Summers instead suggests he is eager to alter the current the course of monetary policy. And the fact that he is likely selecting Mr. Summers in particular also implies a potential political element associated with the appointment, as Summers has close ties to the president including serving as his Director of the National Economic Council when he first took office back in January 2009.

Thus, the priorities of Mr. Summers as Chairman of the Federal Reserve are likely to be vastly different than those of Mr. Greenspan and Mr. Bernanke. And supporting the stock market at all costs is not likely to rank near the top of the list anymore.

Larry Summers brings an added element of uncertainty to the role of Fed Chairman. Unlike Janet Yellen, his views on monetary policy are largely unknown outside of scattered commentary. Also, it is widely discussed that he is someone that likely to act far more independently on policy than Mr. Bernanke, which may result in more unpredictable actions from the Fed versus what we have become accustomed to in recent years. Lastly, while it has been widely stated that Mr. Summers possesses a brilliant intellect, the same was said about those that were directing LTCM, and we all know how that played out. Put differently, great intelligence does not necessarily guarantee great policy. In fact, sometimes it can create a very complex mess.

A wind of change is about to blow upon investment markets with the appointment of Larry Summers as Chairman of the Federal Reserve. And with this change is the distinct likelihood that the Fed is about to abandon its nearly three decade long policy of supporting the stock market at all costs. This does not necessarily mean that the U.S. economy will struggle under a Fed led by Mr. Summers, but it does suggest that the stock market may very well face an unpleasant adjustment as the inflated valuations fostered by the Greenspan/Bernanke put are eventually unwound amid a potential new reality that the Fed's priorities and focus has shifted elsewhere.

One has to look no further than global markets to see the potentially painful impact of an unwind in inflated valuations. Many emerging markets (NYSEARCA:EEM) are already in tatters amid the expectation of the Fed scaling back policy support and the uncertainty of its future leadership, as the surplus of capital that flooded these markets in recent years is now being withdrawn. As a result, stock markets in places like India (NYSEARCA:EPI), Indonesia (NYSEARCA:IDX), Brazil (NYSEARCA:EWZ) and Turkey (NYSEARCA:TUR) have fallen precipitously in recent months even before the Fed has officially started to pull the plug on QE3. This, of course, has also had a profoundly negative impact on the performance of emerging market bonds (NYSEARCA:EMB) as well. And for a glance at how markets perform when policy stimulus is focused on something other than the stock market and inflating asset prices, it is worthwhile to look at the second largest economy in the world in China (NYSEARCA:FXI). Although the Chinese government and central bank has engaged in targeted stimulus programs over the last two years, its stock market is down over -20% over this same time period.

In my next article, I will be conducting an exploration of how much the U.S. stock market may be artificially inflated by Fed policy and what we might expect going forward if this policy support is removed or redirected under new leadership. I will also be examining what are likely to be the best investment opportunities over the next decade in such an environment.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

This post is for information purposes only. There are risks involved with investing including loss of principal. Gerring Wealth Management (GWM) makes no explicit or implicit guarantee with respect to performance or the outcome of any investment or projections made by GWM. There is no guarantee that the goals of the strategies discussed by GWM will be met.

Source: Stocks: The Winds Of Change Are Coming