Asset markets are focused on policy makers and particularly central bankers. Commentators who know not where the ECB meets opine on the bank's next policy move. The blogosphere parses a Ben Bernanke speech ad nauseam in an attempt to speculate on market direction.
A debt laden world is binary. Should growth slow and debts begin to be defaulted the scary specter of deflation quickly arises. Growth is required for debts to be serviced and rolled over. Absent growth the entire Western world quickly would have Southern Europe's problems.
When debts are too large, the natural economic order is for default to occur. Continual easy money is the policy response and government deficits are increased. Treasury and central bank backstops develop quickly. Interest rates are lowered and when rates approach zero the quantitative easing money printing begins.
Each policy intervention battles deflation in hopes of a beautiful deleveraging. The policy fight remains the central focus as the speed of intervention and deleveraging are vigorously debated. Ever increasing amounts of stimulus are required. Less than a decade ago 1% Fed Funds were enough to ignite a housing bubble, while the debate today centers on when QE3 will occur.
The source of the stimulus is the chief determinate of asset price direction. Should China and emerging market policy makers choose stimulus then emerging markets and industrial commodities would be winners. Until then look for base metals, lead by copper, to be the laggards.
When the source of stimulus is Europe, perhaps gold and the precious metal complex will be the leader. Should the ECB choose to monetize debt the economic significance would be muted. However, the monetary meaning would trump.
The Bernanke put is well known and understood to be money printing, with the winner being the U.S. stock market. With the U.S. private sector economy stronger than generally understood, only the timing and size need to be determined.
Should policy makers act too slow or in insufficient size, markets would react sharply. Investors ought not underestimate the size of the continual response either. Meanwhile, central bankers seem eager to please. In our binary world, the first investment choice is little different than red or black.