Hitting Reset Is The New Way Of Life – Back To Square One

After witnessing your son graduate from elementary school, there will be an inevitable sense of loss for us. 12 years gone by with no reset button.

That is much like the new way of life, all of us expecting a reset button hidden somewhere. It has become a given that everyone gets a second chance, or a third, or a fourth, or till infinity and beyond, like when you play GTA5, Battlefield 4 and Call Of Duty – Ghosts on the Xbox. We have reset buttons for ex-convicts, failed students, entrepreneurs, divorcees, all the way to refugees.
It is a rather appealing thought.

I like the idea of the reset button because it then means we do not give up yet it also has a dark side that failure will not be tolerated which means we could end up doggedly pursuing a lost cause or avoiding a cause at all when it is likely to be doomed, no matter how right it is.

If we apply it to a grand scale, the evidence around us is overwhelming. It started right after Lehman and Iceland, spilled over into the bailouts of the “too big to fails” – AIG, GM, went over to Europe with Greece and Cyprus and even in China and her state bailouts.

There is a price to resets – to the reset-er and the reset-ee. These are far reaching economic, social and moral implications that no model can predict.

QE 1, 2 and 3. LTRO. Abenomics. BOE bond buying.

One thing we know about resets, is that we go back to Square One. And Square One’s are the slow starting blocks.

The calls for 2014 are all for a better year (because economists would never say things are going to turn bad – just go and read all the 2013 calls) with qualifiers for a slow pace to be approached with caution.

It has been a bond bull market since 1981 and is unlikely to know any better. Markets will convince themselves that the Taper is acceptable but rates will remain suppressed. It is a matter of analytical conditioning.

10Y UST YIELDChart : 10Y UST yields since 1960.

Yellen has came out to reset the markets to the way they were back in May before Taper talks. Markets have moved ahead 1% in interest rates and expectations higher these days for returns. The 10Y UST yield is trading close to its 5 year average yield of 2.85%, currently at 2.70%.

We have been reset in the bond markets but not in the stock markets. The 5 year average for the S&P 500 is about 1250 and we are at 1798 now, a new record high for all the expectations of higher returns either via stock buy backs or revenue/dividend growth or low interest expense or just lowered expectations of returns (that make low returns look high ?).

S&P 500 5Y ChartChart : S&P 500 5 year chart.

The Big Question For Us

What if the Fed, BoJ, ECB and BOE got it wrong, and the global economies turn pear shaped, for instance, if we have a default out of a BRIC nation or quasi BRIC or if asset prices continue to break through the roof and people tire of the widening gap between the have and have nots or if unemployment persists, then would we continue to doggedly hit the reset button for more stimulus ?

Adding this recent Larry Summers video on the dangers that lie ahead for the US and Europe in a lost decade or two. http://equitablegrowth.org/2013/11/16/759/this-mornings-must-watch-larry-summers-on-the-danger-of-a-japan-like-generation-of-secular-stagnation-here-in-the-north-atlantic#.Uoms6QeYe84.facebook

Mind you, he was on track for the Fed chair position and now he joins in the echo of the rest of the field in their dire warnings. https://tradehaven.net/market/the-great-market-exit-2013-edition-is-bad-news-for-retirees/

There would be a pandemonium if the reset button does not work the next time.


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