'Groundhog Day'

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Includes: GREK
by: Bill Kort

My title references the 1993, Bill Murray movie of the same name, where Murray plays an egotistical, obnoxious weatherman assigned to cover Punxsutawney Phil's annual winter trip out of his burrow … very demeaning stuff. The problem for Murray's character, Phil Connor (how ironic, another Phil) is that he becomes trapped in a time warp. Each morning he wakens to another Groundhog Day in Punxsutawney, PA.

I am beginning to feel that I am in some sort of time warp. Every morning I awaken to the financial media worrying about the impending (potential disaster) Fed move to begin to raise (i.e. normalize) interest rates; and, of course, the Greek tragedy (a.k.a. "the Grexit"). Will this circle ever be broken?

A few Words on The Dreaded Interest Rate Lift-OFF and The "Grexit"

Regarding Lift-Off, I am pretty sure that when the Fed moves to begin normalizing interest rates (ever-so -slowly) it will not be traumatic. Instead, it will be liberating, as the uncertainty as to when and the market effect of its action will be lifted, equating to a better environment for stocks. We discussed this at length in our post "The Great Interest Rate Mystery-Solved."

As to a potential Greek default and exit from the Eurozone (Grexit), let me see. This is probably the most anticipated, best telegraphed global economic problem of the past decade. Ergo, as Greece is a tiny economic entity and most banks and fiduciaries have had plenty of time to analyze their issues, only the most hearty of risk-takers would experience the brunt of this hit. In other words, a Greek default does not appear to be a global systemic issue.

There is an argument that a "Grexit" might give other Euro weak sisters (Italy, Spain and Portugal) license to pursue the same course. I don't buy this, because the Greek people will have to endure significant pain in the process, which would be a deterrent to others, whose economies may be struggling, but not nearly as badly as Greece's economy. Also, if contagion were an issue, why are the sovereign credits of Italy, Spain and Portugal not forced to pay a lot more for money these days? Except for Portugal, which is a slight outlier below, US, Spanish and Italian ten-year debt yield pretty much in line … no panic here, except these low rates would still indicate an extreme preference for the safety of principle. This is not the kind of market psyche you normally see at bubble tops (at least not in equities, maybe fixed income).

Sovereign 10-year rates

US 2.24%

Spain 2.30%

Italy 2.28%

Portugal 3.03%

Will my Groundhog Day ever end?

My sense is that it will. And, it will be resolved to the upside. Things are just not that bad out there.

What do you think?