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Swap spreads and implied volatility are subsiding

The first chart shows 2-yr swap spreads, and the second shows the Vix index. Both are good measures of the level of fear and uncertainty plaguing the markets. From the looks of things, the negative impact of the Euro debt crisis on the U.S. economy is fading. Not surprisingly, stocks (below) appear to be finding a bid. Even European stocks are doing better on the margin (last chart). I continue to believe that the Euro debt crisis, while not inconsiderable, is not the end of the world by any stretch, and the market may be coming around to agree with that view. The important thing is that it is not degenerating into widespread uncertainty, as happened with the subprime mortgage crisis. If the problem is limited to writing down the value of Greek debt (and possibly that of a few other countries), then the global bond market is plenty big enough to absorb the hit. Relatively large debt writedowns have occurred with some frequency throughout history (I'm reminded of the Latin debt crisis in the early 1980s), yet economic disaster did not necessarily follow.

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