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Fear has been trampled by panic

As this chart of 10-yr Treasury yields and the year over year change in Core CPI suggests, the Treasury market is zigging when it should be zagging. Yields have plunged on fears of a double-dip recession, which in turn are being driven by fears of a financial market meltdown in Europe. The fears embodied in today's 2.0% 10-yr Treasury yields eclipse even those that prevailed at the end of 2008 when markets were convinced that The End of the World As We Know It was just around the corner.

While there are certainly many things to worry about, one of which is the half-trillion dollar run on European banks that I discussed a few days ago, I think that fear has been trampled by panic these past few weeks. There has been no deterioration in the fundamentals of the U.S. economy. Things are far from perfect, to be sure, since we are suffering from monetary policy which is too easy and fiscal policy which is smothering the private sector, the combination of which has resuscitated a moderate form of the 1970s stagflation. But even then it was not the end of the world, as the economy managed to grow 3.3% per year on average during that otherwise-awful decade.

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