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As equities continue to "melt up," boosted by continued signs that the economy likely is growing at a 3-4% rate and not at risk of another recession, Treasury yields remain extremely low, priced to a lot of bad news that has yet to materialize. The market's apparent belief that the Fed can keep interest rates at extremely low levels for years to come, despite the fact that the economy is doing Ok, is being challenged. In my view the resolution is going to come sooner or later in the form of sharply higher Treasury yields. Higher Treasury yields at this point would be unmitigated good news for the economy, but of course very bad news for the Treasury market.


The recently-released household balance sheet data for the Q4/11 didn't show much change from previous reports, mainly because the stock market was relatively flat last year. But with stocks up almost 10% so far this year, household financial assets have probably risen by almost $3 trillion, boosting net worth to some $61 trillion, only $4 trillion shy of the 2006 highs.


As of Q3/11, household financial burdens had fallen significantly since their pre-recession highs. This is largely due to deleveraging, rising incomes, and lower borrowing costs. Households have materially improved their financial health, making the economy more resilient to possible future shocks.


The Eurozone crisis is slowly fading away, as reflected in this chart which shows the ratio of the Vix index to the 10-yr Treasury yield. Today's record-setting Greek debt restructuring—which forced bondholders to accept a 70% writedown—was so widely anticipated that markets received the news with total aplomb. I'm reminded of my assertion last summer that the eventual resolution of the Eurozone sovereign debt crisis would end up being a non-event similar to Los Angeles' "Carmageddon."


This chart of the dollar's inflation-adjusted value against other currencies is arguably the best measure of the dollar's relative strength available. As of the end of January, the dollar was only only slightly higher than its all-time lows. Dollar weakness is also reflected in strong gold and commodity prices. A weak dollar may be helping U.S. exports, but it is also contributing to inflation, and it reflects genuine concerns in the market about the long-term outlook for the U.S. economy. If the Fed is at all concerned about the long-term health and purchasing power of the dollar, then today's weak dollar is an indicator that there is essentially no more room for quantitative easing. Moreover, there is no more need for further quantitative easing, given the many signs that the economy is making forward progress.

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