Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its “Operation Twist.” The market correctly perceives that the central bank’s plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn’t QE3, that’s for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed’s sterilized asset swap actually tightened financial markets. The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference. But the real issue is the new Federal Open Market Committee forecast: “There are significant downside risks to the economic outlook, including strains in global financial markets.” That was the killer statement.
So let me repeat: We are on the front end of a recession. The profits picture is very much in doubt. More Obamanomics tax hikes are in the air. Europe is unsolved. U.S. finances are a mess. All this is being discounted by slumping stocks.
