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 FOMC 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. And coming back home, the Obama $1.5 trillion tax-hike plan, and his veto threat for any deficit package that doesn't include big tax hikes on successful earners, investors and businesses, is another sword of Damocles hanging over the economy and the stock market. Also, the U.S. banking system is flush with cash, as is corporate America. And for better or worse, interest rates in the Treasury market are negative (easy money). Business profits will slow significantly, but are still likely to rise a bit. And with oil dropping to about $80, a price shock that was a key slowdown factor is going away. Housing is still in the tank, and consumer spending looks very iffy. And we had zero jobs and zero retail sales in August -- two very bad signs. On the other hand, exports and business investment are still rising.
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