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Townhall
Finance...
A
Twisted Outlook
By Larry Kudlow
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.
Corporate
credit risk spreads have
been widening, which is a negative for the profits picture, as
economist
Michael Darda has pointed out. Profits are the mother’s milk of stocks.
And the
European funding markets have tightened substantially, as their
much-wider
financial-stress spreads all indicate.
Indeed,
the European banking and
sovereign-debt crisis is still a shoe waiting to fall. Greece may get
bailed
out again in a couple of weeks. But so far, the European Union’s
authorities
have not agreed on a bailout or bankruptcy plan to backstop
debt-restructurings, or to recapitalize banks in the wake of those
default
restructurings.
Meanwhile,
September purchasing
managers’ indexes for European manufacturing and services teeter on the
brink
of recession. In Asia, Hong Kong shipping volumes are way down, and
China’s PMI
came in weak. The global transportation-delivery powerhouse FedEx just
lowered
its worldwide earnings and sales outlook.
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.
Read
the rest of the column at
Townhall Finance
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