The scuttlebutt for the late-day sell-off in the stock market yesterday, and the negative carryover today (thus far), is because Fed “dove” Janet Yellen was not vociferous enough in her support of QE2. This is what the equity market is hanging its hat on, which is quite remarkable and more than just a tad disturbing. It does beg the question what a 2% yield on the 10-year note will accomplish that a current 2.35% yield cannot. Remember this from the first $1.7 trillion of QE1 — the Fed can print the money, but it can’t control where it goes. If households are deleveraging, corporations are busy squirreling away the nuts for winter and banks hoarding excess reserves for whatever reason, then we could be sitting here six months from now still debating double-dip economic risks. Goldman Sachs only has two economic scenarios — “very bad” (outright recession) or “fairly bad” (sub-2% growth that leads to a further rise in the unemployment rate).
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