I did what Peter did but hours ago, and I had the same problem you did.
So I've been messing with it and writing a bug report for Peter – all to NO avail.
His macro works.
He didn't forget to change Default Clipboard to System Clipboard.
Somehow my mind likes to synonymize those two (and I’m not the only one).
Default Clipboard is a user-named clipboard and has NOTHING to do with Keyboard Maestro defaults. (Mistaken.)
Edit 2016/03/04 18:20 CST:
Keyboard Maestro creates a named clipboard called Default Clipboard that is DIFFERENT than the System Clipboard.
This is very confusing and has caused many people problems over time.
It is likely to disappear in a future update to Keyboard Maestro (post version 7.0.3).