Baum on Money: Doubling Down on Uncertainty
Good morning, all. Here's a look at what I'm reading to start my day.
Bad news sometimes is bad news.
The U.S. stock market was elated last week when the Federal Reserve decided to stand pat with its bond-buying program. Bad news for the economy meant good news for the stock market. There's a downside: An economy too weak to stand on its own two feet may be too weak to produce robust profit growth. At 14.94, the S&P 500 Index is at its most expensive on a forward price-earnings basis since 2010, according to Reuters. The stock market may actually start taking a no-confidence vote from the Fed at face value.
A lesson in hostage-taking.
Don't take a hostage you can't shoot, warns former Republican Senator Judd Greg, referring to the debt ceiling. The debt ceiling "will have to be increased not because it's a good idea but because it's the only idea," he writes in an op-ed for The Hill. Most Americans aren't looking for ideological purity. They want answers to everyday problems. Not raising the debt ceiling would produce a bad outcome for everyone: the Republican Party, its members of Congress and the American people.
More on the uncertainty principle.
Get ready for all the talk about uncertainty over a possible government shutdown and debt default. In my mind, uncertainty is overrated, over-hyped and misused. Why do I say that? The future is always uncertain. It's just that sometimes uncertainty is tinged with pessimism, sometimes with optimism (think March 2000/Nasdaq 5,000). A better term would be a mess (for a shutdown) or a catastrophe (debt default). For what it's worth, the New York Times' Annie Lowry walks us through the paces, explains the risks and estimates the actual cost in dollar terms.
That forward guidance thing didn't work out so well for the Fed, which last week defied tapering expectations of its own making. So what's a central bank to do? "The Federal Reserve is leaning toward an explicit commitment to keep interest rates at rock-bottom levels, as long as inflation remains low," writes Ylan Q. Mui in the Washington Post. That would be in addition to the pledge not to raise rates until unemployment falls below 6.5 percent and projected inflation rises above 2.5 percent. It would also be just plain silly, like doubling down on a losing bet.
Searching for a bottom.
Bill McBride at Calculated Risk has been tracking various measures of housing inventory in an effort to declare a bottom. He sees signs that the inventory of unsold homes bottomed earlier this year, which is important because a dearth of homes for sale has boosted prices. Prices have been rising rapidly in areas of the country that saw the biggest declines during the bust. Wouldn't it be nice to return to a pre-1997 state of affairs where U.S. housing prices rose in line with the CPI.
(Caroline Baum is a Bloomberg View columnist. Follow her on Twitter.)