You Can't Have Your Cake & Eat It Too

This article puts in persepctive the fantasy of the goldilocks economy or 'soft landing' scernario. The soft landing argument goes something like this, raise interest rates to slow the economy and keep inflation in check but not too far to push the economy into receession. Key to this scenario playing out is that housing doesn't fall off a cliff- and so far it hasn't however signs are looming that it might just be a matter of time. As the article suggests delinquencies and foreclosures are on the rise, banks are applying stricter lending policies whilst upping their provisions for doubtful debts.

Durable Goods orders fell almost 8% in January, maybe its a little early to tell if this is a knock on effect from the housing sector but it certainly can't be ignored. 4Q06 GDP growth was revised down to 2.2% whilst inflation in January has not subsided and actually core inflation showed its highest rate of growth in seven months outside of the Fed's preferred range of 1 - 2%.

As the article suggests if the Fed tries to reign in growth in the money supply to tame inflation short term interest rates will rise putting further pressure on housing. If they do nothing the Fed looks like they are dropping the ball on inflation. The Goldilocks economy could easily transform into the 3 bears economy. The 3 bears being a collapse in housing, slowing growth and rising inflation. Just the right envirnoment for the equities bear to come out of hibernation.