Goldilocks and the Three Bears

Don’t worry; I am not going to bore you with the details of the traditional children’s story. Rather, I have my own version the tale.

First we have Goldilocks, who in our story is the economy. Like the traditional Goldilocks, our economy functions best when things are just right. Not too hot, not too cold. Not too much growth to overheat the economy, and not too much economic slowing to cause a recession.

Well, the three bears here in my version of the story are the following: Energy prices; inflation and its corollary, interest rates; and housing. Let’s take a quick look at each of these bears.

The first bear is energy. Now, we all know what’s happened to energy prices over the past several months. Oil and gas prices have hit record highs, with oil consistently hitting the $70-a-barrel mark over much of the past month.

Now, over the past week of so energy markets have see-sawed from day to day with each new diplomatic development with Iran. But there is no doubt that high energy prices are weighing on Goldilocks, and that further pressure from the energy bear could knock the porridge out of her lap.

Inflation, and its corollary of high interest rates, is another bear waiting to disrupt the economy’s equilibrium. So far Fed chief Ben Bernanke hasn’t really done a good job of hiding his feelings on the fate of interest rates. A few over-interpreted comments these past few months have caused a lot of turmoil in the financial markets, and right now Wall Street just doesn’t understand how to read the mind of the new Fed honcho.

I don’t know if the Fed will continue raising rates over these next few months, but it certainly seems as though we will get at least one or more quarter-point hikes before the central bank is through. Will that prove to be too much for this economy to handle? Possibly, and an overshooting by the Fed could force the Goldilocks economy out of her comfortable bed.

The last bear that Goldilocks has to deal with right now is the housing market. Much has been made over the past couple of years about the mass disruption to the economy that could result from a busted housing market bubble. Until recently, however, signs of a breakdown in the housing market were only vaguely present. Now, the signs are starting to become increasingly obvious.

In recent days, the Housing Sector Index (composed of stocks that make up the industry) has declined to new 52-week lows. One of the index’s key components, American Standard Co., recently reported a 43% decline in new sales. That, my friends, is an implosion, and more reports like this from other key sector companies will surely provide us with incontrovertible evidence that the housing bubble is losing air at a rate rapid enough to blow Goldilocks off the porch.

Of course, we’ll be keeping a keen eye on our version of Goldilocks and her three economic bears, because unlike the traditional children’s story, our tale literally changes day to day.