![]() If what we at RHAM expect should happen, and the deterioration in the US housing market continues, then Goldilocks is dead, leaving only scenario two or three. It presumes that the slowdown in the US housing market will only have a limited impact upon the US economy. Such an outcome would allow the eurozone and Japan to continue to grow as would many of the emerging markets. ![]() His three scenarios for the US economy for 2007 are a soft landing a hard landing, economic growth between 0% and 1% or recession.Ī soft landing he explains is the scenario on which the world's central banks and governments have based their current policies and would see the US growth falling to an annual rate of about 2%. Wolfgang Mnchau wrote in the Financial Times on 3rd January under the headline "The good the bad and the ugly scenarios for the year ahead". (For more on this, see: The US housing market and domino economics.) It's almost impossible to insulate one falling domino from its neighbours. When one domino, such as the housing market falls, sadly other dominos in close proximity, are hit and in turn fall which, in turn, hits the next domino, etc., etc. The real world isn't like that because there are things called dominos. What an enticing argument, that two such key elements of the US economy can be ring-fenced and the rest of the economy continue unscathed. It is argued, therefore, that if only 9% of the economy is in recession it need not be a source of alarm because the other 91% is OK. ![]() It has been calculated that the US housing market and auto market, both of which are in recession, represent about 9% of American GDP. US soft landing: will the dominos continue to fall? That is the soft landing they talk about. The Goldilocks concept however, asks us to believe that an economy or a market can go from being too dear or too cheap to being just right not too dear, not too cheap and stay there. Economies also go from boom to bust and back again. Markets that have become too cheap after time become attractive and are bought and bought until they become too dear again, and so it goes on. Markets become too dear, then eventually fail and continue to fail until they become too cheap. The history of investment markets is that they swing from one extreme to another.
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