Warren Buffet expects Recession Longer, Deeper Than Most Think.

Warren Buffett, the world’s richest person, said Monday that the U.S. economy is in a recession that will be more severe than most people expect. “This is not a field of specialty for me, but my general feeling is that the recession will be longer and deeper than most people think,” Buffett said. “This will not be short and shallow.

“I think consumers are feeling gas and food prices,” he added, “and not feeling they’ve got a lot of money for other things.”

I agree with Buffett and made the Case for an “L” Shaped Recession on April 8th.

What Morgan Stanley thinks depends on who you talk to. Morgan Stanley analysts see things much differently than John Mack, Morgan Stanley’s CEO. Please consider Morgan Stanley analysts see big bank woes just beginning.

Morgan Stanley (MS) analysts on Monday told clients to “sell the rally” in financial stocks, slashing forecasts for big bank earnings and warning that the current credit crunch is only just beginning.

In aggregate, Morgan Stanley reduced its estimates for 2008 large bank earnings by $17 billion, or 26 percent, and reduced 2009 forecasts by $13 billion, or 15 percent. The analysts expect higher loan losses and expenses, offset by higher net interest income, though profits could fall further still if the Federal Reserve stops lowering interest rates.

“More capital hikes and dividend cuts (are) coming as our credit deteriorates and forward earnings decline,” analysts led by Betsy Graseck wrote in a report. “We think we are only in the third inning of the credit cycle and expect this credit cycle will be worse than (the slump in) 1990-91.”

Flashback April 8, 2008

Morgan Stanley’s Mack Expects Credit Crisis to Last A Couple of Quarters Longer.

The collapse of the subprime market in the U.S. has reached its eighth inning or “maybe top of the ninth,” Mack said today before the company’s annual meeting, referring to the final period of a baseball game. Europe is in the sixth inning and the market for securities backed by commercial mortgages is “probably in the fifth,” he said.

My Comment: I doubt the subprime mess is in the 9th inning but it is well established. However, the Alt-A crisis, the commercial real estate crisis, the prime loan crisis, and the credit card crisis are only just beginning. Happy days are not just around the corner.

Former Federal Reserve Chairman Alan Greenspan, speaking in Tokyo today, said the drop in U.S. home prices will probably end “well before” early next year as the number of houses on the market diminishes, aiding an economic rebound.

“It will not be until early 2009 that we will get close to having eliminated most of this home inventory”, Greenspan said at a conference sponsored by Deutsche Bank AG and co-hosted by Bloomberg LP. “But it is very likely that home prices will stabilize well before that.”

My Comment: Anyone who thinks home inventory will be worked off by early 2009 is either delusional or reporting from another planet.

Economic Outlook

  • Buffett is calling for a severe recession.
  • Morgan Stanley analysts call for more capital raising and dividend cuts.
  • Morgan Stanley CEO John Mack thinks the subprime crisis is in the 8th or 9th inning and commercial mortgages are in the 5th inning.
  • Greenspan says the inventory of homes will be worked off by early 2009 and home prices will rebound in advance.

The top two opinions coincide with mine.

Mike “Mish” Shedlock
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