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Buffett: Recession Will Last Far Longer And Be Far Deeper Than People Believe

May 26, 2008 11:41 AM

bullfrog.jpgI have mentioned more times than I can count that I believe this recession is likely to be severe or at the very least will be very, very long. The reason I have mentioned is this is a fundamental issue of consumers not having the cash flow to either service existing debt or the real income growth to increase spending going forward. I firmly believe the only way for an economy to prosper long term is for real incomes to rise. This theory has proved correct for 70 years and unfortunately will prove correct to the downside.

This weekend, Buffett reiterated that he believes people are wrong and that recession will be more severe than most people realize and last far longer. Sounds very similar to what I have been saying for over 6 months.

The more relevant issue is, will the market follow suit? This is a far more difficult question. There are two possibilities as I see it. We will either have a severe and obvious recession and the market will go far, far lower and the direction will be exceptionally clear. Or the economy will continue to get “bullfrogged” and the markets will rise and fall sharply on even the slightest news as hope springs eternal, but will always prove to be false hope.

What I mean by being “bullfrogged” is an analogy to what has happened to our economy for the last 10 plus years, perhaps longer. If you drop a bullfrog in boiling water, it will scream and attempt to get out. But if you place it in water and slowly turn up the heat, it will die and never make a sound or notice what is happening. This is exactly what China has been doing to us for 10 plus years - slowly eroding our economy - but not fast enough for people to take notice and make noise. We are slowly but surely being “bullfrogged”.  This process has resulted in real earnings declining and will cause issues for many, many years unless we correct the problem, and soon.

Written by Tom@StockBlade.com · Filed Under General Investing/Trading Commentary 

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