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Why Warren Buffett Is Wrong About the “Very Low” Risk of Recession

Aaron Task
Editor in Chief
Daily Ticker

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With the U.S. economy clearly slowing and Europe on the brink of melting down, fears of another recession is rising. If the Economic Cycle Research Institute is right, the U.S. economy will definitively be in recession by the middle of the year, if it's not already there. (See: ECRI's Lakshman Achuthan: No, I'm Not Wrong — We're Still Headed For Recession)

In an attempt, perhaps, to quell such concerns, Warren Buffett declared last night the odds of a recession are "very low" -- barring a major "spill over" from Europe's crisis, of course.

David Levy, chairman of the Jerome Levy Forecasting Center isn't as negative as the folks at ECRI but he thinks Buffett is being too cavalier about the risks facing the economy.

"Warren Buffett is probably greatest value investor maybe in U.S. history but I have to differ with him on analyzing what's going on with the economy," Levy says. "We're not in a typical period where the usual cyclical rules apply."

For some time now, Levy has been warning about the deflationary forces of debt deleveraging, which he has dubbed a "Contained Depression."

As a result, "the next couple of years is a high risk, unusual period where we're going to have some moderately bad shocks and recession is a much higher probability," he says, echoing Mohamed El-Erian's warning about the rising risk of "fat-tail" events.

In addition to the deleveraging process here, the risk of Europe's banking system coming unglued, the potential for the U.S. to go over a 'fiscal cliff' later this year and his concerns that Chinese authorities can continue to "fine tune" their economy means "the chances of things going wrong" are much higher than in a normal business cycle, Levy says. "The present economy not only looks scary, but actually provides plenty of legitimate reasons to be seriously scared."

While the market seems to be in a "what me worry?" mode Wednesday morning, Levy remains bullish on Treasuries, forecasting the 10-year yield will ultimately fall below 1%.

"Keep your powder dry," he says. "We are going to see some periods of great long-term 'risk on' investing opportunities but this is not the time. This is a time to be careful."

Aaron Task is the host of The Daily Ticker. You can follow him on Twitter at @aarontask or email him at altask@yahoo.com