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Monday, February 26, 2007


a greenspan torpedo

this page has taken away from its studies of the current state of economics that a recession is looming in the not-too-distant future. postings from the last months pepper the register here. but the equity market, having recovered from a summer slump, has defied that view and headed higher. the reason why remains uncertain as ever, but the word "complacency" has become one of the most often used in financial journals. even as trouble in subprime lending has turned to outright disaster, even as the housing industry -- source of much of the last four years' national economic growth and repository of the national wealth -- has begun to nose over from a spectacular debt-driven run, confidence has remained high.

but today complacency and confidence received a torpedo in the side -- loosed by former fed chairman alan greenspan.

"When you get this far away from a recession invariably forces build up for the next recession, and indeed we are beginning to see that sign," Greenspan said via satellite link to a business conference in Hong Kong. "For example in the U.S., profit margins ... have begun to stabilize, which is an early sign we are in the later stages of a cycle."

"While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 ... with some slowdown," he said.

Greenspan said that while it would be "very precarious" to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

Greenspan also warned that the U.S. budget deficit, which for 2006 fell to $247.7 billion, the lowest in four years, remains a concern.

"The American budget deficit is clearly a very significant concern for all of us that are trying to evaluate both the American economy's immediate future and that of the rest of the world," he said via satellite at the VeryGC Global Business Insights 2007 Conference.

Greenspan also said he has seen no economic spillover effects from the slowdown in the U.S. housing market.

"We are now well into the contraction period and so far we have not had any major, significant spillover effects on the American economy from the contraction in housing," he said.

it may not sound much, but it is a word of severe warning. the spillover from housing that not only greenspan but every financial analyst worth his salt fears is probably on the way. as noted by deep bear bill fleckenstein:

In the dark-matter universe (for a quick primer, click here), risky BBB tranches (subgroups) of home-loan-backed securities have been annihilated, and now the A tranches are weakening. Supposedly, the real pain will start when the higher-rated AA and AAA tranches start to weaken. But really, one won't need access to dark-matter market quotes to know that trouble is at hand. It will be obvious when stocks like Washington Mutual and other housing-finance-related stocks start sinking.

that weakness is quite possibly just getting underway in the aa tranches that make up the 2h06 abx basket. washington mutual remains just off its peak.

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