Diane Francis, Financial Post Published: Tuesday, March 10, 2009
The United States has Warren Buffett, the Sage of Omaha; Canada has Prem Watsa, the Sage of Toronto.
On Sunday, Buffett gave a very scary interview on U. S. television about how the economy nearly collapsed in September. He said the world is going through an "economic Pearl Harbor" that will take years to turn around only to end in serious inflation problems. Printing money to stimulate and rescue basket cases will result in potentially runaway inflation.
It is surprising people still seek Buffett's opinions given his recent track record and his proclivity to be inappropriately certain. Buffett and his Berkshire Hathaway Inc. were also casualties of this irrational tax-cut, credit bubble exuberance.
Berkshire sustained a dramatic drop in profitability in 2008 because he did not see it coming and, after it struck, still did not get it. He bought blue-chip stocks at what he thought was the bottom (it wasn't) then also took positions in troubled companies. Worse yet, he took a lot of other investors down with him by publicly encouraging people to buy U. S. blue-chip stocks prematurely in November.
By contrast, Watsa and his Fairfax Financial Holdings Inc., have made a fortune for shareholders. Even so, he remains circumspect about everything from the markets to the future as a whole.
In several recent interviews with me, Watsa, Fairfax's chairman and CEO, struck all the right notes by cautioning people about uncertainty, volatile markets and the cloudy future. Fairfax is the largest investor (with a 22.41% stake at the end of last year), apart from the Asper family, in Canwest Global Communications Corp., publisher of the National Post.
"The bottom?" responded Watsa to my question in an interview a few days ago. "Stock prices are down 50%, credit spreads are very wide in the U. S. and Obama has come up with a very significant stimulus plan. The Treasury Secretary has a very thoughtful way of handling the banks and yet no one believes it's the bottom. Today, we've some of the biggest actions by the U. S. government in terms of stimulus, interest rates at zero and nobody believes it'll have any impact."
Fairfax saw the catastrophe coming, took controversial short and hedge positions and made record earnings in 2008. "We still have to worry about deflation," said Watsa, "because remember, while Obama and the U. S. government are spending this money, the rest of the economy -- businesses and individuals --are de-leveraging.
"Demand is the issue and what we have to worry about. Also, remember that in the last five years, half of the increase in consumer spending in the U. S. was home-equity loans borrowed against appreciation of homes. And that's all gone...
"[Inflation is] a potential problem in the future, but right now the problem is demand, excess capacity all over the place. It will be a worry a few years from now but not currently."
Watsa was cautiously optimistic. "We have been negative on common stocks for four or five years, and hedged our positions. But we stopped hedging in December and have bought long-term valuable, big companies with good, tested management such as Johnson & Johnson, Dell Computers, Kraft Foods, Wells Fargo, Intel and others."
Psychology will play a large role in future. "It's a question of pessimism, which means it's not a bad time to buy for the long term. We could have four or five years of difficult times. We really don't know," he said.
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