1) take anything the CBO says with a very large grain of salt. Their prediction record has been abysmal.
2) housing prices are increasing? Maybe the third time since 2009 will be the charm. Tell me who will buy them when the coming generation is graduating with the largest amounts of student debt and the lowest paying jobs we've seen in a decade?
3) trade balance is improving precisely because individuals can no longer afford many of the imported luxuries they used to buy IMO. Hardly bullish.
4) stock mutual fund flows have consistently been negative up until this year. Not sure if this will last through the next correction or not.
5) deflation takes years to culminate. Even Greece is just now experiencing it. Increased Federal debt has made up nearly every penny of consumer deleveraging. All that's hit the economy has been corporate deleveraging if I recall my numbers correctly. Realize that all interests have to do is go back to the 4-5% they were at before the crash and we're spending more than 30% of current government receipts servicing interest. You don't think that will be a drag on th future economy? Spending will have to be cut somewhere or revenues will have to rise or we can keep interest rates artificially low until we've inflated enough of the debt away where that's not a threat (not bullish for the economy either),
1) industrial production increasing isn't a substantial part of the economy anymore. I'd say this is more of a lagging indicator and is a small part of a much much larger economy.
2) debt service is only at multi-decade lows due to extremely low rates. What happens when rates rise with a recovey?
3) bank capital ratios mean nothing in light of the trillions of derivatives that they hold on their books with global counterparties who aren't as strong (European banks leveraged 30-to-1 who have gone double or nothing in buying European sovereign debt).
4) the level that housing construction is rising from is meaningless without the context of the overbuilding that occurred. There are still empty neighborhoods with vacant houses in places where the most overbuilding occurred.
5) housing may be the most affordable it's been, but only for those who can obtain credit. Not the easiest task nowadays.
6) non-farm jobs are being added but they're typically low wage, part time jobs that are replacing the full time jobs. Not bullish for real wages (which have been declining for a decade) which means its not all that bullish for the long-term economy. Granted, some jobs are better than no jobs.
All of this isn't to say that I think Watsa will be right. It's simply saying arguments could very easily be made for the other side. He's been cautious in his approach to protect capital, not necessarily to maximize short term gains. Also, we're seeing unprecedented amounts of global stimulus that aren't sustainable. What happens when trillions in liquidity stops? The velocity of the dollar has continued to slow and has fallen very far from where it began in 2007. This is not the sign of a healthy economy, but is partly why we aren't seeing inflation from printing.
I think Watsa made a very smart choice. He looked at the unprecedented rise in global debt over the last 30 years, asked himself what are the consequences if this goes South, and hedged accordingly. This was a way to protect his business. Could we have profited from it? Sure. Was that the intention? Unlikely. Secondly, you focused on all U.S. statistics but the majority of the deflationary derivatives were written on Europe. Europe does appear to be heading towards a deflationary end game and these may still pay off in the next 5 years.
I have nothing to add but do I count as an upcoming generation? I graduated in 2011 and I bought a house in 2012 and now I am trying to buy another. ;D This is in the SF Bay area too so no 200k house for me.
Plenty of people still have money.
As for inflation or deflation, I have no clue!
Plenty of people may have money but not enough people are working to sustain it IMO. And at this rate and with these policies in place and Obamacare ready to really kick in, I find it highly unlikely employment will pick up significantly enough to change the underlying problem. I very well may be proven wrong but this sure feels like a game of musical chairs to me. The party is great until the music stops. Watsa has reserved a chair for us shareholders for that moment....should it come. Right or wrong, I agree with that bet.
