ICUMD

Thanks rb for the detailed explanation. Its an interesting time - on the surface it seems to be business as usual as you say. However, the unprecedented cycle of debt accumulation has led us into an uncertain financial period. There are many schools of thought (I myself believe the Kondratieff cycle) that an unraveling of this debt may lead to a liquidity crisis. Certainly, there is a general unease that is reflected among many conservative investors. Savers are being punished with low interest rates, yet to invest potentially places risk into over inflated investments with historically high PE values. Its a damned if you do, damned if you don't scenario, with no resolution in sight. I think this situation could go on for many years - especially with Governments sitting ready to 'bail out' financial distress at its earliest signs and with their 'Too big to fail' philosophy, using tax payer money. I'm skeptical about conventional economic theory applying in extreme circumstances - such as the extreme debt loads we are seeing, and unprecedented government intervention. Of course, I'm not an expert in any of this so can only offer a personal observation.

FIH.U - biggest holding. Mostly invested - access to large Line of credit in case of correction. Speculative holdings: FRO, BABA, TCEHY. Googl. IFFNY.

AD - what are the determinants of AD? I would think AD is determined by access to credit. The general public is essentially spending their future income to make luxury purchases today. Over time, I would expect to see AD decline as access to debt becomes more difficult. If this is indeed the case, then what would be the leading indicators of such a scenario? a. Declining GDP? b. Slowing money velocity? c. Increasing defaults- credit card, home, auto. d. Rising interest rates? e. Declining Asset prices - ie. homes. In my mind, there is no question that this will happen as the debt burden continues to grow and the interest payments consume increasingly more income. This is inevitable. The question is the time line. I understand that governments and the fed will try and ease sudden movements, but ultimately - the debt has to be reduced and to do this with a debt fueled AD system seems to be impossible. Also, much of the increase in debt has been to fund over inflated asset prices rather than to improve consumption. As such, there is very little bang to the buck - regarding debt improving AD. Hence the loss of effectiveness of each additional round of QE.

Sure - I agree that national debts (alongside personal debts) also are at risk here. The interesting thing is that there is collusion between other nations to prop up debt burdened countries to avoid 'contagion' . We've seen this with Greece, who knows whats going on behind the scenes with Italy and Spain. And you mention how US and China are helping out Japan. The global coordination of 'inflation' and debt support makes it difficult to know where the chips will fall in my mind. I guess it depends on who blinks first.

Re #4: This scenario is possible, but I think improbable based on human behavior. For people to stop borrowing - they would need to give up on their lifestyle and make sacrifices - perhaps going from a BMW to a used car. Downsizing homes etc. I think most people will have a difficult time with this without defaulting. Hence boom-bust cycles in the economy rather than gradual waves of acceleration and deceleration. Re #5: I agree with Cameron - that QE and low interest rates are funding demand presently. Without this debt creation, I think there will be major economic contraction - ie. deflation. I'm not sure business investments will be able to compensate.

I don't disagree with you at all. QE is essentially masking a deflationary period, each round becoming less effective. However, I think what's happening in Japan is arguable a bit different than North America. Japan I feel is a more closed and protected economy with a different culture where people will not default on their debts. Also, I believe they have multi generational mortgages. Hence the long standing stagnation/deflation ongoing. In N. America/Europe, I think as deflation occurs and for example we see a correction in house prices, people will end up owing more than the underlying assets are worth. Once people go upside down, I think people will simply hand back the keys of their house or car to the bank. As these defaults start, their is a risk of stampede to the door. Interest rates may rise due to default risk increasing. The next step is for the printing money and inflation. How long this takes to play out is anybody's guess. We may in fact go through several more rounds of QE efforts and interest rate reductions.

Source? Based on my personal observations - in 2002 - when Condo 1 bedroom rent prices were $1600/mo and 2017 rental prices where I can get no more than $1700/mo. today. Of course I cannot predict the future, but I don't see rental prices increasing anytime soon. Inventory has at least tripled I would say since 2002. Wages haven't increased significantly. Ergo, the frothiness in condo prices I think is due to cheap credit. Convince me otherwise...

The CDN realestate market will correct, given the proper conditions. It is not unlike the stock market, both of which are propelled by 'investors' utilizing low interest rates to borrow. In 2002, I purchased a 780 sq ft Toronto Condo for 200K (to rent was $1600/mo). This was less than its new construction price of ~350K in 1988. The price of this condo continues to rise and similar units are listed today at ~420K (to rent, still only ~1700/mo.). Maintenance fees increased from ~$325/mo to $700/mo over the same time. Interestingly, during the financial crisis of 2008, prices came down suddenly to about $250K, then continued their upward trajectory afterwards. New condos command an even higher premium of ~ $400 - 500K for 550 sq ft. Things that may cause a correction: 1. Increase in interest rates. (certainly). 2. Tighter regulation on mortgages. 3. Foreign buyer taxes. 4. Creditors get tapped out - leading to higher default rates. When will this happen? It should have happened 5 years ago. Aside from this, it could happen at any time I suspect, but it WILL happen. To have rent/ purchase price disparity of this sort with ongoing maintenance fee and tax increases means that something has to give. I don't think rent prices will increase which leaves a deflation of house prices. Wages have not increased significantly during this time.

My question is how will this debt unwind itself? Some possible scenarios: 1. Collapse of Housing Bubble: ex. CDN housing. Leading to Bank defaults, rising interbank lending rates and finally consumer interest rates. 2. Credit Card Defaults: rising credit card rates, leading to contagion of personal default rates and economic slowdown though decreased consumption. 3. Rising Inflation: currency devaluation followed by demands for rising wages What I'm not sure is how globalization will help to contain some of these bubbles.

Fantastic - thanks very much.

Does anyone know of where it is possible to obtain credit default statistics for home and auto loans? Thanks in advance!

I agree with all rationale in this thread. Everything is overpriced- classic cars, homes, stocks. The common issue I believe is low Interest Rates. With debt so cheap, everything is in a bubble, including Government Debt. The question remains when will the debt bubble pop and what will be the catalyst for this? If governments continue to lower interest rates when niche bubbles (ex. housing market) appear to destabilize, the action may further propel debt to higher levels. If and when the debt bubble pops, cash will be king. I'm just not sure the governments will be passive and allow that to happen as it may very well undermine the financial system. I don't know where inflation factors into all of this, but at some point, I think it will have to rear its head. What's most relevant is wage inflation - currently in Canada there is a move to increase minimum wage to $15/hr - this maybe the tip of the iceburg. Happy to hear other views that support or refute my thoughts.

Re BIAL Land: See Chairman's Letter 2017 http://www.fairfaxindia.ca/investors/Chairmans-Letters-to-Shareholders/default.aspx Scroll down to the section on BIAL. I highly recommend reading the whole of the Chairman's letter to understand the direction of the company.

I think the argument gets compelling if you believe the following: 1. Prem Watsa's track record and management. 2. Middle class growth in India > 20% (which will vastly outpace NA) 3. Ability to select early, but already highly profitable companies. 4. Disciplined approach: backing away from deals when valuation is unrealistic - ie. Catholic Syrian Bank. 5. Highly respected in India - people seem to want to do business with them (and give up substantial equity to do so). 6. Diversification - holds many companies and the list is growing, diversity of industry. 7. Powerhouse Gems: IIFL, BIAL (incl 460 Ac of valuable land), and possibly now Infibeam. 8. Confidence/ collaboration of investment powerhouses: OMERS and others. I do not believe that it is possible to accurately value this company at this early stage. OTH, I believe that this company is far more valuable than its share price currently. Yes I am very bullish. Yes, my valuation is very subjective an not necessarily based objective valuation. Hopefully the rationale is sound. In my experience, to be successful in investing you need a couple of home runs in a field of avg performers. I think FIH.U magnifies that potential by levering the above 8 points through equity selection in India, where the market is still very young. If FIH.U can manage a few home runs - the returns are potentially astounding. I believe they are already showing much promise. The risk of waiting on this is like letting the horse leave the gate then trying to mount it and win the race.... While there is nothing wrong with that, I've opted to get on now ::)

Supply and demand ::) Why do you think it went up?

I think this is a case of a highly undervalued stock realizing its potential. It holds several very valuable and profitable companies, including nearly a 50% stake in BIAL. EPS is growing, trading at low PE multiples and its aggressively expanding in a developing country. Many already invested are wondering why its not going up faster. ;D

Great earnings release in an otherwise down cdn market. Seems like they know what their doing. ☺

Wow - just saw the chart on IIFL - what a rise! FIH in at under 200 inr/share. IIFL at 500 on an exponential growth curve.

Some great points - its true, its hard to fully understand the value of the FIH holdings. I suppose the proof will be in the performance over the coming quarters. Still, one of my more confident holdings. R.

I didn't attend the AGM but also would be very interested in thoughts. I've so far been pleased with the FIH.U performance this year. Certainly more so than FFH. I also feel that FIH.U may confer better protection in a stock market downturn than FFH. Exciting times :) R.

Some interesting points about FFH's portfolio. Tracking Prem Watsa's Fairfax Financial Holdings Portfolio - Q4 2016 Update https://seekingalpha.com/article/4047513?source=ansh

Core insurance business seems sound. Perhaps with the Allied World purchase, they are going back to their 'roots' and to doing what they do best. I would be leary of any further non insurance/banking investments with this track record. A drop in stock price = accumulation opportunity???

Certainly very valid points. I've taken out a large position in FIH.U (Avg about 11.50) and a smaller one in FFH which I hope to build over time. Perhaps I am speculating and highly hopeful on the upside. The quarterly revenue for FIH.U was quite impressive and I feel it is trading at low multiples. Given that book value is about $10, it is trading at or very close to book value minimizing downside risk. As far as I can tell, it is also carrying very little debt (although I am not certain of this). It will be interesting to see if FIH.U can match its parent's historic returns.

Hi - looking to get opinions on the prospects of FFH vs FIH.U. Which is currently the better investment over the long run? Which has more risk? My thoughts: I like the new acquisitions of FIH.U. They seem to be solid industries in India, which may have lower risk than many of the investment holdings of FFH. Although, some have tremendous debt associated with them (ex. BIAL). I am unclear about the debt reduction approaches Fairfax will employ to mitigate these risks. Also, India I think will enjoy a faster growth rate than many of the businesses of FFH. From a valuation perspective, although it is still early, FIH.U seems to be undervalued. On the other hand, I like the insurance float of FFH which is obviously absent in FIH.U. From a valuation perspective, FFH may be a bit overvalued. Would be interested in opinions! Cheers.

Hi there. New to this board. I am interested in learning about peoples perspectives on the safety of FFH is a market correction. Give the high Shiller PE ratio, I think we are at risk of a significant one. How does one value the current hedging book of FFH vs holding Cash in one's account?