TwoCitiesCapital

I think you're looking at a very limited time frame. Japan has been printing money with the encouragement of people like Bernanke and Krugman since the 90s. They just recently announced QE8 (or was it QE9). Has the currency "collapsed" over the past 20 years? No. It's down maybe 20% in the last few months, but it's up a significant amount over the past 20 years if I'm not mistaken. The stock market has also rallied by a similar amount, but still remains at less then 1/3 of its peak value even after the recent rally. If a similar situation does happen in the U.S., we could definitely expect another drop in equities of 50-80%. Secondly, the recent occurrences have been in large part predicted by Kyle Bass. He believes Japan is going through a currency collapse given that they are the most indebted nation in the world. The U.S. is a long way from there, but definitely going down that path, IMO. It might be 10-15 years before we experience similar happenings as Japan right now. I tend to agree with Watsa on being concerned about deflation. We haven't seen deflation because there has been no deleveraging. Private households have mainly delivered by defaulting (not paying down credit) and the government picked up the slack by spending with massive deficits. On a net-net basis, no deleveraging has occurred. What has occurred is that wages are down and prices for necessities are higher meaning less disposable/taxable income to service the same amount of debt. the next crisis will be worse because we're in a much worse spot to handle it. Secondly, I don't know if this is a macro "bet" as much as it is a hedge and our attitudes towards the 2 should be different. Watsa spent what was roughly 1 year of earnings (~6.5% of market cap) on deflation hedges to protect the entire company against a very serious outcome that is definitely a possibility. Not only that, he gave himself the ability to profit from it if it does and place him in a fine spot to swoop in with cash at the bottom. I don't care if deflation happens or not. This is a smart way to protect your business. it is prudent to protect assets and capital when they are in danger even if the danger never materializes. Hindsight is always 20/20.

Damage from sandy seems pretty bad in the tri-state area. Fair fax doesn't have much exposure Coming in at 74 on estimated impact. Berkshire may not be so lucky. http://www.zerohedge.com/sites/default/files/images/user3303/imageroot/2012/10-2/20121030_sandy2.png

I have a hard time believing that any financial assets (paper assets) do well in a hyper-inflationary environment. I guess it all depends on the rate of the hyper-inflation. The simplified scenario looks like this: 1) You buy an ownership in the business through purchase of stock. 2) The earnings of the business should grow with inflation, but will likely lag a little bit given lower earnings/prices at the beginning of each period. 3) The price of the stock might rise to reflect these gains in earnings However, if we're talking real hyper-inflation like Weimar Republic, then I don't think it works like this. Think about it; it takes a few days for trades to settle and cash to be withdrawn from your account. If there is a danger of that cash losing a significant portion of value of that 3 day period, then that will have to be discounted into the prices. Secondly, in a hyper inflationary environment, investors will be drawn to real assets as a hedge. Third, there are huge risks to companies for holding cash for liquidity/safety/flexibility because it's losing value so fast. This means they have to either continue holding a depreciating asset or accept the risks involved investing it in other less liquid assets. This increases the risk to businesses and exposes you to the risks involved with whatever investments they are making. Stocks may appreciate some, but I do not see how it will keep up with inflation. I think that there could be massive real losses resulting from P/E contraction due to the loss of attractiveness in stocks for the aforementioned reasons. Just my two cents...

I was under the impression that PIMCO was the one who sold them the contracts. Can anybody clear this up? Secondly, it's a very real threat given that derivatives are a legal contract that follow very, very specific rules and guidelines (just like any other legal contract). If something occurs that is outside the bounds of these limits, it's likely in legal limbo. For small deviations, counterparties will generally work out agreements/compromises to maintain their rapport with clients; however, if you're talking about a multibillion dollar payout from institutions who will already be struggling from such harsh economic conditions, then it's a matter of survival and you can be sure they'll fight it.

Low interest rates and low prices make real estate a very attractive play at the moment. My business partner and I have started a LP to collect money from family and friends and we are identifying properties that we would like to own if we can get the right price. We're working on our first acquisition right now. Both residential and commercial real estate offer huge opportunities. For example, it currently costs 30% more to rent a home than own in Atlanta. That means if you can buy the home and find a tenant, you could have 20-30% gains on it in just the first year employing absolutely 0 leverage...that's incredible.

I typically ignore "small bumps" in the macro economy for a more bottom up view. I'm still highly invested in individual equities as well, but just as a rising tide lifts all boats, a receding tide will likely lower them all. I agree with Watsa that this is not like other recessions. If it was, I'd be buying now and all of the way down to the bottom; however, if this really is a one-in-50 year event and if the U.S. does really have 10 years of slow growth and the possibility of deflation ahead, then equities will get slaughtered no matter how cheap they appear to be now. I'm not selling my current holdings but I am diversifying and putting all my money for the next year or two into privately traded investments that will likely perform well no matter what happens in the economy, and I benefit from not having glaring red numbers stare at me everyday. I think if you cherry pick your investments well, you could stand to profit (even in the short term); however, I think more losses are likely to come for most everyone before the gains.

I disagree. If Italy gets to the same point that Greece is at, Europe will have a crisis that causes more global financial loss then did the U.S. mortgage debacle.....and that's just Italy. What happens when Greece, Italy, and Spain topple? Or all of the PIIGS? This European debt crisis is far more serious than the U.S. mortgage debacle both in the severity of loss and the inability of over-indebted governments to be able to do anything to prevent it due to fiscal inflexibility from decades of overspending. Value investing is all about downside protection. Do you really believe that stocks are at reasonable prices assuming a worst-case scenario? U.S. businesses are in a much better shape than they were in 2008, but sovereign entities are not. Thus, if we dip back into a depression (assuming we ever really recovered from the last one) we won't see the same kind of steep 2009 recovery that we saw before that was induced by trillions of government stimulus because the governments will not have any flexibility to spend anymore or borrow anymore. Try to convince companies to spend their cash piles going into such a depressionary environment. I'm no expert about what is occurring in Europe, but it seems that a Greek default is all but inevitable and is likely the best solution in terms of biting the bullet now for a better long-term outcome. Beyond that, I think there is still the possibility for other countries and their banks to be spared; however, there is no guarantee of this. Whatever the outcome, we can be certain it will be painful for the entire Euro area, and thus will be painful for the U.S. and the rest of the global economy. It seems like a decade of flat/declining equity markets may be just what we have ahead of us. Japan lost two decades and had long-term spouts of deflation even though the global economy wasn't in a recession. Can you imagine the global consequences if both the Euro area and the U.S. go into a decade or two of little to no growth and are in deflationary depressions? This to me would suggest that markets are actually UNDERREACTING and that we could certainly go much lower. I'm not a fan of speculating in commodities, and I do not personally own gold, but I think that equities will go much lower and gold will go much higher before this is all over. Market timing is near impossible though and I could always be wrong. I would think that beginning moderate positions in undervalued companies now would be a good idea, and to add to these positions slowly over the next two years. I think going forward is going to be a once in a lifetime opportunity for stock-pickers/value investors; however, it's going to be a very rough ride. If you can't stomach extreme volatility, you may consider other investments outside of stocks, bonds, and commodities over the next two or three years.