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Watsa calls out CN Real Estate and commodities


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Watsa has a decent record of calling out specific bubbles -- TMT - 2000, US real estate - 2006.  Now, there is a new target: Chinese economy and its effect on commodities.  2011 and 2012 will be interesting times for those with cash and hedges.


Meanwhile we have concerns over potential bubbles in emerging markets. Consider, for instance, what we learned on a recent trip to

China: many house (apartment) prices in Beijing and Shanghai had gone up almost four times – in the past four to

five years!; many individuals own multiple apartments as investments with the certain belief that real estate prices

can only go up; and maids are taking holidays so that they can buy apartments also. “Buy two and sell one after it

doubles to get one for free” goes the refrain! In his essay in Vanity Fair, “When Irish Eyes Are Crying”, Michael Lewis

says, “Real estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The

moment people cease to believe that house prices will rise forever, they will notice what a terrible long term

investment real estate has become and flee the market, and the market will crash.” We agree!!


Infrastructure and construction spending in China accounts for more than 40% of GDP – a number rarely seen in the

past in any economy. In fact, this demand has resulted in commodity prices going up in a parabolic curve. Combine

the increase in commodity prices, substantially from Chinese demand, with hedge funds and others again trying to

allocate money to these very illiquid markets, and you can understand why some of these commodities have

exploded in price, as shown in the table below.

2000 2008 2010

Oil – $/barrel 27 45 91

Copper – $/lb. 0.83 1.39 4.35

Nickel – $/lb. 3.09 5.31 11.23

Wheat – $/bushel 2.80 6.11 7.94

Corn – $/bushel 2.25 4.07 6.29

Cotton – $/lb. 0.62 0.49 1.45

Gold – $/oz. 274 870 1,405

Even onions and chilis went up 64% and 38% respectively in 2010!! We shy away from parabolic curves, so we

continue to maintain our equity hedges!

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so.. we have 1.3billions in China and similar number of ppl in Indian... 10% of them started to drive car and have better food... that's another US right there.


So... commodities' prices are driven by supply and demand... more ppl want it and the prices up.. is it really make sense to compare price 10 years ago to now?


Of coz, there is speculation premium build in..... and infrastructurei is overbuilt - but the most of the demand is real. IMO.

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Guest broxburnboy

What? value investors speculating on the effects of "macro" trends such as emerging bubbles in foreign markets?


Here's a commentary from the site of Jim Sinclair, dean of the Gold Bug community and an experienced macro trend investor:





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Jim Rogers believes the commodities bull market will last another couple of years.  It looks like he wants to be given a decade in order to predict that gold will hit $2,000.




Of course, I don't put too much weight in what he says.  After all, go back to what he said in 1988:


"Most stock markets around the world," echoed TV commentator and motorcycle buff Jim Rogers, "are going to go up dramatically ... but no longer than six months, at which point we are going to have a real bear market.  I am talking about a bear market that is just going to wipe out most people in the financial community, most investors around the world.  And in fact there are many markets I would short but which I will not be short, because I think they will probably close them down."


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