Why Prem Watsa Has Never Been More Bearish

Derek DeCloet reports in today's Globe and Mail:

The global credit squeeze is in its "early days," says investor Prem Watsa, who is so bearish that his insurance company has stashed the bulk of its $18-billion investment portfolio into ultrasafe government bonds.

The head of Fairfax Financial Holdings (FFH/NYSE) thinks the US could see a market slide similar to the long bear market that struck Japan in the late 1980s.

"We raise the question, why can't the Japanese experience be repeated in the U.S.? We think it could be," Mr. Watsa said.

"I was in Tokyo in 1988-89. They said: 'We work together, we're not like the Americans, we're not going to let this happen, we're not letting our stock price come down.' Well, the bear market went 15 years," Mr. Watsa said. "So today, you ask your American friends and they say, 'We're not like the Japanese, we're free enterprise, we face the problems head-on. We react. We're not going to hide the stuff like the Japanese did.'"

This further into the piece:

Mr. Watsa suggested the decision to put 75 to 80 per cent of Fairfax's portfolio into government debt - "for the first time, I think, ever" - reflects his view that credit markets will take a long time to digest the problems in the U.S. real estate and mortgage business. "We don't know how bad the recession's going to be, so credit is going to be tough," he said. "You're going to have these big losses, the banks are going to have big losses. So we are worried."

Perhaps we should all be. You know I've been buying stocks recently. But I'm buying stocks of companies,not the market. And I'm taking a long-term view of things. I'm willing to weather short-to-intermediate downturns because I believe the holdings will, on average, come higher on the other side. Only time will tell what happens.

Comments

[Dennis Mangan]

The U.S. market doesn't look nearly so overvalued as the Japanese market of 1989.

[Ron Paulian]

How about hedging your bets and buy some gold/silver ETFs?

[Sivaram Velauthapillai]

Although big, the real estate bubble isn't as big as it was in Japan; and the stock market is nowhere near a bubble (it isn't cheap but it isn't insanely overvalued either). So in my newbie opinion, this isn't anything like Japan.

However, the debt problems can end up being very large and it is quite possible for things to keep declining for a while. The broad market may not drop big but it may not go anywhere for years too. I don't know... just guesses on my part...

[Arohan]

Interesting perspective. But I would disagree with Mr Watsa. Different times, different situations, as pointed out above by other commentators. Japan was no where as open an economy as US is today, neither was the world as globalized. A lot more money out there today trying to find the pockets of undervaluation to allow the US markets to fall into abyss

[Bill aka NO DooDahs!]

I didn't think that most hardcore "value" guys thought MARKET TIMING was profitable, or even possible.

Mr. Watsa's statement is pure MARKET TIMING, however.

[midas-gold]

Well, at its peak, the Japanese were valuing the real estate under the Imperial palace (a few acres of land close to Tokyo station) as worth more than all of Canada or all of California. OK, maybe I would have traded Canada for the Imperial palace and the earthquake sensitive real estate underneath it. But sunny California? Come on!

Is Prem really equating a crazy country and its anti-capitalist, steroid economy with the free-market system of the US? Are young Mexican and Indian immigrants really going to leave the US for better opportunities in China?

Prem has said some pretty flaky things from time to time. But this takes the cake!

[fazsha]

So here we are, a year after the above dorky comments, and Prem Watsa has been proven emphatically right. Do NOT try to say the U.S. is different than Japan; it is not.