Fairfax Financial Holdings Ltd (TSE:FFH) (PINK:FRFHF) held its annual meeting for 2013 on April 11 in the company’s home city, Toronto. Prem Watsa, the company’s CEO, made some interesting comments about the future of the world economy, including his thesis that the US is headed for a period of deflation.

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Since the Federal Reserve began its program of quantitative easing, many analysts have been predicting the economy was likely to enter a period of high inflation. Taking inspiration from the situation in Japan, Watsa actually believes deflation is more likely.

According to the CEO, Japan didn’t see deflation until five years after the initial bubble burst, and then saw deflation for the next seventeen years. There is, according to Watsa, a period of delay before people realize they need to deliver. Watsa seems confident that deflation in the US economy is possible in the coming years.

To further support this view, Watsa points to Greece, where deflation was first seen last month, despite several years of poor economic results. That delay could be exactly what we’re seeing in the United States right now.

Fairfax Financial Holdings Ltd (TSE:FFH) (PINK:FRFHF) is actively hedging against inflation right now. Its major businesses are in insurance, a market that is sure to be shocked by a period of deflation. Watsa says that a period of deflation would really hurt that business, but that the company is hoping their hedge will make up for the lost income.

Prem Watsa sees a huge amount of risk in the global economy right now. Though he believes that it’s possible that we may just “muddle through” the difficulties, there is a lot of risk, and Fairfax Financial Holdings Ltd (TSE:FFH) (PINK:FRFHF) is actively preparing for the worst.

Some of the major risks that Watsa perceives are the real estate situation in China, which appears headed toward financial crisis and the size of the banking industry in Europe, three times the size of the continent’s GDP. One of the most substantial problems is that the Federal Reserve simply has no ammunition left. If there is a recession in the next year, the central bank can’t do anything.

The company’s defining philosophy is that it knows there will be nobody around to bail it out, and it will do anything to survive. That means it has to be in a defensive position right now, because there are so many risks in the global economy. Watsa is fine with underperforming relative to the S&P 500, as long as it means Fairfax Financial Holdings Ltd (TSE:FFH) (PINK:FRFHF) is in the best possible position to survive.

According to the minutes of the meeting, Prem Watsa holds about 90 percent of his wealth in Fairfax Financial Holdings Ltd (TSE:FFH) (PINK:FRFHF) shares. He believes in the firm’s decentralized business model and the presidents of its subsidiaries.

Fairfax Financial holdings is preparing for the worst. Full document below.

2013 Fairfax Annual Meeting Notes Prem Watsa by ValueWalk.com