Prem Watsa on China, the inflation in United States and Europe, European and German bonds – he is still concerned about the prospects for financial markets.
Below are remarks from the Fairfax Financial conference call this morning.
Core inflation continues to be at or below 1% in the United States and Europe. Levels that we have not seen since the 1950s.
In fact, it may be a surprise to many of you to know that in the second half of 2014 the US had deflation of 1.5% or an annualized rate of 3%. And Europe had deflation of .5% or an annualized rate of 1% point. That what this is saying is that prices went down in the second half of 2014 at an annualized rate of 3% in the United States and 1% in Europe. This is in spite of QE1, QE2, QD3, and now quantitative easing in Europe.
Prem Watsa: European bonds at record lows
Long-term government bond rates in Europe are making record lows quite often the lowest in 200 years.
In Germany, almost half of the German government bond market is yielding negative interest rates. Also six or seven countries in Europe are already experiencing deflation. Thirty-year German government bond rates are below 1%. The spread between 30 year US long-term rates and 30 year German government bond rates is at a record . German rates have fallen much faster than the United States.
Just to keep a perspective out remind you that it took five years in Japan before deflation set in for the next 18 years.
Prem Watsa concerned about the prospects for financial markets
We purchased Thomas Cook and 50 to rupees per share in 2012 and it is now creating at about Rs.200 . We continue to be concerned about the prospects for financial markets and economies in North America and Western Europe accentuated as we have said many times before by the potential significant weakness in China we have said for some time that we believe it continues to be a disconnect between the financial market and the underlying economic fundamentals . As of December 31, 2014, we have $6.1 billion in cash and short-term investments in our portfolio which is 23% of our total investment portfolio.
That price of oil coming down by the way we think is not only supply in the United States but it’s reflecting decreasing demand in from China. China’s and we took the better for some time — China is a big potential negative. And you never know when it will strike. But you have to be careful about it.
We are maintaining our defensive equity hedges and deflation protection as we remain concerned about the financial markets and the economic outlook in this global deflationary environment.
Long US government bond rates continued to drop and our common stocks did much better than the Russell index which increased 3.5% in the year. We have yet to significantly benefit from our hedges and are approximately $112 billion depreciation swaps. And of course our cash position gives us great optionality.