Watsa: China Real Estate Bubble Unparalleled In History

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Prem Watsa, the ‘Warren Buffett of Canada’, a man who needs no introduction to our regular readers, has been bearish for quite some time on the global economy and China in particular. Although, he has not been right (yet?), Watsa is still very bearish on global growth. Below are some interesting comment which Prem Watsa Made on the Fairfax Financial Holdings Ltd (OTCMKTS:FRFHF) (TSE:FFH) call this morning.

Related Prem Watsa: Monstrous Real Estate & Construction  Bubble in China [SLIDES]

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Prem Watsa on the prospects for the financial market

We continue to be very concerned about the prospects for the financial markets and the economies of North America and Western Europe, accentuated as we have said many times before by the potential weakness in China and emerging markets.


We can't tell you when will do -- when -- we can't predict the quarter were the year that it happens but the first two quarters of a great example of that.

On that certain circumstances we can make a lot of money for our shareholders and you know I remarked in my prepared comments that these interest rates in Europe are 200 year loans -- Lowe's Companies, Inc. (NYSE:LOW).

Prem Watsa on German bonds

That means German 30 year we call it bonds government bonds are selling below 2%. You have to go back to hundred years. So that is telling you that these markets are something is happening in the marketplace when you have to hundred year lows that no one -- with no inflation to speak of in the last number in Europe was .4%.

And the U.S. it's running around 1%. So with all of this QE1 QE2 QD3 inflation is very muted very low and the economy by the way and you saw the 4% in the second quarter 1.7% of that inventory build up so it's more like 2.3 but if you look at the half nominal GNP for the United States nominal the the first half was 2 1/2% will GDP the the first half 6.9% so still very tepid in spite of all of this monetary easing.

And we have -- we are of the opinion that you have to protect yourself from that. Whenever want to look for money and be in a position where we get blindsided. And we continue to be -- continue to be that way inclined. And I know in the last two years that was not necessary and perhaps we will muddle through and perhaps that won't be necessary.

Prem Watsa: few numbers suggest China is picking up

But we worry about this perhaps one of the point that I might make is in China there's a few numbers suggesting that there's a little bit of a pickup. You know I just thought I talked about it in our annual report but basically it's been an interesting point written a little article where he said China use most segment of the last three years that the U.S.

United States used in the entire 20th century. That's 100 years. China use more cement of the last three years of United States used in the entire 20th century. And that you will be interested -- anyone who looked at Japan in the 1990s would be interested in these two comments and executive from one of China's largest real estate companies made in London the first comment he said was the total land value in Beijing that's only Beijing is 62% of U.S. GDP. Total land value in Beijing is 62%.

The second comment he made is China house production 8000 had a population reached 35 at -- it reached 35 in 2011 and that figure is below 12 in most developed economies. Even when the housing market is hot no country has ever had a figure greater than 14. This is the house production thousand had a population.

So this is staring us in the face we think and we just want to be careful and conservative further try to build a company over 2530 years. We have to go through periods like this where you are not going to be where you have to be careful. But in spite of that we do have many things in our portfolio including a more recent purchases of common stock. That can do well for our shareholders.

Prem Watsa in Q&A


Added think that you alluded to the first question that I have with your comment on China and the cement demand there. How do you expect a slowdown in China like we -- likely scenario to sort of flow through and impact to North America? And second question is regarding your assumptions -- it seems a lot of them are macro related. Is there a valuation component to the equity hedges as well and if so, what are you looking at from valuation standpoint?

Prem Watsa

Yeah that's a good question Chris.

On China China is the second largest economy right. So you were talking eight $9 trillion . The United States 16 and 17 trillion. Europe about the same. That you got China. And so any problem there will impact the world.

You must -- you know that of course that China consumes 40 or 50% of almost every commodity you can think of. Copper, steel, iron ore, and so a slowdown in China will in fact the rest -- it will impact the rest of the world quite significantly. And in terms of valuation your second question the Russell 2000 any type of price earnings ratios that you would look at would suggest that they're very high levels if you look at market And GDP ratios going back 100 years you will see them at high levels.

The Shiller ratios that we show at our annual meeting our and price earnings ratios Shiller basis on a 10 year average. You will see that on the high side. So many valuation parameters but also Chris of course earnings. Earnings have been going up some and in a tougher economic environment earnings are likely to come down. The S&P is making a lot of money. There's lots of stock buybacks so the earnings-per-share been going up. And so you know there's not only the macro but the valuation parameters and then finally we look for things on a bottoms up basis and we are not finding too many things that we think that gives us downside protection and allows us to make a return over time.

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