Prem Watsa and Warren Buffett Disagree About Inflation

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Includes: BRK.A, FRFHF
by: The Rational Walk

Prem Watsa, Chairman and CEO of Fairfax Financial Holdings (FFH), has often been referred to as “Canada’s Warren Buffett” due to his successful insurance and investing track record. However, in a recent interview with canada.com, Mr. Watsa expressed very different views regarding inflation compared to Warren Buffett’s recent statements on the subject. A few excerpts from the interview appear below.

Inflation Expectations

80% of the economy [the private sector] is de-leveraging. 20% is government stimulus. Companies are operating at 65% of capacity or utilization rate. Unemployment is rising. If in six to 12 months’ time, the stimulus and bailouts don’t work, and we are at zero interest rates, what then? We had 20 years of good, meaning no recession to speak of, and only one year of bad. We are not worried about inflation, just the opposite. If wages start to go up, there will be inflation. But there is lack of demand. That’s the problem.

Greenspan’s Legacy

The Greenspan policy was part of the problem. If Paul Volcker had been chairman of the U.S. Federal Reserve would this have happened? Not likely. He would have put interest rates up in 1996 when Greenspan warned about “irrational exuberance” and the tech bubble. Mr. Volcker would have let Long Term Capital Management go bust, raised interest rates and we never would have been in this current situation.

On Glass-Steagall

Q: Should the Glass-Steagall Act be re-enacted?

A: Things got a little lax with respect to risk management in the U.S. and capital should be distinct between different parts of banks. The Canadian banks [and their investment bank divisions] have done a good job in that sense.

One of the interesting aspects of the inflation debate is the fact that so many economists and investors with sterling track records have completely different views on the subject. However, in our opinion, Mr. Buffett seems to make the strongest case when he talks about how excessive “greenback emissions” make long term inflation nearly inevitable.

Click on this link to read the full interview on Canada.com