Prem Watsa Explains Why This Will Be A Long And Deep Recession Globally!

Oops.. and yet another dooooooooooooom posting!

Last Friday, I posted the warning from IMF: Massive Warning From IMF: US Could Head For Deep Recession

On theGlobalAndMail, legendary Canadian Investor, Prem Watsa of Fairfax Financial, states Why this slump will be 'long and deep'

• A global recession may be near, but the global bear market has already arrived, and my, what teeth it has.
  
  After yet another Monday horror show - the fourth in a row in which the Dow Jones industrial average dropped at least 300 points - every one of the world's major equity markets has shed at least one-quarter of its value so far in 2008.
  
  On the bright side, when it's this bad, how much worse could it get?
  
  Much, much worse, says one of the few investors who has prospered in the meltdown.
  
  "Stock markets are not down 50 per cent in Canada or the United States from their highs. They've got a long ways to go down before that happens," says Prem Watsa, chairman of Fairfax Financial Holdings.
  
  Uh-oh.
  
  "We think there's a significant recession coming, long and deep. It's going to spread all across [the world] ... It's very difficult to not be caught by it."
  
  Yikes. But surely there are reasons for hope.
  
  The world's central banks have moved to Defcon 1. There's talk of a co-ordinated cut in interest rates. And don't forget about that $700-billion (U.S.) bailout for bankers.
  
  "It will be difficult for the Fed to do too much now," with the key lending rate already down to 2 per cent," Mr. Watsa says.
  
  "This $700-billion all sounds good. But they [the central bankers] have no ammo."
  
  Considering the source, this is worrisome news. A lot of people will claim they saw the credit fiasco coming, but Mr. Watsa is one of the few who can prove it.
  
  He can pull out a letter to shareholders that he wrote in 2004, in which he warned about the evils and risks of "bonds that are backed by home equity loans, automobile loans or credit card debt" and hinted that maybe the rating agencies were a tad too eager to give those bonds a triple-A gold star. Or he can just point to the Fairfax bank account, flush with the proceeds of a large and highly profitable bet on a financial nuclear winter. Fairfax has turned a $1.65-billion (U.S.) profit from buying and selling credit default swaps - a form of credit insurance, essentially - and was sitting on another $447-million in gains from those investments, as of Sept. 19.
  
  So, when he speaks of recession and credit catastrophes, it's time to listen.
  
  Do not expect that a sharp contraction in the economy will purge the toxic debt and bring on a quick recovery, Mr. Watsa says. The Great Unwinding is the end of "a 20-year phenomenon of excess optimism ... so I don't think we should expect it [to be over in] six months."
  
  The bailout, passed last week by the U.S. Congress and signed into law by President George W. Bush, may help. But it could prove to be a mixed blessing. As the program begins to buy unwanted mortgage debt from banks, it will establish new (and probably low) market prices for that debt, which means the stuff that remains on financial balance sheets will have to be marked down, too. So expect a new round of writeoffs and pain in the banking system. "It's not easy to solve," he says, "other than [with] time."
  
  Fairfax remains positioned for worse times to come. Seventy per cent of the company's investment portfolio is cash and government bonds. The parent company has $1.1-billion in cash and securities as of the end of June, but Mr. Watsa has no plans to spend very much of it - not even picking over the remains of insurance rival American International Group, which is being disassembled by the U.S. government, though Fairfax may try to buy some AIG "crumbs."
  
  This much is certain: He's in no rush to buy stocks. Sure, sometimes a desperate seller comes to Mr. Watsa with an offer that just can't be refused - as an Australian agrifood company just did, selling Fairfax a majority stake in its Canadian subsidiary for less than its balance-sheet value.
  
  But in the bigger scheme of things, this is no buying opportunity in the equity markets. There's not enough despair yet, little sense of capitulation. When will that day come? "You'll know about it when no one here is optimistic, perhaps including us. You'll know when there's no expectation of a turn. We're not seeing that, by the way. Everybody's looking at the point to buy.
  
  "In September, there were redemptions [of mutual funds], significant redemptions ... But history shows you've got to have months of redemptions. That's an indication that people are losing their confidence and want to be out of the market.
  
  "You'll see the average pension fund going down to 30 per cent, 40 per cent equity allocation. ...'Stock' will be a bad word. You'll see all that for some time before you have to react."
  
  And in the meantime? Bolt the doors. Hunker down. Hoard your cash. If you owe, repay your bankers.
  
  "This is the time to be cautious in your own finances - to get out of debt, to not buy the big car you don't need," says Mr. Watsa.
  
  "This will pass. But you have to survive it."

Source: here