An increase in federal debt can be financed in three ways: borrowing from foreigners, borrowing from our own citizens or, through a roundabout process, printing money. Let’s look at the prospects for each individually — and in combination.
[...]
I think it’s worth commenting that many financial market participants are focused on questions like, is the economy bottoming out and getting better? Is the stock market up too far and too fast in the last few months? Or is it foretelling better conditions in underlying sales and earnings? Will we have inflation? Will we have deflation? And so on and so on. These are all terribly important questions and they will have a huge impact on future investment returns. The fact is I don’t know the answer to any of them. And I don’t believe anyone who claims that they do. Consequently, since we do not and cannot know the answers to these important questions, we tried to invest in equities and fixed income securities that should be all-weather craft and able to provide appropriate returns no matter what unpredictable conditions we will face.
Specifically we own high quality and short duration fixed income securities so that we can be assured of both the return over our money and the ability to re-invest quickly should interest rates rise due to inflation or concerns about the dollar and various currencies. We own a prudent amount of equities in companies with pricing power, valuable brand names, and solid balance sheets. They should be able to grow and produce shareholder value at steady and attractive rates whether the economy re-ignites or [inaudible] out; if oil prices are low or high; if deflation continues or inflation returns or any of the other important and unknowable big picture economic forces manifest themselves. As an added bonus, these types of firms sell at historically reasonable valuations.
Owning interest in durable businesses with growing intrinsic value at reasonable valuations should produce returns we will enjoy as Markel’s shareholders. That remains the guiding principle for our investing activities and I look forward to your questions in the question-and-answer session.
Bond investors do not sit passively and wait until governments cheat them. One startling statistic that emerges from the UBS note is that 55% of US government debt is due to roll over during the next two years[...]. If investors think inflation is on the way, they will simply raise the nominal interest rate they desire. Worse still, they may also increase the real interest rate they demand. Higher real interest rates (which discourage business investment) are associated with lower economic growth. And slower growth of course makes it much harder to reduce debt-to-GDP ratios.
