Fairfax Financial is putting its money on deflation.
The company, which announced last week that it earned $325.2-million (U.S.) in the second quarter, up from $275.4-million a year earlier, is a believer in the theory that the deleveraging that's taking place in Europe and North America will have a deflationary impact.
To protect itself from that, Fairfax has bought 10-year inflation-linked derivatives. They cost about $180-million, but could potentially provide notional protection of more than $20-billion, a spokesman for the company says.
The bet is reminiscent of the one that Fairfax made on credit default swaps prior to the crisis, when it presciently decided to gamble on the possibility that a number of large global financial institutions would fall onto hard times. Those swaps generated more than $2-billion in profits during the crisis.
Fairfax is also fortifying itself these days by hedging the vast majority of its stock market exposure.