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Fairfax Financial Holdings Ltd. Chairman and Chief Executive Officer Prem Watsa gestures while speaking during the company's annual meeting in Toronto on April 11, 2013.AARON HARRIS/Reuters

Fairfax Financial Holdings Ltd. was busy adding a new Greek real estate firm, insurer and president to the company in the past few months. But despite the activity, Prem Watsa, the Toronto-based insurer and investment manager's founder, isn't sounding any more upbeat about the state of the global economy.

"We think we're not being paid for risk, so we're stepping away from the marketplace," said Mr. Watsa in an earnings call following the company's second-quarter results on Friday.

The company continues to stand by its plan to hedge all of its portfolio, and posted a net loss for the quarter of $157.8-million.

But lukewarm GDP growth in the U.S. and low core inflation following three rounds of quantitative easing make Mr. Watsa feel confident to continue playing defence. He has concerns about what would happen should the U.S. economy skip a beat, China run into issues or the business conditions in Europe stay tepid.

"Today, we think there's a significant amount of risk and we think you have to be very, very careful," he said. "I'll remind you that in 2008 [and] 2009 when the stock markets were down we were fully invested, and when spreads were wide we bought ... all sorts of bonds."

Mr. Watsa detailed his outlook in response to a question about the point at which a deepening hedge becomes a directional call on the markets, posed by Mark Dwelle, an analyst at RBC Capital Markets.

Mr. Dwelle has gone head-to-head with Mr. Watsa before on company earnings calls, questioning Mr. Watsa's use of relatively unique 10-year derivative contracts linked to the consumer price index in U.S. and Europe.

Overtime, Mr. Watsa has added to that position to the tune of about $523-million, taking a view that there will be deflation and the contracts will produce gains – there are still eight years until maturity. As in the past, Mr. Watsa pointed out on the call that Japan's deflation took several years to hit following the burst of the asset price bubble.

The rest of Fairfax's positions are similarly defensive, from the company's large cash holdings, to its investment in treasury and municipal debt.

But for its depth, the position is a cautious one. Mr Watsa pointed to famed investor Benjamin Graham's research showing those who went bearish on Wall Street too soon before the 1929 crash had a very small chance of survival.

"So we are very concerned," he said. "We don't take this lightly."

(Jacqueline Nelson is a Globe and Mail Financial Services Reporter.)

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