Written March 9th, 2011

I have been negative on a lot of asset classes for a long time, but it was always part of a larger process of getting back to some normalization (earnings, geopolitics, etc.). I have been hesitant to call a top, because quite honestly, I am not sure anyone can do that effectively. With that in mind, I feel like we are close to a breaking point on multiple levels. Walk with me through today’s news, none of which is actually new to our readers, but the combination may finally hit investors in a new light:

  • All’s NOT well in Libya. Pictures of burning oil fields, a lot of misinformation, etc. If nothing else, oil supplies are threatened. Not new, but a piece.
  • Meanwhile, in Iran, Reuters had this headline: “U.. OFFICIAL EINHORN SAYS BELIEVES IRAN SEEKS TO REACH THRESHHOLD OF NUCLEAR WEAPONS CAPABILITY”. Iran is testing the waters, maybe even provoking a little. How will the world respond? Again, nothing new, but coming with Libya and the rest of the Middle East turmoil it might finally make sense to investors.
  • Finisar (FNSR) is down 35% as I write this. Why is this important? It’s a small company, with limited exposure. Except, they’re the guys who make some of the switches for fiberoptics cable around the world. They’re very active in China, and had this to say on the conference call:
    “[Earnings were] impacted by the full three months of the annual price negotiations with telecom customers that typically take effect on January 1, the 10-day long shutdown at certain customers for Chinese New Year in February, the adjustment of inventory levels at some telecom customers, particularly for products which had previously been on allocation and long lead times, including WSS and ROADM line cards, and a slowdown in business in China overall.”
    Slowdown in China? Well, that got everyone thinking. If China slows down, why is copper up? For weeks, we have been telling readers that China is slowing down, their numbers are fake, and that hyperinflationary fears on the back of endless Chinese buying are overblown. Maybe now investors will start realizing that in a debt deflation cycle, commodity inflation is not the big threat – lack of pricing power is.
  • As if China’s slowdown won’t have enough of an economic impact, ZeroHedge reported that Bill Gross dumped 100% of his government holdings. Now, I am short treasuries and continue to believe they offer return-free risk – the worst kind, but having PIMCO front run pretty much every other bank and asset manager is a big deal. The guys at Blackrock are probably pretty worried about not having a bidder when they finally need to get out also.
  • Lastly, I encourage everyone to read James Montier’s new piece on GMO’s site:

That is without mentioning the fact that oil is 30% higher than 6 months ago and is now flowing down to the consumer who’s seeing it in higher gas prices.

None of those pieces of information are new on a macro level. However, sometimes investors need to hear things multiple times before they understand the full implications. And I believe that we’re close to the break point, the point at which investors comprehend and then price assets accordingly. It would mean a revaluation of all industrial commodities down (China will no longer be the marginal buyer as it slows), equities down (as the E in P/E goes down and pulls down P with it), and bonds down (as government debt will no longer be the safe haven).