Ted Butler, Investment Rarities
What can we learn from Amaranth? Primarily, we should learn, once again, that concentration leads to bad things. No general good comes from concentrated market positions. Concentration goes hand in hand with manipulation.

Nowhere is the evidence of a concentration problem more evident than in silver. While the overall COT structure of the market in silver (and gold) rarely looked better, and provides a spectacular buy point, the concentration by the largest traders has grown to absurd levels. In the most recent COT report, as of September 19, the 4 largest traders are now net short 34,809 futures contracts, or more than 174 million ounces. Incredibly, these four large traders now control 97% of the total commercial net short position, the highest in memory and a substantially higher concentration than when I started complaining to the CFTC and the NYMEX almost 4 months ago.  

In other words, if these 4 traders’ positions didn’t exist, there would be, effectively, no dealer short position on the COMEX. It is, quite literally, these four traders against many thousands of long participants. The true test of a manipulation has always been – what would the price be if the concentrated position did not exist?

Richard Daughty, the Mogambo Guru
I know what you are thinking. That sharp Mogambo-honed brain (SMHB) of yours is saying "Hmmm! I am perplexed by the fact that there is only $798 billion in actual cash in existence, and my wonderful SMHB wonders how that little bit of money can produce an $11 trillion economy, a national debt of $9 trillion, consumer indebtedness that is over $30 trillion, $80 trillion in accrued federal government liabilities, $450 trillion in derivatives, a $600 billion annual federal budget deficit, and an $800 billion trade/current account deficit. How is this possible?

I smile in satisfaction at your wisdom about the monetary insanity, and, putting the last piece of the puzzle into place, merely remark, in typical Mogambo melodrama, "Hear me, doomed ones! It all came from debt, which comes from Federal Reserve credit, from which springs multiplication by fractional-reserve banking, which creates the debt and the money, which is how money now comes into existence! And the fractional-reserve ratio at the banks is so insane that it has financed a debt so huge, so freaking huge, so un-payably huge, so insanely, monstrously huge that no scale created by man can weigh it!"

Taking a question from the audience, "How ridiculous is the fractional-reserve ratio?" I laugh derisively and say "It can only be crudely estimated by the difference between a paltry $798 billion in cash, and the sum total of everything else! Zillions of dollars in assets, created by an equivalent debt! Hahaha! We're freaking doomed! Doomed! Hahaha! Welcome to the insane hell of fractional-reserve banking!"

Apparently, both the Federal Reserve and their fellow American morons missed the significance of the Modigliani Lifetime Income Hypothesis, which holds that, in the particular and in the aggregate, people cannot spend more over a lifetime than they make over a lifetime. If you try to, through assuming debt and then cleverly dying before you have to pay it back, then the loss incurred by creditors will be the offset to THEIR lifetime income, proving Modigliani's original hypothesis.

If, however, you make the big mistake of taking on more debt and then NOT dying, then you will doubtlessly notice that your future consumption will be, by the necessity of the Modigliani's hypothesis, reduced because of your excessive current consumption. Maybe this is why consumer credit grew at only a 2.8% annual rate, or by $5.5 billion, in July, slowing markedly from June. I dunno.

Peter Grandich, The Grandich Letter
While I’m now in my 23rd year in the financial arena, I have never seen such a discrepancy between what I perceive the future holds versus how the majority of Americans are living their lives and are seemingly unprepared for it. I don’t consider myself a pessimist but a realist. I believe America as we knew it just a couple of decades ago, has ceased to exist—only it’s politically incorrect to even suggest that. Cultural relativism and secularism is becoming the norm while the very fabric that held this country together for the first 200 years is being ripped apart. At the same time, our country’s financial health is rapidly deteriorating and little if anything is being done to prevent a catastrophe that will make the Great Depression look like a walk in the park.

Wilfred Hahn, Hahn Investment Stewards & Company
Are we witnessing the first innings of a classical housing bust or not? We believe the answer is "yes." Consider some of these statistics:

• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000.
• 43% of first-time home buyers in 2005 put no money down.
• 15.2% of 2005 buyers owe at least 10% more than their home is worth.
• 10% of all home owners with mortgages have no equity in their homes.
• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.
• Housing related industries -- for example, builders, mortgage lenders and real estate agencies -- have generated 44% of the jobs created since 2000 and today employ 1 in 10 workers.

Already, these industries have stopped adding to payrolls. Actually, in some regions builders are already reporting lay-offs. Assuredly, these problems have been building for some time. For example consider the trend reported by Washington Mutual (WaMu) in its annual report. At the end of 2003, 1% of WaMu's option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to the principal). At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

The mortgage bubble today is simply an up-sized version of the junk bond bubble of the 1980s. Then, a rising default rate on earlier loans was hidden by the boom of fresh new junk issues. When the new issuance collapsed, default rates soared.

Jas Jain
I am no expert on Peak Oil, but Peak Oil is not the urgent problem that the world faces, economically, or politically. The problems of the supply-demand of oil will play out over a longer period and its effects would be spread over a longer period of time than that of the Peak Debt, which are lot more immediate. As a matter of fact, it has been the rapidly rising debt (racing towards the peak), which in turn has "fueled" a worldwide construction boom, that has resulted in the high prices for oil over the past 4 years and not the realization of the problem of Peak Oil. During the coming global depression, within this decade, the price of crude oil should fall below $25 a barrel and there will be glut due to sharply falling demand.

The most immediate impact of the falling debt would be a collapse in corporate profits, hence, a sharp fall in the stock market, either crash-like, or over a period of 1-2 years. The second would be fall in inflation rate to level significantly below the level preceding the Peak Debt. Demand Destruction is what is going to kill inflation in the US, as has been the case in the past time after time, and when inflation starts to fall it doesn't stop readily and keeps falling all the way into the next economic recovery.

Rob Kirby, Kirby Analytics Newsletter
5.5 Trillion's worth of business sure isn't what it used to be. I mean, where I come from people normally celebrate, hold news conferences or a ticker tape parades perhaps - on occasions such as conducting RECORD 5.5 TRILLION new business in one quarter! But no, not the humble guys and gals over at J.P. Morgan; they accomplish this Houdini-esque feat, and their accomplishment get BURIED in what amounts to "minutes" of a two bit obscure publication of the Office of the Comptroller of the Currency? Who would have ever thought such an accomplishment could "come and go" without a congratulatory howdy-doodle and a little face time for those responsible from the Wall Street Journal or CNBC?

According to the Office of the Comptroller of the Currency for the U.S.A. in their Quarterly Derivative Fact Sheet J.P. Morgan Chase's derivatives book grew from 48.26 Trillion notional at Q4/05 to 53.76 Trillion at Q1/06. That's RECORD new growth of 5.5 TRILLION notional folks!

Let's first try to quantify just how much a 5.5 TRILLION build in a derivatives trading book over a three month period really is, shall we? The first quarter of 2006 contained 65 business days [64 excluding Presidents Day]. 5.5 Trillion divided by 65 equals 84.6 Billion per day in NEW BUSINESS - forgetting rollover of existing business which, in itself, must be massive.

We know for a fact that J.P. Morgan's involvement in these derivatives is not being motivated by "end user demand" because the Comptroller of the Currency's Quartery Derivative Report tells us end user demand for derivatives is all but non existent. Aggregate End User Notionals for all derivatives have gone from 1.4 TRILLION in Q1/95 to an AGGREGATE 2.6 TRILLION as of Q1/06. Meanwhile AGGREGATE DEALER NOTIONALS [of the 5 largest dealers] have spiraled from 15.9 TRILLION to 102 TRILLION over the same time period.

So at very best, they are speculating; but what could their true motivation be? Who would want to risk their own capital to "trade" something, like natural gas, that is difficult to store with well documented reports abounding that all storage facilities are already full - and there's no where left to put the stuff? It's beyond me. But then again, maybe I just underestimate? These guys at ole J.P. Morgan really are good. After all, they can pull 5.5 Trillion rabbits out of their hats, can't they?

Chris Laird, Prudent Squirrel Newsletter
As financial markets start to show big stress, the central banks and plunge protection teams are going to spend a gigantic sum of money trying to support them. Previous economic collapses have not had the present battery of coordinated central banks and programs such as plunge protection teams to manage their crashes. We now are in a situation where, the next time we have major stock drops, these CB's and PPT's are going to pull out all stops to try and stop a stock panic.

Of course, gold will find any major monetization of financial markets extremely bullish. In this case, gold could easily rocket to $2000 once a consensus was reached by financial markets that such monetization of falling stock markets was under way.

Mike Morgan, MorganFlorida
For those “value investors” buying the home builders because the P/Es are so low, I ask, “What happens when there are no earnings?” And for those “value investors” buying for the book value, I ask, “What happens when the builders take massive write downs to land, and burn up cash with carrying costs of unsold inventory?”

But that’s not even the heart of the current problems. For the last two weeks I’ve been receiving daily calls from desperate mortgage brokers, real estate attorneys, insurance brokers, title companies and subcontractors looking for deals and work. This week I spoke with a real estate attorney closing his office and returning to the corporate world. And several of the smaller builders have called me offering triple commissions to entice sales of their inventory. It doesn’t end there.

Who will the housing crash effect? Everyone. Real estate agents will be first. [But] with sales off 50% and more, all of the industries that have benefited from the boom will suffer loss of revenue and jobs at accelerated rates and massive proportions. Home builders and condo developers have been announcing cancellations of projects and cut backs in spec building. Many flippers bought multiple properties. They’re washed up now.

When in the history of the world have we ever seen the housing industry conduct business like a stock exchange. We had bidding wars. We had lotteries on new developments, just like we had allocations for new tech offerings during the late 90’s. And just like the tech boom, the buyers were not making decisions based on fundamentals. Take a look at the recent Vonage offering, where buyers don’t want to pay for their stock, because the price dropped after the public offering. The same thing is happening in the housing market, with thousands of buyers walking away from deposits, refusing to close on homes.

But this is all old news for us. The other shoe is dropping now. Loss of hundreds of thousands of jobs created from housing will act like a virus and spread throughout our economy. As real estate agents, attorneys and mortgage brokers reign in their spending, it will effect restaurants, car dealers, advertising companies, jewelers, remodeling contractors, furniture manufacturers, bank profits, electronic retailers, clothing and the list goes on and on and on.

Doug Noland, PrudentBear
It is not inflation that is in retreat but, at least for now, only The Crowd that had placed bets on rising energy and commodities prices. There are two quite distinct dynamics involved, with destabilizing speculation, crowded trades and ensuing tumultuous market dislocations all key marketplace facets of Monetary Disorder. Indeed, the general inflationary backdrop fosters speculations that will inevitably be unwound. And the longer rampant Credit Inflation is accommodated the larger the pool of speculative finance that is allowed to balloon; and the more spectacular the inevitable dislocations. Worse yet, policymakers have adopted an asymmetric stance of ignoring asset price inflation while ensuring aggressive reliquefication in the event of asset price vulnerability. This, as we are again witnessing, nurtures a powerful inflationary bias that significantly increases the likelihood of marketplace dislocations first erupting on the upside (speculative buying panics, short-squeezes and derivative-related “melt-ups”)

Often, and it has certainly been the case in the bond and equity markets, liquidity overabundance can lead to speculators getting squeezed in spite of underlying fundamental trends and prospects. I am reminded of how deteriorating fundamentals induced heavy shorting of technology stocks during the late nineties, only to have excessive marketplace liquidity ensure a spectacular squeeze that took NASDAQ for quite a ride - that is, until it collapsed. Major squeezes can be significant developments with regard to inciting speculation and liquidity creation, working to exacerbate Monetary Disorder.

Inevitably, however, there will come a point when The Unrelenting Inflation in the Quantity of Late-Cycle U.S. Debt Instruments Collides with the Grossly Inflated Market Price of Total Dollar Financial Claims. And, sure, U.S. financial sector and bond market dynamics certainly increase the likelihood that this collision manifests in the currency markets.  Even assuming that dollar confidence holds in the near-term, there remains the more nebulous issue of a bloated and foolhardy leveraged speculating community faced with the Upshot of Heightened Monetary Disorder, including wild volatility across the spectrum of global financial markets, widening spreads, wildly vacillating marketplace liquidity dynamics, and acute general financial and economic uncertainty. The bond market rally has become destabilizing.

Kurt Richebächer, the Richebächer Letter
All excesses, if not stopped, are sure to exhaust themselves over time. That is no less true for economies than for the human body. In our view, the housing bubble is finished not because credit has become tight, but because the borrowing excesses are running against natural barriers.

One such natural barrier is the affordability of housing and the limited number of greater fools who are able and willing to pay these inflated prices. At some point, excess supply will exceed demand. We read from reliable sources that in June, sale offers of existing single-family homes were up 35%, while actual sales were down 6.5% versus a year ago. So the year-over-year "excess" supply was 42.2%.

Past experience with housing bubbles suggests that the first effects are in the steep fall of actual sales and in the lengthening of time until sales materialize. The markets become illiquid. Until sellers capitulate and accept lower prices, it can take a long time. In this way, apparent price stability becomes increasingly treacherous over time.

Steve Saville, Speculative Investor
Regardless of what happens over the next several months it's important for investors to understand that the long-term bull markets in metals and the stocks of metal producers did not end earlier this year. Long-term bull markets don't end when the major stocks in the bull-market sector have valuations that are less than half the broad market's average valuation; they end after valuations in the bull-market sector reach huge premiums. Right now, the world's two largest miners of industrial metals -- BHP Billiton and Rio Tinto -- are being valued by the stock market at less than 10-times earnings; and even if we assume that the prices of industrial metals are going to be, on average, 30% lower over the coming year than they are right now, at their current share prices these companies will still earn enough money to keep their P/E ratios in single digits.

Furthermore, many of the smaller metal-producing companies are trading at even lower valuations than the aforementioned majors. In other words, although the stocks of industrial metal producers would almost certainly trade at lower levels in response to a 6-12 month downturn in the prices of the metals, there doesn't appear to be scope for them to trade a LOT lower. This is because current share prices already discount much lower metal prices. Investors in these stocks should therefore be wary about getting too bearish at this time. The time to have done some selling was earlier this year when prices were spiking upward in spectacular fashion, not now that almost all of the speculative enthusiasm has been wrung-out of the market.

Puru Saxena
The world is littered with statistics which, more often than not, are misleading and distort the truth. In this regard, the “official” statistics released by the US establishment are no different. Take the US budget for example. The budget reported in the media claims that the deficit was reduced to $319 billion in 2005. However, the Financial Report issued by the Department of Treasury says it was $760 billion, or over twice as large. “But how come?” you may wonder. It is fascinating to note that the US budget process meant for general reporting uses accounting procedures that ignore long-term, future obligations such as Social Security and Medicare.

The US keeps two sets of books, only wanting the world to see one of them. The “President’s Budget,” issued by the Office of Management and Budget and used to develop the annual budget, is based on cash-accounting. The other set of accounts, the “Financial Report of the United States,” issued by the Department of the Treasury, uses a more realistic accrual-basis accounting. US Federal law requires ALL businesses with revenues in excess of $5 million to use accrual accounting, yet the budget figures released to the public don’t follow this rule. But according to the Financial Report issued by the US Treasury, which takes into account the future obligations of the federal government, the US budget deficit is now at a record-high!

Next, let’s review the strange US unemployment numbers released in the media. Since the end of the recession in November 2001, reported employment growth is up moderately, which makes it the worst performance during any post-war economic recovery. However, closer inspection reveals that even this small reported growth in employment is an absolute joke. The reported official unemployment figures don’t include those people who’ve given up looking for a job (due to non-availability of jobs), joined a university or taken a part-time job since they can’t find full-time employment. When you add all these people, the real rate of unemployment is closer to 10%.\

Finally, the biggest “Cover-Up” award must go to the officials who determine the Consumer Price and the Producer Price Indices (CPI and PPI). These “inflation-barometers” are a total fraud! Remember, the Federal Reserve’s biggest motive is to conceal the ongoing inflation and manage the inflation expectations, or else the viability of the Federal Reserve itself may come into question. Therefore, both the consumer and producer prices are massaged, seasonally and hedonistically adjusted to keep inflationary fears under check. So, by keeping the CPI and PPI artificially suppressed via voodoo accounting and understating the inflation menace, the Federal Reserve maintains the public’s confidence in the US dollar as a great store of value. After all, as long as the masses continue to believe in the “inflation-controlling” powers of the Federal Reserve and the other central banks, the more inflation and credit they can create!

Peter Schiff, EuroPacific Capital
In my most recent appearance on CNBC I debated Arthur Laffer, who gained fame during the Reagan administration for sketching his controversial "Laffer Curve" on a cocktail napkin. The encounter reaffirmed my belief that the same napkin would probably be large enough to hold the sum total of his economic wisdom. Although I would love to refute all of his absurd positions, two in particular stand out as worthy of discussion.

First, Laffer compared today's current account deficits to those experienced during America's first two hundred years as a developing nation. This flawed comparison ignores that as a developing nation America borrowed to invest. Those current account deficits funded the construction of vast infrastructure, such as roads, canals, ports, and rail roads, as well the formation of capital equipment, farms, and factories, all of which fueled American productivity. Such investments enabled the production of vast quantities of consumer goods, which America sold back to its creditors, to both pay interest and retire principle. In the end, America's creditors got consumer goods, and America became the wealthiest industrial nation the world had ever seen, in the process turning its current account deficits into enormous surpluses.

In a "night and day" contrast, today's current account deficit has the much more limited role of solely financing consumer spending. Borrowing to produce is the way poor nations become rich. Borrowing to consume is the way rich nations become poor. By squandering borrowed money on consumption, America has no way to repay the principal of its debts, let alone the interest. Borrowing to build factories is not the economic equivalent of borrowing to buy flat panel, high definition televisions, and it's amazing that Laffer can't see the difference.

Second, Laffer confused legitimate wealth creation with the mere paper appreciation of stocks and real estate. Real wealth creation refers to additions made to the capital stock or improvements made to land; such as constructing new homes, building new factories, opening new mines, laying new infrastructure, planting new farmland, etc. However, if an unimproved house simply appraises for twice its value of five years ago, how is society any wealthier as a result? The house provides no more shelter now than it did then. If stock prices rise merely as a result of multiple expansions, what real wealth has been created?

Though assets themselves may reflect wealth, their prices do not. Assets are wealth because they enable the satisfaction of human desires. In the case of factories it's the ability to produce products, in the case of houses it's the ability to provide shelter. Prices merely reflect the perceived value of those abilities and can change substantially over time. The point Laffer misses is that asset prices can fall just as easily as they can rise. Real wealth on the other hand, though it may depreciate if not maintained, barring natural or man made disaster, is far more lasting.

America's paper wealth however is merely a dream that will soon vanish. Perhaps it's our gargantuan trade deficit that will actually provide the wake up call. When it does all that will remain will be the debt. As higher interest rates make servicing that debt impossible, the dream will become a horrific nightmare. Perhaps if I drew it out on a napkin Laffer might finally get the picture.

Ned Schmidt, Value View Gold Report
Markets have been clearly distorted by the Hedge Fund Mania that has swept across the U.S., and much of the rest of the world. A trillion dollars, guided by childlike mis-managers, has flowed in and out of markets in a manner that has distorted the pricing function. This giant pool of money is frantically searching for returns to justify its existence. Mob psychology has taken over this group. Group think leads to money flowing disproportionally in one direction and then another, usually all at the same time. That distortion is making it hard for investors to make rational investment decisions. However, the swan song for the hedge fund mania is starting to play.

The collapse of Amaranth in about a week shows the lack of discipline that exists within this sector. All the talk about risk management is clearly just smoke to make it easier to mislead investors. Imagine trusting your money or the money of your company or the money of your clients or the money of your college to a hedge fund. Or imagine doing something really wild and crazy, like putting the money in some firm's fund of funds. Sends a cold chill down one's back to the wallet just thinking about it.

Mike Shedlock, Mish’s Global Economic Trend Analysis
One of the favorite targets of these "income funds" selling volatility has been bank stocks. The option open interest on BAC alone is staggering (and many of the big financial stocks and indices look similar).

Funds have been selling puts and calls at ever decreasing volatilities (and premiums) to make "income" for their funds. This is a risky strategy, since with decreased volatilities ever increasing amounts of leverage are needed to make the same percentage returns.

Given the massive numbers of options floating around, an unwinding of those trades will be disastrous if technical support levels are broken. For now, hedge funds using this technique have been getting away with playing with fire for so long they no longer see any risk. Every month more options are added to the heap. Just like little kids playing with sticks and matches, that pile of tinder will ignite at the wrong time with the wind blowing from the wrong direction. It is only a matter of time before we see some serious burns.

Jay Taylor, J. Taylor's Gold and Technology Stocks
We believe the odds now favor the U.S. heading into a recession in the near term, and given where we are now in the Long Wave or Kondratieff cycle—apparently at the start of the major credit contraction—we have to be concerned that this next business slowdown could indeed be the beginning of the mother of all bear markets, at least in our lifetime.

Martin Weiss, Safe Money Report
Are we prepared for the next terrorist attacks?

In terms of Homeland Security, the answer is debatable. But in terms of financial security, it’s not. We’re not ready. We simply don’t have the cushion of cash. Indeed, according to Federal Reserve data, the typical American family today ...

* Has a balance of only $3,800 in cash in the bank ...
* Has no retirement account whatsoever ...
* Owes $90,000 on their mortgage, and
* Owes $2,200 in credit card debt.

Overall, we are now less prepared for economic hardship than at any time in our lifetime.

Jim Willie, Hat Trick Letter
Hundreds of thousands will be forced to leave their homes and sell out, some of whom with negative equity. In fact, a new subclass will reveal itself, the homeowner who is bankrupt, in full ownership, but with negative equity. Wow, the homeowner in poverty! Imagine occupying a home, enjoying its shelter, its opportunity for comfort and privacy, a place to raise a family, but being unable to make payments which have risen monthly by 30% to 50%. Imagine for these unfortunados that they must produce tens of thousand$ in order to sell and depart. Initially the mortgage lenders, the title holders, will seize the properties when payments fall into arrears, all within the prescribed legal process. Later on though, they will be overwhelmed. In 2003, the Boston area suffered the ignominy of a record high abandonment of cars with underwater equity. They simply “walked away” and left the cars at the bank lots with keys. Adept analysts expects walk-aways from underwater houses in the near future.