If you have funds in the Stock Market you might want to remember that cash is a position.

Henry Lui who manages a hedge fund in NY and writes for the asia times explains it this way.

"The theory is that winnings are balanced by losses so the overall system will alway be in equilibtium. That is true unless some of the losers cannot pay because they lose not only all their money but their credit rating with it. In this case there will be a squeeze that quickly turns contageous to the winners as well. In the past, the Fed could step in because the creditors could all be fitted into one room. But today, the counterparties are in the thousands all over the world and there is no way to work out a hair cut deal within the time frame to stall a meltdown to provide an orderly unwounding of the contracts. Even the Fed cannot inject money into the banks fast enough because the banks would not know whom to lend to. While the overall picture is fairly clear and understandable, the actual details of the webs of derivative trades are unknown to any living soul. You cannot pluck a leaking balloon if you don't know where the leaks are. The banks will face a liquidity trap while liquidity dries up in the system. This is why the Fed and many other central banks are beginning to focus on regulations. But it is too little and too late and most of the effort is designed to cover the political asses of central bankers rather than curbing systemic risk. Nobody knows when this will happen and how it would happen but happen it will. It could be triggered by non-financial events. Derivative traders now use models and real time market data from the likes of Reuters which supply real time data to feed trading models that include all kind of factors, from weather, to geopolitics to market movements.

These guys use data that make the government statistics look like stale bread.

Traders cannot stop trading in anticipation of what might happen because they can't afford the opportunity cost fo not trading to the last minute. Everyday that a melt down has not happened means the likelihood of it happening has increased, but enough days going by without a melt down neutralizes fear and caution and that is when it will happen. It will always be a surprise.

This is a completely different problem than a cyclical recession which will surface sometime in 2007, mostl likely by Q2."

I can't tell you that the market will decline 20% before year end. All I can tell you is that if it does and you ask me why I didn't tip you off, I will direct your attention to this email and tell you I gave you the clearest warning I could.

Republicans say Congress must act right now to create procedures for charging and trying terrorists — because the men accused of plotting the 9/11 attacks are available for trial. That’s pure propaganda. Those men could have been tried and convicted long ago, but President Bush chose not to. He held them in illegal detention, had them questioned in ways that will make real trials very hard, and invented a transparently illegal system of kangaroo courts to convict them.

It was only after the Supreme Court issued the inevitable ruling striking down Mr. Bush’s shadow penal system that he adopted his tone of urgency. It serves a cynical goal: Republican strategists think they can win this fall, not by passing a good law but by forcing Democrats to vote against a bad one so they could be made to look soft on terrorism.

Last week, the White House and three Republican senators announced a terrible deal on this legislation that gave Mr. Bush most of what he wanted, including a blanket waiver for crimes Americans may have committed in the service of his antiterrorism policies. Then Vice President Dick Cheney and his willing lawmakers rewrote the rest of the measure so that it would give Mr. Bush the power to jail pretty much anyone he wants for as long as he wants without charging them, to unilaterally reinterpret the Geneva Conventions, to authorize what normal people consider torture, and to deny justice to hundreds of men captured in error.

These are some of the bill’s biggest flaws:

Enemy Combatants: A dangerously broad definition of “illegal enemy combatant” in the bill could subject legal residents of the United States, as well as foreign citizens living in their own countries, to summary arrest and indefinite detention with no hope of appeal. The president could give the power to apply this label to anyone he wanted.

The Geneva Conventions: The bill would repudiate a half-century of international precedent by allowing Mr. Bush to decide on his own what abusive interrogation methods he considered permissible. And his decision could stay secret — there’s no requirement that this list be published.

Habeas Corpus: Detainees in U.S. military prisons would lose the basic right to challenge their imprisonment. These cases do not clog the courts, nor coddle terrorists. They simply give wrongly imprisoned people a chance to prove their innocence.

Judicial Review: The courts would have no power to review any aspect of this new system, except verdicts by military tribunals. The bill would limit appeals and bar legal actions based on the Geneva Conventions, directly or indirectly. All Mr. Bush would have to do to lock anyone up forever is to declare him an illegal combatant and not have a trial.

Coerced Evidence: Coerced evidence would be permissible if a judge considered it reliable — already a contradiction in terms — and relevant. Coercion is defined in a way that exempts anything done before the passage of the 2005 Detainee Treatment Act, and anything else Mr. Bush chooses.

Secret Evidence: American standards of justice prohibit evidence and testimony that is kept secret from the defendant, whether the accused is a corporate executive or a mass murderer. But the bill as redrafted by Mr. Cheney seems to weaken protections against such evidence.

Offenses: The definition of torture is unacceptably narrow, a virtual reprise of the deeply cynical memos the administration produced after 9/11. Rape and sexual assault are defined in a retrograde way that covers only forced or coerced activity, and not other forms of nonconsensual sex. The bill would effectively eliminate the idea of rape as torture.

•There is not enough time to fix these bills, especially since the few Republicans who call themselves moderates have been whipped into line, and the Democratic leadership in the Senate seems to have misplaced its spine. If there was ever a moment for a filibuster, this was it.

We don’t blame the Democrats for being frightened. The Republicans have made it clear that they’ll use any opportunity to brand anyone who votes against this bill as a terrorist enabler. But Americans of the future won’t remember the pragmatic arguments for caving in to the administration.

They’ll know that in 2006, Congress passed a tyrannical law that will be ranked with the low points in American democracy, our generation’s version of the Alien and Sedition Acts.

By Javier Blas and Scheherazade Daneshkhu in London

Published: September 6 2006 00:20 | Last updated: September 6 2006 00:20

Four months ago, I dared to pen my first constructive piece on the global macro outlook in years (see my 1 May dispatch, “World on the Mend”).  Yet recently, I have warned of the mounting downside risks to world economic growth in 2007 (see my 14 August dispatch, “Not Much Fizz Left in the Global Economy”).  How do I reconcile these seemingly contradictory points of view?

My optimistic assessment was primarily a call on the global policy architecture -- the structural framework that governs the cross-border interplay between national economies and world financial markets.  I was encouraged because the so-called stewards of globalization finally seemed to be taking the threat of mounting global imbalances seriously.  The 22 April meetings of the G-7 and the IMF were watershed events -- singling out global imbalances as an increasingly worrisome threat to sustainable growth in the world economy.  The IMF introduced a new paradigm of surveillance and consultation that moved from a single-country to a multilateral framework.  I drew added encouragement from pro-consumption rumblings in China that pointed to a rebalancing of that economy away from excess dependence on exports and fixed investment.  For years, I worried that the authorities were asleep at the switch as an increasingly unbalanced world veered toward a highly disruptive strain of global rebalancing.  With global policy makers finally waking up to the threat, I argued that it made sense to reduce the odds of a crisis endgame. 

Notwithstanding the potential for an improvement in the global architecture, the cyclical outlook for the world economy has deteriorated in the past few months.  The major force at work is the long-awaited bursting of the US housing bubble.  In my view, this spells consolidation for the asset-dependent American consumer as well as for export-led economies elsewhere in the world -- especially in Asia but also in Europe and South America -- that are heavily dependent on end-market demand in the US (see my 28 August dispatch, “Global Fallout from America’s Post-Bubble Shakeout”).  At the same time, the odds of a China slowdown are rising, as the authorities in that country now have little choice other than to impose additional cooling off measures on an increasingly overheated Chinese economy.  And the European economic outlook seems to be deteriorating -- reflecting the likely headwinds imparted by looming fiscal consolidation, together with the lagged effects of monetary tightening and a stronger euro.  While the four-year global boom is not exactly giving way to a bust, there are good reasons to believe that the world’s growth cycle will shift markedly to the downside in 2007.

The macro prognosis always reflects a balance between structural and cyclical forces.  In early May, I drew comfort from the structural piece of this equation -- in particular, a shift in the policy response to the growing threat of global imbalances.  I noted at the time, however, that cyclical risks still seemed very much in evidence -- especially those bearing down on the American consumer.  As a result, I concluded that it was not appropriate “…to give an unbalanced world the green light.”  With the benefit of hindsight, I certainly wish I had placed greater emphasis on that caveat back in early May. 

Over the past four months, the balance between structural and cyclical forces has been more heavily influenced by rapidly changing developments on the cyclical side of the equation -- especially those that pertain to the bursting of the US housing bubble.  Largely for that reason, the near-term global prognosis has deteriorated relative to conditions prevailing in early May when I turned more optimistic on the structural story.  The surprise was more in the timing of the cyclical shift than in the tradeoff between these two sets of forces.  By definition, structural change is typically glacial while cyclical shifts unfold with considerably more speed.  The bursting of the US housing bubble is a fast-breaking cyclical development that has gathered considerable force in the past couple of months.  By contrast, there has been only modest follow-through to the late-April structural breakthroughs on the global policy architecture -- namely, the IMF’s prompt identification of the US, Europe, Japan, China, and Saudi Arabia as the first candidates for multilateral consultations.  In a world where the wheels of architectural change turn ever so slowly, this is actually speedy progress.  But when judged against the rapidly changing state of the US housing market -- or even the pressures building in an overheated Chinese economy -- progress on the structural front has been swamped by the emerging downside pressures on the global business cycle.

The upcoming IMF meetings in Singapore later this month will provide an important opportunity for the stewards of globalization to build on the efforts of last April.   Intent is one thing -- results are another.  Putting meat on the skeleton of multilateral surveillance and consultation is critical.  So, too, is providing better balance to IMF member voting rights.  Global rebalancing is a shared responsibility.  Yet for most of its 60-year history, the IMF has been dominated by the US and Europe -- with the developing world largely on the outside looking in.  Currently, a proposal is on the table to expand voting rights for China, South Korea, Turkey, and Mexico.  The intent of this US-sponsored initiative is to empower large developing economies as stakeholders in the governance of globalization.  Passage of this proposal would be another important milestone on the road to architectural reform.  So, too, of course, would be a restarting and successful completion of the Doha Round of trade liberalization.  Structural reform of the institutions of globalization is a long and arduous process.  Last April, an important breakthrough finally occurred.  It is critical for an unbalanced and increasingly integrated world to build on that momentum.  That won’t offset serious cyclical problems that may be brewing in the world, but it could go a long way in providing a more robust framework for the global economy to cope with these problems. 

The key message from my bullish call on the global economy pertains less to the near-term growth outlook and more to the risks of a crisis-type endgame for an unbalanced world.  Rewriting the rules of engagement that govern the institutions of globalization is an unambiguous plus, in my view.  It reduces the possibility that America’s current-account adjustment will eventually result in a sharp plunge in the dollar and a concomitant back-up in real long-term US interest rates -- outcomes that could have devastating consequences for a still-unbalanced world.  Alas, progress on the structural reform front does nothing to temper the cyclical risks that still pose more of an immediate threat to an unbalanced world.  As the air comes out of America’s housing bubble, those risks are now mounting.  The bad news is an unbalanced world remains highly vulnerable to a consolidation of the asset-dependent American consumer.  The good news is that the stewards of globalization are finally working together to temper the risks associated with such a shakeout.  On balance, I remain constructive on the structural prognosis while I have turned more pessimistic on the cyclical outlook.

In response to Hezbollah's attacks, Israel was justified in attacking Hezbollah to protect itself against the threat of missiles on its border. However, Israel should have taken greater care to minimize collateral damage. The civilian casualties and material damage inflicted on Lebanon inflamed Muslims and world opinion against Israel and converted Hezbollah from aggressors to heroes of resistance for many. Weakening Lebanon has also made it more difficult to rein in Hezbollah.

Another weakness of the war-on-terror concept is that it relies on military action and rules out political approaches. Israel previously withdrew from Lebanon and then from Gaza unilaterally, rather than negotiating political settlements with the Lebanese government and the Palestinian authority. The strengthening of Hezbollah and Hamas was a direct consequence of that approach. The war-on-terror concept stands in the way of recognizing this fact because it separates "us" from "them" and denies that our actions help shape their behavior.
 
A third weakness is that the war-on-terror concept lumps together different political movements that use terrorist tactics. It fails to distinguish between Hamas, Hezbollah, Al Qaeda or the Sunni insurrection and the Mahdi militia in Iraq. Yet all these terrorist manifestations, being different, require different responses. Neither Hamas nor Hezbollah can be treated merely as targets in the war on terror because they have deep roots in their societies; yet there are profound differences between them.

Looking back, it is easy to see where Israeli policy went wrong. When Mahmoud Abbas was elected president of the Palestinian Authority, Israel should have gone out of its way to strengthen him and his reformist team. When Israel withdrew from Gaza, the former head of the World Bank, James Wolfensohn, negotiated a six-point plan on behalf of the Quartet for the Middle East (Russia, the United States, the European Union and the United Nations). It included opening crossings between Gaza and the West Bank, an airport and seaport in Gaza, opening the border with Egypt, and transferring the greenhouses abandoned by Israeli settlers into Arab hands.

None of the six points was implemented. This contributed to Hamas’s electoral victory. The Bush administration, having pushed Israel to allow the Palestinians to hold elections, then backed Israel’s refusal to deal with a Hamas government. The effect was to impose further hardship on the Palestinians.

Nevertheless, Abbas was able to forge an agreement with the political arm of Hamas for the formation of a unity government. It was to foil this agreement that the military branch of Hamas, run from Damascus, engaged in the provocation that brought a heavy-handed response from Israel - which in turn incited Hezbollah to further provocation, opening a second front. That is how extremists play off against each other to destroy any chance of political progress.

Israel has been a participant in this game, and President Bush bought into this flawed policy, uncritically supporting Israel. Events have shown that this policy leads to the escalation of violence. The process has advanced to the point where Israel's unquestioned military superiority is no longer sufficient to overcome the negative consequences of its policy.

Israel is now more endangered in it existence that it was at the time of the Oslo Agreement on peace. Similarly, The United States has become less safe since President Bush declared war on terror.

The time has come to realize that the present policies are counterproductive. There will be no end to the vicious circle of escalating violence without a political settlement of the Palestine question. In fact, the prospects for engaging in negotiations are better now than they were a few months ago. The Israelis must realize that a military deterrent is not sufficient on its own. And Arabs, having redeemed themselves on the battlefield, may be more willing to entertain a compromise.

There are strong voices arguing that Israel must never negotiate from a position of weakness. They are wrong. Israel’s position is liable to become weaker the longer it persists on its present course. Similarly Hezbollah, having tasted the sense but not the reality of victory (and egged on by Syria and Iran) may prove recalcitrant. But that is where the difference between Hezbollah and Hamas comes into play. The Palestinian people yearn for peace and relief from suffering. The political - as distinct from the military - wing of Hamas must be responsive to their desires. It is not too late for Israel to encourage and deal with an Abbas-led Palestinian unity government as the first step toward a better-balanced approach. Given how strong the U.S.-Israeli relationship is, it would help Israel achieve its own legitimate aims if the U.S. government were not blinded by the war-on-terror concept.

George Soros, a financier and philanthropist, is author of "The Age of Fallibility: Consequences of the War on Terror."

The economic forecasters that we do have, to inform the public, give fortunetellers a bad name. A case in point is economist Diane Swank, a pretty face that frequently appears on financial TV, whom I heard saying, answering a question on what the Yield-Curve was forecasting, "this indicator will crash," i.e., totally fail this time. If economists, as a group, had any professional integrity, let alone any shame, they will pay for advertorials to inform the public that they are incapable of forecasting recessions and depressions. The stock market might have predicted, "nine out of the past five recessions," as Nobel economist Samuelson is supposed to have quipped, how many have economists, as a group, predicated? A fat zero. So, please ignore a crank like myself, or any other non-economist prognosticator of the economy, if you must, but don't hold your breath for an economist to forecast a recession until after the economy is already in a recession. And in many cases until it has already come out of a recession. The best ability to forecast recessions and depressions is to be found among those that dwell into investments and among professional speculators. A degree in economics is a very big hindrance in forecasting recessions and depressions; on that history's verdict is clear.

Why can't America have a recession? Because Americans can't afford it! Especially, not now. There is a book titled, When Wish Becomes a Thought, by an American sociologist that encapsulates the truth about most people's forecasts. Add to this the most common psychological disease among Americans - Optimitis Americanitis - and you have all the makings of a grand denial and its consequences (this disease has been carried on by many Indians and Chinese to their native lands). As we saw in the case of New Orleans, catastrophes are more likely to hit those who are least prepared. Or, so it would seem.

The proximate cause of the coming recession would be the bursting of the Housing Bubble, existence of which lot less people deny now than a year ago, and one can list more than a dozen indicators to support the case for a recession within the next 12 months. Here are just a few that quickly come to mind:

1. NAHB (National Association of Homebuilders) Index, at a 15-year low and at levels that precede recessions.

2. LEI - Exhibiting a condition of peaking, since Jan'06, which ALWAYS leads to a recession after average of 11 months (thank you David Rosenberg of Merrill Lynch).

3. Yield-Curve that began to invert in Feb'06 and now is very close to the level (10Y-3M-YD = -0.32%) that ALWAYS leads to a recession within 12 months but mostly in 4-8 months.

4. Consumer Confidence - very low, despite the employment holding OK.

5. Break in the Scam Market in May despite very good earnings and huge buying of their own Scam by corporations.

6. The Pause - the main reason is the expectation of a weaker economy, but how much weaker? (More later).

I have been among the leaders of those who saw the Housing Bubble building and predicted a recession once the Housing Bubble bursts. In fall of 2004, I thought that the Housing Bubble was in the process of deflating. Based on that I forecast the recession to begin before the end of 2006Q2. I was wrong about the deflation of the Housing Bubble to begin in the fall of 2004 (which took place exactly a year later) and, hence, wrong on the dates and probabilities of recession I outlined in the fall of 2004. In the forecasting business making mistakes is not uncommon. The important thing is to learn from the failures. I learned two things - gathering historical data on housing, including supply and demand, and to spend lot more time on understanding various leading indicators and gather data on them. The most important part of this process was to accurately quantify the predictive powers of the Yield-Curve. It is the best predictors of the recessions as well as periods of falling inflation, as presented in my editorials over the past six months:

Feb-27-2006 Why Yield Inversion Foretells Recession? http://www.safehaven.com/showarticle.cfm?id=4681.htm

Feb-28-2006 The Best Way to Interpret Yield-Curve's Ability to Forecast Recessions http://www.safehaven.com/showarticle.cfm?id=4686.htm

Mar-06-2006 Accurate Characterization of Yield-Curve and Recession Probabilities http://www.safehaven.com/showarticle.cfm?id=4720.htm

Jun-17-2006 Yield-Curve, Inflation, and Recessions: Are Recessions Necessary to Control Inflation in the US? http://www.safehaven.com/showarticle.cfm?id=5390.htm

My big break in being on the top of the Housing Bubble Watch came with the historical data on the Fundamental Demand for housing (as in a place to live, including second homes, or for a dwelling, i.e., number of households) and the supply. It is true that the prices were going up so rapidly because of the market demand outstripping the market supply, but what if the market demand were to be Speculative Demand, as I suspected and claimed? The data settled that question as well as repudiated all the arguments by the bulls who claimed that Fundamental Demand for house-dwellings (a term from Adam Smith) was leading to the rapid increase in prices. Just a few days ago, Paul Kasriel, an economist I respect along with David Rosenberg of Merrill Lynch, wrote an article on the Supply-Demand question:

August 25, 2006 New Homes Market: Worst Supply-Demand Situation Since Early 1970s by Paul Kasriel http://www.safehaven.com/showarticle.cfm?id=5766.htm

Well, I foresaw this coming more than a year ago:

07/31/2005 The US Housing Supply-Demand: Countering Lies with the Facts http://www.financialsense.com/fsu/editorials/2005/0731.html

In July of 2005 I became convinced that when this Speculative Demand driven bubble bursts it would be ugly. Thus far, even though the burst has barely begun, it has not disappointed. It will make all the previous bubbles and crashes look mild by comparison.

Connecting the Dots

Few weeks ago, Ron Insana, one of the better commentators on CNBC, said, during a debate on inflation, "Inflation peaks during the first year of a recession (you can see for yourself in Fig 1. of http://www.safehaven.com/showarticle.cfm?id=5390.htm). How many people know this fact even today?

How many of you believe that Bernanke will let inflation keep rising for another six months, let alone a year? If inflation does not start going down, and continues going down, in another six months he will be forced to apply the brakes if for no other reasons than to establish his credibility. Assuming that it takes up to nine months for inflation to start to fall, we will already be in a recession in nine months. I personally think that inflation will start to come down lot sooner than nine months. Why? The Pause!

One risk that Bernanke will not take is that of letting the inflation going out-of-control. Even the current level is way outside the 1-2% declared target zone by Bernanke and various Fed officials who have bought into that. The Pause is a clear signal of expectation by the Fed of weakening economy, led by Housing Bubble bursting, and once the economy starts to weaken due to Asset Deflation, the Fed can't control its slipping into a recession, as we already learned, once again, in 2000-01. The fact is that bursting of an asset bubble is a psychological phenomenon and there isn't much the Fed can do in a short period. By the time the Fed knows that the economy has weakened into a recession, usually it is late by several quarters. The Fed will have to use terms like slowdown, soft landing, orderly retreat, etc., until we are well into a recession.

I have already indicated, earlier, that the Yield-Curve is now at the point where the recession is highly likely to occur in 4-8 months.

Two Most Important Economic Reports

Existing Home Sales reports for the months of August and September. I have been waiting for the August report for some nine months. What is so special about that report? The housing broadly peaked in August 2005 and the YoY comparisons will look plain ugly. Here is what I see between the August and the September reports:

1. The YoY nominal median prices of homes, nationwide, will be negative.

2. The YoY nominal median prices of homes for the state of California will be negative.

3. Sales volume will be down 20-50% across most of the areas in the US.

The first hasn't happened for some 53 years and it will get the attention of all the bulls in denial of how serious the housing problem is going to be for the economy - a hard landing and the beginning of the first depression since the Great Depression.

Why the Depression?

It Is the Debt, Stupid!

All asset bubbles are "Credit Bubbles." Well, Debt is just the other side of Credit. I think that Americans are running out of bubbles. No? Also, the Fed and its constituency, Bankrupters and Fraudsters of New York City (BFNYC), are running out of "options" to push more Consumption Debt (yes, mortgage is consumption debt) and Scams. And it was the unprecedented push of Consumption Debt, mostly via "reckless mortgage lending," that has kept the US economy out of a recession for the past four years. I think that the "Bush recovery" has been pushed as far as it could be pushed already. Nicht mehr, nicht mehr, nicht mehr. (No more, no more, no more).

Now, about the Deflation case. Most people misjudge the powers of the Fed. Almost all its power, long-term, is a matter of The Confidence Game (title of a book on the Fed). Fed is in no position to inflate as most inflationists think. Deflation will come so suddenly, as a result of the Demand Destruction leading to inflation falling very fast and going from +1.0%, YoY, to below zero within months, that Fed will not be able to pre-empt it. Once Deflation takes root for few months it would be very hard to get rid of. The proverbial Pushing On the String (not being able to Pushing ON More Debt!) will become a reality. It would be good for Americans to learn about the limits of Fed's power in being able to manipulate the economy. Americans will also learn a thing or two about what wealth is and what an investment is.

Here are some excerpts from the LME’s press release of August 16 –

"Those with short positions in nickel falling prompt on Friday 18 August 2006, and on subsequent prompt dates until further notice, who are unable to effect physical delivery an/or unable to borrow metal at a backwardation of no more than $300.00 per tonne per day, shall be able to defer delivery for a day at a penalty of $300.00 per tonne. Those with long positions for prompt on those days who are subject to deferred delivery shall be entitled to compensation of $300.00 per tonne per day

Commenting on the announcement, Simon Heale, LME Chief Executive said:

"Nickel stocks are at historically low levels and we now have a genuine material shortage. Our first priority is to ensure that trading remains orderly and to prevent the risk of settlement defaults."

Although there has been widespread reporting of this event in all the popular media and news services, I have been thunderstruck by how mostly all of the reports have danced around the key fact at the heart of this matter. That key fact is that the LME just declared that its nickel contract has gone into default.

While Mr. Heale states that the action by the exchange is designed to prevent default, the action taken is nothing but a declaration of default, rendering his statement as absurd. Default is a simple word. Any time you unilaterally violate or negate the terms and conditions of any legal contract, that contract is in default. Period.

Moreover, a simple analysis of the situation reveals that the LME is aligning itself with the interests of the naked shorts in nickel, as common sense should tell you that no long holder asked the exchange to suspend the delivery obligation of the shorts.

I must say that it is troubling that with such widespread reporting of this event, the most important fact, the delivery default, seemed lost as a message. But make no mistake; this default is a most serious matter. In fact, as I have written previously, a contract default is the absolute worst event that could befall any exchange. In an instant, a delivery default renders an exchange suspect as an institution. It makes no difference if that exchange has existed for hundreds of years, a delivery default can immediately destroy the strongest reputation. This is the grave risk that the nickel debacle poses to the LME.

The main concern for the nickel market and the LME is that the abrogation of the shorts’ delivery obligation is not the end of problem, even though it may lead to the end of the LME itself. That is because legitimate long contract holders, particularly industrial consumers, have been left in a lurch by the deferral of delivery of actual metal. What do the industrial nickel users now do?

The legitimacy of any exchange or contract is based upon all conditions and obligations being upheld, and not suspended when it is expedient to certain interests. In the case of a futures or forward contract on a physical commodity, the most important conditions and obligations are those which guarantee and mandate how the contract is converted to actual delivery.

Although only a very small percentage of any futures contract normally results in actual delivery of the physical commodity, it is precisely the delivery mechanism that determines the legitimacy of the contract. Take away that delivery mechanism and you take away the legitimacy. Take away the delivery mechanism and all you have left is paper contract with no connection to the commodity involved. This is what has happened to the LME nickel contract – because the exchange has suspended the shorts’ responsibility to deliver actual metal, that contract has become, essentially, worthless to industrial consumers.

The key point here is not that every contract created between a long and a short will result in actual delivery, but that every contract will result in delivery if either party wants it to. Each party to a contract, the long and the short, entered into that contract voluntarily. No one held a gun to anyone’s head, forcing them to buy or sell any contract. It is unfair and illegal that any authority (the LME) intercedes on behalf of either side to override a contract that was entered into voluntarily.

What the LME has done in nickel is relieve the shorts of having to round up actual metal to deliver against their contractual promise to deliver, and unilaterally transferred the obligation to the longs, the industrial user. These industrial consumer longs (and other longs) entered into their nickel contracts voluntarily and legally, with the option of taking delivery. Now they are told, with no warning, they can’t take delivery and must secure metal elsewhere. The shorts don’t have to scramble for material they promised to deliver, the longs have to scramble for material they were legally promised to receive. Nothing could be more unfair.

Furthermore, as long as the shorts’ obligation to deliver nickel is suspended, there is no good reason for an industrial user to buy an LME contract. This is the greatest threat to the LME. And it’s not just deterrence for those buyers who want to take actual delivery. With the delivery mechanism destroyed in nickel, the linkage between the price of real metal and the LME contract is also destroyed. Without the requirement for delivery, the price of nickel on an LME contract and nickel in the real world loses its connection. In this case, the price of LME nickel is merely a figment of anyone’s imagination. What good does it do an industrial consumer to hedge on the LME, if there is no assurance his contract will converge with the price of actual metal on the delivery due date? Without the delivery mechanism, there is no linkage between paper contract and actual metal.

This is the real meaning of the LME’s delivery default. It is also the same thing with the short-side manipulation in COMEX silver. It is a coincidence that this LME nickel disaster has occurred precisely at the same time others and I have been alleging a manipulation in COMEX silver. However, nothing could prove our case more clearly.

A long-side manipulation, evidenced by a concentrated long position and prices higher than would be without the concentrated position, is something the regulators have vast experience in dealing with. While disruptive and illegal, long-side manipulations are usually short in duration and easy to terminate. The concentrated longs, usually speculators, are forced to sell their positions, causing prices to collapse and end the manipulation.

A short-side manipulation, like those in LME nickel and COMEX silver, is evidenced by a concentrated short position and prices lower than would be without the concentrated short position. (The concentrated short position in nickel has been reported in news stories, while the concentrated short position in COMEX silver is reported by the CFTC). The regulators have little or no experience with short side manipulations, and since the concentrated shorts are industry insiders, rather than outside speculators, there is little incentive for the regulators to move against their own.

The real problem with short-side manipulations is that it is very difficult to terminate without great damage because they have a long duration. When a short-side manipulation is terminated, like in LME nickel, it threatens great and lasting disruption to the actual market because the resultant shortage of material causes real hardship with no easy remedy. This is in addition to the damage caused to an exchange or contract involved in such a short-side manipulation, which ends in a delivery default.

Clearly, the UK regulators and LME officials waited too long to attack and resolve the short-side manipulation in nickel. If they had acted responsibly and forced the concentrated shorts to cease their manipulative activities, the delivery default might have been averted. Now it is too late in nickel, as the damage is done. Is it too late for silver?

I think there may still be time for the US regulators to act in silver and avoid a COMEX silver delivery default. But I also have my doubts. That’s because the CFTC and NYMEX/COMEX officials have been dragging their feet on the issue of the concentrated short position. Instead of promptly responding to allegations of manipulation and a looming delivery default, the regulators are stalling. Stalling didn’t benefit the regulators in LME nickel. It only made matters much worse.

In fact, the main, if not only, difference between nickel and silver is that the regulators will never be able to say they were not warned in silver. And if the regulators in silver still do not see how the recent events in LME nickel are directly foretelling what is going to happen in COMEX silver, then they do not deserve to be regulators any longer.

While I will continue to attempt to end the silver manipulation (with your help), it is entirely possible that government regulators and COMEX officials will continue to evade their legal responsibilities and allow the silver manipulation to exist, right up to the inevitable delivery default. That will be tragic, but it will be on their heads.

Fortunately, there is something else that you can do. You can take the debacle in LME nickel as yet another confirmation as what will happen in silver and position yourself accordingly. If there has ever been an exclamation point given to "buy and hold real silver", it has been given to you by the LME actions in nickel. If an exchange that has been in existence for hundreds of years can suddenly terminate delivery obligations in its contracts, how hard do you think it will be for those issuing pool and leveraged accounts in silver to do exactly the same thing? I think anyone holding such accounts needs to have their heads examined.

But the strongest message of the LME default is being sent to the silver industrial consumers of the world, because the biggest potential losers in nickel are the industrial users. If the LME can get away with suspending delivery requirements in nickel, how hard will it be for the COMEX to suspend delivery requirements in silver? Do you think the CFTC will come to your defense? The same CFTC that is stalling on the concentrated short issue in silver? Even more than those investors and speculators dealing in paper contracts, any user who is not stockpiling real silver inventories, in light of what just occurred on the LME, is missing the boat.

I hope the CFTC and the NYMEX does the right thing with this concentrated silver short position and moves against the manipulators. But even if they don’t, there is no good reason for investors and industrial users to not protect themselves and buy real silver. How many wake-up calls are necessary?