Mud, as in the smelly, dark, foul brown kind that is injected into a high-speed airmoving device.

The internals today absolutely blew bananas. There's simply no other description for it.

Market action wasn't any better.

Friday? All retail idiots. If you bought into that - or worse, if you were the FOOL who bought the 2,000 S&P Minis last night on Globex I hope you like gay sexual acts, because you got it, and we're not talking about a spanking.

In that, that might have been a horse..... or a bear.

There is nothing to like in the market action, and to those who think we're headed for hyperinflation in the future, the credit market says otherwise - it is screaming loud and clear "SOLD TO YOU!"

Ditto for those of you who are long metals thinking that is going to "work". Beware. In a deflationary scenario you do not want to be in metals. Far from it. Yes, they've had a nice run, but you better be right about the inflationary tendencies. Were I in metals here I would take my profits and run.

NOW.

I am also getting very wary about being short dollars here. This has been "working" but it is, without question, the most one-sided trade I've seen in my years in the markets. If and when that reverses you're going to get destroyed.

Being long other currencies, or, for that matter, playing any part of the "hyper inflationary" game, requires that you believe that other nations will be ok even as we get destroyed.

That's a losing bet guys and gals.

Look at what is happening to Airbus. Now extrapolate that to any European nation that relies on exports to us. Then consider what happens when our consumption and Europe's both go in the toilet (we go first, and as soon as we clear the bowl they're right behind us) if you're over in the Far East thinking about "what's next".....

Oh yeah, and the Chinese appear to be intending to put the heat on Japan and play with Ms. Watchamacallit and her Carry Trading too. I bet she is learning all about gay male sex as well these last few weeks.

This is likely to continue.

The Fed will pump money like nobody's business? Uh, I doubt it. They've said they're going to be paying attention to headline inflation. Oh, and you have been watching those price ramps on import prices - especially from China - yes?

Rate cuts eh?

Hmmmm...... or is the truth more like "following monetary velocity as it spirals into the dirt"?

One helps the economy, the other, well.....

If you haven't read the Ticker about The Fed, Fed Funds, and how it really works, go do it now. Get educated, because understanding reality is going to be critical in the next few weeks and months.

Being wrong on critical gating issues is going to get you killed.

Today Chuck Schumer (D-NY) went after the record FHLB loans to CountrySlide (CFC). Those who have read the ticker for a while know that I am generally no fan of Democrats - but credit where credit is due must be given, and this is one of those times.

MR. SCHUMER, THANK YOU FOR LISTENING - AND ACTING.

Ok, now onto something far more serious - the possibility that we are literally weeks or a handful of months away from an utter implosion in the equity markets.

I believe we are very, very close to the precipice - and that nothing Bernanke or Paulson can do now will change the outcome. The opportunity to address this and stop it expired a few years ago, with the cumulative damage growing the longer regulators fail to act.

Treasury and The Fed are now caught between choosing only the orifice in which the US Economy is about to suffer a gang******- it is no longer possible to prevent the assault itself.

The correct move is to force immediate marking to market on all "Level 3" assets, with full disclosure and recall onto the balance sheets. Those who fail, fail. Consolidate them into those who are left. Yes, this will cause an immediate - and huge - selloff in the equity markets.

THE ALTERNATIVE IS WORSE as even "good" institutions will get dragged into the toilet IF BERNANKE AND PAULSON DO NOT ACT NOW!

I want to talk a bit about the "why" and "when" on this.

Remember, the original estimates were for $50-100 billion of losses due to "subprime."

The problem is that we've already seen nearly $100 billion worth of losses (including $39 billion at GM alone!) and yet the ALT-A mess hasn't even begun to be realized. Nor have the worthless HELOCs and Seconds - all of which have a net present value of zero in a declining housing market should the homeowner decide not to pay (or be unable to pay!)

Remember that back when the S&L crisis got going the original estimates were in the low tens of billions - the ultimate bill was $150 billion, when it was all added up.

This is going to be worse.

Perhaps ten times worse.

The leverage in these deals insures it.

We are likely to see a real, no-bull**** trillion dollars of losses - real losses - in the United States alone. That's 7% of GDP. Overseas investors and institutions will take a trillion of their own up the chute in addition. Then there will be the collateral damage from OTC derivatives which can't be paid.

Supposedly "money good" institutions will get sucked into the hole by this. GM, for example, is a car company with a huge exposure, and they just ate $39 billion. How much more is there? I have no idea, but I bet its not zero. In fact, I'll bet my entire account balance its not zero.

This gets very ugly as credit contracts - yes, interest rates fall (a lot) but it doesn't matter as there's no velocity of money (credit) and shortly after consumer spending goes in the toilet businesses follow.

Not because they want to - but because they have no choice.

What sets off the spiral?

Likely a major financial institution - like Countrywide - formally violating a reserve requirement and being seized. Will it be them? I have no idea - but that this is likely to be the trigger event is pretty much assured. Indeed, it could even be an overseas organization that goes up in smoke first.

Timing?

I am now looking for this event any time from literally tomorrow through some time in the first quarter of 2008. I could be early, in which case we're still talking about '08, but perhaps into the second or third quarter.

How bad do I think it is going to get?

1070 on the SPX - minimum.

The potential exists for multiple circuit-breaker trips on the major indices when it cracks.

There is the possibility that the 2003 lows in the Dow and SPX could be taken out.

I do not rate this probability as high at the present time, but the possibility of this happening is now on the table, where as recently as a couple of weeks ago it was NOT.

You will not be able to effectively short into the hole - if you're not prepared to take REAL losses if you're wrong on timing and/or the outcome - perhaps very heavy losses - get the hell out and sit on the sidelines, watching the pretty fireworks from a safe distance.

In my viewpoint for 90% or more of the traders out there, you really ought NOT to try to play this, except perhaps for some lottery tickets (e.g. way OTM PUTs) on which you are willing to take a 100% loss.

Return OF capital is way more important than return ON capital.

The market is likely to be insanely volatile with extreme whipsaws during the upcoming next few months, and unless you are prepared to be very nimble and trade this aggressively, you can easily be right and still lose your ass if you're unable to hold positions due to getting in margin trouble, or if you get the timing wrong and are in options.

To put this in perspective - this will not be a quick plunge and recovery like '87. It has the potential to be more like what happened in Britain during the 70s, or worse, like what happened to us in '29.

You've been warned.

Oh, and here's your technical...... :)