Here's reality folks - Paul McCulley of PIMCO has finally told the truth - 10% of all Americans are underwater on the price of their house.

Of course then they go on to say that "this has to be fixed", because their book of business requires that it is, or PIMCO is going to get the Chrysler building somewhere that hurts. A lot.

There is in fact where the problem lies - and it can't be "fixed."

That's reality, whether people like it or not.

And lots of people don't like it.

You're now seeing some real "reporting" from the media, with the truth coming to the fore - maybe.

Today's banner should have read "nobody wants risk of any sort, including interest rate risk" as the IRX - the 13 week bill - was bought HARD across the board. This speaks very poorly to the potential for the future, and if you look at the WSJ's "Market Data Center" you might see a reason for it - P/Es on the indices are higher today than they were a year ago, despite the plunge in prices. Why? Because earnings are sucking and in fact are likely to suck even worse than what we've seen thus far!

Now add to this that the trade isn't just into TNX (long end of the bond curve) but is REALLY into the short end, which speaks to a raw FEAR that we are about to provoke capital flight and/or massive government bailout attempts which will spike the long end of the Treasury Curve higher.

What's going on beyond all the crooning for government intervention? Simple - the death of the hedge fund. Leverage is being forcibly taken down. 20, 30, 40:1 is no longer acceptable to the prime brokers that fund these Hedgies. They're being told to cut back to 4:1 or less. This is a serious problem because with the 2 and 20 compensation system they use there is no reason for them to exist unless they can gear up 20:1 or more - their return to the client will approach that of Treasuries!

If this keeps up, and I believe it will, there will be effectively no hedge funds in a year or two - there will be no way for them to make money any more. This is a major problem for equities because at least half of all volume in fact comes from these institutions and its even worse in commodities!

This augers very poorly for both equities and commodities - the "hot money" is being forced to cut out their wayward ways, and the result is going to be serious pressure in both the equities and commodities space.

Those who think the market is going higher because "money on the sidelines will come in" are just dead wrong because the money is gone!

Fannie and Freddie were out pumping their "liquidity change" today on CNBC, but they also said something that should give you pause - they expect at least 15% in home price declines on a national basis, with most of it to come.

Now look at what this does to foreclosure rates and their capital ratios.

Oh, and they're talking about deploying this new liquidity "opportunistically" (that would mean a bit of risk being taken eh?) - that could end very badly for them. One thing they did say though - repeatedly - is that they will be "conservative."

Hmmm... what's "conservative"? Why am I reasonably sure its not 20% down and a maximum 36% "back end" ratio?

If this doesn't make you nervous, in my opinion it should!

Oh, here's the real ugly from today - Merrill is apparently suing one of their CDS insurers (you know, one of those "monoline-type" companies?) that they bought swaps from (which are supporting the credit quality of some of their book) and which they allege are now defaulted under the terms of that purchase. The company refuses to pay.

This is huge news; if there is an explosion in one of these firms the cascade effect of "exposing" the supposedly-wrapped investments in one of these investment banks is likely to cause cascading cross-defaults in other places. It is possible that this could cause a cascade of capital ratio violations across various institutions with disastrous consequences, and unlike Bear Stearns, this one can't be stopped by The Fed.

Pay attention folks - things are quite likely to get very interesting in the coming days and weeks.

The truth is now leaking out on these "wraps" - they are all worthless as the money to pay is simply not there. As the demands for payment start to line up people will soon "get it"; the wise man is now making damn sure he's standing right near the door, as there's a whiff of smoke in the air.