We are fey, dear readers. We seem to have the second sight...

It is only to be expected, of course, as our blood is Celtic. But still, even we are taken aback by our prescience.

Yesterday, we suggested that an implosion might be awaiting the hedge fund industry...and today, we see that, indeed, an implosion - and a ripe one - has already occurred:

"The gamble that went spectacularly wrong," trumpets the Sunday Times, referring to hedge fund Amaranth Advisors' recent sensational slip-up.

It seems that traders at the Connecticut firm were gambling that the difference between futures prices for natural gases in the summer and winter would continue to widen, as they had since the beginning of 2004.
But instead, they narrowed...sharply.... leaving the fund frantic for cash to cover its margin calls - those nasty but necessary requests by brokers to their clients, to pony up money on losing positions not paid for in full.

The bad bet left the luckless Amaranth with a hit of a several billion - yes, billion - dollars and a year-to-date performance that has gone, apocalyptically, from a 22% gain to a 35 % loss, in a matter of days. To put the matter in perspective, Long Term Capital Management, whose collapse sent seismic waves through the New York Stock Exchange in 1998, was facing paper losses of $2.5 billion, when a posse of financial top guns - including the Federal Reserve - rode in to the rescue.

And, Amaranth is not alone. Two high-profile hedge funds have already folded this year from losses made in trading the commodity markets. What else is in store?

We do not know, of course. We merely take a look at the cards spread out in front of us and hint to our readers to take care, if we see danger written in them. But we are not fortune tellers; we do not tell anyone when and how they will meet their fates - we leave that to Madame Zuleika, glittering in scarves and incense at the carnival booth. But, occasionally, even we have to wonder...
 
We wonder all the more when we read that the biggest hedge fund of them all continues to flourish. Goldman Sachs' third quarter numbers came in so strong that the stock shot up by more than 4% that day and is now hovering within striking distance of its high, this spring, of $170.

Goldman Sachs is already the world's most profitable bank and the numbers set a new Wall Street record. Already Porsche salesmen in New York are rubbing their hands in glee over those ten million dollars bonuses with which Goldman directors are apt to reward themselves.

But whence this feast in the midst of hedge fund famine?

Not from its trading division, we know. Goldman's traders posted a 7% decline. Instead, it is its Investment Banking and Asset Management Services that have boosted the numbers. Both are up 27% and 20% respectively. And, $30 billion of new assets have also flowed in.

Well and good. But who are these lucky new clients, and what is the source of all this new money? Here, we consult our crystal ball, turn over the cards and find...the jokers: Goldman's Asset Management services are now in the service of hedge funds....the new money is pouring in from "alternative" investments, which pay higher fees than traditional products (we wonder why!)...and Goldman's non-compensation expenses rose 29% versus only 2% growth in net revenue.

Goldman may be booming now, dear readers. But, we know what follows booms...

And now we read that President Bush intends to nominate Robert Steel, a senior director at Goldman Sachs, to the position of Treasury undersecretary for domestic finance. Former CEO Hank Paulson is, of course, already Treasury Secretary. The mavens at Goldman must also know what follows booms...and are stacking the jury in advance of their day of reckoning.

*** Housing posted a decline of 6.0% in August, following a 3.3% drop in July. Year on year, the drop is worse - 19.8 percent below August 2005 levels and at their lowest level since April 2003. Building permits are also down - 21.9 percent from August 2005 levels. Only the Northeast of the United States rose. The Midwest, South, and West all fell in August

One would call this a sharp decline, would one not, dear reader? Yet, paper after paper assures us solemnly that the numbers fit the "soft landing" projected by the Fed. We wonder what hallucinogenic they have been ingesting...as for us, we are asphyxiating on laughing gas...

A helpful reader pointed out this piece in the Washington Post:

"A leading retail trade group predicts that holiday sales growth will lag behind last year's in an early forecast that set a tepid tone for the most important shopping season of the year," reported the paper on Tuesday.

"The National Retail Federation (NRF) estimated Monday that sales during November and December will grow 5 percent, to 457.4 billion dollars, compared with a 6.1 percent increase last year. Average growth over the past 10 years was 4.6 percent, the group said.

"Ellen Davis, NRF spokeswoman, said the cooling housing market is partly to blame for the anticipated spending slowdown. Consumers are feeling a little less flush, she said. 'Housing prices have a psychological impact on homeowners,' she said. 'There may be a perception that you're not as well off as you were.'"

"All along you thought that plummeting housing prices were having a real, negative financial effect on people," notes our dear reader. "It turns out it's only psychological. Cheer up guys!"

Heh.

Bill Bonner is the President of Agora Publishing.  For more on Bill Bonner, visit The Daily Reckoning.