Tere's increased scuttlebutt that derivative trades are blowing up, and that counter parties are failing. There's a blow out in Corporate CDS sector in general. The suspects involved a range of players, from Deutsche Bank (likely), to commodity kingpin Glencore. Until the tide goes out completely, we won't really know. On the issue of commodities, there seems to be an assumption that the leveraged paper trades are on the long side or inventory side. That notion is not just untrue, it's ludicrous. In fact, I would suggest that the leveraged paper trades on a variety of metals — and especially the precious metals — are very crowded speculative short sales.

Beyond basic over-trading in paper instruments, the second area of exposure is within Ponzi derivatives sold against credit. These are always highly leveraged. Once the counter parties to this are taken out back and shot, then the Ponzi credit lines to support uneconomical money-losing commodity and energy production will be closed off, as will the production itself. Judging from its trading action, one must assume Glencore is one of the counter parties to insuring this Ponzi corporate credit within the commodity spectrum. A glance at Glencore's liabilities shows a large mix of financial contracts.  The serious meltdown and production wipe out will occur in the worst-cost quartile of producers.

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The impact on inventories or stockpiles of physical metal commodities is very exaggerated. Companies like Glencore reduced those last spring and especially this summer. Eyeballing the zinc inventory at the LME is a decent canary in the mine of that and offers clues. After relentlessly drawing down to a quite low level back in May, zinc stocks or inventory suddenly showed up starting in mid-August and peaked on Sept. 16. Stocks have dropped 22,000 tonnes since the 16th.

Many analysts point to this surge in part coming from Glencore. That is plausible, but the combined stocks of Glencore, the LME and others are not even remotely excessive now. In fact, if Ponzi credit is pulled from the high-cost zinc producers, physical stocks and supply will evaporate in a flash. Nearly a third of global zinc production is at a cash cost well above the current spot price.