The levees in New Orleans held. The Republican convention is underway, and “drill, drill, drill…” is Larry Kudlow’s partisan answer to all that ails this domestic economy. All the while, the emotionally removed and analytically objective are surveying the world’s proverbial storms.

I have maintained for some time now that the largest market flood gate that has yet to open is that of the hedge fund industry. This has not been a popular call amongst my industry peers, but it has been the right one to stay with. As Bloomberg all-star Kathy Burton (author of Hedge Hunter’s) pointed out yesterday, “"Sixty-one percent of the 2,795 funds managing more than $100 million that are in New York-based's database are losing money in 2008."

Bubbles popping are processes, not points. As the facts get louder, revisionist historians are issued more impactful ones. This morning, that high profile fact is that commodity levered long hedge fund, Ospraie, is being forced to liquidate. Being from Thunder Bay, Ontario, has its analytical advantages. One of the local facts is that it has harbored the most contiguous grain elevators for one port in the world. At the peak of the commodity bubble, Ospraie was buying grain elevators! No, unfortunately I cannot make this stuff up.

My grandfather, Russ, proudly worked in Thunder Bay’s harbor for Provincial Papers as a Stationary Engineer for over 40 years, and was a member of IUDE # 865 Boiler Makers Union. He was not a hedge fund man, but I can tell you this, if he heard of this hedge fund “Trade” for elevators, he would have snickered, and asked “how many beers did the buyer have?!?”

From Goldman’s prop desk to lesser known hedge funds, the commodity bubble popping will reverberate deep into the moorings of the US Financial system. Commodities are what they are by definition – commodities! Putting leverage on top of commodity leverage is what Dick Fuld did when he had Lehman take a 20% stake in Ospraie in 2005. Fuld clearly didn’t “do macro”, so how can you blame him for Ospraie being down -27% in August. At least he can’t blame and fire his former CFO, Erin Callan, again – she’s left the Lehman building and now oversees hedge fund strategies at Credit Suisse First Boston. Nope, I can’t make that up either.

As global growth slows, the levered bet on global commodities pops. As commodity levered hedge funds liquidate, the commodity “prop desks” at US investment banks have to de-lever. As the world de-levers, the velocity of capital markets screeches to a halt. Asian growth slows, their currencies break down, and all that “Sovereign” cash begins to de-flate.

Incidentally, that’s my answer as to why the US market had a nasty intraday reversal yesterday…

All the while, the men running Citigroup, Lehman, and the US Treasury, are the ones who oversaw and oversee these global proverbial storms. Pandit at Citi blew up a hedge fund; Fuld’s news is on the tape; and Paulson’s Goldman Sachs is getting banged up all of a sudden. Maybe we should get these three “leaders” of what used to be American Capitalism some of them CNN red hurricane jackets and put them out in the “field” to report on this situation live. Maybe we shouldn’t… that would really be embarrassing.

The world economy is as interconnected as it has ever been. This storm is real, and “global this time”, indeed.

Good luck out there weathering it,