Well I just did some more checking. At fast idle with spark lever about where it should be got the knocking. Reduced spark and it went away. I also checked the mag output, 8 at idle, about 30 at high RPM and noticed knock was coming from back of motor at the higher RPM. Right now I am incline to think at higher RPM's the gap is closing between the magnets and the coil ring and the knocking is coming from the keepers hitting the face of the coil ring but not sure how retarding the spark could effect that.
To top all that off, while I was running the engine, smoke started poring out of the breather pipe, the unmistakable smell of burnt Jack Rabbet clutch. I don't smell too good now ether!!
Those disk will be coming out for sure and I will go back to Ford disks (about time some would say ). They've been a problem as long as I have had'em it in. They slipped too much and may have tightened the clutch too much which may have contributed to the failure, I did have a nice neutral. Never had clutch problems with the Turbo 400 disk but they are too worn out to reuse.