  
Man your battle
stations, this is no drill
Bob Moriarty
July 31, 2003
About seven
weeks back I wrote a piece
about the impending
bond market crash.
In it I said, " . . . when the bond market self-destructs
(and that's on the cards shortly) the entire derivatives market
is going to melt down. The bond market is a bubble. The US Federal
Reserve is on the verge of buying up the long bonds to lower
interest rates. (Let me see if I can understand this clearly.
We are going to buy up a bunch of funny looking but basically
worthless bonds with funny looking but basically worthless dollar
bills. Why didn't I think of that? Of course).
The dollar
is toast."
Take a gander
at the chart below and see if you understand what I meant. On
June 15th, the interest rate on the 30 year bond was about 4.2%
and now, a short six weeks later, the interest rate is over 5.25%.
In $150 trillion dollar derivatives terms, that's a crash that
makes 1929 look like children playing in the sandbox.
Chart courtesy
of StockCharts
The bond markets
are far larger than the stock market and in 6 weeks bonds crashed
further and faster than I can ever remember seeing.
And you've
hardly read a word about it.
That's partially because there are only about five people in
the world who understand the implications. As I have said many,
many times before, forget the gold derivatives time bomb, it
was nothing more than an urban legend. Gold didn't explode when
it passed $305, it didn't explode when it passed $330, and $354
is no more important than any other number. Anyone trying to
get you to believe gold is a cause of the current chaos is deliberately
trying to mislead you. Gold is the solution to the problem, not
the cause.
But worldwide
derivatives in total are above $150 trillion dollars (to give
you an idea of how important that number is, the entire world's
economy is only $45 trillion per year) We have derivatives on
derivatives on derivatives. And no one wants them really marked
to market or the financial system is going to collapse. It may
do so anyway, the invisible bond market crash of the last 6 weeks
is causing more problems than you can possibly dream of.
So here's my
opinion and if you want to see how often I have been right, go
back through all my pieces. I've done a pretty fair job of calling
things but I'm not a Guru, no one is. I just have an opinion
of my own.
As I predicted,
the bond market bubble just crashed. As a result of long interest
rates going up by 25% in a month, the total price of a home over
a 30 year period just went up by 10-15% since you actually pay
more in interest than in principal over 30 years.
So you can
kiss the real estate bubble bye-bye as well, it won't survive
when people actually realise how much the cost of a mortgage
just changed in 6 short weeks.
And since the
stock market is a bubble as well, just as much as it was in March
of 2000, between now and later this fall, I believe we will have
what will clearly be understood as a market crash.
I said it on June 16th and I meant it, "This market is at a turn
in the road. The general stock market is at a top. A top which
may never be touched again in real terms in our lifetime. Believe
it or not, general market investors are both more bullish on
the market than in March of 2001, they are less bearish. It's
a marriage made in hell. The market has peaked or is about to.
The next move is down and it's going a lot lower than last October."
We did see a top in the general market, the VIX is again near
a record-measuring complacency of average investors and that
spells trouble with a capital "CRASH."
Naturally gold
will benefit and I suspect the move in silver above $5 is a bellwether
of bigger things to come. Jim Sinclair, Tom McClellan and others
have predicted
an immediate rally in both gold and silver and they called it first, and I agree,
in spades.
But come September
or October and a major crash in the stock market, the gold stocks
will more than likely get creamed as well. Investors will be
dumping all kinds of stocks with both hands and the baby is going
to get chucked out with the bath water.
So here's what
I see very very soon. A big rally in gold and silver and the
metals shares followed by a major market crash in real estate
and the general shares. And as I mentioned above, gold and silver
shares may well get hammered with the general market. Now more
than ever, if you ride gold stocks up 100, 200, 300-400%, take
profits and protect your gains, no matter how popular the shares
get. If the market gets hammered, so will the metals shares.
So if you have
been postponing buying actual physical metals, waiting for a
rainy day, my bones are screaming that the rain is about to start.
Keep some cash around the house and wave goodbye to absurd real
estate prices, the market is about to get a reality check. In
Chinese culture, it's a grave insult to wish someone 'interesting
times.'
But . . . we
are about to see interesting times.
Bob Moriarty
Archives
Email bob@321gold.com
Jul 31, 2003
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