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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
Jul 31, 2003
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