July 22: That historians should give their own country a break, I grant you; but not so as to state things contrary to fact. For there are plenty of mistakes made by writers out of ignorance, and which any man finds it difficult to avoid. But if we knowingly write what is false, whether for the sake of our country or our friends or just to be pleasant, what difference is there between us and hack writers? Readers should be very attentive to and critical of historians, and they in turn should be constantly on their guard. - Polybius

As an example, consider the question of the death of David Kelly. Was it a suicide as the majority of the press seem to be reporting, or was it something more sinister? I don't know as I did not see the event. All I can do is read others' views and try to cohere them into possible scenarios with the help of a sense of the past. That is, have there been other times in history where a murder was first termed a suicide and only belatedly discovered as a murder? Yes, there have been many such instances. Thus while trying to fit this event into a model of the 

*source US Federal Reserve, Haver Analytics

I dwell on the subject of history in response to the recent proclamation of Tony Blair that history would judge the invasion of Iraq as a worthy cause. In his words, If we are wrong, we will have destroyed a threat that, at its least, is responsible for inhuman carnage and suffering. That is something I am confident history will forgive. How exactly PM Blair achieves this confidence is a bit beyond me unless he is thinking along the lines of Winston Churchill who famously wrote, History will be kind to me for I intend to write it. 

Sadly for Mr. Blair, in my view, the invasion of Iraq will be judged by the events which flow from it whether causally related or not. Further, perceptions of the invasion will be constantly in flux as new experiences condition the analysis thereof. It was not too long ago that the US military was seen as incapable of policing the world and if Iraq becomes another Vietnam, this perception could easily return.

On a more abstract level, the useful application of a sense of history to an awareness of the present requires one to draw generalizations. Are there certain conditions which tend to lead to certain outcomes? If one views history as a sequence of disconnected events, you may not believe in the causation which would lead one to see how condition A invariably leads to outcome B, much as one assumes that a rock released from an upper story window will invariably fall to the ground (or on whatever impediment stands between it and that ground). In keeping with my skeptical bent, I cannot argue with certainty that the behavior of man in general follows certain well-worn paths, but as a working hypothesis, the view has served me well. Indeed, those who read these musings for the occasional 

economic forecast share in some sense Shakespeare's view that what is past is prologue.

Returning to a more timely topic, lets consider the recent collapse of the bond market. As noted last week, rapid 50bp advances in 10 yr rates are rare events and often lead to market dislocations either domestically or abroad. Today's charts aim to compare the current decline with the two most recent previous declines of this magnitude. On this mode of comparison, the current decline seems far less economically distressing in the sense that much of the move is merely a quick reversal of the faith that the Fed would employ extraordinary measures to fight deflation. In my view the real sector effects of the current yield rise will be small as rate were only below 4% for a relatively brief period. Trading desks, however, may well bear the brunt of this decline which could reduce the willingness to take on future risk.

Of course, the above analysis is only based on current events. Should 10 yr yields approach 4.5%, the real sector effects will, in my view, begin to manifest. More intriguing, in my view, will be the expectations for the future. That is, at what point will markets come to the conclusion that US Treasury yields have reached their nadir? 

Recalling my past life as an options trader, I lost the most money in the least amount of time when the trend changed. Given the enormous notional size of interest rate derivatives position concentrated in the money center banks, and my own experience, I wonder how they will fare when this 2 decade long trend of ever lower US rates is perceived to be over? To whom will these banks off load their positions, totaling many multiples of world GDP? Voltaire wrote that paper money inevitably trends to its intrinsic value, zero. Is this how it happens this time? As always History will judge.

Iraq

Foreign Minister warns Iraq conditions deteriorating rapidly - Russia Journal

US soldier killed in Iraq - Wash Post

Weapons-Gate

Blair may be quizzed as Kelly crisis deepens - FT

Blair at bay - FT

Blair ratings plunge after Kelly suicide - AP

No. 10 overruled MoD in leaking Kelly's name - Independent

Dr. Kelly's final hours did not indicate suicide - Scoop

Axis of Evil

Bush in new threat to Iran and Syria - Guardian

New World Order

Jakarta says US vote to block military training funds could affect bilateral relations - CNA

Economy

Savage sell-off in bonds - NYTimes

IBM explores shift of white collar jobs overseas - NYTimes

What's the story between the lines at FNM - NYTimes

Unsold homes rise to 3 year high in UK - FT

Mid-east Peace

Both sides look to Bush to stabilize Mid-east course - NYTimes