With many more bonds on offer...

Jun 15, 2015

- By Bill Bonner

Bill Bonner
Paris, France

Dear Diary,

On the walls of the chapel at the French military school in Paris, are rich paintings, including a couple of masterpieces by Louis-Michel van Loo. The one behind the altar of is St. Louis, dying from dysentery in the 13th century. There he is in his splendid blue robe...with the fleur de lys on it...receiving extreme unction from a priest.

St. Louis died in Tunis, North Africa, on the 8th Crusade; what he was doing there is not clear. But at least he went in person. And he died in the campaign.

Everything has a price tag. The previous crusade - undertaken by him 20 years earlier - had been a disaster too. He took his army to Egypt. There, in the heat of the Nile river valley, his soldiers must have made quite a picture, with an English contingent led by William of Salisbury and the Knights Templar with their banners and tunics. And everything seemed to be going so well...until...

We were sitting in the chapel, attending mass on Sunday. The priest offered his sermon. We couldn't tell if it was dull or just pointless, but our eyes wandered to the paintings on the wall...and our mind wandered to thoughts of war. This - the chapel at the Ecole Militaire -was the sacred heart of France's military tradition.

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This week marks the 200th anniversary of the great battle of Waterloo, a French defeat. Since then, French military successes have been few. But before Wellington and Blucher hammered them at Waterloo, the French had won far more battles than Americans have ever fought. French history is littered with bodies - cut, pierced, blown to bits.

The French, like the English and the Americans, celebrate their fallen heroes and pretend that their wars served a worthy purpose. And who knows? Wars may look foolish - in retrospect. But man is God's fool. And all His works demand our solemn curiosity.

And so, with a mixture of respect, shame and embarrassment, this week, we turn to Mars - the god of war.

But first, let us take up our usual post - where we keep an eye on markets and economies, in the hopes of seeing what mischief is afoot.

Friday, the Dow fell 140 points. Looking at a three year chart, we see that the recent movement in the stock market is nothing. Stocks are still near an all-time high after an almost steady march upward over the last 6 years.

The bond market, meanwhile, may have topped out. After 33 years, the direction of yields could have switched, from down to up. The yield on the 10 year French bond quadrupled in the last two months, for example. The yields are still microscopic, however. And neither the significance nor the permanence of this move is known.

By the way, the direction of the bond market is probably the most important known unknown in the financial world. Central banks influence, but cannot control, interest rates. So knowing what Janet Yellen wants to happen is not the same as knowing what will happen.

People are not usually prepared to lend money for nothing. Sooner or later, we expect they will want a decent return on their savings. When they do, the world will change. Asset prices have floated higher and higher on the flood of credit over the last 33 years. When the tide ebbs, assets will fall and the character of the economy will change.

And that change could be shockingly quick and staggeringly much. The bond market is huge. But it is dominated by just a few players - central banks and central governments, most prominently. The US government, for example, owns 60% of the mortgage market, through its Fannie Mae and Freddie Mac subsidiaries, and large parts of the US 'national' debt is held by just a few players - such as the Fed and the Bank of China.

This Wednesday, the feds have convened a meeting of major banks and bond investors. They are worried about what would happen in a crisis. There could be many bonds on offer, for example, but no bidders. Bond prices would crash - provoking an even more sensational disaster.

But let's return to the poor Christians...sweating in the hot Egyptian sun...9 centuries ago. They were there to sort out the Mideast and wrest control of the area from the locals - much like US troops in Iraq and elsewhere.

At first, the campaign went well. The Egyptians fled, leaving a crucial bridge over the Nile intact. The crusaders crossed, led by Louis IX, Saint Louis and Robert of Artois. Then, the town of Al Mansurah was open to them too. Thinking the defenders had run off, they entered the gate. They soon discovered that had been led into a trap. From all sides, the Muslims attacked. Robert of Artois was killed. So was William of Salisbury. The Knights Templar were almost wiped out. Only five escaped alive.

The Christians retreated as best they could. They dug a ditch to protect their camp. The sun beat down. Supplies of food and water ran short, as the Egyptians blocked the Crusaders' ships from reinforcing their compatriots. Famine and disease settled unto the camp like swamp gas.

Finally, a deal was struck. Louis was taken into captivity by Muslim forces, along with about 12,000 of his troops. They were freed when France paid a ransom. The price tag: a sum equal to about a third of France's annual revenues.

Louis agreed not to do that again. But he seemed to learn nothing from the adventure. Twenty years later, he was once again sunning himself in North Africa, waiting to die.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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