“Bis dat qui cito dat”
Miguel de Cervantes
“He gives twice that gives soon, i.e., he will soon be called to give again.”
Benjamin Franklin
Let’s work our brains a bit, shall we? Our title phrase offers significant food for thought but must be analyzed carefully, as it can be interpreted in multiple ways.
Understanding the first of these – indisputably the more hopeful of the two — compels us to brush off our Latin, which, I fear, for most of us, is probably a bit rusty. It comes from Cervantes’ magnificent “Don Quixote” and suggests that rapid largesse dispenses a double gift – precluding the need for multiple solicitations and placing the associated fruits immediately in the hands of the recipient.
In a more perfect world, I’d be able to resist the temptation to refer that most ubiquitous of DQ images: that of the title character tilting his lance at windmills. Moreover, as I am unable to ignore this glib parallel, I reserve the right to bring it forward again a bit further down the road.
“Don Quixote” was published in two volumes in the first part of the 17th Century. Over a hundred years later, that singular American statesmen, philosopher, inventor, and wit – Ben Franklin – put his own spin on the notion, pointing out that a too rapid giving leads to a near-certainty that the giver will be compelled to give again.
Both interpretations, so it occurs to me, appear to be valid.
Applying this to our long-time and current obsessions, investors have acclimated themselves to favors, given rapidly and repeatedly, for at least the last 15 years; arguably longer. It may have started about two decades ago, when politicians and bureaucrats in Washington decided to subsidize the mortgage markets – in a misguided quest (Impossible Dream?) to confer the blessings of home ownership on broader swaths of the electorate than had heretofore enjoyed the privilege. Lots of folks got their piece of the rock – albeit temporarily and, for many, at prohibitive cost. Wall Street turned these mortgages (and other forms of loans) into sparkly, fee-rich financial instruments, and everyone made a bundle.
Until they didn’t.
The packaged loans ultimately proved themselves to be about as flimsy as Don Quixote’s homespun armor – unable to withstand anything but the feeblest of assaults. When they shattered, the whole financial earth shook, placing at risk much of the core of the capital economy.
Cue the Fed and its magic money-printing machines. Hark the tinkling of the fiscal sleighbells.
Within months, we were the recipients of glittery, gravity-defying, green gravy, bestowed upon us, each month, for > 5 years. Moreover, these care packages grew as the decade of the 10s unfolded.
By the end of ‘13, the Gallant 500 and Captain Naz had tripled. All was good and quiet in the land.
Lots of stuff happened in the intervening years, including a global pandemic that crippled the world’s economy for quite a spell (and is still – truth be told – somewhat of a pain in the ass). Here’s where the Ben Frank side of the equation kicks in. The Government was compelled to give again. And boy oh boy did it come through. The Fed shelled out ~$4.5 Trillion of manufactured money, and used it to buy its own publicly traded securities. Its elected counterparts, determined to surpass the bureaubankers, managed to indeed excel them, but only by a measly $100 Billion ($4.6T). Of course, it would’ve been more had not meanies McConnell, Manchin and others not veered from script.
Be that as it may, the covid Christmas spirit extended for more than 18 months in Equity-land and more than two years in the realms of Fixed Income. The former more than doubled from its viral lows; and the latter saw benchmark yields plunge to deeply negative at the short end of the Treasury Curve, and < 1% at the longer end.
And then the giving, which had certainly been historic in its scope and proportions, stopped. The Fed switched off the Money Machine, began allowing the assets on its Balance Sheet to mature without replacement, and, in cruel coup de grace, started to jack up its own terms for lending.
The White House and Congress have tried to fill the breach, allocating another couple tril – earmarked to favored constituencies – Green Energy Purveyors, Scholar Borrowers, and Microchip Manufactures (FFS!). But these offerings are currently subject to the caprices of Congressional appropriation and the Courts, and their ultimately delivery is thus very much in doubt.
Investors, feelings and sensibilities injured, have shown their wroth. Been, until lately, putting stocks, bonds, crypto, crude oil, nat gas (?) on fire sale.
My own notion is that they were channeling their inner Ben Franklin, and figuring that if they moped around enough, they could force the re-ignition of the giving engines anew.
Who knows? It may even work, and we’ll find out more this week when the FOMC lays down its latest round of righteous wisdom on us. Official Fed Watch metrics indicate an 80% likelihood of another full-smash 75 bp hike – which would place Fed Funds on the threshold of 4%. Hard as it is to believe, as recently as this past February, the Fed Effective Rate was Zero:
All this Fed Giveth/Fed Taketh Away folderal has the yield curve tied up in knots. Never (I believe in anyone’s living experience) has the government been forced to pay a higher rate to issue 6-month bills than it does for thirty-year bonds:
And thus investors, as depicted in the following graph, can be forgiven if they are confused as to how best to position themselves in the Treasury markets:
What any of this means is anyone’s guess; yours is certainly as good as mine.
I do like the color scheme, though. So, there’s that.
But I hate to see our investment warriors so at odds with one another as to whether they wish to be long or short, and where, upon the Treasury Curve, they wish to be so.
I reckon it all boils down to whether the Fed, who certainly gave early anytime it was remotely compelled to do so, will find itself obligated to give again. The consensus is that it will; the main question is when.
Maybe, someday, we can address the larger, philosophical issue as to whether dual or multiple largesse cycles is a blessing or a curse, — to the giver or the recipient.
Cervantes and Franklin disagreed on this score, but both are dead, and the debate has thus never been resolved. Don Quixote and Poor Richard live on, though, and it may be well to conclude that an overabundance of the windmill tilting proclivities of the former, places us at risk of devolving into a condition of poverty, as indicated in the modifier of the latter.
Don’t do it is my advice, given quickly and with the hope that I am not obliged to give it twice.
TIMSHEL