“Prett-ay,
Prett-ay,
Prett-ay Good”
—Larry David, “Curb Your Enthusiasm”
In a nod to the series finale of “Curb Your Enthusiasm,” I thought we would start with the iconic catchphrase from the show. While the phrase—delivered in response to Larry’s parents’ innocuous question “How are you?”—is nothing special on its face, Larry’s labored delivery is what makes it both funny and impactful.
I imagine most investors would say they are feeling “prett-ay good.” Risk-free yields are high, equity multiples and earnings have expanded globally, and credit spreads have contracted. In all, a Goldilocks outcome for asset allocators. As we discussed in our last piece, this is not an environment many investors have experience with, particularly post-WWII. We have a tight monetary policy: Real rates are 150bps–200bps into positive territory and the Fed continues to reduce its balance sheet holdings, traditionally a headwind for risk assets. We also have exceptionally loose fiscal policy, with an estimated 6% budget deficit as a percent of gross domestic product (GDP), an unprecedented number outside a crisis environment.
What happens in theory when tight monetary policy meets lose fiscal policy? Almost exactly what has occurred in practice. The U.S. dollar has strengthened, equities as a pass-through vehicle for nominal growth have done well, credit has cooperated and even commodities are now participating. As George Costanza and the bears would say, “Serenity Now.”
