Crescat Capital Investor Presentation — February 2021

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The year is just getting started and the US fiscal deficit already reached another record, now at its worst level in

70 years. The Fed is facing its worst predicament yet. The current fiscal spending path will lead to record

Treasury issuance this year. Foreign investors are unlikely to be the ones funding this operation. With 2020 as a

guide, there are no buyers of any siz e for those securities outside of US banks and the Fed. Major foreign

holders of US debt only bought about 5.2% of all Treasuries issued last year. In the face of this enormous new

government debt issuance, the Fed faces the impossible task of continuing t o prop up already historic asset

bubbles while also preventing inflation. The current extreme fiscal imbalances put the central bank on a crash

course to fail at both.

A Tsunami of Debt Issuance

In March of 2020, lawmakers passed the $2.2 trillion CARES Act bill and an additional $900 billion of stimulus in

December. However, with the decline in tax revenues and other discretionary and non -discretionary outlays , the

government had to issue $4.4 trillion of net new debt in 2020 to fund these programs. The Fed purchased $2.4

trillion of these Treasuries, or 54% of the total issuance, which equates to an average of $197 billion per month.

This year, the Fed has announced that is committed to purchasing just $80 billion per month, but with fiscal

spending lik ely to be significantly higher, it is simply not credible that the Fed is going to buy 60% fewer

Treasuries than it did last year. The math does not add up. The Biden administration is now planning on a two -

stage stimulus package: rescue and recovery. The “ rescue” will be close to $1.9 trillion which needs signing in

the coming weeks before unemployment benefit programs are exhausted of money. The “recovery” part, still

being discussed, could be as large as $3 trillion. That puts Biden’s rescue and recovery package cost close to $4.9

trillion for the American taxpayers, compared to the $3.1 trillion that was passed in 2020. In our analysis, the

Fed will need to substantially increase its planned quantitative easing. By our math, the level of QE this year tha t

will be necessary to stop interest rates from rising appears to be closer to $300 billion per month than the

planned $80 billion.

Inflation Starts with Commodities

Crowded l ong duration growth stocks and fixed income securities are at historic valuations today . Rising interest

rates place these instruments at risk. T he new Treasury supply is naturally forcing rates higher . To keep rates