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The Top Three Things Affecting the Rising Inflation Thesis

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In a recent Crescat Capital briefing, Portfolio Manager Tavi Costa presented current financial metrics that are expected to affect the rising inflation thesis. Also, Chief Investment Officer Kevin Smith discussed his firm's view that the current market is creating an equity bubble and highlighted catalysts that could burst it.

Tavi Costa, Crescat Capital portfolio manager, began the broadcast by listing and briefly commenting on numerous factors expected to impact inflation. They are:

- Natural gas prices: They are the strongest they have been in 15 years, Costa said, and they are expected to remain high in the long term.

- Wages growth: Growth in wages and salaries per employed person is up 14% year over year, according to the Atlanta Fed Wage Growth Tracker.

- Current average wage: The Richmond Manufacturing Survey of about 60,000 households showed that the current average wage is now moving higher than record levels.


"I'm expecting this to really build on itself again, like inflation," Costa said. "It's a huge part of the inflation thesis."

Fiscal deficit relative to gross domestic product (GDP): It has been improving and is now around 12.5%, compared to 18.5% at its recent worst, Costa said.

Trade balance to GDP: It has a lot of room to go lower, and is expected to do so, if commodity prices and inflation both increase.

"That will add to this issue of the twin deficits in a larger way, where the trade balance becoming more and more negative will be one of the draggers of this twin deficit," Costa said. "That goes back to the gold-silver-tangible assets thesis where [there is] the need for the monetary stimulus to fund those levels of twin deficits."

Next in the broadcast, Crescat Capital's Chief Investment Officer Kevin Smith addressed the current market and two catalysts that could crash it. He explained how, given the setup, his firm is investing.

Smith purported that the broad market is overvalued, thus we are in an "enormous" equity bubble, and two possible catalysts for bursting it loom.

To illustrate today's high market valuations and how they are not sustainable, Smith compared, on an enterprise value (EV) to gross domestic product (GDP) basis, the Top 5 tech stocks today, in terms of market cap, to those at the top of the tech bubble in 2000. During that bubble, the five stocks' cumulative EV to GDP was 24%, and today, it is 37%.

"We think index investors are going to be in for a real shock here, you know, much like they were in 2000 because the big have gotten too big too to grow, to sustain these valuations," Smith said.

He noted that on the flip side, there is a group of undervalued stocks, which are in the commodity sector and in the precious metals asset class.

One of the two potential catalysts for bursting the bubble is volatility spiking then consolidating, which just happened between 2000 and 2021. Smith showed how this recent trend looks compared to two previous incidences, during the oil meltdown in 2015 and during the emerging markets meltdown a few years later. The most recent peak was much steeper, and the consolidation happened faster.

The second possible bubble-bursting catalyst is rising inflation, as discussed in the broadcast by Tavi Costa.

What this current macro situation means for investing, Smith said, is that opportunity lies in the short side of the overvalued market, in the short side of the undervalued market in commodities, such as energy and forest products, and in the long side in precious metals. Crescat Capital is investing accordingly, with its Global Macro Fund and its Long/Short Hedge Fund.

Lastly, in a segue to Quinton Hennigh's updates on numerous companies in Crescat's exploration portfolio, Smith addressed the current gold price. Technically, he said, it appears to be ready to break out and ascend higher than $2,000 an ounce.

"It's just a hop, skip and a jump to get back to $2,000," Smith added.


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