This document discusses scenarios for the US economy and financial markets in 2021. It considers the possibility of a merger between the US Federal Reserve and Treasury Department. Three potential macroeconomic scenarios are outlined: 1) Good scenario: A Fed-Treasury merger directs stimulus to infrastructure projects and UBI, boosting GDP growth and the stock market. 2) Baseline scenario: Liquidity injections fail to boost consumption, leading to stagnant GDP growth and a modest stock market rise. 3) Ugly scenario: Excess liquidity fuels speculation and asset bubbles, eventually triggering a stock market selloff. Stock valuations are at very high levels by historical standards, setting the stage for a potential deep

1. FED-TREASURY MERGER
28 January 2021

2. WAR ROOM
Idea Generation
Macro Coaching
Scenario Updates
HiddenLevers runs on SCENARIOS like Instagram runs on PHOTOS
Fed Underwrites Economy
Climate Disasters
Real Estate “Post” Covid
COVID 2.0

3. SCENARIO PULSE CHECK
VACCINE REBOUND – mutation fear US REFLATION – greenback comeback
Japanification

4. USD
BITCOIN
GOLD
US REFLATION SCENARIO PULSE CHECK
sources: HiddenLevers
NO Election Uncertainty
NO Stimulus Uncertainty
NO MORE USD FLIGHT
10Y back above 1.0 in January
INFLATION (US CPI)
1.4%

5. sources: MarketWatch, HiddenLevers
ECON PULSE CHECK
TRAVEL + HOSPITALITY UNEMPLOYMENT
Jobless Claims
rising again
Labor Force
Participation
stalled
HOME + RETAIL
Key Indicators trending down from Q4 – when will vaccinations kick in + turn this ship?
(-6.5% at 12/15)
(-71.6% at 12/15)
Retail Sales
rebound fading?
Housing Starts
at 15 year high

6. sources: FRED, FRED 2, Coindesk, Robinhood, HiddenLevers
SPAC IPOs on pace for 4x 2020 activity
Excess liquidity must find a home:
• Zero rates = investors seek more risk
• Valuations higher across all asset classes
• Upside volatility + bubble pockets form
Personal Savings Rate
spikes with $1200
stimulus checks
FED-TREASURY MERGER LIQUIDITY UNPRODUCTIVE
Money Velocity Collapses
in Pandemic: No Spending

7. sources: US BEA, HiddenLevers
Economy still $300B smaller than Q4 2019
• Goods consumption flatlined in Q4 vs Q3
• Service sector awaits end of pandemic
• Homes a bright spot, but less as rates rise
GDP Breakdown: Winners+Losers
2019 2020
Durable Goods
FLAT vs Q3
Residential
+17%
Q4 GDP
-2.4% YoY
Travel +
Restaurants
-24% YoY
Change vs Q4 2019
GDP baseline = 2%
How quickly can we return?
FED-TREASURY MERGER Q4 GDP = REBOUND SLOWING

8. sources: CNBC, HiddenLevers
FED-TREASURY MERGER UNEMPLOYMENT
Employment Data trending down in Q4 – expect UBI if vaccination rollout fails
How does Fed
solve this?

9. sources: HiddenLevers, NBC News, Bloomberg
FED SCENARIO PRICED IN
Fed Chair Powell Tried
But 8M more in poverty, 55M total
FED
UNDERWRITES
ECONOMY
Biz Cycle Reset

10. FED-TREASURY MERGER GOOD
State + local
govt bailouts
Infrastructure
projects
Universal
basic income
Actual GDP Boost
S+P 500
4500
+20%

11. FED-TREASURY MERGER BASELINE
No consumption
Stock buybacks
Wrong recipients
Liquidity Trap S+P 500
3950
(+5%)

12. FED-TREASURY MERGER UGLY
Short Squeezes
SPACs
Cryptocurrency
Speculation
Triggers Selloff
S+P 500
3250
-13%

13. GOOD
S+P 500
3250
-13%
S+P 500
4500
+20%
S+P 500
3950
(+5%)
BAD
TOXICITY FROM EXCESS
LIQUIDITY INFECTS
MARKET INTEGRITY
YELLEN ENSURES
FED LIQUIDITY
LEADS TO SPENDING
FED LIQUIDITY INJECTIONS
CAN’T REVERSE PERSONAL
CONSUMPTION DOWNTREND
FED-TREASURY MERGER MACRO RISK PARITY
10Y
1.04%
FLAT
BASELINE
GDP
FLAT
GDP
+5%
GDP
FLAT
10Y
1.50%
+46bps
10Y
1.00%
-04bps
Actual GDP Boost
Speculation
Triggers Selloff
Liquidity Trap

14. sources: Advisor Perspectives, Bloomberg, HiddenLevers
Q Ratio and Crestmont P/E
now at or above 2000
Global P/E ratios at second
highest level since 1988
S+P 500 Long-Term Valuation Metrics
Multiple metrics now flashing
red – at or above 2000 levels
Time for new metrics?
“Overvalued” since 1990?
S+P VALUATION PULSE CHECK

15. sources: HiddenLevers, Bloomberg, Wolf Street
margin debt not really a tell
highly correlated to equities
toxicity creates margin calls
S+P VALUATION GLOBAL EQUITY MULTIPLES
BUT

16. sources: HiddenLevers
10% drops before top.
Bigger drops after.
S+P 500 Index: Jan 1999 – Dec 2001
-12.1%
-8%
-10%
-15.5%
-20%
-22.5%
2000 Top
Rising Tech Exuberance
=
Rising S+P500 Volatility
Nasdaq Index: Jan 1999 – Dec 2001
2000 Top
-37%
Irrational Exuberance =
Wild runup + deep crash
-59.4%
+83.8%
No 10%+ corrections for
19 months before peak
S+P VALUATION ANATOMY OF Y2K TOP

17. GOOD
S+P 500
2320
-38%
S+P 500
4900
+31%
S+P 500
3560
-5%
UGLY 21 CAPE, LAST TOUCHED AT
PANDEMIC LOWS
44 CAPE, MULTIPLE
VALUATION METRICS NOW
ABOVE Y2K LEVELS
RISING EARNINGS NOT
UBIQUITOUS,
35 CAPE LIKELY UNJUSTIFIED
S+P VALUATION MACRO RISK PARITY
NASDAQ
12.6K
-5%
BASELINE
10Y
0.19%
(-85bps)
10Y
1.94%
(+9bps)
10Y
1.02%
(-2bps)
NASDAQ
18.5K
+39%
NASDAQ
8060
-39%
All Time Highs
Steady
Typical
Recession

18. Fed + Fiscal chiefs on same page – accommodation
10% corrections are healthy for markets
Toxicity = sign of top, may trigger margin calls
Stimulus is going to the wrong recipients
WHAT TO SAY

19. BIDEN AGENDA FEBRUARY WAR ROOM