David Jensen: Gold & Silver To Head Dramatically Higher, Mirroring Palladium

Mike Gleason: It is my privilege now to welcome in David Jensen of Jensen Strategic and a highly studied mining analyst and precious metals expert with close to two decades of experience in the mining industry. And it's great to have him back on with us.

David, thanks so much for the time again today, and it's nice to talk to you again. Welcome.

David Jensen: Thank you, Mike. It's good to be back with you again.

Mike Gleason: Well, David, we had you back on at the beginning of the year and you shared some amazing insights on palladium, and we'll get to that in a bit because that market is still very interesting. But first off, you've been watching the Fed balance sheet closely here and I wanted to get your comments about that to begin with. Now, after the extraordinary expansion, which followed the 2008 financial crisis and a few rounds of QE, the Fed began contracting the money supply in 2017. You've been making the case that the withdrawal of liquidity could trigger another catastrophe.

So, let's start with the basics here. If you would, please explain the history of the Fed's balance sheet, and why it is something investors should be carefully watching.

David Jensen: Yeah, I think that the root of it all, the reason we're watching so closely is the tremendous imbalance between the amount of cash, liquid cash that's in the system versus the amount of debt. And the Fed has run interest rates from around 20% in 1980 down to 0% or 0.25% here a couple of years ago. And what they've done is expanded the greatest debt bubble in history. The total debt in the U.S., now on all levels according to the Fed's flow of funds report is about $72 trillion. And to serve as that $72 trillion of debt that's in extent, there's only $14 trillion of liquid currency in deposits and in physical cash. So, what we're seeing now is that the Fed needs to continually to expand the money stock with the money supply. The money supply is the annual change or the addition to the outstanding money stocked addition to the $14 trillion that's out every year. And they need to add a substantial amount so that the debt can be serviced and so that the economy can continue to move forward.

And what they've done in the last three years, since Q1 2017, they've contracted the money supply, which is, again, the year over year change, they've decreased that increase down to about 3% from roughly about 11% in Q4 2016. So really a precipitous drop.

And so what we're seeing now is that the rise of the interest rates and the, and the cutoff of the money supply, they've basically withdrawn about a one and a half trillion dollars of additional liquidity, which would be here if it continued to run it at the same run rate as in Q4 2016. So, they've withdrawn or tightened a substantial amount. And as interest rates go up, it also, over time, generates a need for about another $2 trillion per annum in interest payments. So what they've done is they've really created a liquidity crisis here in the market. There's not enough money to pay the debt that's outstanding. And, of course, the most levered or the most unstable borrowers show the distress first when these things happen. And that's what we saw in the repo market here in September, was that that market started to seize up because the capital wasn't there to meet the needs.

Mike Gleason: Kind of leads me right into my next question. The Fed has really been pumping lots and lots of money into that repo market and they've extended it multiple times. You see this intervention in the repo markets as the “first domino to fall," and what might be the next financial crisis. The Fed, is as usual, not bothering to explain itself, but we know that, we're pretty sure, that it isn't good. Give us some more of your insights on that repo market intervention and why it could be the signal of larger troubles ahead.

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