To Say There is a Severe Disconnect is an Understatement

Written by Gerardo Del Real
Posted June 15, 2020

Deflation is central bankers’ worst enemy. Don’t believe what they say (ever), believe what they do.

By the time you read this there will be over 40 million people who have filed for unemployment yet the Fed chairman Jerome Powell knows that to maintain the illusion of “order” the financial markets must be supported at all costs.

To that end, the Fed has done an excellent job thus far. Making sure we are all clear that the Fed isn’t even thinking about raising interest rates. His words not mine.

To say there is a severe disconnect between the reality of the economy and the performance of the stock market is an understatement.

oc jmm 12june20 image 1

In simple terms, the black line is those of us who have exposure to financial assets getting backstopped by the Fed. The other one is a measure of what everyone else is going through.

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Central bank balance sheets as a percentage of GDP are rising in rapid form but not all central bank balance sheets are created equal. For those who don’t like charts here is the report card as of May.

  • Swiss National Bank = 122%
  • Bank of Japan = 114%
  • Bank of England = 56%
  • European Central Bank= 50%
  • Norges Bank = 33%
  • Federal Reserve System = 33%
  • Sveriges Riksbank = 25%
  • Bank of Canada = 17%
  • Reserve Bank of New Zealand = 14%

The chart shows why the Fed Chairman can go on 60 Minutes and confidently tell the American public that the Fed is far from running out of options.

Bottom line is the U.S. still looks pretty good. You know my phrase, "cleanest dirty shirt in the laundry basket."

By options, he means negative interest rates.

He would never, right? Only if the market forces him to.

He also means buying equities directly. Seem far-fetched? 

The Fed is already buying corporate ETFs and corporate bonds. Why stop there?

The week of May 15 the Federal Reserve took in $305 million worth of exchange-traded funds in one day, pushing the balance sheet to nearly $7 trillion. 

Powell has made clear that there are no limits to how much the Fed can buy because the Fed has the power to just “create” the money digitally.

Don’t try that at home.

With all states now re-opened — though in stages — the markets are acting as if the economic damage that has been inflicted by the response (whether you agree or not) has been undone.

The University of Chicago’s Becker Friedman Institute predicts that 42%, or 11.6 million, of all jobs lost through the end of April due to the coronavirus will become permanent.

You can read the rest of the CNBC article that provides a good overview of which sectors will be hit hardest and which companies stand to benefit from the paradigm shift we are all experiencing together by clicking here.

Approximately 15 million credit card accounts and 3 million auto loans didn’t get paid in April.

I highlight the disconnect because you’ve all read my argument for a higher dollar and new record highs in the major U.S. indices.

I don’t know if those highs happen this year or next. I don’t expect new highs this year in the Dow or S&P but then again I didn’t anticipate seeing new highs in the Nasdaq this soon either.

What I do know is that in order for economies around the world to adapt to the new paradigm there will need to be even larger amounts of collective stimulus around the world.

What I do anticipate is a lot more money printing, more creative labels to mask the counterfeiting, and much higher gold prices.

Higher gold prices that will lead to the kinds of returns in the junior space that I’ve been positioning for for years. 

We are not in the first inning of this new gold bull cycle anymore but there is a lot of game left.

To your wealth,


Gerardo Del Real
Editor, Junior Mining Monthly and Junior Mining Trader.

For the past decade, Gerardo Del Real has worked behind-the-scenes providing research, due diligence and advice to large institutional players, fund managers, newsletter writers and some of the most active high net worth investors in the resource space. Now, he is bringing his extensive experience to the public through Outsider Club, Junior Mining Monthly, and Junior Mining Trader. For more about Gerardo, check out his editor page.

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