January 26th update; Manufactured crises, including the Coronavirus outbreak, help the central banks

-Despite conventional wisdom, the central banks need muted inflationary and economic growth over time in order to keep the nation-states solvent via QE. This will allow debt yields to continue to fall and the central bank balance sheets to expand as needed.
-The Coronavirus outbreak can be viewed as an auspiciously timed factor helping the Fed in its struggle with the short-term lending markets.
-Based on recent market behavior, I have to conclude that the coronavirus situation has been beneficial to furthering the QE objectives of the central banks.  If this outbreak becomes a lasting and growing matter, I see massive deflationary forces overwhelming the markets and economy. Stocks could fall in the short-term, but falling sovereign yields will ameliorate asset price shocks.

The Dow Jones Commodity Index (DJCI) (bars) and 10-yr UST yield (line) both fall in the wake of the corona virus outbreak (click to enlarge)

-I am encouraged to see the drops in commodity prices and sovereign bond yields. This shows me that the system is working as we theorize.
-The worrying strength in commodities is turning to weakness, and that can only mean one thing—it’s time to start worrying about the global economy again. Both WTI and Brent, as well as copper, are rolling over. Taken together, their poor price action suggests that perhaps the global economies’ growth rates are slowing.
-For those in the oil patch, I view the Coronavirus outbreak and others like it as a potential adverse demand shock in a sea of oversupplied markets.
-I leave it to you to determine whether the Coronavirus outbreak is natural, man-made, or just a cover for the central banking programs.

The only factor keeping the 10-year yield from dropping further is the yield compression on the shorter-end of the curve. Yields have been managed since the 2008 crisis. (click to enlarge)

-the Fed’s balance sheet has stopped expanding since the beginning of the year and actually contracted by some $25 billion in the week ended on Wednesday. While the central bank has said it would continue to purchase $60 billion of Treasury bills a month, it’s winding down its repo operations and letting its holdings of agency mortgage-backed securities mature without being replaced.
-Though the changes in the overall balance sheet over the past couple weeks could be viewed as ominous, the longer-term viability of the markets rests on the Fed’s ability to continue buying Treasuries on a permanent basis. It has stated it will continue this for a few more months. The Fed can continue peeling off their high amounts of repo collateral and mortgages as long as it continues buying $50-60 of Treasuries in permanent operations.
-Viewed through a wider lens, the direction in longer-dated Treasury yields is clearly down. The 30-year UST yield is stubbornly close to its recent all-time lows, but the 10-yr is overly affected by short-term rates.

Daily performance of the 10-yr UST yield. The Fed needs lower longer-dated yields and the corona virus outbreak has been auspiciously timed; a breach of 2% has been averted. (Click to enlarge)
20-year performance of the 30-yr UST yield. This yield continues to sink over the long term, as predicted. I was encouraged the outbreak helped cause longer-dated yields to drop this past week

-Gold continues to find support in the face of an ongoing overwhelmingly bearish COT report. If these disease outbreaks continue and expand, I look for a test of $1,583 soon. If $1,587 is taken out, then a retest of $1,600 will occur shortly after.

Daily platinum chart. With its less-liquid sister metal Pa in the stratosphere, I see continued support for Pl. Notice the nice pennant flag formation.

-Platinum looks very good here as well and is showing a nice pennant flag formation. We need silver to share in the rally for genuine confirmation of the trend.

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