Tax collections fell in June as the Trump Tax Cut continued to bite into federal revenues. The fall in tax collections, combined with the rise in spending stemming from the Congressional Budget Busting Agreement signed by Trump, is causing an increase in the government’s issuance of Treasury bills, notes, and bonds, month in and month out.
That increase in supply puts downward pressure on bond prices and increases in interest rates and bond yields. It isn’t obvious in the bond market at the moment, since the 10 year yield has traded in a tight range around the 2.80s. But short term T-bill rates are soaring, with the 13 week bill hitting 2% this week.
Meanwhile increased debt-financed deficits have kept the US economy running hot, but there are hints of slowing in current data. That’s not supposed to happen. Tax cuts and deficit spending are supposed to stimulate spending.
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The volatility we have seen in the markets since early February is enough to put bears and bulls alike at unease. Prior to early February, the markets were climbing up and up, making it worth maintaining a long position and buying each and every dip.
Just have a look here at the SPX:
But early February was the warning shot across the bow for the bear market that I expect. If you had been following the advice that I published throughout the third and fourth quarters of last year and into January, you would have converted to 60-70% cash and saved yourself from the headache and loss, which that shot would have inflicted.
Since February, the markets have been up and down. There are times when the market gets locked into a trading range and the market chops and churns, and the past 6 months have been a case in point. I call these periods “meat grinder” markets, because they tend to chew traders up.
Nevertheless, I’ve been on record saying that a bear market will arrive soon – and I had anticipated that it would arrive even sooner. But when things go against our expectations it’s critical not to panic. We must continue to watch the charts, and stick to our analysis and conclusions about what is fueling the larger emerging trend.
So I harken back to three ideas that I’ve been harping on, all of which point to increased market risk.