Today I want to take a bit of a deep dive into the latest tax collection data and what it tells us about the coming market accident.
Tax collections surged in April on a massive gain in individual non-withheld income taxes. On the other hand, social security taxes, which weren’t impacted by tax law changes, showed no gain on an inflation adjusted basis.
The theme remains that those at the top of the wealth and income pyramid are skewing the economic data to the plus side while the bulk of workers and consumers are falling behind. It’s a tale of two economies, with the structure of the US economy being hollowed out over time.
But that doesn’t matter to the Fed. It only looks at top line growth. The tax data suggests that economic data will remain strong, encouraging the Fed to continue with its bloodletting program of draining money from the banking system.
The massive tax windfall enabled the Treasury to temporarily pay down $133 billion in debt in mid April, but it began net borrowing again at the end of the month. I covered that issue in the Treasury updates and in this report last month. We know that that was almost certainly one-shot deal. It is unlikely to be repeated. We can only guess as to the cause, but it may be related to capital gains taxes flowing from the heavy selling of stocks in the first quarter.
That’s a double-edged sword. Another big market selloff could lead to another surge in estimated taxes for the mid July due date. But both the stock and bond markets will be lower. The bond market in particular is doing very badly with the 10s now trading at 3.09 and surging. This is a clear technical breakout in yields. There can no longer be any doubt that bonds are in a bear market. And it’s going to get worse. Stocks will follow.
|Stocks are Trash (this is FAR more exciting)
The market is in crisis. Since Jan. 1, it’s made virtually ZERO gains. No matter what you invest in, the era of stocks is officially OVER. But thankfully, there’s a new way to make THOUSANDS of dollars per week from the markets and it doesn’t involve a single stock (or stock option). Find out more here.
The US EIA reports gasoline demand weekly with a lag of less than a week. This is another source of near real-time data that the media ignores that is useful as an indicator of how the economy is doing right now.
Here again we see the weakness of the majority of economic actors. Demand has persistently declined year to year over the past 3 months, and is little changed or even weaker over the past 2 years. It’s another signal that the gains in top line economic data are attributable to gains at the top of the economic pyramid. The base is getting weaker. As the base is hollowed out over time, eventually the pyramid will implode.
Employers adjusted tax withholding after the IRS published new tax tables in February. Employees have seen increased take home pay since that. Weren’t those tax cuts designed to stimulate broad based spending? Apparently they’re not working.
The fact that those at the top are skewing top line data positive is enough to keep the Fed on its tightening course.
Where we can draw sketchy conclusions, the data continues to hint that those at the top of the income spectrum are still doing well enough to skew the top line numbers positive. That will keep the Fed tight. The economy may do well, but the stock market won’t.
The TBAC has told us that Treasury supply for the first half of 2018 will be gargantuan. That has been confirmed by the JCT (Joint Committee on Taxation of the Congress). The CBO (Congressional Budget Office) confirmed it in a report issued April 9. It projects massive and growing deficits for the next 8 years.
That’s stimulative for the economy but bad news for the stock market. Massive Treasury supply will put downward pressure on the prices of all financial assets, not just Treasuries. Under QE, the Fed was funding all new Treasury supply. Under QT (Quantitative Tightening) it is actually adding to supply at the same time as it is pulling money out of the banking system. It’s very bearish.
The Treasury has poured $133 billion of its cash hoard back into the market in mid April by temporarily paying down debt. That windfall ended on Thursday, April 19. The Treasury went back to net borrowing at the end of the month. Supply will only continue to build from here. I wrote at the time, “This is as good as it will be for stocks right now, through this week. Some of that cash could slosh around till the end of the month. I would use this as an opportunity to aggressively lighten up on longs, and gather some shorts on the broader market.”
As always, if you’re interested in making profits on the downside of the market, in addition to our ideas here, you can check out Shah Gilani’s put play recommendations in Zenith Trading Circle.
Today, the bond market broke down. Stocks are next. I have warned before and I’ll say it again, it’s time to be out of the market. Take that money home and let it hug you tight.