In the ongoing tradition of “one chart you should see this weekend,” the latest withholding tax data is definitely worth a look right now.
Total withholding tax collections are available to us virtually in real time in the US Treasury’s Daily Treasury Statements, released with just a one day lag, which makes them an excellent analytical resource. However, they are extremely volatile day to day so I rely more on a monthly moving average of the 11 day total collections, comparing that with the prior year. Smoothing sacrifices a bit of timeliness to get a clearer picture of the trend without losing too much of the edge that the daily data provides. Unfortunately, I have found even the 11 day total data too noisy for meaningful comparison so I’ve had to resort to additional smoothing, which ordinarily I don’t like to do. As a result the smoothed data is a little slow, so I also look at raw data trends to get a better sense of timing.
Withholding tax collections rebounded from a deep trough in April, in the month ended May 31…
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The new tax cuts took effect in January, but the IRS did not publish new withholding tables until mid-February. We see the effects there. A new range in the year to year comparison is now being established. May now shows a slight acceleration vs. April. So far, it’s not material.
While we cannot accurately adjust for the impact of the tax change in year to year comparisons, it is clear that, so far, the tax cuts apparently are not acting as stimulus. Year to year revenue growth is running well below pre-tax cut levels. The growth rate is fluctuating between -4% and +2%, whereas prior to the tax cut the growth rate was +2% to +10%.
That doesn’t mean that the economy is shrinking, just that the Federal government is collecting less taxes. That’s economic stimulus and it means that the top line economic data numbers will continue to run hot-yes, maybe even hotter than before.
But the drop in revenue also means that the deficit has increased. That translates to more government borrowing. More borrowing means more Treasury supply. That must come out of the accounts of dealers and investors. The Fed is no longer a buyer. It’s pulling money out of the markets.
These billionaires seem to be prepared for a massive market crash (are you?)
Furthermore, stronger economic data doesn’t mean higher stock prices. Au contraire! Bull markets top out when the news is good because that’s when the Fed pulls the punchbowl. Strong economic data will only encourage the Fed to stay on course in tightening money.
While the effects haven’t been clear yet in terms of lower stock prices, the time is coming. This is no time to be chasing stocks.
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.