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.
Each month I review both the end of month Daily Treasury Statement and the Monthly Treasury Statement published on the 8th business day of the following month. Then around the 12th or 13th of the following month it produces a monthly report with a little more detail that gives us additional clues about the state of the economy, unfiltered by statistical manipulation and Wall Street propaganda.
Fortunately, these statements provide the unvarnished, unmanipulated, real time view of the state of the US economy that follows…
The Monthly Treasury Statement Shows a Fly in the “Strong Economy Ointment”
The Monthly Treasury Statement provides an obvious warning sign of things ahead.
Social security tax collections are running soft. The data suggests that there’s something wrong with the BLS jobs-manufacturing algorithm (that’s right, not the “manufacturing jobs”). The social security tax collections suggest that a big negative surprise is headed our way in the jobs report over the next couple of months. They can’t keep skewing the data higher indefinitely. Sooner or later it will need to conform to the actual.
Changes in social security taxes were minimal under the new tax law. So this is a valid year to year comparison. Social security tax collected in June rose 2.2% vs. June 2017. The gain comes on the heels of a similar gain in May, and just a 1.7% gain in April. That means that Social Security tax collections have been consistently less than the rate of wage inflation, which ran 2.7% in each of the past 3 months.
If wages rose 2.7% and social security tax collections rose just 2.2%, that would mean only one thing. There must have been fewer jobs. We know that the BLS doesn’t see it that way. Maybe the wage inflation rate is overstated. And maybe there’s an explanation I had not thought of. But this data at least raises questions about the reported strength of the jobs data.
Something is rotten, and it’s not the tax data. In all the years I have been following this data I have never seen a revision that’s more than a rounding error. This is hard data. I also think that it’s good data because economists, Wall Street pundits, and the Wall Street captured media all ignore it. When they ignore something, it just means that we’d better pay attention to it.
Under its balance sheet “normalization” program, that I liken to a medieval bloodletting, the Fed may be reducing the supply of money into a weakening economy. That supply of money, aka liquidity, is the money that fuels demand for stocks, and supports stock prices. Less money must ultimately result in lower prices, the present margin driven rally notwithstanding.
Not Even This “Magic Wand” Will Rescue Your Portfolio from the Economy
The Fed has said that its first tool in combatting a weaker economy will be to lower interest rates. It said that it would not stop its balance sheet “normalization” and start printing money (QE) again, except as a last resort. So the Fed’s first step will be to try to pause interest rate increases by waving a magic wand and saying “Abracadabra! Rates stop going up!”
When that doesn’t work, because the quantity of money is still being reduced, the Fed will solemnly intone, “Abracadabra! Rates go down!” When that doesn’t work, the Fed will cave, and will restart QE. This process is likely to take place over the course of at least three Fed meetings. That’s 18 weeks. During that time, the Yellen doctrine’s trigger, whereby the Fed will respond to “a material adverse event,” is likely to occur.
By the time the Fed realizes that the economy is weakening and does something about it, it will be too late. We’ll have our material adverse event. And as a “material adverse event, by definition it will involve a lot of pain.
Until then, stay out of the market. If you are an aggressive trader, trade rallies like this one from the short side, entering short positions on the SPY near key resistance levels like 2815-20 on the S&P with a mental stop just above.
Meanwhile, if you are looking for other trading ideas, long, short, or market neutral, check out my special collapse to profit/ collapse to protection report, or check out Shah Gilani’s put play research and recommendations in Zenith Trading Circle.
Have a very bearish weekend!