Withholding Tax Collections Declined. Here’s Why That’s Bearish

Withholding tax collections declined 0.8% year to year as of October 5.

This was better than a 1.8% year to year decline one month prior and the same as the 0.8% decline 90 days before.

The stabilization of withholding taxes suggests that top line economic data will continue to show increases.

This is all very bearish.

And it’s critical information for allowing you to protect your assets, and even profit from an impending decline in the market.

Trending: No one in our business holds a candle to what this man can do…

Less Tax Revenue Means More Tightening by the Fed

The decline in total tax revenue from the tax cut passed earlier this year, and the increased spending from the subsequent Budget Busting Agreement, will continue to drive enormous Treasury issuance.

That constant pounding of supply coming to the market will be a source of ongoing pressure on the bond and stock markets.

That is not news. We’ve been talking about this for the past year. However, stock investors are the last to get the news, thanks to the drumbeat of constantly bullish guidance out of Wall Street. But the market is starting to wake up now.

Hopefully, you are already out of harm’s way. If you aren’t, withholding tax collection data is an important resource that can help guide your decisions.

Total withholding tax collections are available to us in real time in the US Treasury’s Daily Treasury Statements, released with just a one day lag. 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.

On that basis we can see that the short term trend has strengthened slightly since August, but it’s not materially better than in July, and is weaker than in May.

This shows that there is no clear sign that the economy is seeing any stimulus from the tax cut.

Tax cut proponents will argue “lag effect.” But it’s irrelevant, even if it were true. If the economy strengthens on a lagged basis, it would only cause more monetary tightening for longer. That would be devastating for stocks and bonds.

I’m not worried about a lag effect. I’m interested in the here and now. The point is that the Fed only looks at the topline government data, and the reported employment gains will keep it on its tightening track.

The BLS also reported a massive increase in wage inflation in the payrolls report for September. We’ll take a closer look at the particulars of that, this weekend.

And make no mistake, the accelerating inflation in wages will transmit to CPI. That will encourage the Fed to clamp down even harder. I can increasingly see a scenario brewing for something like 1970s style stagflation and a protracted bear market in stocks.

Whether the economy is disjointed and weakening or not, and whether consumer inflation is heating up or not – although it is – the case remains the same:

Reality doesn’t matter to the Fed. It acts on the superficial stories told by government data and its own preconceptions.  Eventually though, reality bites. As the Fed continues to tighten, the effects will be felt in the markets before they become clear in the economic data.

Critical: Is our economy less than a month away from collapse?

As the Bear Market Commences, Use This Trade Repeatedly

This is not my first warning on this, of course. I’ve been warning you since late last year that we should gradually get out of stocks. By this spring I suggested that we should be 80-100% in cash by July.

I was too early, but my analysis has not changed. I still think that we’re headed for a big, bad, bear market.  I’ve previously discussed with you the exogenous factors stemming from the tax cut that drove stock prices higher for longer than I expected. Those factors were a one-shot deal.  One has ended and the other is now receding.

So over the past week we have seen signs of cracking. I have long warned that when the 10 year yield broke the May high of 3.14% yields would soar, and that would pressure stocks. That happened last week, and stocks sagged, falling below 2900 on the SPX.

That was a sign to buy puts on the SPY. I have recommended buying the closest in the money puts with about a month to expiration to play the downside in the market, using the income from T-bill holdings for the purchases. That would limit the risk to a small percentage of your portfolio. If the market drops, the puts could yield triple digit gains and allow you to meaningfully profit from declines in the market.

As the bear market progresses, this trade can be repeated multiple times, either rolling the puts over to a lower strike price at expiration or buying calls for short term bear market rallies. With options, it’s also always a good idea to take profits and put aside cash from winning trades along the way.

For help in fine tuning the timing, you can follow my weekly market updates in the Wall Street Examiner Pro Trader.

For other trading ideas, check out why Shah Gilani is “DONE WITH STOCKS” and how he’s making money anyways.


Lee Adler

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