Every day the financial infotainment media feels obligated to come up with a reason for that day’s gyrations in the stock market. Since I’m in France these days, I like to call it the “raison du jour.” It’s kind of like the daily special at the local lunch counter, the soup du jour. Only it’s not the “soup of the day;” it’s the reason of the day. Or more often, the “excuse du jour.” No need to translate that!
Lately, the excuse du jou, has been the idea that investors are worried about a weakening economy. Now, the Wall Street PR flacks usually modify that as a weakening global economy, and certainly, I’ve seen plenty of evidence for that in my regular tracking of European banking system data for many months. So there’s some truth in that.
Whether it’s the impetus for the US stock market downtrend, is another matter. You know what I think. It’s not the economy, it’s the liquidity!
But what about the excuse du jour for the bond market rally and the crash in US Treasury yields. The rationale, or what’s commonly called the market “narrative,” for that is that the US economy is weakening, and that that will lead to lower inflation, lower bond yields, and looser Fed policy.
Is there any truth to that narrative, and should it matter to us as stock investors and traders? Because if it’s not true, then Wall Street is leading you down the garden path, as always doing its best to separate you from your money.
Lucky for you, you’re reading Sure Money and have access to the best data there is to assess the current state of the US economy. What makes it even better than conventional economic data is that it’s real time, it’s unmassaged, and nobody, but nobody pays any attention to it except us! So we are able to stay ahead of the crowd.
So let’s take a look at it!
The Real Time Federal Tax Collections Data Gives Us the Facts We Need, Ahead of the Crowd
That data is real time Federal Tax Collections, which, fortunately for us, is still being published every business day by the US Treasury, despite the government shutdown. I report it twice a month in the Wall Street Examiner Pro Trader liquidity reports. In fact, I warned subscribers yesterday that if the jobs data to be released today accurately reflected the tax data, the jobs number would be strong. Lo and behold, it was!
So is there any truth to the narrative that the the stock market decline and bond market rally in December were because investors were worried about slowing economic growth. No doubt, investors were worried about it. The media has been telling them to worry about it every day. But what does the tax data show?
Tax collection data for December did not show evidence that the economy is materially slowing. No doubt, it will slow if the stock market keeps plunging. Business decision makers and consumers both take their cues from the direction of stock prices.
Consumer and Business Surveys Follow The Stock Market, Not The Other Way Around
Consumer and business survey data all move in the direction of stock prices. You need not follow those surveys because they’re just following the market. We looked at that in relation to consumer confidence back at the market peak in September.
The Consumer Confidence survey at that time reached a multi year record high right along with the stock market’s all time record. While the Street and its media handmaidens got all bulled up over that news, I warned that it was a sign that the great bubble was topping out.
Indeed, after stock prices plunged, Consumer Confidence finally followed in December. Virtually the entire drop was in the “expectations” component. Consumers adjusted their expectations lower because stock prices had plunged in November and December.
Yesterday, we got a measure of business confidence, the ISM Manufacturing PMI data. It nosedived in December. Purchasing managers have been watching the stock market crater since October. They started cutting their purchase orders when stocks plunged in October, and they cut even more when stocks plunged again in December. This is no anomaly. The same thing happened last February on the heels of that market break. And new orders even upticked a bit when the market rallied in November. When stock prices rise for a time, the ISM data rises along with them.
Here’s How We Know That The Wall Street Media “Narrative” Is False
The Wall Street media says that the worry lately has been that the economy is weakening. That’s the excuse du jour. It’s supposedly why stocks are going down and bond yields are falling too. The speculation in the media echo chamber has gained traction that the Fed will stop hiking and may even cut rates soon.
Piling on to that “narrative,” Fedheads are suddenly floating trial balloons that the Fed will consider slowing its bloodletting of the banking system with its balance sheet “normalization.” That means that instead of draining $50 billion per month from the banking system, they’d do something less. As you know if you’ve been reading these reports for any length of time, simply reducing the size of the drains will… not… help!
Top NASA Expert Shakes Wall Street
I look at the tax data now, and folks, I wouldn’t pin my hopes for a Fed pause and a stock market rally on the idea that the US economy is weakening in any material way. I wrote that sentence BEFORE this morning’s nonfarm payrolls blockbuster. That release merely confirms what we already knew. The US economy is not weakening. That’s a false narrative-pure baloney.
Withholding tax collections were in line with previous months in December, following a surge in November. They suggest that the growth rate of the US economy has not changed. The timing of the surge in withholding in November suggested that the December jobs data, based on the survey data of December 12, would be in line with the trend of the past couple of years. Indeed it was, even a hair stronger, although it would not surprise me if that little extra is either revised away or disappears in January.
Without going into all the numbers, this chart using a smoothed monthly moving average shows that even with all the fluctuations, and the bulge coincident with the jobs survey date, withholding collections are in the same range that they’ve been in ever since the tax cut took effect in February.
The conclusion that we can draw from this data is that the worries about a slowing economy aren’t supported. The downtrend in stocks and the rally in bonds has nothing to do with discounting a slowing economy. The trends in the markets are still and always about the direction of liquidity.
The Data Is Still Bearish So Here’s What You Should Do
In any major market turn, the economy may or may not correlate initially. Yes, as the downtrend in stocks persists, ultimately the economy will follow. But the only barometer we need is the stock market itself. It reflects the trend of liquidity, and liquidity is the driver. If we know the direction of liquidity, we know the direction that stocks must go.
But a weakening economy is not a necessary condition for a bear market. In fact, the longer the economic data stays positive, the longer the Fed will continue tight monetary policy. Tight monetary policy causes bear markets.
So my recommendation stands. Stay out of stocks and bonds and in T-bills. Do not buy these rallies. Rallies come and go frequently in bear markets. They fail and lead to lower lows until the underlying monetary policy goes from tightness to ease. The tax data says that the US economy is still growing steadily. We’re nowhere near a policy reversal yet.
Meanwhile, you can profit from the moves in this market by setting aside a small portion of your capital for high risk, high reward options trading, while keeping the bulk of your powder collecting interest in safe T-bills.
If you do this by Sunday, you could secure a minimum of $1,500