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.
With another surge in capital gains taxes the Treasury may pay down some debt in the latter half of July, which would give the markets a little boost. But the trend of lower highs and lower lows will be clearly established by the second half of the year. And as the Fed increases its withdrawals from the system, a market accident awaits.