Yesterday was the fourth day of my transatlantic crossing to Europe. A Nor'easter has been chasing us, following our departure from the Brooklyn Cruise Terminal, which is right across the East River from Wall Street.
The storm is hot on our tail and due to catch up with us today. The skies have been dark, the seas choppy and threatening. But the big storm is yet to come. No doubt the Queen Mary 2, a fortress of a ship designed especially for crossing the stormy seas of the North Atlantic, will handle the big waves just fine – as she always does. She's built for this kind of thing.
Have you built a fortress ship to prepare for the stormy seas ahead for your portfolio? I hope so! You know how bearish I have been over the past year. If you have followed my advice you've gone mostly to cash.
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Meanwhile, there's more news from Federal Tax data published this week that will help you decide how you want to weather the storm ahead.
Lower Tax Collections Are a Red Flag
I looked at the Oct. 31 Daily U.S. Treasury Statement earlier this month in The Wall Street Examiner. Withholding taxes for October were down. I updated that data on Tuesday, and there was more deterioration. The tax cut has not, and is not, stimulating growth. This is bad news for the U.S. economy.
Now, the data on excise taxes from the Monthly Treasury Statement for October, released this week, gives us more bad news. It's news that hasn't shown up yet in government economic data, but it will. Unlike economic data, tax data isn't statistically massaged. It doesn't lie. Knowing what the tax data shows now gives you a heads-up before the facts are recognized in the market.
The news was that both gas taxes and aviation taxes were down in October, turning what had been a slowdown over several months into outright contraction.
The withholding and excise tax data are signs that the Fed is tightening policy into a recession. Past periods of policy tightening have led to bear markets in stocks. Businesses and consumers take their cues from stock prices, and the economy thus enters a recession. Eventually the Fed reverses policy, usually after the recession has already been around for a couple of quarters. But by then, it's too late for investors. The bear has done its damage. Big damage.
Total Excise Tax Booms, but Drill Down and You'll Dig Up the Bad News
The United States collects excise taxes on a broad cross section of goods and services. They are based on the unit volume of sales, not the dollar value. They are therefore an excellent means of seeing the trend of the economy without the need to make haphazard inflation adjustments. That is, until the tax law changed. The tax on alcohol was cut, but a new tax was added on excess executive compensation for tax-exempt organizations. There were no changes to highway gas taxes or aviation taxes.
Total excise tax collections have surged wildly in the past two months. I have searched for and found no information about any significant increase in any excise taxes under the new tax law. But obviously there's something weird going on.
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Looking at a breakdown of excise taxes by type, we see all of the increase was in the "miscellaneous" category. Those are mostly sin taxes, but the also include the newly increased category of excess compensation of non-profit executives. So let's put that aside for a while and look at highway and aviation taxes. They are telling a different story.
One month does not make a trend, but the declines in the gas tax (Highway Trust Fund) and aviation taxes are a red flag that the U.S. economy may be weakening.
Another month of year-to-year declines would suggest that the Fed is tightening into a weakening economy.
My dictum that businesses and consumers take their cues from the stock market applies here. The stock market's direction is a signaling mechanism. As stocks decline, the commercial/industrial and household sectors will begin cutting spending. The U.S. will enter recession, and the Fed will eventually reverse policy.
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But before it does, the stock market will be well into a bear market.
Supporting data comes from the U.S. Energy Information Administration. It reports gasoline demand weekly with a lag of less than a week. This is another source of near real-time data that is useful as an indicator of how the economy is doing right now. The mainstream media generally ignores this data.
Gasoline demand shows just how weak most U.S. consumers are. Demand was soft in the peak driving season and back-to-school period.
Despite the tax cut and tales of job growth and a growing economy, demand was lower in both August and September than during the same period in 2017. Then it was weaker again in October.
Now, thanks to strong supply and weakening demand, crude oil prices have collapsed here in November. Apparently all those new jobs the economy has added weren't paying enough for people to afford to get in the car and do a little driving as gas prices rose.
Those at the top of the economic pyramid are doing well. Most consumers are not. But that doesn't stop economic data from showing "growth."
The Days of Top-Line Economic Growth Are Numbered
Now there's another warning that the days of top-line growth may be numbered.
Aviation taxes had been in a solid growth trend through June. They had a sharp drop in August that looked like a data anomaly, but collections had slowed in July, and growth remained slow in September. Then they plunged in October.
Air travelers tend to be in the upper half of the income spectrum. They had been spending big on travel until this summer. The weakness of the past four months suggests that consumers who have discretionary income are growing more cautious and cutting spending.
However, the Fed isn't likely to even notice any weakening until the conventional economic data reported by the government's statistical manipulation agencies starts to turn negative. Then the Fed is likely to be slow to react as it waits for clear signs of recession, which requires two quarters of negative growth, to begin reversing policy.
The Fed is initially likely to see any weakness as "transitory." That's always its knee-jerk reaction.
Initial signs of economic weakness, which haven't even shown up yet in the government's economic data reports, aren't likely to deter the Fed from its current course of steadily removing money from the system. The fact that those at the top are still spending enough to keep skewing top-line data, such as today's retail sales report, positive is enough to keep the Fed on its tightening course.
So, if you have followed my advice to largely get out of the market, good for you! Stay out. And if you haven't, I hope that this report gives you the impetus to at least start doing so. It's not too late.
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The post Market Squalls Are a Warning To Prepare for Stormy Seas. Here's How appeared first on Lee Adler's Sure Money.
About the Author
Financial Analyst, 50-year charting expert, finance + real estate pro, and market analyst; published and edited the Wall Street Examiner since 2000.