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As you know, the Fed dictates the direction of the markets… but there's actually a way to predict the Fed's actions ahead of time. And this indicator is available to us every day in real time.
There's an economic indicator (actually, indicators) that gives a much clearer picture of the U.S. economy than the official and unofficial economic statistics that are reported in the mainstream media. It's hard cold data of what actually is. It's not collected by survey, not constructed from tiny samples and then extrapolated a million-fold, and not manipulated by statisticians and economists. It isn't misreported by the media because they never report it.
The U.S. Treasury publishes this data every day, one day after those taxes are collected. When it comes to the U.S. economy, it doesn't get any more real time than that.
It is U.S. government tax collections, and right now it's telling an important story that we all need to pay attention to.
But economists and Wall Street talking heads and PR merchants seemingly ignore this data. If they do track it, they don't report it to us. I do. I have been tracking, accumulating, and reporting this data for many years.
Economic activity does not drive stock prices. Liquidity does. But if we know what the U.S. economy is actually doing, we can get an idea of how policymakers will respond to economic data. And since we're up-to-date on the tax data, we know in advance what the lagging official economic statistics should tell them.
Sometimes the massaged and manipulated official statistics don't match up with reality. Then we know that the narrative about the economy that is being fed to investors is false.
All of that helps us to understand whether the current market trend is sustainable or not. It tells us whether the dominant narrative about the economy is mostly true or not. Most importantly, it tells us how central bankers, particularly the Fed chair and the FOMC, will formulate policy.
And today's "crystal ball" tells us something very interesting.
These Numbers Tell the Fed to Keep Right on Shrinking
The question today is whether the tax data supports a continuation of the bull market. Or conversely, will it tell policymakers to continue to tighten policy?
Janet Yellen has told us that the policy of "normalization," which really means shrinking the balance sheet and pulling money out of the banking system, is on autopilot, barring "a material adverse event." I expect that policy to end the bull market in the next year. I have given you the reasoning for that in previous reports.
Yellen did not define what she meant by "material adverse event." But the clearest and most obvious such event would be a sharp decline in stock prices.
The media long ago declared that a 20% decline in the Dow is a bear market. My guess is that the Fed would start lowering interest rates as a first step in trying to stem a decline once that level is hit.
Lower interest rates alone won't stop a bear market. Pumping money into the system will. Money is the fuel of demand. To turn a bear market around, first there needs to be more money. The market is likely to be down significantly more than 20% by then.
Right now, the market hasn't even started down. So it's a sure thing that real monetary tightening is near. Within a few months, that tightening will stop the bull market. Money is the fuel of demand for securities. When there's less and less of it, there will be less and less buying. Stock prices will fall.
How does current tax data fit into that scenario?
Booming withholding tax collections tell us that top-line official economic data will continue to show strength. As of Oct. 3, a smoothed four-week moving total of withholding taxes collected by the IRS showed a whopping 8.3% gain. That's before inflation. If wages are growing at 2.5%, then that implies real growth of 5.8%. Apparently, Trump is a genius! Or the luckiest man on the face of the earth. Stock market bubbles have a way of making presidents look smart.
On the other hand, maybe this is more about huge gains in withholding from those at the very top of the income spectrum and not about broad-based recovery. Big percentage gains by those earning millions could easily skew the top-line totals to obscure weak gains, if any, in the middle of the spectrum.
I think that's material in the long run, but in the short run, it doesn't matter. Only the totals matter because that's what investors and policymakers see.
The fact that there is no sign of recession is bearish. It will encourage the Fed to stay on course in its determination to begin shrinking its balance sheet. Markets top out when the economic news is good because that's when the central bank "pulls the punchbowl." And make no mistake, this central bank is pulling the punchbowl.
However, if you look through the data the way I have, you'll also notice some red flags. It looks as though the Fed may be pulling the punchbowl into an economy that is weakening below the surface. That's a worst-of-all-worlds scenario.
Smaller Line Items Hint at a Weakening Economy, But…
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.