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Federal tax revenues are still growing rapidly, signaling an overheating economy. The debt ceiling will be lifted. And the Fed will begin reducing its QE purchases.
9/3/21 These three things coming together as soon as October will pose a grave threat to the Treasury market, to short term interest rates, and ultimately to the stock market.
In this report, we’ll focus on the threat to the bond market. Just keep in mind that stocks won’t be immune. I cover that perspective in the Technical Trader reports, but I will refer to them in these reports at critical junctures.
In view of Friday’s BLS nonfarm payrolls report, I just want to remind you that tax data is fact. The BLS jobs data is fiction. It’s constantly repainted after the fact to represent past reality, but it is not current reality. BLS jobs estimates are SWAGs based on severely flawed methodology. They rarely accurately represent actual current conditions, and then only accidentally.
If you want to play the jobs growth guessing game, the tax data for September showed that the pace of growth in September was 16% stronger than the August number. However, given the BLS’s statistical massagery, their number could be anything. This is really just a game of chance each month.
The August BLS nonfarm payrolls reported increase was 235,000. If that was accurate, then the gain for September would be 235,000*1.16= 273,000. According to Bloomberg, the current consensus for that number is +455,000. But the BLS estimate for August should be revised upward.
Note post BLS release: It was. The change for August was revised up by 131,000, from +235,000 to +366,000.” Adding that 131,000 to the reported gain of 194,000 = 325,000. That’s still an overstatement relative to the tax data reality. They’ll need to revise down next month. Meanwhile, clueless economists will revise their October estimates down even more, and the stupid guess the number game will go on.
Furthermore, the jobs data is irrelevant for our purposes. It is tangential to the knowledge we need to understand and successfully trade the markets. Supply and demand rule the prices in the securities market, just is they rule the commodities markets, real estate, labor, and the day to day prices of the things we buy. Each market has its own forces of supply and demand.
For Treasury prices, and their inverse, yields, we’re interested in the supply of demand for Treasuries. There’s no need for secondary or tangential data. We have the primary data. We know the near term supply outlook, because the Treasury publishes it in advance. We can estimate how it might change because we have the real time data on Federal revenues and outlays, and hence the budge deficit and future issuance needs.
We don’t need the silly exercise of pretending to know how many jobs were created each month. We have the withholding tax data. That’s the primary data that tells us how much revenue the Federal Government is taking in, and whether it’s increasing or decreasing.
Withholding tax collections strengthened in September. While more revenue would normally reduce supply, we don’t know where spending will go. That will matter in the longer run.
In the shorter run, the big unknown is whether there will be only a temporary fix for the debt limit, as opposed to something longer term. If it is only a short term fix, we may see accelerated Treasury issuance. That would draw down the Fed’s RRP slush fund much faster than probably would have been the case under a long term lifting of the debt ceiling.
That would be more bearish, sooner.
Note: After I wrote that Congress did agree to a short term fix, with momentous implications.
9/3/21 The next problem is that the Federal Government should run out of cash in early October. At that point, it must raise or suspend the debt limit. The Treasury will then begin issuing a torrent of supply to replenish the accounts it raided under the “extraordinary measures” it has undertaken since July 31 to avoid exceeding the debt limit.
The pile of cash in the Fed’s RRP program will act as a slush fund to buy the new T-bill issuance. There are a number of moving parts to the outlook for what happens then, including the mix of T-bills versus coupons in the new issuance schedule. Likewise, we don’t know for sure how holders of RRPs will react to any of this. We have no historical precedent to guide us.
The impacts could vary. Either short term rates, or bond yields could xxxxx xxxxx (subscriber version only). We should see the first hints of market impacts when xxxxxx xxxxxx xxx xxxxxx . But one way or another, once the RRP cash xxxxx xxxxx xxxxx (subscriber version only), the real problems will mushroom.
By then it could be too late. It’s possible, even likely, that significant market damage will already have occurred. Therefore the time to act is now. If I owned long term bonds I’d xxxx xxxxx xxx xxxxxx (subscriber version only). Or I’d need to be willing and able to hold to maturity while suffering the loss of purchasing power that rising inflation would entail.
Meanwhile, I would keep a close eye on stock market technicals for any sign that it’s time to stop trying to ride that bubble wave any further.
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