If the US economy is so strong why is this happening?

Declining federal and state tax revenues raise many doubts.

Everyone knows that US corporate profits have been declining in recent quarters and supposedly had a rebound in the third quarter last year. Shown below no rebound in corporate taxes seems apparent in monthly data through November 2016. Declines in corporate profits happened in the 1998 growth scare. This time around declines in corporate profits are larger and more consistent than in 1998 suggesting a larger downturn. With declining profits why would corporations rush out to make CAPEX and hire employees? The reality is they are not spending.

Federal Corporate Tax Revenue

12 month change in 6 month moving average

What is more troubling is the decline in federal total tax revenue. Something only seen in recessions.

Federal Total Tax Revenue

12 month change in 6 month moving average

So now even individual income taxes are declining with supposedly reasonably strong employment. Good jobs being traded for burger flipping jobs? Declining sole proprietorship income we can only guess.

Federal Individual Income Taxes

12 month change in 6 month moving average

So if income is declining, banks are increasing lending standards and tightening credit, delinquency is rising on non-housing loans… What does that mean for spending and the US consumer to continue saving the day? We guess it is no surprise that state and local sales taxes growth is plummeting.

State and Local Sales Taxes

4Q change in 4Q moving average

With the US economy not showing very healthy signs as shown above, the Fed hiking rates into a weak economy, the bursting bond bubble, the worst market for IPOs since the great recession, the corporate stock buyback being apparently ending and a lot of strange noises coming out of China, we feel it is best to tread carefully and that is why we have a large hedge position.

And we almost forgot to mention the huge overvaluation in US equity prices where prices could easily decline by 30 to 50%.

Ratio of S&P 500 Market Cap to EBIT

Will Trump save the day? We imagine the changes will be too little and or too late in the best case scenario and the potential for a nasty trade war in the worst case scenario.

2017-02-21T15:32:01+00:00