Transcription
GDP forecasts for the United States economy have just collapsed. Um, we are looking, I think, at GDP being done. Concerns about a growing risk of recession. But is this something we as investors should be worried about, or is this just noise? I'm going to reveal the answer for you in three simple, fast steps.
Step number one, let's go over this GDP indicator from the Atlanta Fed called well GDP. Now, you can play a drinking game how many times I'm going to say GDP in this video. All right, back to the serious stuff. We'll start with a chart from ah call it the middle or the beginning of July going all the way back to April 30th. And on the left we go from zero basically 0% up to 5%. Now this is the Atlanta Fed's indicator. It's a realtime indicator as to what they think the next GDP print is going to be. And remember GDP is a very broad way to measure economic output in the economy. More on that in just a moment.
So, right around, let's say, April into May, we're looking pretty good. Look, it got up to almost 4.5%. That's like an emerging market. That's really, really good. But then we had this little bit of a waterfall here. it kind of plateaus and then we get the WTF moment right here where it completely does a wild E coyote straight down. So basically just in the last couple months we've gone from the economy being smoking in Fuego all the way down to right now at 1.2%. This is the prediction based on all of the realtime data kind of. You see the Atlanta Fed's indicator is actually updated once a week or so. And the last update happened July 1st. But as you guys know from watching my videos, what happened July 2nd was nonfarm payrolls came out and they massively disappointed to the downside. The expectation was right around 115 117,000 if my memory serves me correctly. We got 57,000 and that in and of itself is bad. But wait till we discuss what I've got right here in B and C when we get into the red numbers. That is the key.
But let's go back to this wild e coyote moment here and try to figure out what on earth happened. Well, editor, go ahead and pull up this kind of graph that we see at the Atlanta Feds website. And the major contributor to this decline in expectations was the trade deficit. Now there's also a decline in consumer spending and spending with inventories for businesses, but this was the big daddy that was the main contributor. So why does a deficit actually decrease the GDP? Well, let's go back to what we were talking about at the beginning of the video. And this is supposed to be a metric basically for economic activity in the United States, but we really want to focus on how much stuff goods and services were actually produced. Okay, this makes sense. So, what they do is they take the combined total of spending. In fact, fortunately, I've drawn it right up here on the chart. My fantastic, my unbelievable artistic ability. Everyone's favorite Moody, the millennial with their blue hair. And I don't know Moody's preferred pronouns. Is that actually a thing anymore? I know it was a couple years ago with Biden, but now it's one of the good things about Trump. We've kind of swept that one away. Pure nonsense with the pronouns. But anyway, we've got Moody and their blue hair. So Moody represents just consumption. So, you going to Walmart, putting gas in your car, going to a hotel, going out to eat at Olive Garden or something like that if that hasn't gone bust. So, that's just 10 bucks. Keep it super simple here. Okay, 10 bucks. But we have to combine that with this guy. We've gone from everyone's favorite to everyone's least favorite, your drunk, insolvent uncle Sam. So, government spending, we've got to combine what Moody's doing with what your drunk, insolvent Uncle Sam is doing. We'll say he's spending 10 bucks as well. But then what you have to do is you have to subtract the deficit. So again, why is this? Because we've got $20 of spending, but that doesn't mean that $20 of stuff was actually produced in the United States. So, we have to take all the stuff that's coming from China on net balance because obviously we import a lot more stuff from China than we export. And I'm just using them as a proxy for imports and exports in general. So, China is sending us all of this stuff. So, let's say that's uh $2. All right, two bucks. So, we've got 20 bucks right here, but we have to subtract the stuff that they sent us because we're trying to figure out how much stuff we actually produced in the United States, which of course, if my math is right, would be about 18 bucks.
So, now that we're all on the same page as far as how this is calculated, we have to ask the question, well, why did the deficit absolutely explode between this period? and why did it really get extreme right here? And we're going to go into the details in step number two. But before we get there, let's go back to these dreaded red numbers. So, we had a huge disappoint with 57,000. But, as you guys know from watching my videos, it's all about the revisions. We had revisions to the downside, a negative 74,000 jobs from the two months prior. So, whatever the headline numbers were, you've got to subtract 74,000. And let's not forget these numbers will be revised again. This number will likely be revised down to a negative if history is any indicator. But this is the major data point that we cannot ignore. Minus 57,000. Now, what is this? If we get into the nitty-gritty of the household survey, because this is the establishment survey, but if we look at what's underneath the hood here, we see the amount of Americans employed from June to July dropped by over a half a million workers. But remember, the last Atlanta Fed report came out July 1st. These data came out July 2nd. So this massive wy coyote drop had nothing to do or did not factor in the non-farm payrolls which the next report will factor in. and all else being equal, I don't see how the expectations for GDP or economic output in the United States wouldn't go well below 1% and maybe even negative.
Step number two. Now, let's try to connect some dots here with the trade deficit to determine whether or not this Atlanta Fed indicator going from here straight down and possibly even going negative is something we should be concerned with. So starting off I want to ask the question what is driving what's structurally driving the trade deficit that we've had over the last year. Now to be clear the explosion that we've recently seen in the deficit didn't entirely have to do with this but what it does is it takes us down that very important rabbit hole. So we can see okay structurally what's going on here and will this negatively possibly negatively impact the US economy on a move forward basis. So it all goes back to AI capex spend because what are they doing here? In fact to get a clear picture let's go right here to the internet. the multibillion dollar AI trade engine. Looking at fullear data, US imports of capital goods skyrocketed by 165.9 billion. What is striking is the majority of that massive wave was entirely techcentric explicitly tied to building and filling out AI optimized data centers. And that breaks down to computers and advanced servers. computer accessories, parts, and semiconductors. So, you see what we're doing here is we're starting off with this indicator, and we're looking for the anomalies, the things that really stick out, and then that's obviously the deficit, and then we're looking beneath the hood and asking ourselves, okay, structurally, what's going on here? And is this relevant to the US economy? And the answer is absolutely, it is. And check this out. Just the other day, the largest data center project ever proposed was cancelled by none other than Blackstone themselves. So, this was a 2100 acre project in Virginia that would have had 37 buildings and 22 million square feet of data centers. Wow. At full buildout, the project carried an estimated hundred billion price tag. So let's think about this. That's a hundred billion dollar that isn't going to go into GDP moving forward. So then you have to stand back a moment and ask the question, well, how much of GDP over the last couple years has been a result of this AI capex spending, which a lot of people would say is in a giant bubble. And one of those people looks like Blackstone themselves, giving us an indication, yeah, it's in a bubble. We're cashing out right now. But assuming that the large majority of GDP growth and some people actually attributed to 75% of the economic activity or increase in economic activity we've seen over the last couple years has been a result of what Blackstone themselves now is pulling the plug on. No pun intended. And we have to remember this cancellation came just days after Blackstone agreed to hand digital reality full ownership of three built and leased Northern Virginia data centers valued at 7.8 billion. That's a fancy way of saying they sold. And remember, you got to watch their actions. You don't listen to what they say on CNBC. But what they're doing is they are cancelling huge data center projects and they're selling other data centers that they have in their portfolio. So if these data centers were such a fantastic business and if we weren't in a bubble and if demand was going to continue to grow exponentially then why would they be pulling the plug and why would they be selling? I think the answer is obvious. And I know a lot of people will say, well, they're not being shut down due to economic reasons. It's this nimi, right? Not in my backyard. People don't want the energy consumption. They don't want these loud, obnoxious data centers right next to their house. I mean, understandably so. But regardless of why the capex spending might decrease moving forward, it doesn't matter. The net result is still the same. And that could be a huge huge impact on economic activity in the United States. Oh, but wait, there is more. Let's go right over to Mr. Zuckerberg. Beta is what I call his big business. So beta is actually selling some of their key word here. excess excess AI computing capacity. So let's consider this. If what you're hearing on CNBC and Bloomberg was true and that's the demand for this compute is just neverending. It's an insatiable demand for compute. Then why is beta selling its excess capacity? Excess capacity. You say, "Well, maybe they're just renting them out. They want to become a cloud business. Okay, but great, a cloud business is pretty good, but why wouldn't they want to make even more money by using that compute capacity themselves? So, the bottom line here is we're starting to see some really significant cracks in what has been the driver for GDP growth, let's just say over the last two years. And if this is coming to an end, then those imports will be reduced, but so will that spending and the net result would be GDP going down. And remember, the definition of a recession is two quarters of negative real GDP. And based on the Atlanta Feds indicator, we are right on the cusp of negative real GDP right now as we speak once they include that horrific labor report that we went over in step number one.
Step number three. So, should you be concerned with these forecasts for economic activity absolutely collapsing? Not really. I don't think you should lose sleep over it because it could be just noise. When I talk about that, I'm specifically referring to the Atlanta Feds indicator. But what is extremely important and what I think you should be concerned with is when we look at what has propelled GDP in the past and what will likely happen to that tailwind moving forward. That's the real story and that's what we should be focused on. Let me show you what I'm referring to. So, we've got my incredible artistic ability that knows no limits right here. Well, this is SpaceX, obviously, and this is Google. Now, we got to rewind all the way back to 2015. And I think you will find it interesting that Google themselves invested money in Elon Musk's venture. That's right. In these rockets. Well, now let's go ahead and fast forward to 2026, just before, in fact, coincidentally, just days before Space X went public with their IPO, Google announced that they were giving them a contract for almost a billion dollar a month. a billion dollars a month for compute for all of the AI demands, right? Exactly what we're talking about in step number two. And then what happened is they went public, their IPO, and this investment that Google made back in 2015 went to the moon. No pun intended or well, yeah, pun intended for sure. So, let's think about this. They started by investing $1, okay? And then they said, "Okay, we're going to give you a contract out of the blue, just coincidentally two days before you go public for $3, a billion dollars a month, right?" And because or one of the main reasons why SpaceX the IPO goes to the moon is because of this contract, right? So, because SpaceX valuation skyrockets, all these puns, I know I I can't help it. And because they're now worth, I don't know, 2 trillion, 3 trillion, 10 trillion, 15 trillion, who's counting. That investment that Google made back in 2015 goes from $1 up to five bucks. So you see what's happened here is Google has created this perpetual money machine where all you have to do is put in four bucks and out comes five bucks. But if you read the fine print, you see that Google actually has the right to cancel this contract. So they might not even be taking four bucks to make five bucks. They might be taking one buck to make five bucks through just smoke and mirrors financial engineering and what I would call an extreme lack of ethics. But let's assume for a moment Google does not cancel the contract. So, the three bucks is going to go into SpaceX and they likely give it to someone like Nvidia Jensen right here with his spiffy black leather jacket. Or maybe it's a long sleeve black Hawaiian shirt. I don't know what it is, but it's supposed to be his signature black leather jacket. So, it goes down to Jensen the three bucks. But what's Jensen going to do with it? Well, my goodness gracious, who wouldn't want to invest in SpaceX because they're building orbital data centers and we all know that's the future. So, the three bucks goes right back to SpaceX to build data centers that likely Google will invest in as well and give them future contracts. You see what I'm talking about here? So this is what is propelling another pun the entire US economy. So although I wouldn't worry about the Atlanta Fed's forecasts, what I would worry about is when you scratch beneath the surface, you see how fragile this economic growth actually is and how we can go from growth to a contraction very very quickly.
So the next question becomes, okay, when does the perpetual money-making machine actually come to an end? When does the game of musical chairs stop? Well, first and foremost, they can do this because they've got cash. But what we've seen recently is the cash is going bye-bye. It's already been spent and therefore they're having to go out and sell equity. Google just the other day sold $85 billion worth of common shares. In other words, they diluted their shareholders by $85 billion to pump more money into the circular economy. And now what they're doing is they're going to the extreme. And this is usually what you see in the late stages of this cycle. And they're not just selling equity, but now they're selling debt as well. So at a certain point for all of the shenanigans in financial engineering to continue in order for the US economy to continue, you have to have an economic model. See, back here, Google could do this because they had an economic model that worked really, really, really well in Google search. But now the question is not whether AI is the future because it absolutely unequivocally is and AI demand in my view is going to continue to go parabolic. But that doesn't necessarily mean there's an economic model. The bottom line is if you have to spend $20 to make $10, you can only do that for so long. But the question is how long can they continue to do it? And in my view, the party ends when the nonAI economy deteriorates to a point where it starts to impact the AI circular economy.