Folks, we need to discuss the rapid developments. I Had no time to even put on a jacket today because things are developing so quickly. First, we're going to talk about why one of the FED branches just officially moved to projecting a recession and what that means for overall Fed policy number two: we're going to talk about the sad truth of how profits moved from this pre-pandemic to this post-pandemic and where they are headed next. Also, a quick reminder are 50 off America 50 zip Trader you coupon code will be expiring midnight on July 4th.

If you want to lock in lifetime access for the reduced one-time fee, make sure to check it out before it expires. Link below and a strong shout out and warm welcome to all the folks who joined this past week. Welcome to the team! Okay, so what's official, folks? The S P 500 has now posted its worst first half since 1970, and this comes the very same day that the Atlanta Fed Branch's projection model is now officially forecasting a recession. Now, what is very unique about this model is that it's a raw data, math radical model.

It doesn't have a lot of human error or subjectivity in it. It is a running estimate of real GDP growth using actual economic numbers. It's not a survey of what Fed participants are feeling based on their own subjective view of the economy and pricing. It's not a view on how Jerome Powell's stomach is feeling after that burrito he ate last night and how much he paid for it.

It's not a groomed expectation from a Wall Street valuation model that is made with the intention of backing up whoever is running the institutional fund and what their policies are and what their investment strategies are. Now folks, this model uses raw data and then spits it into a formula. and then you get what you get. And the thing is, when you have a model that is not attached to human ego and human subjectivity and human incentives that are adverse to the truth, Well, oftentimes it's a lot more realistic than the ones that the consensus uses.

And while no forecast is going to be perfect, it has been anticipating numbers well below where subjective consensus estimates are if you look at its real GDP estimates for Q2 of 2022, which is what you're looking at here. They've been dumping rapidly as the economic data came out and has looked worse and worse, causing it to go down more and more. Now, when you give bad data to the Fed or to Wall Street analyst firms, they look at the data and then they have to figure out how to explain to their clients how they didn't see this data coming. Now it's just a small blip, an outlier in their overall trend analysis, but luckily at least one of the branches at the FED has a non-biased model that tells you what's going on.

Actually, even taking a sharp downturn at the same time or a blue chip, consensuses were heading upward, this is what it looks like when you factor in changing data into your analysis. This is what it looks like when you refuse to. Now, pretty soon we'll get the next consensus estimates and I'm pretty sure they're going to be lower now because everyone's starting to acknowledge. but this is the first time that this indicator and this is one of the first major indicators to say this is is projecting a negative real GDP estimate for Q2 of 2022, which is a big deal because again, Q1 was contractionary and as you know, no two contractionary quarters equals recession.

So this means that the Atlanta Fed's model is now officially predicting a recession for the first time. Naughty naughty! Keep in mind that this model was criticized earlier this year for projecting lower than average lower than consensus Q1 growth. and it actually turned out that it wasn't negative enough. If this model makes the same mistake of overshooting growth again, well, this one percent down number could be way worse You look at the last quarter.

With the latest revisions released yesterday, we were down 1.6 percent down. One percent would be a deceleration of the Slowdown. Have things gotten better or worse This quarter? Have things gotten worse since Q1 when the Russia invasion had just barely started? Or have things gotten better? Probably worse. But on Sunday we talked about how the data would be curved because of the China shutdown, essentially closing in some of the U.S trade deficit in Q2, which could help push GDP numbers upward because we have less Imports versus exports.

but still, that's not going to help too much, and the trend is still pretty damn clear. Now, what criteria does the Atlanta Fed's model take into consideration? Does it take its little pinky finger, lick it and put it in the air And if it's cold and it feels a little windy on it, it says recession? Well, I'm pretty sure that's actually not how they do it. Here's the main criteria that move their analysis today and the commentary they released on it: The GDP Now model estimate for real GDP growth in the second quarter of 2022 is negative one percent on June 30th, down from 0.3 percent on June 27th. So they went from projecting 0.3 percent growth in Q2 just a few days ago to now saying it's going to be negative after recent releases from the U.S Bureau of Economic Analysis and U.S Census Bureau the Now cast of second quarter real personal consumption expenditures growth and Real gross private domestic investment growth decreased from 2.7 percent and negative 8.1 percent respectively to 1.7 percent to negative 13.2 percent, respectively.

While the Now cast of the contribution of the change in real net exports to second quarter GDP growth increase from negative 0.11 percentage points to 0.35 percentage points. Okay, so the last part was just talking about the closing in of the trade deficit specifically because of the China shutdown. or at least largely because of that. that kind of Curves upward The GDP a little bit but not much I mean we're talking a number of 0.35 percent.

So we went from a slight reduction to now a growth from that line item which is good but just wait till China reopens then all of a sudden massive deficit again. But the main points that I want to talk about here are these two line items: Number one and not to get too personal, but number one: Real Personal Consumption expenditures growth. It was expected to increase 2.7 percent in Q2. Now they are expecting just 1.7 What does that mean and who cares? Well, real Pce growth is what the main measure of consumer spending in the economy and the latest monthly report on that came out just today and it turned out that for the first time in this crisis, while customers spent more dollars overall on personal consumption expenditures, they spent less.

They spent less when adjusted for inflation before they were spending more. but they were also spending more even if you adjusted for inflation which meant people were spending faster than prices were going up. That changed this morning. That completely changed.

which means that consumption is just starting to go down and consumers are starting to cut back. Once this becomes a trend and it's entrenched, you know exactly how this ends. This is exactly how a recession starts, and if you don't think this trend is going to continue to accelerate and get worse Us: Remember when you're getting to the point in time where prices are going up faster than wages and you've already depleted your savings which are now at Great Recession lows and you've maxed out your debt which are near all-time highs. While the laws of mathematical facts say that all of a sudden you no longer have any more money now I Understand that the government doesn't have to follow math because they can just make up numbers and new rules as they go along.

But when it comes down to Consumers, they do have to follow math. And if you have ten dollars in your bank account and you spend the ten dollars, you now have zero dollars. which means no more spending and you're starting to see now the actual impacts of that. You're actually starting to see people start cutting back because they're feeling a little bit of that pain.

Now, they haven't started feeling a lot of pain yet. they're still feeling crunch, but they're not feeling actual pain in danger. But they're starting to react to all of these compounding factors. So this projection from the Atlanta Fed is acknowledging.

Hey, we didn't know that the Pce numbers were going to be this bad. and we didn't know that the revisions from Q1 were going to be that bad either. If these are the numbers that we're seeing, well, the overall quarter is going to have worse numbers too. And and then the implication is that well, if we're seeing these bad numbers in May, well, we're certainly going to be seeing those bad numbers in June, July and August.

It's going to be an overall trend of negativity. which means that when you start getting the estimates for Q3, it's probably going to look even worse than Q2. Again, keep in mind that this is before the FED has even meaningfully done anything. Most of the pain that the FED has caused has been in asset markets in the real estate market, but the real estate Market's still pretty hot anyways.

It's just starting to cool down eventually. Rate hikes make their way through almost all of the economy, but it takes a few quarters right? And then the second part here was pretty predictable. But the second part is that real gross private domestic investment growth was expected to drop 8.1 percent. Now they are expecting it to drop 13.2 percent in Q2.

So unfortunately, investing in the United States at least over the short to medium term is kind of like buying a train ticket on a train going 500 000 miles per hour down a backward looking slopey mountain with no tracks. It's like, okay, it's kind of a fun ride until you go off the hill and die. So people are saying Okay well I don't really want to keep this ticket anymore. That's what people are saying right now in the long run.

Very very confident that U.S equities are going to be some of the best investments. But right now things are bad. They're bad. And when you're looking at this level of private investment going down, well, remember, part of the GDP formula is how much investment there is and investment again is dwindling quite a lot.

This other model was saying. hey, Q2 investment growth was going to be bad. People would be closing out of positions. It was going to be rough.

Very rough. But it's actually a lot worse than we thought. Now, admittedly, this is one of those things where if you get a lot of these types of reports and you start seeing a clearer Trend To the downside: all of a sudden, this bad news for the economy is going to start being good news for the market. Historically, markets like to try to factor in recessions a couple quarters ahead of time, and as the details come out, they factor in whether it's going to be worse or better than they thought it would be.

But once you start actually getting data that suggests that the market was right all of a sudden, the markets are very, very close to bottoming, right? Of course, that's not a rule, and if you get into a situation where things become prolonged, then all of a sudden it takes even longer to recover. But oftentimes the worst of of the worst is done before the economy starts matching what the market is factored in next. So I do want to talk about this. One of our viewers sent me this on Twitter call follow me at zip Charlie and feel free to send me or tweet me data points you think I'd be interested in talking about, but it showcases Us non-financial corporate profits after taxes.

From 2011 to right before 2020's coveted shutdowns, average profits hovered at one trillion dollars and stayed within this overall range. So think about that for a second. Corporate profits stayed in the same range for like nine years. Nine years.

So what happened to the stock market during those same nine years? Well, it certainly didn't stay within range. No, no, no. the S P 500 went up 158 percent, the NASDAQ went up 245 percent, the Dow Jones went up 148. Okay, so you think about this on a broad level.

Well, how do you value a company? Well, a company's valuation should be based on a multiple of earnings. If you're a growth investor, maybe that's a multiple of sales, which then later turns into a multiple of very, very profitable earnings. But but if you're talking about the broader Market we are talking earnings AKA profits after taxes. So here we have a Whole Decade where profits after taxes basically stayed within a range, yet markets skyrocketed during that same time period.

What happened? well, there's a lot of little reasons for that, but on a bigger level on an overall picture. One of the major factors that caused that to happen is because of our friends over at the FED with their Easy Money policies, their low rates, and their creation of an environment where there's nowhere better to invest for money, which of course, helps bid up multiples that entire decade even though profits weren't improving that much and we're staying within range during that same exact time. So think about what happens if the FED is forced to reverse policies that push markets to grow when corporate profits did not Think about what happens if in the future, corporate profits not only don't grow, but they shrink and the Fed's no longer there to help the market anymore. Now, if you've gotten a little ahead of me, you might have noticed that the story gets even better because shutting down the economy apparently resulted in companies being able to have record profits all of a sudden.

Who knew? All you needed to do to make sure that companies have record profits is to lock everybody at home and magically they'll come out the other side with tons and tons of bucks, all willing to go and throw at different big companies. Well, that's not exactly what happened, right. There were definitely excess Savings in the pandemic, but the big reason this happened and the big reason there is so much more of an increase than we've ever seen before in that previous decade was because we printed so much damn money. We threw tons and tons of stimulus into the economy via a million different methods and that boosted profits insanely fast in the coming years.

Great, But where are we now? Well, now the U.S savings rate is down far below where it was not just since 2020, but throughout most of the last decade now. U.S Consumer Debt is basically maxed out as rates are going up. And of course, as we know, wages are underpacing inflation, which in turn means watch Well, it means that this little corporate profit line here this pretty little corporate profit line is going to to plummet from the insanely high levels up here to likely levels that are insanely lower at the same time where the Fed's multiple expanding tool that it used the last decade is being turned off. Now, if you listen very closely and I hope you did, you're going to be tested on all of this.

But if you listen closely, you may say Charlie It's a bit weird that this data set you're referring to doesn't list Financial corporations when market performance like the S P 500 does well. this data set probably took them out because Financial corporations tend to benefit from what well. Rising asset prices not necessarily Rising profits in other areas of the economy. If you take out Financial firms, you can see the profits of companies that are making more money because of natural profit increases in the economy.

Not just what the FED is supporting with their lower and lower interest rates. but that said, I mean the crazy thing is that even if you do include them, the overall profit trend is still very, very flat. It's just slightly less ridiculous. And if you're going to include them for the upside argument, you also have to include them for the downside argument: If Financial firms make more and more money when prices are going up and prices have been going up the last 10 12 years, well guess what? when prices go down, they're going to start dragging down this curve as well and profits are going to go down.

So I mean whichever way you spend the data, it's still pretty freaky. Okay, But anyways, to conclude with an ironic thought on July 1st 2021, the White House tweeted this cutesy punny tweet about the 4th of July costs planning a cookout this year. catch up on the news. ha ha.

According to the Farm Bureau the cost of a Fourth of July barbecue is down from last year. It's a fact you must hurt hot dog. The Biden economic plan is working and not something we can all relish. Okay, so they're bragging about bringing costs down and they're saying that this is because of the Biden economic plan.

and then it cites the cost of a Fourth of July cookout in 2021 is down 16 cents from last year according to the Farm Bureau which of course was a huge windfall for American families. But this year the same Source put out a new stat showing that costs are up 17 for a Fourth of July Cookout which is a 10 increase year over year now. I Don't want to be a douche, but if you do the math on that, we are now paying 62.5 times more than we saved year over year last year. However, there is good news.

While pretty much everything is more expensive heading into this Fourth of July weekend, there is one thing that is substantially cheaper and that is our ZIP Trader you. That is right. If nobody else is going to commit to tackling inflation, then we here at Ziptrader are going to take it into our own hands. Coupon code America 50 will get you 50 off if you use the code before July 4th at midnight.

That's said, I will admit that the discount is transitory and I don't mean it in the Jerome Powell Way Anyways, that gaps off the video. make sure to hit that rap as you like button and subscribe and share your thoughts. Down Below Have a good one folks and I'll see you in the next video.