New GDP Calculation taking effect

If you recall my article on the newly invented way of calculating GDP, well we are at that point now.

Today, the new GDP numbers (including legal bills, art, music, theatre and imaginary pension funds) were in effect. Real GDP grew 1.7% on an annualized basis in the second quarter of 2013.

As you can see, the old nominal GDP numbers (red chart) and the new nominal GDP numbers (green chart) are about 3% different from each other. 

Nominal GDP

With these new numbers in place, my zero hour debt chart is being reformed to this.

You can see the large drop there, meaning that debt has actually dropped due to the debt limit.

Zero Hour Debt

Second, with these new GDP numbers, the debt to GDP ratio has declined by 3%. It isn't 105% anymore, but is now 105/(100+3) = 102%.

Good work in fudging the numbers, Ben.

(also note that stocks are now seemingly 3% less overvalued)

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Federal Reserve: To Taper or not to Taper

There is all this talk about "tapering". Will the Federal Reserve taper or not taper, that's the question. To find the answer, we need to take a look at the U.S. national debt.

This is really a weird sight, do we really have an actual debt ceiling? Aren't we going to raise the debt ceiling? U.S. public debt has been growing at almost $200 billion a month and has been staying flat just recently.

Chart 1: U.S. Public Debt

Since May 19, 2013, the debt ceiling has been stuck at $16.735 trillion and this ceiling has been in place for almost 2 months as chart 1 suggests. The treasury says that they would be able to pay all the bills until October by enacting extraordinary measures from May 20 till August 2.

In all, the Treasury has the following measures available to it:

• Suspend the investments of the Thrift Savings Plan G Fund (otherwise rolled over or reinvested daily, such investments totaled $130 billion in Treasury securities as of May 31, 2013);
• Suspend investments of the Exchange Stabilization Fund (otherwise rolled over daily, such investments totaled $23 billion as of May 31, 2013);
• Suspend the issuance of new securities to the Civil Service Retirement and Disability Fund and Postal Service Retiree Health Benefits Fund (totaling an estimated $79 billion on June 30, 2013, and about $2 billion each subsequent month);
• Redeem early securities held by the Civil Service Retirement and Disability Fund and the Postal Service Retiree Health Benefits Fund equal in value to expected benefit payments (valued at about $6 billion per month);
• Suspend the issuance of new State and Local Government Series (SLGS) securities and savings bonds (between $4 billion and $17 billion in SLGS securities and less than $1 billion in savings bonds are issued each month); and
• Replace Treasury securities subject to the debt limit with debt issued by the Federal Financing Bank, which is not subject to the limit (up to $8 billion).

And due to higher tax revenues at the start of 2013, we see that interest payments on government debt weren't a problem. In fact, the interest payments as a percentage of tax revenue has been declining since 2013 (Chart 2).

Chart 2: Interest payments as a % of tax revenue

Though, there is one parameter that was not anticipated and that is the effect of higher interest rates and higher mortgage rates.

Read the analysis here.

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Croatia To Join European Union

Today, Croatia joined the European Union, time to celebrate! But should we really celebrate?

What we took in the European Union is a bunch of problems.

First off, the unemployment rate of Croatia is a staggering 20%, rivalling with Spain and Greece.

Second, its balance of trade is negative and has always posted a trade deficit.

To make matters worse, since 2008, the country was in recession and is still in a recession. Added to this, there is an almost 5% inflation in the country (which has come down to 2% just recently), which makes real GDP decline even more rapidly. As we have seen recently in this correlation, it doesn't bode well for the unemployment rate, which will keep rising.

This decline in GDP quickly added to the government's debt. A positive point is that the government debt to GDP is still at 54%, which is good. But it is worsening. External debt though, is higher at around 90% of GDP.

As debt goes up, the country's bonds had been downgraded to junk status last year. This creates the possibility of a bail out of the country by the IMF once it joins the Eurozone.

What a gift.

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GDP revised lower

As I suspected here, declining PMI will always result in lower GDP forecasts and "unexpected" revisions downward.

GDP growth was going to be 2.4% on an annual rate, now it is only 1.8% in Q1 2013.

This also means that the Zero Hour Debt chart is on track to go to zero.

More weakness is coming ahead of us as interest rates and mortgage rates go up. 

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Ben Bernanke: "Our debt is in great demand"

Ben Bernanke (2013): "Our debt is in great demand". (at 06:40)

Not anymore...

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U.S. Debt Flattening Out

I don't know if you've noticed, but this is the first time in more than a decade where total public debt has actually dropped...

I'm wondering what is happening. (of course, it's the debt ceiling of $16.7 trillion)

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Percentage of U.S. Government Public Debt held by Foreigners

This page is created to monitor the Percentage of U.S. Government Public Debt held by Foreigners.

The debt held by foreigners can be found here.

From the chart we can conclude that an ever increasing amount of the U.S. Government Public Debt is financed by foreigners. As long as the chart keeps increasing, U.S. bonds are in demand by foreigners. Once this chart starts to decline, it means that confidence of foreigners in U.S. debt is starting to wane.

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Interest Payments as a Percentage of Tax Revenues

This page is created to monitor the U.S. Interest Payments as a Percentage of Tax Revenues.

One metric that the U.S. government can never manipulate is this ratio. You can apply hedonic adjustments to inflation numbers, you can calculate GDP differently, but you can't falsify the amount of interest payments on government debt and you can't falsify tax revenues.

This ratio measures the affordability of government debt. A spike upwards means that the country is having difficulties servicing its debt load. This can have many causes, like higher yields on bonds, higher public debt or lower tax revenues.

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GDP Misses Expectations

The 2013 Q1 real GDP was weaker than expected. 2.5% year over year instead of 3.2%. With a miss in expectations, be prepared for lower stock markets as we are due for a correction. We are overvalued for sure.

But actually the number is pretty good. the GDP growth to debt growth ratio has inched up since the last release (Chart 1). Nominal GDP grew 1% from a quarter ago, while debt grew 2.4% in the same period.

Chart 1: Zero Hour Debt

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150% Debt to GDP

On the Peter Schiff Show with Neeraj Chaudhary I learned about the 150% debt to GDP limit. If a government's debt goes above this limit, then there is no way the debt will be repaid. It's historic evidence.

In Europe, the country that has gone over the limit is Greece, Italy is at 130% as we speak. So we need to watch Italy closely.

Chart 1: Eurozone Debt to GDP

The U.S. doesn't have much time left as debt is skyrocketing.

Chart 2: U.S. Debt to GDP

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Total Credit Market Debt

Since 2008 we have started a new era. We entered the period of deleveraging. For more than half a decade we had an exponential growth system in credit, but we have ended this period. I will show you by analyzing "Total Credit Market Debt".

Total Credit Market Debt today, is at an astonishingly $55.3 trillion dollars.

Chart 1: Total Credit Market Debt Owed

And it is 350% of GDP.

Chart 2: Total Credit Market Debt as a Percentage of GDP

The total credit market debt = federal/state/local government debt + federal debt to trust funds + business debt + household debt + domestic financial sector debt.

This total credit market debt can be divided by federal debt and private debt.

1) Federal debt: $16.7 trillion.

Chart 3: Federal Debt: Total Public Debt

Federal debt is at 100% of GDP.

Chart 4: Federal Debt: Total Public Debt as a % of GDP

2) Private debt: $40 trillion.

Chart 5: Private Debt

Private debt is at 245% of GDP.

Chart 6: Private Debt as a percentage of GDP

As you can see, since 2008, the private sector has been deleveraging (Chart 6) and the Federal Reserve has been preventing this to happen (Chart 4).

But overall, the Federal Reserve hasn't printed enough money to keep debt going up exponentially (Chart 1).

So what happens when debt doesn't grow exponentially? You will get an economic collapse as Chris Martenson explains here.

To read the analysis: go here.

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Correlation: 10 Year Bond Yields Vs. Total Public Debt Growth

Azizonomics taught me another correlation. When debt grows faster (red line goes up), normally the treasury yield should go up.

But from year 2000 onwards it didn't happen. Either the treasury yields should go up, or the debt growth should slow down.

Chart 1: Federal Debt Growth Vs. 10 Year Bond Yields

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Correlation: Total Stock Market Index Vs. GDP: How to Value Dow Jones

Today I learned about the Warren Buffet valuation of the stock market by looking at the total stock market index and GNP numbers (which is almost equal to GDP numbers + $200 billion).

The total stock market index can be found here and stands at $15.879 trillion on 15 February 2013 (Chart 1). It measures the market cap of the U.S. companies. Don't confuse this chart with the Dow Jones chart.

Chart 1: Dow Jones U.S. Total Stock Market Index

Now you compare that to the U.S. GDP number, which can be found here (Chart 2).

Chart 2: U.S. GDP

If you then divide Chart 1 by Chart 2, you get Chart 3. If the chart goes above 100%, then the stock market is overvalued.

Chart 3: Market Value to GNP ratio

Here is the table for valuation:

Chart 4: Valuation Table

For example, in December 2007, the GDP was $14.25 trillion, while the total market cap was $15 trillion. 15/14.25 = 105%. Meaning overvalued.

For example, in December 2008, the GDP was $14.08 trillion, while the total market cap was $8.78 trillion.
8.78/14.08 = 62%. Meaning severely undervalued.

So today, you could say that stocks are becoming overvalued, so you should take some of your money out of the stock market while you still can.

There is a final note I want to make. If this correlation is true between the Total Stock Market Index and GDP, then you have to take in mind that GDP is very important to watch. If the GDP drops, then the stock market will most likely drop. If the GDP rises, then the stock market will most likely rise.

I pointed out many times that U.S. GDP will not go up, due to the zero hour debt problem, which I talked about here. So theoretically, the stock market cannot rise.

The only way to get GDP go up again is when debt is significantly reduced and we're not at that point yet.

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Zero Hour Debt Has Arrived

As I have warned investors a few months ago on the "Zero Hour Debt" problem here on July 2012, today we find out that GDP has actually reached the 0% growth rate while the debt growth is increasing at an enormous pace. Real GDP in the U.S. has decreased 0.1% in the fourth quarter of 2012 to a mere $15.8 trillion while debt has grown 2.4% to $16.4 trillion.

As you can see on Chart 1, the ratio between nominal GDP Growth and Total National Debt Growth has touched the zero line, which means that additional debt growth is not stimulating the economy anymore. We really are reaching the end game here and will see a parabolic increase in debt.

Chart 1: Nominal GDP Growth to Total National Debt Growth Ratio

To read the analysis, go here.

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Foreign Investors Continue to Buy U.S. Treasuries

It is expected: foreigners continued to increase their positions in U.S. treasuries. Foreign holdings of U.S. debt hit $5.46 trillion from $5.292 trillion the previous quarter (Chart 1). That's an increase of 3%.

$16.28 trillion in debt is now partly in the hands of foreigners. The percentage = 5.46/16.28 =  33.5% (Chart 2).

As long as foreigners are willing to hold U.S. debt, there is no problem at all...

One word of caution though, the interest on this debt will be sucked out of the U.S. economy and go to the foreigners.

Chart 1: Federal Debt Held by Foreigners

Chart 2: Federal Debt Held by Foreigners

China increased their U.S. treasury holdings to $1.156 trillion in September 2012 (Chart 3).

Chart 3: China U.S. treasury holdings

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GDP Numbers are Out for Q3 2012

I'm always excited when I get another data point for my zero hour debt chart. Today the GDP numbers were out for Q3 2012. The media is all positive about the 2% growth in GDP year over year, but we all know 2% is not a positive number. Nowhere in that article they mention the debt growth, GDP growth is meaningless when debt grows faster than GDP. I wrote about zero hour debt here.

We can see now, that our newest data point is right in line with our trendline.

During the 3rd quarter, GDP rose 1% from $15.6 trillion to $15.78 trillion (quarter over quarter). But the debt rose 2% from $15.7 trillion to $16.1 trillion (quarter over quarter). That's double the GDP growth!

Make your own conclusions...

Chart 1: Zero Hour Debt

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Another correlation: Obesity Vs. Debt

"An obese person needs to diet just as a debt-based economy needs to cut spending."

Chart 1: When you gain weight, you need to diet

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Large Portion of QE3 Goes to Interest Payments on U.S. Debt

On 13 September 2012, Ben Bernanke announced a third round of quantitative easing also known as QE3. What the federal reserve will do is buy $40 billion in MBS and $45 billion in 10-30 year bonds per month. So a year from now, the federal reserve will have bought $480 billion in MBS and $540 billion in 10-30 year bonds.

So basically, the federal reserve will try to spur growth by helping the mortgage market and the bond market. But there is a catch in the deal. What investors need to pay attention to is the yearly interest payment on the U.S. government debt.

As you can see, the interest payments on total U.S. debt (blue dots) follow the total U.S. public debt outstanding (red dots). The higher the U.S. debt, the higher the interest payments on this debt.

What will this mean for investors? Read it here.

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U.S. Debt at 16 Trillion

It's official, U.S. debt has exceeded 16 trillion dollars. It's like having a birthday or something, but we shouldn't celebrate.

Chart 1: Total Public Debt

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Euro Vs. USD: Take Two

5 months after I wrote the article about the Euro Vs. the USD, it looks like the USD has won the match against the euro. Since April 2012, the euro has lost 5% against the USD. Let's look at what has changed in those months.

Following list gives the most important indicators for the future of a currency:

• Current account balance of the country
• Total national debt of the country
• Inflation rate
• Interest rate

If the current account balance of the country is positive, a country will export more than it imports. As the population of the country exports more, they will receive more foreign money. This money will then be converted into their own currency, which is then spent or put in their banks. As the foreign money is converted into the money of the country's population their own currency will appreciate in value.

The larger the national debt of the country, the more expensive it will be to sell debt to foreigners. The government will then be obliged to monetize this debt to keep interest rates low and to be able to service this debt. Rising debt load will therefore devalue the currency.

The higher the inflation rate, the lower the currency will go. An example is Vietnam, where the dong lost much of its value due to high inflation.

When interest rates are lower than the inflation rate, there is no incentive for foreigners to buy the currency. There is no incentive to save money. The consequence is a lower currency value.

Let's look at the current statistics:

1) Current account
5 months ago, the current account deficit of the US was in the order of $US 110 billion per quarter, which amounted to $US 450 billion per year (2011).

For the Eurozone, the 12-month cumulated seasonally adjusted current account recorded a deficit of EUR 44.9 billion.

Today, the eurozone is posting a current account surplus of 14.9 billion euro in June, while the U.S. is increasing its quarterly deficits to $US 137 billion in the latest quarter.

So in this case, the eurozone is still the winner.

Europe VS USA: 1-0.

Euro Area Current Account (Million euro)

U.S. Current Account (Billion USD)

2) Total National Debt
Total US national debt is $US 16 trillion. Total eurozone national debt to GDP is 88.6%, the GDP is $US 17.578 trillion in 2011, which translates to $US 15.6 trillion in Eurozone debt. So again, Europe wins by a small margin.

Europe VS USA: 2-0

3) Inflation Rate
5 months ago, the inflation rate in the Eurozone was 2.6%, while the inflation rate in the U.S. was 2.9%. Today the inflation rate in the Eurozone is 2.4%, while the inflation rate in the U.S. is 1.4%. This is a significant and surprising decline in inflation rate in the U.S Vs. Europe.

Europe VS USA: 2-1.

Euro Area Inflation Rate

U.S. Inflation Rate

4) Interest Rate
5 months ago, the interest rate in the Eurozone was 1%, while the interest rate in the US was essentially zero. As we already know, Mario Draghi lowered interest rates to 0.75%, but this is still higher than the interest rate in the U.S. (0.25%). Europe VS USA: 3-1

Euro Area Interest Rate

U.S. Interest Rate

     

Conclusion: Europe still wins by 3-1 against the USA, but is losing ground through inflation. Though I think the current account surplus of Europe is the most important positive indicator of the strength of the euro in the future.

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