After we posted our preliminary thoughts on the Z.1 "Flow of Funds Accounts of the U.S." report earlier, we had the chance to dig deeper through the data in the governmental cash flow report. To our surprise we uncovered some dramatic data revisions whose presence highlights the recent "consumer resurgence" in a very different light. The key finding is that the government has been chronically overrepresenting Household Net Worth in original publications, and subsequently revising the data dramatically in order to hide the fact that consumers' wealth is nowhere near as impressive as originally represented. Putting a number to this statement: a $2.1 trillion downward revision in just one quarter.
Exhibit A - ratio of Household Net Worth to Disposable Income
Two of the most critical data sets in the Z.1 are total Household Net Worth and Disposable Income, and their respective ratio. Over the past decade this ratio has averaged roughly 5.5x, and as the confluence of the real estate and stock price market lifted household net worth into the unrealistic stratosphere, this ratio hit an all time high of 6.5x in 2006. Ever since then the ratio has collapsed, and according to today's release it hit 4.86x. Yet what is notable are the recent revisions to this data, whereby this ratio, which in Q2 was disclosed to be 4.87x originally, was subsequently reduced to 4.63x per today's data. This is a dramatic revision.
What was the reason for this revision? One specific item.
Exhibit B - Household Real Estate Worth
Comparing the constituents of household net worth, yields one glaring disparity. While in Q2 Household Real Estate was valued at $18.3 trillion dollars, in today's data it was revised by a stunning $2.1 trillion lower. To put that into perspective, the entire increase in HNW from Q2 to Q3 was $2.7 trillion, of which $2.3 trillion was from "Equity Shares At Market Value." In other words, had the government not fudged the data initially (or had it not subsequently revised it by a whopping 11.4%), today's Z.1 would have shown a much less ebullient picture, with just a $600 billion increase in HNW instead of $2.7 trillion: an 80% haircut! Our data demonstrates that over the past 5 quarters this has been a habitual game of over-inflating household real estate by the government, only to trim it subsequently, as the stock market picks up courtesy of an imaginary (and soon to be revised massively downward) "improvement" in the consumer's net worth status. A big (and potentially fraudulent) Catch 22 perpetrated by the government: consumers believe they are richer (when they are not), they buy into the ponzi, the government then removes the "net worth" crutches, but the ponzi has ratcheted up a notch in value; next period: rinse, repeat.
The comparison of originally reported real estate value and any given period's most recent revision is presented below. Ever since the peak of the housing bubble, 10 quarters ago, the government has been consistently deflating the margin of actual-revised numbers, while over the past 5, the revisions have gotten simply blatant, with a record $2.1 trillion in actual-revised adjustments in Q1 and Q2 of 2009. Not a bad way to make it seem that the consumer is $2.1 trillion dollars richer based on "adjustments," even if these disappear into thin air after a mere 90 days.
And if the United States government is willing to "adjust" numbers to the tune of $2 trillion+ within 90 days, who is to say what goes on in the Bureau of Labor Statistics, Department of Labor and the Census Bureau...