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The revisions to GDP published this morning have turned to disgustingly nasty one of my favorite charts.  Specifically, this one:

You've all seen this a dozen times.  Well, here's what it looks like with the revised GDP numbers "corrected" in the Excel file:

"Holy Sheeit" doesn't even begin to describe this.

These are not small changes, but they also mark the desperation of our government to avoid recognition of even a tiny, 2% annualized decrease in GDP!

That's right folks - "as-reported", the maximum y/o/y "depression" that garnered the title "Great Recession" was a minuscule 2% decrease in REPORTED nominal GDP.

But look at the policy response.  Oh, and that last dot - it's estimated, based on the 2Q preliminary GDP numbers (which are almost-certainly too "hot" and the debt numbers (almost-certainly too "cold".)

In addition the revisions make clear that there was in fact a zero real growth rate in 2006!  There was your warning.... and likely why we had the nice little dump in the market starting in the early part of 2007.

(Revisions only go back to the e/o/y 2006 numbers.)

If you look to the 2003-2007 period for a clue as to how our government will respond, you're in for a stunner - there will be no material decrease in deficits while economic "recovery" on a nominal scale will be unlikely to go beyond 4% on a reported basis.

At this rate we're gonna be Greece - and sooner than you think.

Ponzi Ponzi Ponzi!

That's the only take-away I can get from this one....

They studied abstract economies in which the monetary policymaker follows an active Taylor-type monetary policy rule, that is, the policymaker changes nominal interest rates more than one-for-one when in‡ation deviates from a given target. Active Taylor-type rules are so commonplace in present day monetary policy discussions that they have ceased to be controversial. Benhabib, et al., also emphasized the zero bound on nominal interest rates. They suggested that the combination of an active Taylor-type rule and a zero bound on nominal interest rates necessarily creates a new long-run outcome for the economy. This new long-run outcome can involve de‡ation and a very low level of nominal interest rates. Worse, there is presently an important economy that appears to be stuck in exactly this situation: Japan.

Yep.

But this is where Bullard loses his connection to reality.  He goes on to opine:

Taken at face value, the Taylor-type policy rule has been fairly successful for the U.S.: Inflation (by this measure) has not been above three percent nor, until very recently, below one percent, during the January 2002 to May 2010 period.

Well, taken at face value with inflation numbers intentionally distorted, and thus policy rates set at the behest of intentionally falsified data, one can conclude nothing of value - other than that when you put garbage into a formula, you get garbage back out.

Need I remind Bullard that our inflation numbers (and indeed the OECD's) are all tainted?  That until President Clinton we had much-more reliable ones, but even those were manipulated.  For instance, counting "owner's equivalent rent" instead of house prices, when a majority of households in fact have fee-simple real estate in their name, is beyond foolish - it's intentionally fraudulent.

The only credible choices that remain before us are to accept the unwind of Ponzi-enhanced "values", or destroy our currency and political system through further puerile and intentionally-fraudulent attempts to conceal the truth.

I was wondering how long it would take before someone got their dander up....

"Defendant Merscorp, Inc., is a foreign corporation created in (on?) or about 1998 by conspirators from the largest banks in The United States in order to undermine and eventually eviscerate long-standing principles of real property law....

MERS is the RICO enterprise and is the primary innovation through which the conspirators, including the Defendants, have accomplished their illegal objectives as detailed throughout this complaint.

Well, well, well.... read the rest of the complaint - it's good.  Specifically, it appears they managed to get the "signer" of a large number of these documents (who claims to be an officer of MERS) to admit that she is in fact not a corporate officer, and in fact doesn't even know who the corporate secretary of the company is!

On it's face, the complaint looks pretty ugly.

I'll be watching to see how the case develops; if you remember my previous articles about MERS, I put forward the belief that what they had attempted to do was end-run around the statutory requirements of several states with regard to assignment and recordings for real property, not to mention potentially the laws relating to trusts and assignments "in blank" (effectively, the creation of bearer paper, which has a whole host of related issues.)

"Here it comes"......

LiesMan on CNBS is spooging himself with "wow"s.

Well, the futures disagree.  And so do I.

Real gross domestic product -- the output of goods and services produced by labor and property located in the United States -- increased at an annual rate of 2.4 percent in the second quarter of 2010, (that is, from the first quarter to the second quarter), according to the "advance" estimate released by the Bureau of Economic Analysis. In the first quarter, real GDP increased 3.7 percent.

Well, so they say.  That's first estimate.  Remember that BEA's average "overstatement" of late seems to be running in the 20-30% range .vs. reality when the finals are in.  So if we apply that sort of discount, we're well under 2.0, which will be admitted once all is said and done (and you've forgotten about the orgasmic response of the CNBS pump monkey clowns.)

Final sales of computers added 0.04 percentage point to the second-quarter change in real GDP after adding 0.10 percentage point to the first-quarter change. Motor vehicle output subtracted 0.01 percentage point from the second-quarter change in real GDP after adding 0.74 percentage point to the first-quarter change.

And again, .vs. the spooging that CNBS is doing right now about "Cars", the report says that motor vehicle output SUBTRACTED from GDP this quarter.

The price index for gross domestic purchases, which measures prices paid by U.S. residents, increased 0.1 percent in the second quarter, compared with an increase of 2.1 percent in the first. Excluding food and energy prices, the price index for gross domestic purchases increased 0.9 percent in the second quarter, compared with an increase of 1.6 percent in the first.

Pay more, have less.  That'll work out great, right?

Real personal consumption expenditures increased 1.6 percent in the second quarter, compared with an increase of 1.9 percent in the first. Durable goods increased 7.5 percent, compared with an increase of 8.8 percent. Nondurable goods increased 1.6 percent, compared with an increase of 4.2 percent. Services increased 0.8 percent, compared with an increase of 0.1 percent.

How the hell is that possible with unemployment up around 10%?  Oh wait, I found it.

Real federal government consumption expenditures and gross investment increased 9.2 percent in the second quarter, compared with an increase of 1.8 percent in the first. National defense increased 7.4 percent, compared with an increase of 0.4 percent. Nondefense increased 13.0 percent, compared with an increase of 5.0 percent. Real state and local government consumption expenditures and gross investment increased 1.3 percent, in contrast to a decrease of 3.8 percent.

Ah, so the Federal Government, despite claims by the Obama Administration that "deficits will come down" and similar lies, in fact dramatically increased non-defense spending.

Further, States and local governments, even though they have no money, increased spending too.  Yes, that pretty green sky is an approaching tornado, and it's labeled "state and local insolvencies."

The change in real private inventories added 1.05 percentage points to the second-quarter change in real GDP after adding 2.64 percentage points to the first-quarter change. Private businesses increased inventories $75.7 billion in the second quarter, following an increase of $44.1 billion in the first quarter and a decrease of $36.7 billion in the fourth.

Oh, so fairly close to half of the GDP "increase" was in fact due to inventory build.  Guess what happens to you when you build inventories that you later can't sell?  Hint: The first letter is "B".

The personal saving rate -- saving as a percentage of disposable personal income -- was 6.2 percent in the second quarter, compared with 5.5 percent in the first.

That's a load of crap.  BEA calls "personal savings" the mathematical forumula "Income - spending = savings."  Uh huh.  Paying off your credit card is "savings", according to the BEA. 

Then we have revisions.

For 2006-2009, we now have a decrease net-net, as opposed to being flat. 

All three years of the revision period were revised down. Again, if a mistake or inaccuracy (as opposed to intentional falsehood) is responsible for errors, one would expect them to be normally distributed - that is, some would be positive, some negative.  This is obviously not the case.

Is there any good news in the report?  Well, yes - there was a material uptick in non-residential fixed investment, centered around equipment and software.  How much of this is a normal replacement cycle (deferred last year) and how much signifies real expansion is an open question and one not easily answered.  However, I wouldn't call this particularly "robust", despite the pump monkey characterization this morning in the media.

The drops in some of the previously-published numbers were, however, simply stunning.  For example, PCE (personal consumption) was previously reported for Q1/2010 as 2.13.  The revision is 1.33, a thirty percent downward revision.  That's not an error, it was a falsehood.

Worse was the services false report.  The previous reported number for Q1/2010 was 0.69.  Revised was 0.03, a downward revision of ninety-five percent.

The services revision backward was truly sickening - the entirety of 2009 was negative with the exception of the fourth quarter, where all but the first was previously reported positive, and the changes were ridiculous.  First quarter was revised down from -0.13% to -0.75%, second from +0.09% to -0.79%, and so on.  Again, that's not an error, it's a lie.

Needless to say when I get all my graph source data updated, it's going to look worse than it did - including my "government ponzi support" graph, one of my favorites. 

The futures are diving on the report, as well they should.  Not because it's bad - but because the entirety of the 2009 data set was a bald-faced lie.

There's a rumor going around that Fannie and Freddie (remember, government-owned GSEs?  Yep)  are cooking up a plan to provide "instant refis" to everyone with a Fan/Fred mortgage that is current, effectively refinancing them to current rates.

This sounds like a huge win for everyone. 

But of course it's not - there is never any such thing as "win for everyone."  Someone always loses.

Let's remember how a mortgage-backed bond works.  You take a bunch of mortgages, then slice and dice 'em into bonds.  The bonds are sold; the investor pays for the bond, and then gets an interest coupon until maturity, at which point the bond principal is paid back.

With mortgages there are a lot of games played because unlike a regular bond that has defined call provisions (if any) a mortgage can prepay at any time, removing it from the pool.  This creates a duration problem for the seller which is accounted for in various ways.

One of the ugly little things I've been suspicious of for a couple of years now is that the capital accounts on these notes may be "silently" deficient.  That is, let's say you have 100 mortgages with an aggregate "face" of $200,000 each (average.)  You thus have a $20 million "face" bond there (all this ignores your "vig"; don't get all technical on me :-))

Let's say the aggregate coupon you owe on that bond is 5%.  So you have to come up with $1 million a year to pay the interest to the holders.  In theory, as each note prepays or pays off, the capital account has been stacking back those funds, so when the bond retires, you can hand the principal back.

But what if some of the notes aren't paying?

Well, at first blush, you're dead, because the coupon "inbox" from the mortgagees is short.  But in fact some of them have prepaid - which means that if you're not being honest you could raid the capital "box" and make the interest payments with it.  Who's the wiser, up until the bond matures and suddenly the money that's supposed to be there to return to the investors is missing?

I know, I know, this can't happen.  Uh huh.  Pull the other one folks.  How many little games have been played over the last three years with accounting?  Why not here?

Now here's the problem: If Fan/Fred were to implement such a "refinance/prepay" program, suddenly all the performing loans will immediately roll off.  All that's left is the non-performing ones. 

Now if, and I stress "if", that sort of deceptive game up above has been played, it suddenly becomes exposed, as the capital account is dramatically deficient, and it's "game over" for those holders. 

It might also be fun trying to separate out the actual prepay risk and problem with the value of these notes and the results of this sort of game.

Now again - I can't tell you it's happened, because I have no access to the security-level books and flows from the homeowners through the servicers and then through Fan and Fred.  But it would certainly explain why we have the sort of delinquency numbers we've seen and yet we haven't seen huge hits to the securities issued by Fan and Fred.  Remember, these guys are informally insolvent (in "Conservatorship") and while their losses have been big, I am having trouble squaring the claimed loss amounts (about 2% of their book) and the amount of funding that Treasury claims it has provided to them.

If I'm right about this - and remember - this is speculation - then some of those note-holders are about to get a truly ugly surprise, and we're also about to be treated to whether Treasury's alleged "promise" to back them was worth the breath that Geithner spent to mouth it.