Howard Davidowitz says Wall Street is A Ponzi Scheme with Lies and Fraud

Day one of the Financial Crisis Inquiry Commission’s two-day hearing on AIG derivatives contracts featured testimony from Joseph Cassano, the former head of AIG’s financial products unit. Goldman Sachs president Gary Cohn was also on the Hill.Meanwhile, the Democrats are still trying to salvage the regulatory reform bill, with critical support from Senator Scott Brown (R-Mass.) reportedly still uncertain.According to Howard Davidowitz of Davidowitz & Associates, what connects the hearings and the Reg reform debate is the lack of focus on the real underlying cause of the financial crisis: Fraud.”It was a massive fraud… a gigantic Ponzi Scheme, a lie and a fraud,” Davidowitz says of Wall Street circa 2007. “The whole thing was a fraud and it gets back to the accountants valuing the assets incorrectly.”Because accountants and auditors allowed Wall Street firms to carry assets at “completely fraudulent” valuations, he says the industry looked hugely profitable and was able to use borrowed funds to make leveraged bets on all sorts of esoteric instruments. “Their bonuses were based on profits they never made and the leverage they never could have gotten if the numbers were right – no one would’ve given them the money in their right mind,” Davidowitz says.To date, the accounting and audit firms have escaped any serious repercussions from the credit crisis, a stark difference to the corporate “death sentence” that befell Arthur Anderson for its alleged role in the Enron scandal.To Davidowitz, that’s perhaps the greatest outrage of all: “Where were the accountants?,” he asks. “They did nothing, checked nothing, agreed to everything” and collected millions in fees while “shaking hands with the CEO.”

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Howard Davidowitz says, U.S. Economy is a Complete Disaster

The U.S. economy is in shambles and Americans will continue to see high unemployment and lower living standards in the years to come, Howard Davidowitz tells Henry and Aaron in the accompanying clip. Davidowitz lays much of the blame for the economy’s woes at the feet of the Obama administration, which he calls “the worst of my lifetime.”Obama “Mr. Mass Destruction”Davidowitz says that the key to Obama’s success is his ability to sell his policies to the public. He can confidently read from a teleprompter and appear competent and in control, when in reality, “it’s one big bag of empty words,” Davidowitz says of Obama’s messages.Davidowitz contends that the President’s spending, including the health-care bill, is creating massive deficits that will take the U.S. years to dig itself out of. “He is Mr. Mass Destruction,” Davidowitz says of Obama. “I mean he is a human destroyer. This guy has spent his way into oblivion and we don’t have a budget. He is surrounded by a bunch of complete incompetents, led by himself. “Housing GloomAs far as the actual economy goes, Davidowitz’s chief concern is the strained state of the housing market, from which the bad news continues to pour in. According to Davidowitz, Americans are facing an $8 trillion negative wealth effect from the bursting of the housing bubble.”We’re talking about some serious money here,” Davidowitz exclaims. “I mean this is a complete disaster and that’s why we are going to have a double dip. We’re guaranteed a double dip in housing.”Small Businesses and UnemploymentDavidowitz says that the job market is also in ruins, noting for every new job there are six applicants. As a result of the intense competition for positions, employers can offer lower wages. Young people entering the work force today can expect to make less money in their lifetime than previous generations. Considering the majority of new jobs are created by small businesses, Davidowitz argues that new regulations governing loans to small businesses are only making matters worse — both for the entrepreneurs and the millions of people out of work.”We have this insane new regulation,” Davidowitz says. “Community banks will not even be able to fill out the forms. They’ll pack up and quit. They’re already underwater. Commercial real estate is still terrible.” The Future a Massive StruggleAsked whether he thought the U.S. would experience another Great Depression, Davidowitz said the coming years will look more like Japan today vs. the U.S. in the 1930s.People will be making and spending less money and the nation as a whole will be dealing with the consequences of the deficit, he says. “We are in a struggle, day by day it’s ugly. At the core, when we look at our debt, we are going to have to deal with it.”A few months ago, while other analysts claimed that the economy would continue to follow a V-shaped recovery path, Davidowitz seemed out of step by insisting the nation’s problems were still dire. Regardless of what you think of his message or style, Davidowitz’s doom and gloom outlook now appears much more credible.

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U Shaped or Double Dip – Economic Risks Are Rising

U.S. Growth Outlook:  Still Anemic and U-Shaped but Risks of a Double-Dip Recession Are Rising

by Nouriel Roubini

A slew of poor economic data over the past two weeks suggests that the U.S. economy in 2010 is headed for – at best – a U-shaped recovery. The macro news, including data on consumer confidence, home sales, construction and employment, actually suggests a significant downside risk even to the anemic 2.7% growth which RGE forecast for H1. With the positive effects of the historic levels of fiscal stimulus due to fade this year, the U.S. faces at best a 1.5% growth rate in H2, which looks too close for comfort to a tipping point of a double-dip recession.

Paul Krugman says, We’ll be Repeating the Great Mistake of 1937

Paul Krugman

Paul Krugman

That 1937 Feeling

Published: January 3, 2010

Here’s what’s coming in economic news:  The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.

Niall Ferguson says, U.S. Empire in Decline and on Collision Course with China

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.”People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain’s in the 20th, he says. “Excessive debt is usually a predictor of subsequent trouble.”Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain’s case back then it was Germany; in America’s case today, it’s China.”When China’s economy is equal in size to that of the U.S., which could come as early as 2027…it means China becomes not only a major economic competitor – it’s that already, it then becomes a diplomatic competitor and a military competitor,” the history professor declares.The most obvious sign of this is China’s major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. “There’s no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region.”As to analysts like Stratfor’s George Friedman, who downplay China’s naval ambitions, Ferguson notes British experts – including Winston Churchill – were similarly complacent about Germany at the dawn of the 20th century.”I’m not predicting World War III but we have to recognize…China is becoming more assertive, a rival not a partner,” he says, adding that China’s navy doesn’t have to be as large as America’s to pose a problem. “They don’t have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble” for the U.S. Navy.

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The Days of “Buy and Hold” Are Over, says John Mauldin

The economy is still the pits yet stocks are on a tear. What’s an investor to do in these confusing times?John Mauldin, president of Millennium Wave Advisors, admits the average investor doesn’t “have as many good choices” as in the past.Contrary to what “experts” have told the public for years, now is not the time for buy and hold, Mauldin says. “You can be a trader. You can ride the wave, I’ve got no problem with that but I don’t think you want to buy something and hold it for five years.”That’s because he thinks another correction is coming in the not so distant future.Mauldin, who writes the Thoughts from the Frontline e-letter, does think there’s money to be made in real estate. With prices so depressed in many markets, he says buying property on the cheap and renting it “is a prescription for making money.”

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Elizabeth Warren says, Housing Market Getting Worse

Home Foreclosures Will Last For Years

10 to 12 million U.S. Homes Could Ultimately Go Into Foreclosure

There’s been a lot of talk lately about a recovery in the housing market – even reports of bubbles re-inflating in certain markets. Elizabeth Warren, chair of the Congressional Oversight Panel, isn’t buying it. “We see things getting worse in the housing market,” Warren says, citing the pernicious effects of foreclosures, which rose 5% in the third quarter to a total of 937,840, according to RealtyTrac. “The long-term impact of high foreclosure rates on our housing market and overall economy would be disastrous,” Warren warns, citing estimates that 10 to 12 million U.S. homes could ultimately go into foreclosure. “We have to get foreclosures under control. “Why the sense of urgency?

A single foreclosure property brings prices down an average of $5000 for every house in a two-block radius and costs investors an average of $120,000, she says. In its most recent report, Warren’s panel criticized the Treasury’s foreclosure modification efforts as “inadequate” and “targeted at the housing crisis as it existed six months ago, rather than as it exits right now. “Specifically, the Treasury program is targeted at subprime borrowers hit with ballooning mortgage payments vs. prime borrowers hit by job losses.  As for the “morality question” of whether the government should be bailing out homeowners, Warren says “I’m passed that,” noting “there’s plenty of unfairness to go around.”More importantly, “ultimately the American taxpayer — thanks to Fannie, Freddie and FHA — is going to stand behind many of these mortgage,” she says. “We need to be thinking more globally what is cheapest possible way to bring this crisis to an end. “One solution: Force investors holders these mortgages who may be betting on a government bailout to take a haircut, as occurred with GM and Chrysler creditors. “That’s why they call it investing,” Warren says. “You make profits in good times, take losses in bad times. That’s the fundamental part of this [modification effort] that’s missing.”

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Jim Rogers Says, Gold Will Hit $2,000 and USA Will Lose Status As The World’s Reserve Currency

Good Time To Buy Gold

Good Time To Buy Gold

Famed investor Jim Rogers is “quite sure gold will go over $2000 per ounce during this bull market.”Rogers’ confidence gold will continue to rally stems from a view the U.S. dollar is on its way to losing status as the world’s reserve currency.”Is it going to happen? Yes,” Rogers says. “I don’t like saying it [and] I’m extremely worried about it but we have to deal with the facts. America is not getting better [and] the dollar is going to be replaced just like pound sterling [was].”Rogers didn’t offer a timetable, and it’s likely gold would exceed $2000 per ounce if the dollar were to lose its reserve status.Still, “I wouldn’t buy gold today,” Rogers says. “I think I’ll make more money in other commodities, which are cheaper,” as discussed in more detail here.Among many others, Rogers is “worried about the fact the U.S. government is printing huge amounts, spending gigantic amounts of money it doesn’t have,” the investor and author says. “People are very worried [and] skeptical about paper money [and] looking for places to protect themselves. The best way is to buy real assets. [That] has always protected one during currency turmoil, and it will again.”

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The Economy Is Dying – It Will Be a Bloodbath; Says, Christopher Whalen

Stocks rallied to start the week thanks to a better-than-expected ISM services sector report and a Goldman Sachs upgrade of big banks, including Wells Fargo, Comerica and Capital One.But all is not right in either the economy or the banking sector, according to Christopher Whalen, managing director at Institutional Risk Analytics. In fact, Whalen says most observers are drawing the wrong economic conclusions from the stock market’s robust rally.”Why is liquidity going into the financial sector? It’s because the real economy is dying [and] everyone is fleeing into the stocks and bonds because they’re liquid at the moment,” Whalen says. “That’s not a good sign.”The banking sector’s assets shrunk by about $300 billion per quarter in the first half of 2009, a sign of banks hoarding cash in anticipation of additional future losses, according to Whalen. “The real economy is shrinking because of a lack of credit.”The shrinkage will continue into 2010, Whalen predicts, suggesting the banking sector hasn’t yet seen the peak in loan losses. Institutional Risk Analytics forecasts the FDIC will ultimately need $300 billion to $400 billion to recoup losses to its bank insurance fund. (In other words, the $45 billion the FDIC sought to raise last week by asking banks to prepay fees is just a drop in the bucket.)”Investors should think about this because the fourth quarter in the banking industry is going to be a bloodbath,” says Whalen, who believes smaller and regional banks like Hudson City Bancorp may come into favor vs. larger peers, which have dramatically outperformed since the March lows.”When you see the markets rallying when the real economy is shrinking that tells you this [recovery] is not going to be very enduring,” Whalen says.In this regard, Whalen finds himself in philosophical agreement with Nouriel Roubini, George Soros and Meredith Whitney, among other “prophets of the apocalypse” who’ve once again been raising red flags in recent days.

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Marc Faber Is “Highly Confident” the Future Will Be Very Bleak: See Video on Tech Ticker – Yahoo! Finance

“The future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults and the impoverishment of large segments of Western society,” Marc Faber writes in the September issue of The Gloom, Boom & Doom Report.A statement like that pretty much speaks for itself, but it’s a bit more complicated than appears on first blush.Faber has been bullish — especially on commodities and emerging market stocks — for some time now and believes the current global recovery trade will last another two-to-three years, as discussed in more detail in a forthcoming clip. But he has major long-term concerns about the dollar’s long-term viability given rising U.S. deficits, massive unfunded mandates and the fact “we have a money-printer at the Fed.”This combination will eventually lead to runaway inflation, wholesale debasement of the dollar, and a major lowering of living standards for most Americans and many Europeans as well, says Faber, who is “highly confident” in this grim prediction.

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