So gold is now publicly loved by armchair investors, famous hedge fund managers and central banks… even as we write, Erin Burnett is “squawking” about it on CNBC. Are your contrarian senses tingling yet?

“So many hedge fund managers and pundits are singing the same tune: long gold and short U.S. Treasuries,” our friend Dan Denning wrote in today’s Daily Reckoning. “The bond bubble could go on much longer than anyone expects. And when so many people agree on something, none of them are usually right. As a contrarian, you’d be worried about becoming a victim right about now.”

Finish reading this article on DailyReckoning.com.

Well… We have a week ahead of us that will be dominated by the U.S. data cupboard. And this week, we’ll get the June Jobs Jamboree (JJJ) on Thursday instead of Friday. Saturday is the 4th of July, and I guess the Bureau of Labor Statistics (BLS) isn’t working on Friday! HA! No, they do this every now and then when the markets will be quite thin on a Friday before a Holiday weekend. And this week qualifies BIG TIME! It will be the 4th of July! And maybe, just maybe because you never know, someone in Washington D.C. will realize that the it’s supposed to be about WE THE PEOPLE, not we the politicians…

Friday, I left you with the currencies moving higher on yield demand, I held by breath this morning when I turned on the currency screens, as I was concerned that another “demand” was going to be the headline. Because that’s how it’s been lately, eh? One day this “demand” the next day some other “demand”… But, no such new trade direction today. WHEW! I totally dislike getting whipsawed around like that, when we all know, and the traders all know, and the Hedge Fund managers all know, that in our collective heart of hearts, that in the end, the dollar will be much weaker… It’s just all this stuff that goes on between now and when the end of the trend takes place.

For instance, one of the headline stories on the Bloomie this morning is that the “Best Currency Forecaster says the Dollar to Rise Most Since 1981 by year end”… WOW! Now that’s an interesting forecast… But, it’s just that… The “forecaster”, believes that the U.S. recession will have come to an end in the U.S. this year, and U.S. growth will outpace everyone else, making the dollar the King once again… Now… I talk about going out on limbs all the time with my opinion / look ahead on things, and this is “forecast” qualifies as going out on a limb!

It’s important that I tell you about these things, because… This is market commentary, and I wouldn’t be doing it right, if I only told you stories on one side the ship… Right? Of course that’s right! Of course, you know me, I just don’t see it happening that way, and the one thing I think of when I read something like that is: rose colored glasses…

And… Speaking of the sides of the ship… Union Bank of Switzerland (UBS), the world’s 2nd biggest currency trader, has just revised THEIR CURRENCY FORECAST for year end, believing the dollar will be lower… So there you go… Two stories from both sides of the ship!

Playing well with the “forecast for a strong dollar” is a story overnight that China has once again backed off their statements calling for a replacement to the dollar as the world’s reserve currency. Of course, that’s what the “markets read”… I don’t read it that way… Let’s see what you think… “China ruled out “sudden changes” to its foreign-reserves policy”… I think it’s strictly China being China, aloof, cunning, and other things… Of COURSE they don’t want any “SUDDEN CHANGES”, they haven’t had enough time to rid themselves of hundreds of billion of dollar reserves!

Even with those two stories this morning, the dollar remains on the down side against the currencies, with the euro remaining above 1.40 through Friday, overnight Sunday, and so far this morning… The euro did get a boost this morning from a report on economic confidence, as the data moved upward to an index number of 73.3, VS the 71 that was forecast…

The European Central Bank (ECB) will meet this Thursday, and I do NOT expect them to make any moves with rates, leaving their internal rate at 1%. The most important thing will be if ECB President Trichet, has something to say that could me the markets after the rate announcement.

Sweden’s Central Bank, the Riksbank, also meets on Thursday this week. (there’s a ton of stuff going on Thursday, eh?) With internal rates at just .50%, I guess they could cut, but what would be the point?

The Swiss franc is getting caught in the middle of a war between the Swiss National Bank (SNB) and traders… The SNB has been in the markets quite a few times recently intervening (selling francs) to keep the currency from getting too strong. And traders see that as a great opportunity to test the SNB’s intestinal fortitude… I’ve always loved watching these things develop… If the traders “really” want to test the SNB, they’ll win, as the SNB doesn’t have the war chest that, say a Japan has… Unless they want to get into the “printing” business….

Besides data, and Central Bank meetings this week, it’s also the end of the quarter tomorrow… Which means the books get closed as some businesses have their year end, on June 30th. This also means that 2nd QTR earnings isn’t that far off, and I think these reports will be quite interesting, maybe taking some of the shine off the thoughts that the recession ended already!

The High Yielders have remained strong since Friday of last week, with Aussie, kiwi, Brazil, all leading the way. And there was no “new News” from the BRIC’s over the weekend… For those of you new to class, the BRIC’s are Brazil, Russia, India and China, all emerging markets that are clamoring for change and a great influence in the world’s financial matters… And why not? They have more money in reserves than you can shake a stick at, and… The have the a very large portion of the world’s population!

So, let’s go to the data cupboard and see what else will be on the docket this week data wise…

Today we have a couple of 3rd tier reports, so nothing to write home about, but tomorrow… We’ll see the April S&P Case/Shiller Home Price Index… I truly expect this data to show that Home Prices continue their downward spiral… We’ll also see The Chicago Purchasing Manager report (manufacturing), and Consumer Confidence…

When we turn the calendar page to July on Wednesday, we’ll be met by the ADP Employment report, and the ISM Manufacturing Index. There’s also Construction Spending, Pending Home Sales, and Total Vehicle Sales. Then on Thursday, which will be the “Mother of all Economic Data and Central Bank meeting days”… The June Jobs Jamboree, along with the Weekly Initial Jobless Claims… Which is going to look really stupid for the Jobs Jamboree… You see, the monthly report from the BLS is expected to print at -350K… Whereas the “WEEKLY” Initial Jobless Claims will print at over 600K for the week! I know, I know, it doesn’t add up, folks… Which is one of the things I complain about, and point out, and make fun of all the time… The BLS… Need I say more?

And then there was this… Did you know… That U.S. Treasuries posted their largest 1st half losses in 30 years? Well, that’s the facts Jack! Now… Quite a few “bond dealers” believe that the worst is over… OVER? Nothing’s over until we decide it is! Was it over when the Germans bombed Pearl Harbor? HAHAHAHAHAHAHA! (ok that’s a line from Animal House, please I know it’s incorrect, just funny!)

Seriously though… I don’t see how these “bond dealers” can say something like that, as they know all too well that the supply of Treasuries that will be issued this year will be enough to send yields higher… How can they get away with saying something like that? Oh! I know! They won’t be technically wrong, if Treasuries continue to lose value, as long as they don’t lose as much as they did in the 1st half of this year! Shame, shame, shame…

OH, and remember last week, when I told you about the President saying “not yet” instead of a resounding “no” when asked about another Stimulus? Well… The White House Senior Advisor, David Axelrod, said this weekend that the President is ready to discuss additional measures… And the President also casually mentioned that “we have not broken the back of the recession”… Is that like baiting the hook? I think so folks…

Now… On to the Big Finish for this Marvelous Monday!

Currencies today 6/29/09: A$ .8065, kiwi .6490, C$ .8685, euro 1.4065, sterling 1.6570, Swiss .9215, rand 7.8405, krone 6.4470, SEK 7.7390, forint 196.30, zloty 3.1920, koruna 18.4855, yen 95.30, sing 1.4540, HKD 7.75, INR 48.10, China 6.8335, pesos 13.1920, BRL 1.9355, dollar index 79.94, Oil $69.69, 10-year 3.50%, Silver $14.12, and Gold… $941.95

That’s it for today… As I said above, yesterday was my little buddy Alex’s birthday. We went to breakfast, as we always do… Yesterday was also my darling daughter Dawn and husband Jerry’s 6th wedding anniversary. I felt bad after sending out Friday’s Pfennig that I had not paid respect to Farrah Fawcett, who had passed away after losing her battle with cancer on Thursday. I wonder how many T-shirts were bought and worn back in the 70’s with Farrah on the T-shirt… They were everywhere! And this weekend, the info-commercial guy, Billy Mays, passed away… OK… Our little Christine returns to work today, after a brief vacation… Yay for us! And a good show for the U.S. National Soccer Team yesterday, losing the Championship game 3-2, after leading 2-0 at halftime! Gotta go… It’s a Monday, so we might as well make it Marvelous, eh?

Source: A Week Dominated By Data

Madoff had provided investors with modest, steady returns, claiming to be making money by trading in Standard & Poor’s 500 Index options, and closing all positions prior to mandatory reporting dates so that investors had no window into the fund’s holdings.

Apart from individuals, charities and numerous “funds of funds” investing in hedge funds, such as HSBC Holdings PLC (ADR: HBC) and Banco Santander SA (ADR: STD), lent billions to investors participating in the Madoff fund, secured only by holdings in a fund that is now insolvent.  The debacle is likely to strengthen criticism of the U.S. Securities and Exchange Commission, for its failure to protect investors, and to cast doubt on the hedge fund sector and on “alternative investments” in general.

It is not surprising that the recent unpleasantness on Wall Street has exposed a gigantic Ponzi scheme. It wasn’t even really even surprising that the Ponzi-scheme losses were an enormous $50 billion: After all, 13 years of excessive money creation have allowed bad Wall Street behavior to grow like weeds, so you’d expect the inevitable Ponzi scheme to be huge, like an out-of-control, possibly radioactive bindweed.

However, it is surprising that the major investors in Madoff’s scheme were not a bunch of suckers he met at a country club, nor a set of unworldly charities seduced by a smooth sales pitch (though both of those were involved), but instead were actually hedge funds, the most obnoxiously professional of professional investors. This raises a hugely heretical question: Is it possible that hedge fund managers aren’t the “best and the brightest” after all?

The Life and Times of Charles Ponzi

The original Ponzi scheme was a much smaller-scale operation, with losses of only few million. In the disturbed years after World War I, Charles Ponzi got the idea that postal reply coupons could be purchased in Italy and exchanged for U.S. stamps at a substantial profit – essentially an early form of arbitrage.

The anomaly existed because the international postal agreements had been designed in a pre-1914 Gold Standard world, which had disappeared, with different currencies having devalued by different amounts.  The kernel of Ponzi’s scheme was thus a genuine moneymaker, albeit on a tiny scale (at its peak, 160 million postal coupons should have been shipped from Italy to the United States, compared with 27,000 actually outstanding worldwide).  However, using this moneymaker as incentive, Ponzi attracted millions of dollars in deposits, paying profits on the early deposits from the proceeds of later ones.

This is the essence of a Ponzi scheme; if there is a genuine moneymaking operation at its center, it is swamped by the amount of money invested, which can only appear to make profits through later investments being used to pay out earlier ones. Even in 1920, the authorities realized this was a no-no. Ponzi was convicted of mail fraud and sentenced to five years in prison on federal charges. Released after three and a half years, Ponzi then faced state charges in Massachusetts. He fled and remained at large for a time, but was eventually captured, tried and sentenced to nine years imprisonment in Massachusetts, where the bulk of his schemes took place.

Modern-Day Schemes Abound

Ponzi schemes are a well-known hazard in the banking world, and the SEC and other regulatory authorities have great experience unraveling them. They are fairly easy to detect by any reasonably suspicious professional: when offered an investment opportunity you simply keep asking questions of the promoter until you are absolutely confident of the mechanism by which money is made.

If you can’t figure it out, you don’t invest – you are, after all, a financial professional and finance is an area in which there should be no impenetrable mysteries to the experienced and competent. In the emerging capitalism of 1990s Eastern Europe, Ponzi schemes were a well-known hazard, because the populace didn’t understand how capitalism worked and regulation was weak. The MMM scheme in Russia collected $1.5 billion, the Caritas scheme in Romania collected $1 billion, and in Albania in 1997, the entire banking system and the government collapsed under a $1.2 billion scheme.

In the West, successful Ponzi schemes rest on the gullibility of simple folk. Two groups in particular stand out. Some rich country club types tend to believe far too much in “connections” – to the exclusion of everything else – and neither understands nor cares about the details of how investment returns are generated.

Thus, rather than invest through well-qualified specialist investment managers, they buy rubbish investment products from people whose “connections” are believed to provide an “inside track” to extra returns. Madoff, a former chairman of NASDAQ with a charming personality, was naturally well qualified to appeal to these gullible amateur investors. Charitable organizations and state funds often have substantial endowments that are run by under-qualified people, because the charities and states don’t pay enough; these people can also be seduced by the well-connected, and are not necessarily competent to assess the details of how investment returns are generated.

Ponzi schemes were given an enormous boost by the advent of derivatives and trading desks in the 1980s. Whereas the doziest country club member or charitable trustee has some idea of how bonds or stocks make money, even many financial professionals are a bit hazy about derivatives and trading profits. Hence, Madoff was able to maintain a plausible smokescreen over his activities. Since private partnerships do not have the same disclosure rules as public investment funds, he had no need to disclose the precise trades by which profits were made, nor any details about his methodology.

The increased complexity of modern investment does not however excuse the gullibility of professionals such as those who manage hedge funds and “funds of funds,” both of which invested in Madoff’s schemes. These people are paid inordinate amounts of money to provide superior investment returns to individuals and institutions that – perhaps naively – believe that by paying excessive management fees, one can obtain truly superior investment management. They should not be able to claim inexperience, a lack of an understanding of complex investment products, or even a lack of intelligence, since most of these people have degrees from top schools.

Warning Signs to Watch For

In reality, professional investors were infected with the “get-rich-quick” fever that reached epidemic proportions during the 13 years of easy money and lax regulation. As a result, these “professional” investors failed to exercise their “due diligence” in investigating how Madoff’s investment operation made money before investing in it. To the extent they were investing other people’s money, they deserve to be sued for failing in their fiduciary duty. To the extent they were investing their own money, they deserve to have their fancy degrees removed at some suitably ignominious ceremony, for crass stupidity and incompetence.

As for the lessons the rest of us should take away from this event, allow me to say that there are several:

• First and foremost, don’t invest in something you don’t understand, just because the promoter has good connections. If he can’t explain to you in terms you can understand how he makes money, there’s probably something fishy involved.

• Second, don’t believe the hype about “alternative asset classes” – most of it is just jargon designed to remove extra fees from you.

• And third, if you obey the three cardinal rules of investing – diversify, buy over an extended period, and research well what you intend to buy – you will probably do as well as most professionals, and far better than that substantial minority of professionals who are in reality utter incompetents.

• One great consolation about this recession: Ponzi schemes do much less well in recessions, because people are more suspicious. Ponzi flourished in the modest hot-money boom after World War I and Madoff made hugely more money in the correspondingly larger bubble from 1995-2008. Recessions, unlike bubbles, are relatively safe times to buy investments, because the investments themselves are cheaper and there are fewer crooks around.

Source: How to Avoid Madoff Mayhem

Hedge funds declined by an average 0.7 percent in June, bringing the year-to-date loss to 0.75 percent, data compiled by Hedge Fund Research Inc. show. It’s the worst start to a year since the Chicago-based firm began tracking returns in 1990. The $1.9 trillion industry has posted one losing year, in 2002, when funds fell 1.45 percent amid the 23 percent decline by the Standard & Poor’s 500 Index.

With hedge funds producing such losses, investors forked over half as much to fund managers in the first quarter ‘08, $16.5 billion, as they did in the last quarter of ‘07, just over $30 billion.

So, the investment vehicle of the rich is also getting pinched in this global downturn. Though funds that invest based on views of the global economic outlook were able to hit double-digit returns this year. This from the Financial Times:

These so-called macro hedge funds, which attempt to identify extreme valuations in stock markets, interest rates, foreign exchange rates and commodities, have shown returns of more than 12 per cent this year, outperforming the S&P 500 index by about 17 per cen.

To identify extreme price valuations, macro hedge fund managers generally employ a global approach that concentrates on forecasting how global macroeconomic and political events affect the valuations of financial instruments.

Worries about the state of the US and world economy show few signs of easing. A recent survey of more than 70 US hedge fund managers and their advisers has found that most have a broadly pessimistic view on the prospects in 2008 for the country’s economy, which 80 per cent expect to be flat or in recession by the end of the year. Many expect the Federal Reserve to raise interest rates rather than lower them further.