How did we and many others resist the attraction of a seeming sure thing in the Madoff Ponzi scheme?  Many noticed that Madoff’s proposal had a few red flags.  They were:

How did we and many others resist the attraction of a seeming sure thing in the Madoff Ponzi scheme?  Many noticed that Madoff’s proposal had a few red flags.  They were:

Madoff’s investment advisory business used his own firm as the custodian for all managed client’s assets.  In general, investors should not invest with an investment manager who is also the custodian of the assets.  Having a separate, unaffiliated custodial firms’ administrative and compliance policies and procedures in place helps safeguard against fraud, and makes it easier to confirm that the assets are actually there.

Madoff refused to give investors any insight whatsoever into his method of investing.  It has been reported that some investors were given their money back for being too nosy.  Never invest with a manager who refuses to give you the details of how the money is being managed.  If the style of management is too secret to share, then it is probably too secret to work for a prolonged period of time.  Supposed secret ways of managing money have a way of getting out.  Once the secret is out, a large number of imitators will decrease the perceived exclusivity of the technique.  Apparently, with Madoff, the “secret” could be maintained because the assets of investors were not circulated through outside traders and other institutions, but were kept in-house, and either sent to the earlier investors or kept by Madoff.

Madoff’s record of low volatility appreciation was impossible for others to duplicate.  No scientific experiment is considered valid if it cannot be duplicated.  How was Madoff able to get stable returns irrespective of market volatility?  Sure, investments can be hedged, but hedges also are affected by changes in market volatility.  When equity market volatility changes (as it has tremendously in the past year), some degree of volatility change should be reflected in the performance of any equity investment vehicle.


The past week appears to have been a watershed period for foreign currencies and for gold.  In the last eight trading days, the U.S. dollar (after several months of rapid ascent) lost its luster and foreign currencies and gold have had strong rallies versus the greenback.

In our opinion, this change from strength to weakness for the U.S. dollar reflects the growing recognition by global bond buyers that the U.S. government will be floating about $2 trillion in new bonds over the next 18-24 months.  This is a huge increase in the existing Federal Debt.  The non U.S. buyers of this debt will be unlikely to step forward to buy a currency which has risen substantially versus almost all currencies in the last five months, and which is paying pathetically low interest rates.  For example, 4-week U.S. Tbill interest rates are at zero, and 2-year U.S. bonds only pay about 0.75% per annum.

In our opinion, bond buyers will demand either a much higher interest rate, or they will demand a lower currency (effectively lowering the price of the bond for non U.S. dollar holders).  Because the U.S. Federal Reserve must keep interest rates low to stimulate expansion of the banking system, the probability of higher interest rates at this time is low.  This leaves only one alternative…decrease the value of the dollar versus other currencies.

It comes as no surprise to us that the U.S. dollar has declined for the last eight trading days.  We believe that this decline will continue for some months.

Thanks for listening.

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