For the first quarter ending March 31, 1996 your account gained approximately +13.0%. We hope you are as pleased as we are.
These gratifying results were the direct result of our having the lion’s share of your assets in investments that benefit from incipient inflation. The market is now vigorously anticipating what we have been saying for some time, while most economists have been ignoring the obvious. Commodity prices are soaring. Here are some prominent examples: corn is up 70% year over year, wheat up 50% on the same basis, soybeans up 30%, oil up 20%, natural gas up 50%. And there are more. Last time we looked there were no substitutes for these raw materials.
A recent commodity column in the Wall Street Journal speculated that corn in storage, now at record lows, might run out entirely some time before this year’s crop is harvested. In the very next paragraph a trader opined that this was no worry, that significantly higher prices would drive some buyers out of the market. With mounting hilarity, we have tried to picture the late summer phone call from the Kellogg chief to his purchasing manager, “Stop buying corn, …way too expensive, …we’re making no more Corn Flakes this month.” Somehow we don’t think the Kellogg’s bigs will be willing to sacrifice a quarter or two just to protect this trader’s short position or to keep Allen Greenspan’s inflation fantasies aloft. Somehow the management will figure out that you paying them much more for the product is better for their bonuses than canceling their corn orders.
The most ludicrous statistic of every month comes when the Commerce Department urges us to focus on the “Core Rate of Inflation”, which is the part excluding food and energy. In other words, those of you who do not eat, drive, heat or air condition your homes or offices will do fine, and the rest of us can go forage for ourselves.
We are convinced that at major opportunities the financial markets are more inertial than Newton ever dreamed. People always assume what has occurred over the last few years will go on forever. This ultimately is a foolish and costly attitude. On the whole, prices are likely to go up faster in the next year as “just in time” inventory management becomes a scramble for stuff at any price.
We continue to believe that we are in the earliest stage of inflation and our current investment posture will reward us handsomely.
Sincerely,
Edwin A. Levy
Michael J. Harkins