For the six months ended June 30, 1996 your account gained +15%. We hope you are as pleased as we are.
Many clients have noticed when the results are better the letters are shorter; since you are not paying us by the word, we trust no one will take offense if our half-year review is quite brief. We only wish to make a handful of points:
First, inflation is no longer incipient, it is here. Food, energy, rents, house prices, and now wages are all synchronously rising at levels that have not been seen in two decades. To be sure, the government clings to a concept of a “core rate” which, with enough massaging, is not going up all that much. A friend has come to refer to this as the Unabomber rate, on the tongue in cheek assumption it is made up only of items the Montana madman found necessary. In your life prices are rising, and it is the charter mission of this firm to provide investors with adequate real returns, meaning the return on capital you keep after the tax inflation is subtracted. Apparently an entire new generation of investors is now in need of grasping why this is the measure that counts.
Secondly, our energy investments seem more attractive by the day. Natural gas is in such short supply that, if the summer need for cooling is great enough, it may not physically be possible to inject enough gas back into storage to answer the Northeast’s heating needs later in the season. The stocks of the exploration companies we have been purchasing lately would be attractive without this added fillip, but it is so pleasant to dream in mid-July of big gains from a freezing winter that we pass the idea along at no extra charge.
We continue to be heavily invested in oil as well, even as we shift assets around in the group as prices rise. Saudi Arabia is an awful mess, and the appalling loss of life of 19 American servicemen is but the latest and bloodiest warning from the world’s irreplaceable energy source. King Fahd is ill and addled, corrupt family factions vie for the top spot, most of the population lives in contrasting squalor, and despite sales of 8 million barrels of oil a day the country is effectively bankrupt. The country is the repository of all that is holy in Islam, and we cannot seize it without instantly turning one billion Moslems around the world against us. Over time, tranquility is a greater mirage than water in this place.
The newspapers are full of reassurances from the Administration about our close ties to the Saudi family and the stability of our ally. Twenty years ago we were much closer to the Shah of Iran, our contacts throughout that country were far more extensive, and the CIA was reduced to watching events on broadcast television with the rest of us when the end finally came. All America knows for certain about Saudi Arabia is our immense dependence on it, a situation that has grown worse recently as the last quarter saw a record level of dependence on imported crude oil.
Lastly, in the face of relentlessly good fundamentals our gold investments continue to plod along morosely. The world consumes in jewelry and industrial uses half again as much metal as it mines, even that meager supply is falling while demand grows, and the investing world couldn’t care less. The deficit is being made up from Western central banks emptying out their vaults, a process that could conceivably go on for quite a long time. The market is discouraged just now, and convinced that the authorities are coordinating their selling and are therefore too strong to challenge. We are skeptical. On the one hand, central banking at the end of the century seems to us like a gentlemen’s club without the requisite number of gentlemen. If a good enough moment presents itself, these fellows would cheat on each other and buy gold as likely as not. On the other hand, if they are in fact coordinating their efforts in an attempt to depress the gold price, and thereby running much easier monetary policies for much longer than would otherwise be possible, our other inflation-minded investments will benefit far more than they otherwise would.
An inflationary world is different from a stable one. For one thing, the meaning of “conservative” changes completely, as cash and municipal bonds become fraught with risks they otherwise are exempt from. If you are uneasy about your own situation, give us a call and we will personally review it.
Sincerely,
Edwin A. Levy
Michael J. Harkins