As of June 30, 1995 our average account was up approximately +14% for six months.  Considering that we stress capital preservation and the avoidance of undue risk, we are pleased with the results.  We do note, however, that the idea of “preserving capital” as an investment goal seems hilariously quaint, and that while it once was the dominant school of money management, school has been out for some time.     We believe strongly rising inflation will be obvious in the second half.  It is already plain enough in the official statistics were anyone to look, but on this issue Wall Street is paid to blink.  For the first half of this year, both the consumer price index and the producer price index are growing at much faster rates than they were in 1994.  The real estate market around the country continues to improve.  Commodity prices are escaping their many years lethargy and surprises appear more frequently on the upside.  Lastly, there isn’t a journalist, economist or government official that believes inflation is even a distant threat.  This is shockingly different from a decade ago, when we were buying bonds in the face of thick despair that inflation had no cure.     There is a universal belief that if the economy remains sluggish, inflation cannot be troublesome.  We Americans are about the last people in the world to still think this way.  The Phillips Curve fallacy, that a modest brake on growth instantly and certainly produces an end to inflationary flare-ups, is seen through everywhere but the USA.  Our Mexican neighbors, to cite one near at hand example, know better.  Their economy is quite a bit weaker than “sluggish”, and prices are escalating at about a 40% annual rate.  Inflation comes from bad policy, not strong growth, and we have all the bad policy we need.     Foremost amongst these is our dollar policy.  The U.S. always wants a cheaper dollar to spur exports; our trade allies would like their dollar reserves to maintain a little value.  We have just witnessed a powerful rally in the bond market which took virtually everyone by surprise.  It was caused by record setting purchases of Treasury debt as the Bank of Japan tried to catch a falling dollar.  This has severely depressed interest rates.  Fleeing low rates, Americans have emptied their purses into mutual funds and touched off the most intense speculative stock market frenzy in history.     A flood of American paper is now sloshing around a world that doesn’t, in fact, want it.  We believe this will prove the catalyst to propel the prices of raw materials much higher, from which we will substantially profit. Sincerely, Edwin A. Levy Michael J. Harkins