Wednesday, August 10, 2011

Levy, Harkins Q2 Update

Thanks to Ben R. for passing this along.

We ended the second quarter of 2011 about where we ended the first; up a little bit and trailing the averages a little bit. We said at the end of our year end letter, “If recent gains come in a fast enough rush, it can be a positive hindrance to performance, at least in the short run.” Turns out that may be the only recent prediction we’ve gotten right, annoyingly. We have also continued to be wrong headed about oil prices, where the market appears to be very well supplied, and still frothy, an odd combination that leaves us perplexed. Natural gas still goes begging, which may be odder still. On the bright side, the companies we are invested in are doing very well, and enough of that for long enough is sure to work in our favor.

Our greatest vexation is that a long held past prediction of ours is coming true, and it gives us not one whit of joy. We mean that inflation is now here, and visible to any and all who want to see it. The American Consumer Price Index is up 3.6% year over year, and this is even with the government’s blatant attempt to manipulate the oil market. The UK is much worse, as is China and sundry third world markets. The common refrain from the authorities that, “3.6 percent isn’t all that bad,” misses the point entirely. There never was a stable inflation rate, certainly not one of that size. Inflation is a process, often thought to be disease like, where you are either getting better or worse. With the Federal Funds Rate at 0, there is near certainty that worse is likely, since negative real interest rates stoke the fever. Only when real rates get positive, that is the Funds rate gets [meaningfully] above the inflation rate, can improvement be hoped for.


We have no intentions of leaving your money in a revolving door, which is why you see us piling into every inflation hedge we can think up.


Related book: When Money Dies

Related previous post: Michael Harkins – Grant’s Conference Speech: “Embrace Reason, Shun Theories or Think Big, and Go Broke”