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December 2021 Performance Review

January 5, 2022

If ever there was a year for American exceptionalism, it was 2021. Our vaccines, if not our deployment, were at the top of the global heap (with some help from Germany). Our stock market as measured by the S&P 500 delivered a remarkable 28%+ return for the year, while the main foreign developed markets index was up around 8%.

For the year, we were up 10.85% in our Conservative portfolio, and 11.35% in our Aggressive portfolio — solid, except when you look at the US stock market, and then it was a miss, even adjusting for the 1.86% negative return in the total bond index fund for 2021. The slightly riskier Vanguard Balanced Index (VBINX) was up 14.09% in 2021, to get an idea where a 60/40 stocks to bonds with no foreign stocks portfolio did last year. And yes, we're in the sort of overheated market where you have to apologize for double-digit returns not measuring up…

For the last month of the year, our Conservative portfolio gained 2.29% , and our Aggressive portfolio gained 2.97%. Benchmark Vanguard funds for December 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 4.48%; Vanguard Total Bond Index (VBMFX), down 0.41%; Vanguard Developed Mkts Index (VTMGX), up 4.80%; Vanguard Emerging Mkts Index (VEIEX), up 1.74%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.37%.

This was one of the few years recently that we beat Vanguard Star Fund (VGSTX), a global balanced fund. At around 63% stocks (and about two thirds of that US stocks), it is a little riskier than our portfolios these days but is the main benchmark we try to beat. When the market is down, like in 2018, we fell by less. This fund was up 9.65% in 2021.

We beat this top low-cost global fund partially because we had some areas that outperformed the S&P 500 in 2021, like our recently sold Vanguard Energy (VDE) and Vanguard Small-Cap Value (VBR), and our bond picks were inflation adjusted and had gains while the overall bond market was down. We also rebalanced out of some hot areas like Franklin FTSE South Korea (FLKR) early in the year, booking some gains in areas that weakened as the year progressed.

In December some of our holdings took off, boosting our relative return, notably Vanguard Utilities (VPU) which was up a whopping (for utilities stocks) 9.42% for the month right after we increased the allocation from 5% to 10%. VanEck Vectors Pharma. (PPH) was up 7.74% in what seems to be a move out of trendy, no-earnings stocks to safe, higher-dividend, older stocks.

Current holdings that did well in 2021 were Homestead Value Fund (HOVLX) and Vanguard Value Index (VTV), both value funds up just shy of the S&P 500 with 25% and 28.6% returns, respectively. The only fund categories to beat the S&P 500 in 2021 were energy (#1) and other natural resources, real estate, small cap value, and financials. Our recently sold Vanguard Energy (VDE) holding was up 56% for the year. Losers in 2021 were most emerging markets; notably, Latin America and China. Our own holdings Franklin FTSE Brazil (FLBR) and Franklin FTSE China (FLCH) were down 17.12% and 20.81% for the year, with a basically flat year for emerging markets.

Foreign stocks — notably China, the # 2 largest economy — started to sink after the big rebound off the Covid-crash lows while US stocks remained on the up and up. Much of this was currency fluctuations, but in general, foreign stocks have wildly underperformed US markets even looking at currency-hedged funds; notably, emerging markets.

When you buy a total global stock index fund today, you get 60% US stocks. You won't see a foreign name in the top 10 anymore. Toyota (TM) — Japan's biggest company by market value and the world's number one car company by earnings — is just 0.28% of the fund. You'll get almost 5x as much Tesla (TSLA) investing in the fund.

To Tesla stock fans, this matters as much as noting Nokia was once the top cell phone company and Apple was overpriced at the dawn of the iPhone. I'd reply to that by noting that Apple wasn't worth over a trillion dollars at the dawn of the iPhone as Tesla is today; it was worth $100 billion.

The future now costs 10x as much.

Back before this long run of foreign stock underperformance, half the global top 10 was foreign, mostly companies in China. In 1999, before the big run in foreign stocks, it was 80% US stocks.

US GDP is just 25% of global GDP. This doesn't mean the US should be at 25% of global market cap for many reasons; notably, more of our economy is publicly traded, and the tech monopolies are located here. But as recently as 2007, after a few years of foreign stocks outperforming the US (much because our dollar sank in value), our stocks were down to around 30% of global market cap. We are double that now.

We are at, or near, the high of our stock market valuation relative to foreign markets.

Historically, US vs foreign stocks go through periods of performance gaps, much of it currency related, and as a sort of reversion to the mean we're probably due for a few years of underperformance relative to foreign stocks. But then, we were due for this at the beginning of this year and yet… here we are with another year of US dominance of global stock markets. Note that we can get back to normal levels by just falling more than foreign stocks in the next bear market.

It is hard to escape the feeling we are in a new grand bubble that has lifted most assets, including essentially all US stocks, bonds, and real estate. Unlike in past slides, there may be no safe resting place for (the money of) the wicked.

To get an idea how bad things could get, imagine if we returned to the valuations of the bottom of the 2007—09 crash, perhaps the last time stocks were cheap since the early 1990s.

To use the so-called Buffett Indicator, which is the ratio of total stock market value to our GDP, we got down to 50% of stock market value to GDP in early 2009 (from a then bubble high of around 150% in early 2000).

Today, stocks are worth $53 trillion, and our current GDP probably hit around $24 trillion by the end of 2021 (largely "thanks" to inflation), or 220% of GDP. If we had a crash back to 50% of GDP or $12 trillion it would be a — gulp — roughly 80% fall.

There are many things different today that could "stop" such a calamity; notably, low rates and a central bank willing to create money and buy assets well before we get to such levels. Frankly, we don't do Great Depressions anymore — the government steps in to make the bets whole again.

One unfortunate side effect is everybody who's anybody knows the support is there and is willing to pay a higher price for assets because the downside seems limited. All this does is create the need for greater support the next time around. It is unclear what will fix housing the next time it crashes — 0% mortgages?

Perhaps the end game is inflation, currently running near double-digit levels in the longest period of "transitory" in history.

Inflation can support inflated asset prices by inflating the fundamentals: rents, earnings, etc. Even the non-inflation-adjusted GDP can inflate, as it has this year. Inflation will also do wonders for our deeply indebted government now committed to running deficits in good times and bad, assuming rates stay below inflation, and why wouldn't they if the Fed creates money to buy bonds and push yields down?

The trouble with this inflationary soft landing is it requires — to quote now infamous 1920s economist Irving Fisher — a permanently high plateau in stocks. We have to freeze prices here and let the fundamentals inflate. But that won't happen. We'll turn 10% inflation into a reason to pay 30% more for homes and stocks as the only game in town to protect you from the inflation.

Our American exceptionalism is hiding questionable longer-term fundamentals. We're in an asset bubble where everything collectible has unlimited upside and little downside. We can't get the economy growing faster than other slow-growth economies globally without permanent fiscal and monetary stimulus. We could never balance the budget without causing a depression, much less reduce the trillions the central bank created to support the economy by removing money from the system without causing deflation and asset price collapse.

There is always the chance we get another near 30% year because bubbles can always get bigger. It is possible we inflate our way out of this one at great long-term cost to safety-seeking investors in cash and lower risk bonds. This risk is the main reason we're not 80% cash and bonds now. We can't safely earn 5% in a 3% inflation world; we can only safely earn 1% in a 7% inflation world.

There are already signs this grand bubble era is ending. Trendy stocks trading on stories without earnings are already crashing — most are now in a bear market. Formerly hot funds like ARK Innovation ETF (ARKK) were down 23% last year, while the rest of the stock market went to the moon.

The real question for 2022 is whether this bear market in hype eventually drags the whole economy and market down, sort of like the dot com crash of 2000. Can the economy handle losing trillions in paper value in digital collectibles?

Or has the stock market become a metaverse, and it no longer matters what assets were valued at in the real world of the past?

Stock Funds1mo %
Vanguard Utilities (VPU)9.42%
VanEck Vectors Pharma. (PPH)7.74%
Vanguard Value Index (VTV)6.94%
Homestead Value Fund (HOVLX)5.38%
Vanguard FTSE Europe (VGK)5.17%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)4.80%
Franklin FTSE South Korea (FLKR)4.67%
[Benchmark] Vanguard 500 Index (VFINX)4.48%
Vanguard FTSE Developed Mkts. (VEA)4.29%
Franklin FTSE Brazil (FLBR)3.93%
Franklin FTSE Germany (FLGR)2.84%
Franklin FTSE Japan ETF (FLJP)2.14%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.74%
Invesco CurrencyShares Euro (FXE)0.25%
Franklin FTSE China (FLCH)-2.48%
ProShares Decline of Retail (EMTY)-2.68%
ProShares UltraShort QQQ (QID)-3.69%
Bond Funds1mo %
iShares JP Morgan Em. Bond (LEMB)0.57%
Vanguard Mortgage-Backed Securities (VMBS)-0.18%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.41%
Vanguard Long-Term Bond Index ETF (BLV)-1.08%
Vanguard Extended Duration Treasury (EDV)-2.71%

November 2021 Performance Review

December 4, 2021

The market is too hot, so we cut back on stocks in late November until things cool off a little. This exuberance has mostly been in US growth stocks lately as global stocks, notably emerging markets, have been weak. We lost money last month relative to the US market, which we don't normally do in a down market, as did Vanguard's global balanced fund. The S&P 500, largely weighed to big-cap growth stocks, barely declined at all. If early December is any indication, beating the S&P 500 in December will be easier.

Our Conservative portfolio declined 1.74%, and our Aggressive portfolio declined 2.43%. Benchmark Vanguard funds for November 2021 were as follows: Vanguard 500 Index Fund (VFINX), down 0.70%; Vanguard Total Bond Index (VBMFX), up 0.33%; Vanguard Developed Mkts Index (VTMGX), down 4.72%; Vanguard Emerging Mkts Index (VEIEX), down 3.22%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.02%.

There was no stock fund category that beat the S&P 500 last month, which is almost impossible, especially in a down market. Somehow the mix of stocks in the popular index was the only way to not lose more than about 1% last month.

On November 26, we decreased our official stock allocation from 67% to 62% in our Aggressive Portfolio and 45% to 42% in our Conservative Portfolio.

Given the current world of low rates and high inflation, it may seem like a very stupid time to cut back on stocks and buy more bonds. It seems especially stupid to cut back on inflation-adjusted bonds in favor of bonds that will almost definitely lose to inflation this year.

While we certainly could be early (it won't be the first time) and miss more gains in stocks, when something seems like the clear way to go, it often is not. It was just last year that we added energy fund Vanguard Energy (VDE) and inflation-oriented bonds when everybody thought the oil business was done and oil futures were even near zero at one point of the negativity. When we bought Vanguard S/T Infl. Protect. (VTIP), our bond fund that owns TIPS or Treasury Inflation-Protected Securities, inflation expectations were for under 1% a year over the next five years.

The dumbest thing we did in hindsight was not buy more risky stocks - because that seemed dumb during a global economic shutdown.

Now that we made almost 10% in these safe bonds while non-inflation-adjusted government bonds went down a few percent and inflation expectations now are for 3%-ish a year, it is time to switch back to regular non-inflation-adjusted bonds. The more likely situation is the Fed tries to clip inflation and sends it down, along with stocks. Investors have been flocking to TIPS funds, which is another bad sign. If you want inflation protection beyond what your house, social security checks, and likely stocks offer, consider buying Series I Savings Bonds direct from the Treasury as they have a better risk-reward now because you won't "lose" 10% if inflation expectations go back down as can happen here.

We moved out of energy and small-cap stocks as the gains have been strong and the risk of downside too great. We sold all the inflation-adjusted bonds in favor of low-risk and low-return government mortgages in a new holding, Vanguard Mortgage-Backed Securities (VMBS), which barely yields over 1% but is a nice place to sit out the next down stock market, which could take inflation-adjusted bond funds down 5%-10%. We'll get some inflation protection, if this is even needed, from utilities stocks through Vanguard Utilities (VPU), which we increased.

Our new allocation to Japan through Franklin FTSE Japan ETF (FLJP) is more to own a safer stock market that has some relative value now compared to hotter markets, as well as potential currency-positive action. There will be a time soon when we will double down on China, which has been weak of late, but we don't want to be too early.

You can view a table detailing changes to the Aggressive portfolio by clicking here.

Changes to the Conservative Portfolio can be seen here.

We also rebalanced where appropriate to get closer to the official allocation percentages.

Stock Funds1mo %
[Benchmark] Vanguard 500 Index (VFINX)-0.70%
Franklin FTSE Brazil (FLBR)-1.52%
Vanguard Utilities (VPU)-1.59%
Invesco CurrencyShares Euro (FXE)-1.99%
Homestead Value Fund (HOVLX)-2.70%
Vanguard Value Index (VTV)-3.04%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-3.22%
ProShares UltraShort QQQ (QID)-4.58%
Vanguard FTSE Developed Mkts. (VEA)-4.64%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-4.72%
Vanguard FTSE Europe (VGK)-4.89%
VanEck Vectors Pharma. (PPH)-4.95%
ProShares Decline of Retail (EMTY)-5.16%
Franklin FTSE South Korea (FLKR)-5.17%
Franklin FTSE China (FLCH)-5.49%
Franklin FTSE Germany (FLGR)-6.45%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)3.60%
Vanguard Long-Term Bond Index ETF (BLV)1.10%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.33%
iShares JP Morgan Em. Bond (LEMB)-3.20%

October 2021 Performance Review

November 7, 2021

The brief weakness in stocks in September didn't last. Any fears of inflation, stagflation, global supply shortages, and the like melted away as the S&P 500, with dividends, returned 7%, leading to a 5.13% three-month return and a whopping 24% year-to-date.

This 7% pop was higher than the monthly return of 95%+ of fund categories (stock and bond). It was also enough to get us to Dow 36,000, only 22 years after the then-famous bubble book of the same name was published in 1999. For the record, it took about 15 years for investors to break even on NASDAQ stocks purchased in early 2000 and about a decade for S&P 500 investors to be safely above the levels of the bubble top (the brief move above 2000 levels in the S&P 500 didn't hold through the 2007-09 crash).

Our Conservative portfolio gained 3.19%, and our Aggressive portfolio gained 3.16%. Benchmark Vanguard funds for October 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 7.00%; Vanguard Total Bond Index (VBMFX), down 0.03%; Vanguard Developed Mkts Index (VTMGX), up 3.15%; Vanguard Emerging Mkts Index (VEIEX), up 1.11%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.33%.

Our low allocation to US growth stocks was covered by strong returns in energy, utilities, and bonds, leading us to roughly match the Vanguard global balanced fund, which is a bit riskier (more stocks and downside) than our portfolios. It was another late 1990s market, where everything sort of underperforms large-cap growth stocks in the US.

Our hottest fund was Vanguard Energy (VDE), up 11.21%, as inflation fears and consumer demand drive oil ever higher. It is almost unbelievable to consider that a little over a year ago we had zero-dollar oil futures and everyone writing oil off as yesterday's investment destined to go the way of the buggy whip, and ultimately the internal combustion engine.

Now there are gas lines in the UK and Russia is sitting in the natural resource catbird seat. While the good times could last, this area needs to get cut back from portfolios, if for nothing else, as protection from the next economic slowdown, which will break the oil markets again. Vanguard Utilities (VPU) was up 6.01% as interest rates drifted back down, boosting the value of this high dividend income area. Everything else we owned underperformed the S&P 500, though only Brazil stood out as a big loser (not including shorting), with Franklin FTSE Brazil (FLBR) down a big 9.17% as emerging markets in general are falling out of favor, kicked off by China's ongoing troubles.

This fear of foreign emerging market risk pushed iShares JP Morgan Em. Bond (LEMB) down 1.18% during an otherwise good month for bonds that saw our Vanguard Extended Duration Treasury (EDV) holding climb 3.52% and Vanguard Long-Term Bond Index ETF (BLV) up 1.72%.

Other hot areas in October were precious metals funds, which jumped almost 10% in an otherwise terrible year where they are still down for the year - surprising to those who believe that gold is the ultimate protection against inflation.

It must be aggravating to gold bugs to finally (after waiting for so many years!) get inflation to jump significantly only to watch in horror as gold- and silver-related investments slide. To add insult to injury, the new anti-dollar investment all the youngsters can't stop blathering about - cryptocurrencies - are up big. We've read stories about the supposedly uncomfortable holiday season as families with, let's say, differing COVID policies get together, but what of breaking bread while sitting on a pile of 'precious' metal coins bought from some TV ad about Armageddon only to hear some younger family members talking about their digital currency riches?

Understandably, with interest rates below inflation, the incentive to do something is high. Low, sub-3% rates will likely be here forever, other than some brief pops, for two main reasons: too much money to invest in too few safe assets, and globally indebted governments like ours literally can't afford the payments on the debt if the rates rise to 'normal' levels.

The Fed is going to orchestrate a system to keep the economy and government functioning and that is likely going to require managing how much cash and bond investors can lose relative to inflation. Don't hate the Fed, though - they are merely picking up after our government, which won't or can't close the gap between spending and tax revenues. It is almost preposterous that the Fed may have to raise rates soon, probably crushing stocks and real estate, all to fight inflation that the government can clamp down on by raising taxes and/or cutting spending. Sadly, the fiscal response would only help our debt situation while the Fed's fix of raising rates will only worsen it by raising the government's borrowing costs.

But while low rates can and should rationalize higher asset prices, they won't prevent downside risk as panic takes over or guarantee higher returns going forward.

The main difference between now and the early 2000s Dow 36,000 book era isn't stock valuations, which are almost equally absurd as they were in 2000 (and in many cases more so). It is the lack of a safe 5% choice.

Imagine stocks double from here in the coming few years, and we get a dividend yield of below 1% across the market (currently only 1.3%, roughly where we were in 2000) and P/E ratios go to 44 from around 22 now. Or double again and get to basically Japan 1989 valuation levels. At some point, you won't beat even the negative inflation adjusted returns of safer bonds or cash over time. The same is true of real estate - there is a point, say when the rental yield doesn't even cover property taxes and maintenance, that upside is more or less limited. There is a reason Warren Buffett currently is sitting on a record $150 billion in cash..

The Japan stock market is still about 25% under the highs of over 30 years ago. When you get into bubble territory, the only way to not lose money in the longer run is if the underlying fundamentals - earnings with stocks, rents with real estate - grow and catch up to your overvaluation. Unlike Japan, we've remained a positive GDP growth country (but only in the sub-3% range annualized since the 2000 bubble) and tech earnings have caught up to the old NASDAQ price level, eventually.

The question is, can we grow the fundamentals fast enough again when we are already running massive budget deficits with little room to add more, under-tax and overspend as if in a recession, are hitting inflation levels the Fed will eventually crush, and are probably going to face rising taxes in the future? We've got other population issues that will be an increasing drag, as they have been in Europe and Japan.

For those looking too hard for investments to get away from zero, please check out "Series I Savings Bonds" directly from the U.S. Treasury's 1990s retro website. They are sold with zero yield with an inflation adjustment, so if inflation is 5% you get a 5% return in the form of the bond's value going up - a gain that can be deferred for 30 years.

These directly sold non-market-traded bonds can be superior to the inflation-adjusted bonds we already own in our portfolios and client accounts (and are now selling), which already adjusted up in value as investors' fear of future inflation grows (leaving room for a drop if we get falling inflation fears). Direct I bonds don't sell at a premium (other than a no-coupon besides an inflation adjustment - itself a sign of high demand). You will still need inflation to be higher than, say, 2% to beat regular non-inflation bonds, so while they may have no downside they can underperform other low-return investments. What you don't risk is "losing" 5% to 10% if inflation comes down fast, as can be the case in TIPS if you buy now and sell when investors aren't as fearful about future inflation.

The direct-bought bonds are limited to $10k per person per year or larger investors would be snapping them all up. It is a gift in this market. Yes, they can be sold when there are better deals in other safe assets (which may be never) or stocks (likely). The current interest rate is 7.12%, but it will drop when the government gets around to stamping out inflation, or if inflation just proves to be transitory as we are told. All those gold investors who are down for the year during our highest inflation year in decades shouldn't be jealous of cryptocurrencies, but zero-risk, zero-fee, or zero-commission inflation-adjusting bonds that guarantee to pay you the rate of inflation. They don't advertise them on TV, of course.

It is also worth noting that stock markets tend to go down soon after a rise in inflation, not so much because rising prices destroy economies at relatively low levels of inflation, but because the actions taken to fight inflation sink asset prices. This is why the transitory theory better prove right - if inflation goes away "naturally," with no major Fed action, we are far more likely to avoid another market slide.

Stock Funds1mo %
Vanguard Energy (VDE)11.21%
[Benchmark] Vanguard 500 Index (VFINX)7.00%
Vanguard Utilities (VPU)6.01%
Homestead Value Fund (HOVLX)5.82%
Vanguard Value Index (VTV)5.44%
Vanguard FTSE Europe (VGK)5.03%
Vanguard Small-Cap Value (VBR)4.56%
VanEck Vectors Pharma. (PPH)3.69%
Vanguard FTSE Developed Mkts. (VEA)3.23%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.15%
Franklin FTSE Germany (FLGR)3.12%
Franklin FTSE China (FLCH)2.43%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.11%
Invesco CurrencyShares Euro (FXE)-0.31%
Franklin FTSE South Korea (FLKR)-1.52%
ProShares Decline of Retail (EMTY)-5.65%
Franklin FTSE Brazil (FLBR)-9.17%
ProShares UltraShort QQQ (QID)-14.69%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)3.52%
Vanguard Long-Term Bond Index ETF (BLV)1.72%
Vanguard S/T Infl. Protect. (VTIP)0.70%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.03%
iShares JP Morgan Em. Bond (LEMB)-1.18%

September 2021 Performance Review

October 5, 2021

High inflation with rising energy prices was unsettling enough, but add interest rates on a move back up and it all seemed to be too much for investors to handle. In September almost all fund categories were down, except energy, commodities, and Japan.

Our Conservative portfolio declined 2.36% and our Aggressive portfolio declined 2.27%. Benchmark Vanguard fund results for September 2021 were as follows: Vanguard 500 Index Fund (VFINX), down 4.65%; Vanguard Total Bond Index (VBMFX), down 0.91%; Vanguard Developed Mkts Index (VTMGX), down 3.43%; Vanguard Emerging Mkts Index (VEIEX), down 3.37%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.96%.

Our own energy holding Vanguard Energy (VDE) was up 8.66%, which with a boost from our shorts helped us to achieve a fair relative performance. However, a big hit to Franklin FTSE Brazil (FLBR), down 11.47%, and a surprising drop of 6.95% in Vanguard Utilities (VPU) kept us on the ropes with the market, though not quite as bad as Vanguard's global balanced portfolio fund.

The drop in stocks last month was a little more oriented towards large caps, possibly because in recent weeks we saw the first real outflows from stock funds since early this year, and ETFs and other funds tend to be capitalization-weighted.

With a slightly rising U.S. dollar and weakness in many emerging markets, there was no help from foreign markets, except for Japan. The Chinese government's continued crackdown on tech companies has been dragging on Chinese stocks and the negativity may be spreading to other markets. The added worry is what appears to be a collapse of one of China's largest real estate companies, Evergrande. Our own China fund Franklin FTSE China (FLCH) was down only about as much as the S&P 500 last month, but much of the damage has been done as China has been the worst performing major market of 2021.

Everybody seems to know that all assets are expensive now, but the cost of not being in the risk party is slow erosion of purchasing power, as 2021 is shaping up to be a negative 3%+ return on near 0% yield cash, after adjusting for our new high inflation. Worse still for safety seekers, it seems as if speculators borrow your safe money at low rates and gamble in the riskier markets, from stocks to real estate - even cryptocurrencies.

Investors seem to have one eye on when the music will stop - and that could come in the form of higher interest rates or a slowing economy. The wages of fear for an investor today is a gamble of how much inflation the Fed will allow before ruining the speculative party. Ideally, inflation drifts back down and the Fed can slowly get back to normal while the economy ceases to need the twin stimuli of deficit spending and money creation. But the continuing stories of supply shortages and disruptions make so soft a landing look increasingly unlikely.

There have been large monthly inflows into stock funds for the first time in years. This investor confidence started in February of 2021 and held up until mid-September. This return to stocks may have reflected confidence early this year that the vaccines would get the global economy back on track. Unfortunately, once things look safe for investors, prices tend to be too high.

For years now, money has been coming out of stock funds, though most of this was just rebalancing into bonds as stocks did well. The last solid stretch of stock inflows, such as we are seeing now, was in 2017. The only down year for U.S. stocks since the 2007-09 crash was 2018, and 2018 was an even worse year for foreign markets, which is where most of the new money was going back then.

When investors start adding money to stock funds month after month, lousy returns often follow. We could be seeing the end of the run-up in stocks now.

Stock Funds1mo %
ProShares UltraShort QQQ (QID)11.76%
Vanguard Energy (VDE)8.66%
ProShares Decline of Retail (EMTY)6.64%
Invesco CurrencyShares Euro (FXE)-2.01%
Vanguard Small-Cap Value (VBR)-2.55%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-3.37%
Vanguard FTSE Developed Mkts. (VEA)-3.39%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-3.43%
Vanguard Value Index (VTV)-3.94%
VanEck Vectors Pharma. (PPH)-4.23%
[Benchmark] Vanguard 500 Index (VFINX)-4.65%
Franklin FTSE China (FLCH)-4.78%
Homestead Value Fund (HOVLX)-5.38%
Vanguard FTSE Europe (VGK)-5.40%
Franklin FTSE Germany (FLGR)-5.63%
Franklin FTSE South Korea (FLKR)-6.83%
Vanguard Utilities (VPU)-6.95%
Franklin FTSE Brazil (FLBR)-11.47%
Bond Funds1mo %
Vanguard S/T Infl. Protect. (VTIP)-0.06%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.91%
Vanguard Long-Term Bond Index ETF (BLV)-2.52%
iShares JP Morgan Em. Bond (LEMB)-3.02%
Vanguard Extended Duration Treasury (EDV)-3.84%

August 2021 Performance Review

September 3, 2021

The S&P 500 beat 95% of fund categories last month, once again leaving portfolios in the dust as mega cap growth and tech stocks continued to dominate, much like they did in bubbly 1999. With no real standouts other than perhaps utilities, we barely beat bonds last month.

Our Conservative portfolio gained 0.37% , and our Aggressive portfolio gained 0.45%. Benchmark Vanguard funds for August 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 3.04%; Vanguard Total Bond Index (VBMFX), down 0.20%; Vanguard Developed Mkts Index (VTMGX), up 1.38%; Vanguard Emerging Mkts Index (VEIEX), up 2.67%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.31%.
The only fund to beat the S&P 500 in our portfolios was Vanguard Utilities (VPU), up 3.7%. This was probably the result of relatively low valuations attracting investors, as well as yields being harder to come by, attracting interest.

Emerging markets have been rocky, with many markets negative in recent weeks and months. This is likely the fear of rising inflation in many of these markets as well as the overall reminder of political risk that appeared seemingly out of the blue in China. Franklin FTSE South Korea (FLKR) was down 2.33% with Franklin FTSE Brazil (FLBR) down 2.8%. Bonds were weak, and only our reduced stake in iShares JP Morgan Em. Bond (LEMB) was up, with a 0.53% return. Interestingly, inflation-adjusted bonds were flat, and precious metals funds were the worst-performing fund category during this era of the highest inflation in over a decade.

At the top of the market in 2000, before the collapse of US tech and growth stocks, tech stocks represented about 33% of the S&P 500. After the 2000—2002 crash—which also took the S&P 500 down by about half, and tech stocks down a whopping 80%—technology was down to just 14% of the index.

Today the tech sector is 27%. While this level seems lower than the past tech bubble, the index creators now count Google, Facebook, and Netflix as communications companies, like Verizon, and Tesla is a consumer discretionary name, like Ford. These high-flying growth stocks are priced as tech stocks, and their value is derived largely from software technology. All in, what could be considered technology shares are pushing half the value of the stock market.

The only reason this is not a completely absurd bubble about to crash 80% (as opposed to an overvalued sector that could fall 25—50%) is that these companies make much of the money in the economy. In 2000 it was a bubble about future earnings, sort of like how Tesla is today. The sector earned 15% of the earnings of the S&P, but was more than 30% of the market value— basically the P/Es were double. Today the tech sector trades at only about 1/3 premium value over the rest of the index. Considering the reliability of the earnings growth, this isn't even out of whack.

In general, being in the most successful and popular area in the market when the economy slides is a bad idea. Financials in 2006 were over 22% of the market—the then #1 position in the S&P 500—as the world was becoming one of finance engineering rather than manufacturing or even tech. After the crash and lackluster years, this sector is now just 11% of the market.

How will the end come for tech leaders? A case could be made that, in the future, most profitable companies will be essentially tech names driven largely by software, and there will be no more epic crashes as in 2000. More likely there will be some hiccups along the way. One path to slowdown is just running out of places to use software to earn high margin profits. More likely the concentration of power will be their undoing, if not from their own competition with each other, then from government intervention as we are now seeing in China.

The top five tech names in the US alone are now around 23% of the S&P 500's market value. Most of them deal in high-margin spaces with few competitors where the buyer has little choice. The price is more about maximizing profit than market share or competition.

The Government has largely ignored tech power because it mostly seems to impact other businesses, not consumers. But input costs don't magically go away. The consumer—or voter, rather—doesn't see the full bill, sort of like Value Added Tax or VAT in Europe. The consumers often just see exciting free or cheap services, or their own behaviors are being sold to the highest bidder.

Tech billionaires also seem to live relatively modestly, at least next to the so-called robber barons of over a century ago, which led to the era of busting monopolies and higher taxation. Sure they have jets and yachts, but you can't really compare the lifestyles of the rich and famous from the turn of the century globally to today. This may have shielded the socialist tendencies of global governments and the public.

These days of relatively low regulation and tax may be coming to a close. They seem to be in China, which also has a high-flying tech sector, unlike most of the world. Europe has little to lose and more to gain as this is barely their own industry getting cracked down on, sort of why adding tariffs to China was popular. Rising regulations and taxes could scare investors out of tech. There even seems to be growing bipartisan support here.

This could take years to play out, but the upside to downside risk from these levels seems skewed to the negative.

Stock Funds1mo %
Vanguard Utilities (VPU)3.70%
[Benchmark] Vanguard 500 Index (VFINX)3.04%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.67%
Homestead Value Fund (HOVLX)2.65%
Vanguard Value Index (VTV)2.09%
Vanguard Small-Cap Value (VBR)2.08%
Vanguard FTSE Europe (VGK)1.81%
VanEck Vectors Pharma. (PPH)1.58%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)1.38%
Franklin FTSE Germany (FLGR)1.33%
Vanguard FTSE Developed Mkts. (VEA)1.31%
Franklin FTSE China (FLCH)-0.21%
Invesco CurrencyShares Euro (FXE)-0.54%
Vanguard Energy (VDE)-1.85%
Franklin FTSE South Korea (FLKR)-2.33%
Franklin FTSE Brazil (FLBR)-2.80%
ProShares Decline of Retail (EMTY)-4.37%
ProShares UltraShort QQQ (QID)-8.23%
Bond Funds1mo %
iShares JP Morgan Em. Bond (LEMB)0.53%
Vanguard S/T Infl. Protect. (VTIP)0.00%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.20%
Vanguard Extended Duration Treasury (EDV)-0.28%
Vanguard Long-Term Bond Index ETF (BLV)-0.36%

July 2021 Performance Review

August 5, 2021

In July, the S&P 500 was in the top 5% of fund categories as market cap-weighted investing in US companies continued to dominate global investing after a brief pause in leadership. The few hot areas that did slightly better last month were yield oriented, as rates drifted lower again in the face of rising inflation and investors snapped up any yields over 2%. The big losers were some recent big winners abroad. A crackdown in China on tech power — and perhaps capitalism itself — hit emerging markets hard, with China down around 10%. Emerging market indexes were down over 6%.

Our Conservative portfolio gained 0.60%, and our Aggressive portfolio declined 1.41%. Benchmark Vanguard funds for July 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.37%; Vanguard Total Bond Index (VBMFX), up 1.21%; Vanguard Developed Mkts Index (VTMGX), up 0.54%; Vanguard Emerging Mkts Index (VEIEX), down 6.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.51%.

Our recently increased exposure to some of the yield-focused areas like long-term bonds and utilities didn't make up for the big losses in emerging markets like China and Latin America, so our Aggressive portfolio, with more exposure to these riskier areas, was down. The other big drag was energy. We should have cut back on energy and shifted more to utilities, as discussed recently. China and Latin America warrant consideration for more buying on recent weakness.

Two things that became clear in recent weeks were 1) a slowing economy is more likely in future than ongoing inflation and rapid economic growth, and 2) tech power might finally be up against global regulations. This can hit market cap-weighted investments hard.

If the economy is going to be so hot and inflationary, interest rates are unlikely to head back down, much less take energy stocks down as well. A strong economy and rising prices are great for energy companies but terrible for longer-term bonds. Perhaps investors are wrong, but it is possible rising prices and our economic boom are merely the result of massive deficit spending globally. That party is about to end and/or rising Covid numbers are about to put a damper on global growth, but not enough of a damper to warrant more aggressive government Covid-related spending.

We've seen the economic limits of increasing demand and reducing supply: prices go up. Moreover, lately it seems consumers are in a semi-permanent hoarding mode. Call it the toilet paper effect. If prices of used cars start going up, it wouldn't take many to defer this purchase for prices to slide — yet they don't. Same with domestic air travel and tourism, which by many measures is a semi-nightmare right now, with trip costs and hassles rising. The consumer doesn't back down. Instead, they get jacked up, as if in a crazed bidding war on a home.

Consumers always felt that inflation was higher than government numbers when, in fact, the opposite was true. Yet it may be true now, if consumers want to buy more of the things that go up the most in price. Since the late 1990s, government statisticians have assumed consumers are rational and switch to cheaper alternatives — substituting oranges for apples if apples go up in price. Time to update your models.

But this frenzy has an end date, if not from consumers backing down at the cash register. It can end in a few ways. Eventually, supply will come back and excess government spending diminish. If prices keep going up, the Fed will tap the breaks and just a tap can cause a pile-up these days. The Federal government can decide it is time to pay for the spending with taxes, though this timing is the most debatable with election issues.

The other area of concern is tech power and government crackdowns. China recently decided tech power has crossed over to the abusive side, even briefly allowing a state-owned news outlet to call video games "opium of the mind." Hyperbole aside, this tech addiction doesn't have the clear health problems of actual drug addiction, but its damage to society is clear if we look at the rise in mass delusions, widespread gambling often in the disguise of investing, increased depression, obesity, and other manifestations. Perhaps it's more correlation not causation, but that won't stop regulators.

The China crackdown hit Chinese stocks and our own holding Franklin FTSE China (FLCH) hard, down 13.42%. We'll never know if this crackdown by China is legitimate concern for citizens or just worry tech power is encroaching on government power. It does highlight what a sizable percentage of market cap-weighted index is now tech companies that have until now largely been allowed to do as they please, as if they don't control many areas of your life.

China is raising interesting issues: How many hours a day should a child be allowed to play a video game, and should 10-year-olds be able to make in-app purchases? In the US, where the government doesn't get to say much about child rearing, this sort of regulation isn't in the pipeline. But how many hours of your time can one tech company control before the government can influence what big tech charges you or those trying to sell you a product that must go through these intermediaries.

As noted previously, the irony is the internet was supposed to be about disintermediation. Yet transactions that in the past were between consumer and company now have a tech overload in the middle of everything, tracking behaviors to sell to the highest bidder or asking for a cut of the transaction between you and another software company.

Stock Funds1mo %
Vanguard Utilities (VPU)3.92%
VanEck Vectors Pharma. (PPH)2.87%
[Benchmark] Vanguard 500 Index (VFINX)2.37%
Vanguard FTSE Europe (VGK)1.86%
Homestead Value Fund (HOVLX)1.26%
Vanguard Value Index (VTV)1.01%
ProShares Decline of Retail (EMTY)0.92%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.54%
Vanguard FTSE Developed Mkts. (VEA)0.50%
Invesco CurrencyShares Euro (FXE)-0.03%
Franklin FTSE Germany (FLGR)-0.19%
Vanguard Small-Cap Value (VBR)-1.65%
Franklin FTSE South Korea (FLKR)-5.01%
ProShares UltraShort QQQ (QID)-5.77%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-6.29%
Franklin FTSE Brazil (FLBR)-8.07%
Vanguard Energy (VDE)-8.70%
Franklin FTSE China (FLCH)-13.42%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)4.95%
Vanguard Long-Term Bond Index ETF (BLV)2.98%
Vanguard S/T Infl. Protect. (VTIP)1.31%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.21%
iShares JP Morgan Em. Bond (LEMB)-0.46%

June 2021 Performance Review

July 3, 2021

The great reversal of investment laggards from the past few years beating tech and growth stocks has come to a grinding halt in recent weeks. Larger-cap U.S. stocks and tech stocks were the top performers last month after lagging for much of the year. Value stocks were at the bottom of the heap. While the S&P 500 was up 2.33%, this disguised the big split. Large-cap growth and tech funds were up around 5—7%, while value funds were down slightly. Our focus on yesterday's losers and some shorts on tech dragged at our returns last month, though some hot areas, like energy and Brazil, kept us in the game with the drag of value stocks.

Our Conservative portfolio gained 0.67% , and our Aggressive portfolio gained 0.85%. Benchmark Vanguard funds for June 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.33%; Vanguard Total Bond Index (VBMFX), up 0.77%; Vanguard Developed Mkts Index (VTMGX), down 1.11%; Vanguard Emerging Mkts Index (VEIEX), up 1.19%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.73%.

Specific hot areas in our portfolios last month included Franklin FTSE Brazil (FLBR), up 6.29%, perhaps Brazil may be appealing to contrarians (those who want to buy out-of-favor investments) looking to get in after years of rough returns and a still very much out of control Covid situation. Vanguard Energy (VDE) was up 5.19% and is one of the hottest funds of the year, as investors realize that not only were last year's hit to energy and predictions of a dying oil industry a little overblown, but the current inflationary rebound, fueled by twin monetary and fiscal stimuli in a not recessionary economy, as ill-fated as that may be, is a perfect environment for this down and out industry. That said, we're going to need to refocus to other areas, perhaps more utilities, to have additional downside protection.

Everything else we owned underperformed the S&P500, as did about 85% of mutual fund categories, notably Vanguard Value Index (VTV), which is down 1.25%, showing that the growth versus value fight had a clear winner last month, though, for 2021, value is still ahead. Inflation fears seem to be abating as gold-related funds were the worst performers last month (the only fund category to drop double-digits) and interest rates drifted further down, into the negatives adjusted for inflation.

This boosted our recently repurchased and very interest-rate sensitive Vanguard Extended Duration Treasury (EDV), which climbed 5.48%, followed by a 3.86% jump in Vanguard Long-Term Bond Index ETF (BLV). Interestingly, higher credit risk iShares JP Morgan Em. Bond (LEMB), which we had cut back on a bit recently after a big run-up, slid 1.13% as inflation fears are very much affecting emerging markets and weighing on currencies, since we are essentially exporting inflation as we create money here and buy stuff.

This inflation phenomenon is dangerous for many markets abroad, as they are still dealing with serious Covid issues and can't necessarily raise rates or tighten monetary policy to fight the inflation we are dumping on them without risks to their own economies. This situation could be a drag on foreign markets.

Such relative swings, particularly between growth and value, do raise the question, why bother? Just own the S&P 500 and you will get some average of the value and growth. First, note that, back in the overpriced value markets from 2006 on, we were heavy in larger-cap growth funds. Our problem back then, at least after the initial rebound in the market off the 2009 low, was generally having too little in stocks, but a focus away from small-cap, value, commodities, and foreign markets was a winner that we, unfortunately, didn't stick with long enough. These relative performance wins tend to go on way too long and you can't walk away too soon. The pendulum swings too far.

But now is not too soon; larger-cap tech and growth are near the end of an outperformance cycle. Even if we don't get ongoing outperformance of value and foreign stocks relative to U.S. growth and tech, the best case for growth is that it moves with everything else—and everything is basically overvalued and goes up or down mostly in reaction to rates, recessions, and wavering risk appetite.

One reason the indexing phenomena may finally be nearing a breaking point is that the whole concept works best as a free ride off all the active stock-picking going on, only without the fees and transaction costs. This has been a smart move for basically 50 years. The problem now is that as more and more buying as a percentage of the market is indexing (or passive), the rest of the "actives" are becoming relatively more important. Unfortunately, that is a world fast being overrun by morons less experienced investors trading more on narratives than numbers. So powerful are all the pocket day traders that expert, or sometimes just a little crooked, investors who short stocks are having to cut back on their questionable yet important work of repricing overhyped or even scam stocks.

If this keeps up, we're going to have a market of Robinhooders reading chat boards and index investors following along for the ride. This doesn't mean you have to avoid all indexes, just the ones with more popular momentum and so-called meme stocks.

The danger for the funds is less in the meme bubble of idiocy than in the question, how much does the real economy and market tank when the speculative mania collapses? The last two crashes were essentially the result of a collapse in speculation, tech stocks in 2000, real estate in 2007. You didn't have to be over-allocated to these areas to feel the pain. When two trillion in cryptocurrencies collapses 90% and so does perhaps another five trillion in blatant market overvaluation, on top of perhaps another one to five trillion in outright future bankruptcies, it's likely that at some point, you are going to feel that, even if you don't have a Robinhood account.

Stock Funds1mo %
Franklin FTSE Brazil (FLBR)6.29%
Vanguard Energy (VDE)5.19%
[Benchmark] Vanguard 500 Index (VFINX)2.33%
Franklin FTSE South Korea (FLKR)1.85%
VanEck Vectors Pharma. (PPH)1.26%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.19%
Franklin FTSE China (FLCH)0.57%
Vanguard FTSE Developed Mkts. (VEA)-0.94%
Vanguard Small-Cap Value (VBR)-1.02%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-1.11%
Vanguard Value Index (VTV)-1.25%
Homestead Value Fund (HOVLX)-1.34%
Vanguard FTSE Europe (VGK)-1.39%
Vanguard Utilities (VPU)-1.85%
Invesco CurrencyShares Euro (FXE)-2.84%
Franklin FTSE Germany (FLGR)-3.35%
ProShares Decline of Retail (EMTY)-3.41%
ProShares UltraShort QQQ (QID)-12.02%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)5.48%
Vanguard Long-Term Bond Index ETF (BLV)3.86%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.77%
Vanguard S/T Infl. Protect. (VTIP)0.04%
iShares JP Morgan Em. Bond (LEMB)-1.13%

May 2021 Performance Review

June 3, 2021

The leadership in the market appears to have changed. Large cap growth and tech names are no longer driving the big gains and are even dragging on the market cap weighted indexes as smaller and cheaper stocks catch up, which benefits our current portfolios.

Our Conservative portfolio gained 1.95%, and our Aggressive portfolio gained 2.74%. Benchmark Vanguard funds for May 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 0.69%; Vanguard Total Bond Index (VBMFX), up 0.24%; Vanguard Developed Mkts Index (VTMGX), up 3.63%; Vanguard Emerging Mkts Index (VEIEX), up 1.73%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.64%.

This was one of our best months of relative performance during a positive month for stocks since the early 2000s, when our value and foreign stock and bond focus did well relative to U.S. large cap stocks, even in up markets. As we are generally taking less risk than the market, we beat on the way down by falling less with the aim of boosting our stock allocations at lower levels than of more closely matching the eventual recovery.

The main problem with this catching up phase of formerly underperforming stock categories is that we're fast approaching overvaluation of everything. It is not like anything was particularly cheap to begin with, more just a relative bargain compared to massive, large cap growth stocks. Keep in mind that most companies aren't growing that fast and don't really deserve very high valuations, though in a world of permanent zero rates, the notion of valuations is becoming less important to investors than predicting what people will desire in the future. This recent strong price action is almost alarming with our Vanguard Energy (VDE) holding up over 41.7% for the year and Vanguard Small-Cap Value (VBR) up 24.3%, compared to the S&P 500's more modest 12.7% gain.

Most of our stock funds beat the S&P 500 last month. Even our Nasdaq short fund was up slightly, highlighting the recent troubles of larger growth stocks. We're likely going to have to do another rebalance-oriented trade, cut back somewhat on stocks, and wait it out in cash and bonds. Ideally, interest rates would continue to go up, but even the big move up in rates from the lows of last year has flattened out, and we never even got to 2% on 10-year Treasury bonds. It is too early to tell if our recent buys of longer-term investment grade bonds came too soon, but those buys should offer us downside protection and something to sell to buy more stocks during the next slide.

The problem everywhere is the one we've been battling for years, which appears to get worse with every rebound in the economy and markets—too much money chasing for too few investments.

You can blame the Fed, but the money creation isn't really the direct issue; it's more the support of falling investments leading to investors overpaying for risky assets. The Fed put, so to speak, means that things won't really fall apart too far for too long before the Federal Reserve steps in to support prices till things get better, as we saw in the very troubled bond market last year, early in the pandemic. Minimal support can fix things as the Fed only spent a fraction of the trillions used to buy government debt last year to buy actual corporate debt and, somewhat controversially, distressed bond ETFs.

On top of this monetary crisis support, the government always seems to forget differences and toss money at problems. This leads to risky investments being priced as if there is little long-term risk because... Is there? As long as you are in good company (lots of investors making the same bet, be it in homes, bonds, or stocks) somebody has your back if things get too ugly. This support plus low borrowing costs (and therefore low cash and savings returns) leads to a collective movement—so why not join in, since you have more to lose by not gambling?

The other issue is that wealth grows fast and much of it is invested, not spent. Thomas Piketty laid this out in his 2014 economics bestseller, Capital in the Twenty-First Century. But where does all that growing wealth go? What if the supply of good investments can't keep up? In a world where wealth is taxed at a lower rate than income and wealth grows faster than income, the only natural limiting factor is poor investment opportunities: opportunities that are overpriced, or underwhelming, that can destroy wealth.

This has always been the main self-correcting mechanism to too much money—bad investment ideas. Imagine that we had never had 1929, or the dot com crash, or the housing crash. Wealth needs to be destroyed every so often to keep balance in the universe. You just don't want to be the one holding the bag when we go into wealth destruction mode, be it ever so brief.

The only real risk in such a supported market is relatively short term, the panic that sets in when trouble starts, where many want to get out and wait for the support to start. This selling can lead to cataclysmic drops followed by government action and fast rebounds. It seems that eventually, if these rebounds take us to ever higher valuations, this formula will stop working and we'll blow through the government support back to some level of valuations that more accurately adjusts for the heightened risk of investing. But can that even happen, if the Fed creates money and buys stocks, not just bonds, in a crash?

Living proof that we have too much cash sloshing around is the ongoing cryptocurrency boom. On some level, you could describe the whole affair as manufacturing collectible assets out of thin air to have a place to put all the money. How much more can go into trillion-dollar growth stocks and high-end collectibles like art, anyway?

Back in the short term, in our own portfolios last month, the leaders were Franklin FTSE Brazil (FLBR), up 9.6% as the out of favor, former high flyer of the 2000s, Brazil, may have hit rock bottom, at least to investors looking to time the rebound. Vanguard Energy (VDE) was up 6.55% as oil prices took off during our fast-overheating semi-post-Covid economy. All is not well in the long term in the energy business, as massive global efforts to phase out carbon and reward alternative energy could mean that big oil's best days are behind them. But then, there were good investment returns in cigarette makers well past their heyday, especially after weakness. At least the regulatory overhang is largely known to big oil. Big tech, on the other hand, is still living a largely government-free life as the increasingly obvious monopoly power these companies have has yet to lead to tangible major damage to these businesses—in fact, they are still allowed to buy up competitors more or less at will.

Much of our stock outperformance this month was because of a falling dollar, as can be seen directly in Invesco CurrencyShares Euro (FXE), which effectively owns euros, up 1.31%. Most fund categories were up last month, except for those with growth stocks, which were down 1—2%, typically. Convertible bond funds were down, as they have devolved into growth funds, due to excessive convertible bond issuance by booming tech stocks. Healthcare funds were down slightly, though our VanEck Vectors Pharma. (PPH) fund was up 3.78%.

We had three losers last month. ProShares Decline of Retail (EMTY), our inverse retail fund was down 1.45% as retail remains hot. Vanguard Extended Duration Treasury (EDV), our very long-term government bond fund, was down 0.11%. This fund was recently added back to the portfolio mostly because there is no cheaper way to add reliable protection from the next calamity, though there is risk here if rates take off again. Such a move would likely come with rising stock prices, so we should be fine with offsetting gains. Utility stocks were weak last month, with Vanguard Utilities (VPU) down 2.34%. Utilities are an area we may increase our (recently reacquired) allocation.

Stock Funds1mo %
Franklin FTSE Brazil (FLBR)9.60%
Vanguard Energy (VDE)6.55%
Vanguard FTSE Europe (VGK)4.45%
VanEck Vectors Pharma. (PPH)3.78%
Franklin FTSE Germany (FLGR)3.64%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.63%
Vanguard FTSE Developed Mkts. (VEA)3.58%
Vanguard Value Index (VTV)2.92%
Homestead Value Fund (HOVLX)2.57%
Vanguard Small-Cap Value (VBR)2.23%
Franklin FTSE South Korea (FLKR)2.01%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.73%
ProShares UltraShort QQQ (QID)1.51%
Invesco CurrencyShares Euro (FXE)1.31%
[Benchmark] Vanguard 500 Index (VFINX)0.69%
Franklin FTSE China (FLCH)0.40%
ProShares Decline of Retail (EMTY)-1.45%
Vanguard Utilities (VPU)-2.34%
Bond Funds1mo %
iShares JP Morgan Em. Bond (LEMB)1.76%
Vanguard S/T Infl. Protect. (VTIP)0.77%
Vanguard Long-Term Bond Index ETF (BLV)0.33%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.24%
Vanguard Extended Duration Treasury (EDV)-0.11%

April 2021 Performance Review

May 5, 2021

It was the best of times, it was the best of times. The only thing that seems capable of burning investors now is just that: too many good times. The S&P 500 was back in the top 10% of the entire universe of over 100 fund categories, and in the top 15% for the year. Our portfolio saw more of our funds underperforming the index as well.

Our Conservative portfolio gained 2.27% and our Aggressive portfolio gained 1.98%. Benchmark Vanguard fund performances for April 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 5.33%; Vanguard Total Bond Index (VBMFX), up 0.95%; Vanguard Developed Mkts Index (VTMGX), up 3.17%; Vanguard Emerging Mkts Index (VEIEX), up 1.86%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.17%.

The S&P's continuing outperformance seems like proof of why the S&P 500 is the best investment, relative to other funds. You will get no beef here about the long-term benefit of low fees and passive management. However, this sort of outperformance is more akin to the experience of the late 1990s, when investors piled into the U.S. growth winners during the years of outperformance. Ultimately this led to a stock market crash, with the S&P 500 underperforming most global fund categories for the next several years.

The end of U.S. large-cap growth and tech dominance may already be here. In that respect, it is just like early 2000. There is no saying what will be the cause of the decline, or just the rotation to other types of stocks (or increasingly — gulp — crypto-collectibles).

Many inflation-oriented fund categories that could benefit from rising inflation had a good month; precious metals, real estate, commodities, and energy partnerships were all near the top of the list. Nothing was down except for Japan funds, India, and surprisingly, energy stock funds such as we now own. However, they are still in the top 3% of fund categories for the year, with returns of over 20%.

Our only real standout was Franklin FTSE Brazil (FLBR), with a 6.46% return. The only loser was Franklin FTSE China (FLCH), down 0.18%. Bond rates drifted down, pushing most bonds up even with the threat of an overheating economy. Our recently re-added Vanguard Extended Duration Treasury (EDV) was up 2.87%, followed by iShares JP Morgan Em. Bond (LEMB), up 1.89%, pushed by a higher risk appetite.

There is certainly fear of missing out on the next leg of the boom as we come out of the Covid lockdown. But optimism can quickly turn. Psychologically, it could just be a fear of losing gains in hot areas, or it could be the temptation of higher-returning speculations beating old winners — trade in the Tesla stock for crypto.

More a fundamental factor than an emotion one to the triggering of a market slide would be the Fed increasing interest rates, to counter the solid boost to an already accelerating economy of another significant stimulus program, if passed. A few years back the Fed did the opposite. The Federal government wasn't doing much deficit spending to boost a still sluggish post-2009 economy, so the Fed did all the heavy lifting — low rates and money creation through so-called quantitative easing or QE. It did the same thing last year, with the extra boost of massive government spending.

Does it make sense to continue to run massive deficits this far into a recovery? An enormous infrastructure plan could be mothballed for the next recession, so they have a ready-to-go (shovel-ready…) jobs and stimulus program, rather than a panic stimulus during a crisis resulting in questionable grants and checks in the mail. If we start an infrastructure stimulus program now, will we have less money to burn when we need it? Will we create more demand for labor and materials in a booming post-Covid economy, and cause increased traffic and energy waste? Why didn't we attend to the infrastructure late in the Covid economic slowdown after the initial hard shutdowns? We already see shortages and price booms in many materials key to growth, and could worsen the problem. Perhaps an on-deck plan doesn't take the nuances of a current crisis, be it real estate or pandemic, but infrastructure seems somewhat perennial.

The current Treasury Secretary and former Chair of the Federal Reserve just slipped, and said aloud that the Fed might have to raise rates to cool the economy in the face of more government spending. The market didn't seem to like it, even though she quickly toned down the message.

The other looming threat to the party is higher taxes. While this future drag is far off, investors' behavior may already be changing in anticipation of significant tax changes. Muni bond yields are at historic lows relative to treasuries, as investors expect even better after-tax returns as rates go up. If favorable capital gains taxes will increase to ordinary income tax levels, which themselves are going up, will investors try to book gains while rates are low? Or will they have to wait, as such changes can be retroactive to the beginning of the year? Perhaps the dumping hour will be late this year, before any actual tax changes are passed with the presumption they are coming in 2022. With such low rates, are large investors using margin loans to avoid booking gains, and will that party end if rates go up? Or will interest rates stay low, with high capital gains rates leading to more extended holding periods — like forever, as investors with significant gains wait for lower rates, years down the road? Perhaps we will get a bigger stock boom, as nobody with capital gains wants to sell and pay 50% taxes on the gains, State and Federal.

The more predictable part is that corporate tax rates will likely climb, which can only lower corporations' after-tax profits, making their current valuations even higher.

Stock Funds1mo %
Franklin FTSE Brazil (FLBR)6.46%
[Benchmark] Vanguard 500 Index (VFINX)5.33%
Homestead Value Fund (HOVLX)5.23%
Vanguard FTSE Europe (VGK)4.78%
Vanguard Small-Cap Value (VBR)4.01%
Vanguard Utilities (VPU)3.78%
Franklin FTSE Germany (FLGR)3.56%
Vanguard Value Index (VTV)3.44%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)3.17%
Vanguard FTSE Developed Mkts. (VEA)3.05%
Invesco CurrencyShares Euro (FXE)2.47%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.86%
VanEck Vectors Pharma. (PPH)1.24%
Franklin FTSE South Korea (FLKR)1.23%
Vanguard Energy (VDE)0.43%
Franklin FTSE China (FLCH)-0.18%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)2.87%
iShares JP Morgan Em. Bond (LEMB)1.89%
Vanguard Long-Term Bond Index ETF (BLV)1.82%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.95%
Vanguard S/T Infl. Protect. (VTIP)0.87%

March 2021 Performance Review

April 3, 2021

The stock market moved back up on increasing optimism that the upcoming roaring post-COVID economy is going to lift all boats, and plenty of yachts, too. This wasn't good for bonds, which have been struggling for months now (except for inflation-protected bonds), as the consensus is that inflation is going to take off with interest rates. This move in stocks was mostly US stocks, as the S&P 500 beat 90% of fund categories last month with only a sub-5% return. Technology stocks were weak last month as more value oriented stocks continued to lead this latest stage of the post-COVID crash-booming market.

Our Conservative portfolio gained 0.81%, and our Aggressive portfolio gained 1.90%. Benchmark Vanguard funds for March 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 4.38%; Vanguard Total Bond Index (VBMFX), down 1.38%; Vanguard Developed Mkts Index (VTMGX), up 2.61%; Vanguard Emerging Mkts Index (VEIEX), down 1.03%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.51%.

Considering how relatively lousy foreign stocks and bonds did globally in March, our returns were not too bad, as noted by performance relative to the Vanguard STAR fund benchmark, which was up less than even our Conservative portfolio. We are in no position now to perform well relative to the US market if mega cap US growth stocks return to leading the way and rates keep going higher from these levels. Moreover, higher rates here are helping push up the dollar, along with a relatively good current COVID situation compared to the rest of the world, which could drag on our foreign funds.

Most of our lift was from market beating returns in value-oriented stock funds. Vanguard Utilities (VPU) was up 10.29%, astounding for a relatively conservative utilities fund, as investors are piling into whatever offers good inflation protection and yield. There is also the future story: who is going to power this electric economy? All five of our S&P 500-beating stock funds had solid yields, as did many of the pretty good returners. The drags were from shorting the leading Nasdaq stocks, and our Euro currency fund, both down by single digits. Except for Vanguard S/T Infl. Protect. (VTIP), which was up 0.42%, all of our bond funds were down evern more than the bond index.

Our recent portfolio changes didn't help, as the stocks we cut back on for rebalancing kept going up and inflation-adjusted bonds that we largely sold were flat, while our newly added non-inflation-adjusted bonds sank as rates moved higher. Inflation probably won't live up to current high expectations—it generally never does. The government didn't launch inflation-adjusted bonds to pay more than regular bonds, but to pay less.

The implied inflation rate by 5-year inflation bonds is now 2.55%, meaning you won't beat regular government bonds unless inflation comes in higher than 2.55% on an annualized basis over the period (at least if you purchased the bond directly and held to maturity). This seems unlikely, as the Federal Reserve has more power to stop inflation than possibly at any time in history: simply selling some of the trillions of bonds purchased with new money would quickly cause a deflationary situation to develop. Worse, if we get another economic slide, this inflation expectation will collapse, potentially sending longer term inflation bonds down by double digits. These types of bond funds did terribly during the early Covid crash for this reason (we didn't own them then).

Anything but a booming year could cause problems for the stock market. It is now looking like other countries are going to have continued COVID problems as vaccine rollouts won't be robust, for the twin reasons of lack of supply and lack of demand. Vaccine skepticism is surprisingly high in many countries.

While the recently slowly rising COVID numbers here and more frightening numbers abroad are a concern the underlying boom in speculation is the potentially destabilizing force in the market at this time, not COVID or even government debt in the shorter run.

Investors are high on the market again, in late 1990s style. We're seeing lots of trendy new ETFs launching with overly optimistic ideas of the future of growth and story stocks, and investors are signing up by the billions—just like in 1999. Worse, when not day trading on new apps that gamify stock betting, more are getting sucked into the wonders of cryptocurrencies, because apparently the last 80%+ Bitcoin crash three years ago didn't end this speculative mania for long.

The only question: is this 1999 or 2000? Can it go on for another exciting year (or two) where those questioning these goings-on are labeled "old-fashioned" investors who don't get it?

Could Bitcoin continue an upward move and not just be worth $1.1 trillion dollars as it is now, but $10+ trillion—more than all the gold that has ever been mined over the centuries—as many of the Bitcoin cult predict? Anything is possible with mass hysteria. In many ways gold shouldn't be worth $10+ trillion, either.

If enough people want to place a high value on something, it doesn't actually have to have any fundamentals to be a collectible—just desire. The trouble is in what happens if some want to sell to buy actual things so they can enjoy their newfound crypto coin riches. If more capital goes into crypto coin hording, mining, and related endeavors, and less into supplying goods and services, and all these millions of bitcoin buyers become bitcoin millionaires, who is going to supply the stuff they want to buy? Ultimately this is how a crash happens, and the fear of losing will exceed the fear of missing out.

The total value of all crypto collectibles (they don't deserve the dignity of being called currency or coins) is now just over $1.6 trillion. This was about the value of all subprime mortgage debt in 2007 when the total residential mortgage market was around $15 trillion. This is probably a good relationship to how much over-valuation there is in hot investments today. While the trillion plus in crypto is dangerous, it is really a sign of an entire market that is over-speculated, so to speak. Crypto needs to fall 90%+ and growth stocks including startups need a 50%+ haircut. How much impact such a collapse will have on the economy remains to be seen, but it will ultimately be worse the bigger the boom gets. The housing market—which was saved from a complete depression scenario with ever lower rates and favorable refinance deals backed by the government—reinflated and could itself follow this speculative bubble down when it collapses.

We're about at a point where, if the cryptocurrency bubble gets any bigger, when it does eventually come crashing down it will take the whole economy with it, much like the housing crash a decade ago. If creating an economy around collectible hording was such a great idea, Spain would have remained an empire as a big gold player hundreds of years ago, exploring the world for more shiny wealth, rather than collapsing in bankruptcy multiple times.

The value of collectibles, be they gold, Bitcoin, Beanie Babies, or Van Goghsare a side effect of an economy that grows in wealth from producing goods and services of value, not the cause of growing wealth in the economy.

Stock Funds1mo %
Vanguard Utilities (VPU)10.29%
Vanguard Value Index (VTV)6.65%
Vanguard Small-Cap Value (VBR)5.31%
Homestead Value Fund (HOVLX)5.09%
Franklin FTSE Brazil (FLBR)4.90%
[Benchmark] Vanguard 500 Index (VFINX)4.38%
Franklin FTSE Germany (FLGR)3.82%
Vanguard FTSE Europe (VGK)3.32%
Vanguard Energy (VDE)3.06%
Vanguard FTSE Developed Mkts. (VEA)2.78%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.61%
VanEck Vectors Pharma. (PPH)2.21%
Franklin FTSE South Korea (FLKR)1.66%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-1.03%
Invesco CurrencyShares Euro Currenc (FXE)-2.89%
ProShares UltraShort QQQ (QID)-5.46%
Bond Funds1mo %
Vanguard S/T Infl. Protect. (VTIP)0.42%
[Benchmark] Vanguard Total Bond Index (VBMFX)-1.38%
iShares JP Morgan Em. Bond (LEMB)-2.56%
Vanguard Long-Term Bond Index ETF (BLV)-3.28%
Vanguard Extended Duration Treasury (EDV)-6.27%

February 2021 Performance Review & Trade Alert

March 4, 2021

February was another good month, for us and for global markets. Many fund categories which have lagged in recent years continue to beat the market. This has benefited our portfolios as we've been moving into these areas in recent years (and paying the price for it, lagging the increasingly tech-dominated market). With a balanced portfolio, we have managed to be in the performance range of the S&P500 while beating the Vanguard Star Fund (VGSTX) by a small margin.

Our Conservative portfolio gained 2.09% and our Aggressive portfolio gained 2.90%. Benchmark Vanguard funds' performances for February 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.76%; Vanguard Total Bond Index (VBMFX), down 1.51%; Vanguard Developed Mkts Index (VTMGX), up 2.52%; Vanguard Emerging Mkts Index (VEIEX), up 1.65%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.87%.

Last month the top fund categories were energy, small cap value, natural resources, value in general, and many foreign markets. These hot returns boosted our overall performance, even with relatively low stock allocations compared to what we have in a bargain market. Vanguard Energy (VDE) was up 22.45% as everyone is suddenly sure that inflation and a booming economy are around the corner. Vanguard Small-Cap Value (VBR) was up 8.79%, mostly because value is coming back and small cap has lagged. It wasn't all roses, as Franklin FTSE Brazil (FLBR) was down 6.37% after some hot months. Vanguard Utilities (VPU) was down 5.54% as rates rose significantly.

The temptation is to sit back and let the dollars roll in. We should be somewhat insulated from the next slide in stocks, which will probably be in whatever sector was hottest over the last few years (sort of like 2000 and 2007). This could happen, but in all likelihood most stocks will drop when this market deflates eventually. There are many signs that the stock market is due for a slide, and not only from high valuations. High prices aren't a perfect indicator; in a boom, a large part of the gains happen in its last phase, and nobody wants to leave the party early. As noted before, low interest rates can support very high valuations because the alternative is bleak and debt financing can boost all assets.

More of a concern, by our methodology, is the number of ill-conceived new funds launching and the number of funds scoring high returns of two or three times the already high returns of the S&P 500 off the bottom. These hot funds are now bringing in tons of money. The financial press, never learning from the errors of the past and always focused on what people want to read about, not what they should read about, is featuring these new fund geniuses as having the hot hands for today's markets. This of course is how 1999 was before the crash in hot stocks: dozens of funds up 100%+ in a year, new funds with trendy strategies, and investors that could not get enough.

We're not quite at that level of pure speculative stock market froth, but there are enough signs (besides triple-digit fund returns over one year) to be wary. One hot new ETF family has brought in tens of billions on future wonder stories that include many companies with zero earnings and a crypto coin fascination. There will be a new ETF that invests in stocks popular in online chat rooms. There is the continuing absurdity of GameStop speculation. Tesla bought $1.5 billion in Bitcoin and then touted the move, juicing Bitcoin and earning a quick near-billion. A dead-end software company that has largely missed out on the last decade in software growth and an old bubble favorite from 2000, Microstrategy, decided to put all its cash in Bitcoin, then do two large convertible bond offerings paying almost nothing in interest to raise cash to buy more Bitcoin — in effect, converting to a de facto Bitcoin fund. This is the 2021 equivalent of 1999's 'add dot-com to your name and watch your stock go up' business strategy. Nobody seems to wonder what will happen to the company if Bitcoin tanks.

If it is not now the equivalent of March 2000, it is certainly mid to late 1999 and it is time to cut back before the music stops. We can't do much, for tax reasons, as our buys from the short-lived crash last year will soon become long-term gains.

One opportunity we wanted to take is to cut back on inflation-protected bonds, which have done very well from the crash lows of 2020, when inflation looked like a far-off land. Pricing was finally good in this area last year, so we jumped in and exited from almost all other bond funds — except for emerging market debt, which we added for some upside. As it turned out, risky bonds and inflation-adjusted bonds did well, so this worked out on both fronts.

Interest rates are now back up fairly significantly, considering how low they were recently, hurting regular bond funds. Inflation-adjusted bonds have done well, as they do when fears of inflation are rising. Unfortunately this cuts into future returns, because inflation now has to be above 2.25% for inflation-adjusted bonds to beat regular government bonds. Could happen, but the potential was much better when inflation expectations were around 0.6% last year. Plus, inflation-adjusted bonds won't do well if we get another stock crash, unless it is a crash based on rising inflation fears, which is possible in the shorter run. Typically, regular government bonds do the best.

The bull case for stocks from these levels is that we're on the cusp of an economic boom, fueled by those desperate to get out of the house and spend all the freely distributed trillions in government money. This may very well be, but stocks are already pricing this in and could just as easily fall.

Trade Alert

We placed a few small trades at the end of February in our model portfolios.

Conservative Portfolio

We added a 5% stake in VanEck Vectors Pharma. (PPH) as its relative safety and low valuations should keep this fund afloat in even moderately down markets.

We added a 10% position in an oldy but goody, Vanguard Extended Duration Treasury (EDV), to take advantage of the recent bump up in rates, hoping for some downside protection in the next crash. This is a very risky fund in the short run if rates keep going up. Long-term, much higher rates don't seem possible as there is just too much debt that needs low rates. The only real question is the rate of inflation. Lowish rates of under 3% on 10-year government bonds should be here to stay, with plenty of short-term volatility.

We sold our 26% stake in Schwab US TIPS (SCHP) because prices had gone too high, leaving little room for gains without truly massive sustained inflation of maybe 3—6% a year. Possible, but considering how easy it would be for the Fed to stop inflation these days, unlikely. There is a risk of the government running 3—4% inflation as the best way out of this debt mess, but even then TIPs funds won't do that well in the long run from here.

We added (FXE) at 10%, just to have something with some direct upside if the US dollar continues to fall. If foreign bonds paid much and didn't also face rising rate issues, we would not use this fund and would instead go with a foreign bond fund. There is also risk here that the rest of the world doesn't get the vaccine out as fast as we do, and that our economy is off to the races first.

We also added Vanguard Long-Term Bond Index ETF (BLV) to benefit from higher rates, though again there is a risk of losses as rates head upwards on fears of a booming economy and inflation.

We sold iShares JP Morgan Em. Bond (LEMB) even though we really want foreign bond exposure. This fund has too much credit risk for a downturn and we wanted to book our gains since purchase, which were substantial compared to safer bonds which have been very weak lately. Ultimately, if rates keep climbing, all these risky bonds will start tanking as the spread between safe and risky yields is getting too close already. In other words, who would own this fund at a 4.2% yield if 10-year US bonds start paying 3% (currently 1.5%)? Bottom line: all bonds have downside from here if rates keep going up because the spread between high-risk and low-risk debt can't get much smaller, and typically will get much wider if the economy or markets slip again. That goes double for convertible bonds linked to high-flying tech stocks.

We also did a limited amount of rebalance trades, which included selling some Vanguard Energy (VDE) after a hot run, as well as Franklin FTSE South Korea (FLKR), another outperformer, and Franklin FTSE Germany (FLGR) and Homestead Value Fund (HOVLX). You can use your discretion on rebalancing to our official percentage allocations and in non-IRA accounts. You may want to wait until you have long-term capital gains on these winners, to sell without offsetting capital losses.

Aggressive Portfolio

We boosted VanEck Vectors Pharma. (PPH) from 6% to 9%, for similar reasons for adding it to the Conservative Portfolio.

We switched to a new 2% stake in (QID), which is an inverse 2x, and sold ProShares Short QQQ (PSQ), an inverse 1x, to generate losses to offset sales and to increase our short position in the Nasdaq, which has dwindled as the market has risen. Avoiding tech and growth stocks here is the best overall strategy, but we will continue to short this high-flying area of the market to help protect the rest of the portfolio. Unlike in 2000, you can't simply buy 5% government bonds and sit out a possible train wreck. Hopefully, this 4% effective short position in the Nasdaq will offset losses in the stock market. There is a possibility that our picks remain mostly flat and only tech slides. If the economy goes back into shutdown mode and tech booms anew and oil stocks tank, we're going to wish we didn't make this adjustment.

We took a new 10% stake in Vanguard Extended Duration Treasury (EDV) for the same reasons that we added it to the Conservative Portfolio.

We cut Schwab US TIPS (SCHP) from 9% to zero, for the same reasons as in our Conservative Portfolio.

We cut iShares JP Morgan Em. Bond (LEMB) from 8% to 4% for similar reasons as in the Conservative Portfolio. But we kept some of this stake because it is a riskier portfolio and can handle what could be a rough ride. Plus, we have shorts in the portfolio which may take the edge off, so to say, and wanted to limit short-term gains.

There were a few rebalance trades where we didn't change the official allocation but got the holdings back in line with our target allocations. This was limited, due to taxes. Vanguard Small-Cap Value (VBR) saw a small sell and ProShares Decline of Retail (EMTY) saw a buy. Frankly, we'd probably cut back on Vanguard Small-Cap Value (VBR) more aggressively if not for the tax implications and our desire to drag out the momentum gains that may continue.

We really thought these trades could be put off until a year after our buying during the COVID crash. Unfortunately there is just too much speculation going on these days not to make some changes. We'll probably make more in a few months' time, after our buys become long-term capital gains (which are taxed at lower rates than income). In an IRA or other tax-deferred account, this is not relevant. In general, our hunch that stocks are due for a pullback is not a good reason to realize gains at a significantly higher tax rate, so close to the one-year mark.

Stock Funds1mo %
Vanguard Energy (VDE)22.45%
Vanguard Small-Cap Value (VBR)8.79%
Homestead Value Fund (HOVLX)5.86%
[Benchmark] Vanguard 500 Index (VFINX)2.76%
Vanguard FTSE Europe (VGK)2.58%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.52%
Vanguard FTSE Developed Mkts. (VEA)2.43%
Franklin FTSE Germany (FLGR)1.97%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)1.65%
Franklin FTSE South Korea (FLKR)0.19%
Franklin FTSE China (FLCH)-0.58%
VanEck Vectors Pharma. (PPH)-0.90%
ProShares Decline of Retail (EMTY)-2.27%
Vanguard Utilities (VPU)-5.54%
Franklin FTSE Brazil (FLBR)-6.37%
Bond Funds1mo %
Vanguard S/T Infl. Protect. (VTIP)0.16%
[Benchmark] Vanguard Total Bond Index (VBMFX)-1.51%
iShares JP Morgan Em. Bond (LEMB)-2.39%

January 2021 Performance Review

February 7, 2021

In a month in which individual stocks entered what can only be described as a crazed bubble fueled by chat room manipulators, it was a calm month for bonds and stocks as a whole.

Our Conservative portfolio gained 0.36% and our Aggressive portfolio gained 0.20%. Benchmark Vanguard fund performances in January 2021 were as follows: Vanguard 500 Index Fund (VFINX), down 1.01%; Vanguard Total Bond Index (VBMFX), down 0.80%; Vanguard Developed Mkts Index (VTMGX), down 1.18%; Vanguard Emerging Mkts Index (VEIEX), up 2.93%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.00%. That is not a typo. The fund had a freakish zero return, correct to two decimal places. Maybe it was up or down .0001%.

In previous months we've seen big swings up and down in various fund categories, but recently things have calmed down somewhat. In January the biggest gainers were funds investing in energy or stocks in China, which were both up only around 5%. The worst category was Latin American funds, down just over 7%. We own funds in all three categories but were approximately flat for the month in our portfolios, which was a solid result relative to benchmarks. We hope it sets the tone for 2021.

It appears that all of the investment areas that have been lagging big-cap technology and growth are starting to catch up, while bigger U.S. stocks plateau at high levels. This has helped us in recent weeks, but it is leading to high valuations in many areas and might warrant a cut to our overall stock allocation. We've benefited from cutting way back on non-inflation adjusted bonds, as inflation-adjusted bonds are doing well now due to investors' fears of future inflation growth. This may lead us back to regular bond funds, which have had a lousy last few months and are becoming attractively priced (or relatively so, in a world in which nothing is particularly attractively priced).

You can't help but notice the massive speculative frenzy that seems to have moved from cryptocurrencies — now a bubble of over one trillion dollars — into businesses with questionable futures, such as mall-based video game retailer GameStop (GME) and movie chain operator AMC Entertainment (AMC). These stocks have been pumped but supposedly not dumped (at least, not by the new day traders as a group) in a likely ill-fated attempt to 'squeeze' professional short-sellers (and probably some ordinary gamblers) who have taken out massive short positions (selling stock they don't own and planning to buy back later at a lower price).

This is all mildly amusing; who doesn't want to see a small investor steal from a billionaire hedge fund manager? The scheme seems to be to profit by causing massive losses to the shorts having to cover their positions (buying shares back at a much higher price), allowing the day trader chat room mob to exit at higher prices. This last part is foggy.

While all this has made the shorting of likely business failures (the future Blockbusters and RadioShacks) a dangerous game, the mob's path to the exit seems questionable. New hedge funds may enter the trade, leaving the total short position unchanged as weaker hands exit (if funds exit at all, as some seem to be raising money to fight the chat roomers). There have also been reports of other hedge funds making hundreds of millions on the way up. Most recently, many of these so-called meme stocks (or stonks as they are known in chat room stock slang) have crashed back to earth. This raises the question — did hedge funds as a group make money on moves up and down, and were the actual manipulators crushed?

This new casinofication of investing (which frankly always had a casino element) is some sort of perfect storm brewing. Its causes include COVID-19 lockdowns, reduced opportunities for sports betting, and the increasing popularity of pocket casino investing at Robinhood, the millennials' app that encourages speculation by delivering 'free' trading with very unfree margin to small investor-gamblers.

Nothing is entirely new here, of course; just more, much more. In the late 1990s the SEC went after teenagers for pumping worthless penny stocks in chat rooms (on Yahoo and Raging Bull in those days, not Reddit) while Wall Street did its own questionable manipulating of hot dot-com IPOs.

The media and politicians seem to be siding with and promoting a David vs. Goliath story, while ignoring the probability of collapse when a company's prospects don't grow with its inflated stock price. (This is one problem Bitcoin gamblers don't have.) Then there is the possibility that illegal stock manipulation, long the preserve of big-time stock crooks, may have been carried out by other individuals who are finally getting their turn. While many large hedge funds are at least semi-crooked, such Ivan Boesky grade stock schemes are not the source of much of the gains.

The same media and politicians have largely ignored how Robinhood, the new day traders' favorite brokerage firm, chose a name for itself that implies the opposite of what it does, which is taking from the poor and giving to the rich. This includes profiting from bad price execution with kickbacks on 'free' trades (something all brokers do, but generally to a lesser extent), high margin costs, and lending short-sellers the very shares its customers want to boost, for sometimes huge lending fees (not shared with customers).

The media attention and the pending investigations seem to be about mysterious dark forces supposedly asking Robinhood to freeze trading in order to help the shorts. This is about as likely to be true as all the other mysterious global big-money conspiracies to be found on the internet. To be fair to Robinhood, they are responsible for the new zero commission world we all live in, which is a good thing, if you are mindful of the pitfalls.

If it seems to you that investing has become more about dodging conspiracy theories and investment bubbles, that's because it has. The last major boom in chat room stock bubbles didn't end well for the stock market in general. It fell just over 50%, while the hot stocks fell 80% or more, and the penny stocks went to zero, as all penny stocks eventually do.

There are two problems now. Unlike in 1999, you can't get 5% in safe bonds as an alternative to stocks. You have to make do with what will likely turn out to be a negative inflation-adjusted return. And while the biggest gains during a bubble are made just before it pops, we don't know if we are in the equivalent of early 1999 or late 1999. There is a fairly feasible story that we may be in for a post WW2-grade boom when COVID-19 restrictions dissipate that could drive stocks even higher.

Stock Funds1mo %
Franklin FTSE China (FLCH)8.43%
Vanguard Energy (VDE)4.96%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.93%
VanEck Vectors Pharma. (PPH)2.92%
Franklin FTSE South Korea (FLKR)2.18%
Vanguard Small-Cap Value (VBR)2.04%
Vanguard FTSE Developed Mkts. (VEA)-0.72%
ProShares Short QQQ (PSQ)-0.76%
Vanguard Value Index (VTV)-0.79%
Vanguard FTSE Europe (VGK)-0.90%
[Benchmark] Vanguard 500 Index (VFINX)-1.01%
Vanguard Utilities (VPU)-1.04%
Homestead Value Fund (HOVLX)-1.06%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)-1.18%
Franklin FTSE Germany (FLGR)-1.18%
Franklin FTSE Brazil (FLBR)-7.46%
ProShares Decline of Retail (EMTY)-12.48%
Bond Funds1mo %
Vanguard S/T Infl. Protect. (VTIP)0.47%
Schwab US TIPS (SCHP)0.29%
[Benchmark] Vanguard Total Bond Index (VBMFX)-0.80%
iShares JP Morgan Em. Bond (LEMB)-1.06%