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June 2024 Performance Review

July 10, 2024

We may be seeing two different reactions to higher interest rates play out globally. Inflation is down, but US central bankers are still on high alert. Interest rates remain high, and bonds are down slightly for the year, though they have recently improved. US large-cap growth stocks are still white hot, while the rest of the stock market is only fair. Abroad, larger foreign markets are up less than 5% for the year after a weak June, compared to a roughly 15% return for the S&P 500 in 2024.

Our Conservative portfolio gained 0.12% in June, and our Aggressive portfolio declined 0.57%. Benchmark Vanguard funds for June 2024 were as follows: Vanguard 500 Index Fund (VFINX) up 3.58%; Vanguard Total Bond Index (VBMFX) up 0.93%; Vanguard Developed Mkts Index (VTMGX) down 1.91%; Vanguard Emerging Mkts Index (VEIEX) up 2.17%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 1.02%.

By moving into out-of-favor areas, our portfolios are positioned for a rotation from US large-cap growth stocks to bonds and smaller, more value-oriented global stocks—a market shift that hasn't happened yet, resulting in our performance lagging behind the S&P 500. Foreign stocks, including emerging markets, are still below 2021 highs, and bonds are down from 2020 highs.

There are signs parts of the real estate market are cracking under higher rates, notably commercial real estate, where sloppy high-risk lending is becoming apparent. While it is partially true that the worst aspects of the 2005 era real estate bubble—liar loans, no income no job (NINJA) loans, low down payments, excessive subprime loans—have been greatly reduced, the prime loans backing today's real estate boom may prove otherwise.

A recent article in the WSJ notes how commercial borrowers essentially lied about building revenues and expenses to get favorable loans, and lenders didn't look too closely. Many projects simply aren't going to work out at current high rates, as the income from the project can't handle higher payments. This has been a slow-moving crisis with extend and pretend arrangements, where defaults can be pushed off by not forcing borrowers' hands.

Perhaps this will devolve into the zombie loan era in Japan post-1989 twin stock and real estate bubbles, one that took decades to fully clear out of the system. The strong Japanese market (thanks to what else — chip stocks) broke the all-time intraday Nikkei 225 high set back in 1989. Can it happen here? Not likely, but it might if we lose the ability to respond to disasters either by bond investors being unwilling to buy more debt without demanding higher rates or the Fed losing the ability to create money to buy debt without causing high inflation.

Recent developments seem to reinforce US large-stock global dominance. Interest rates don't seem to be dragging on our economy much, which is astounding considering the high prices in real estate matched with now high mortgage rates. Abroad, perhaps due to weaker economic foundations, fewer long-term rate-locked mortgages, minimal AI boom, or just less deficit spending compared to the USA, currencies are weakening and the economy is sluggish. We are increasingly standing alone, except for maybe India, which has been a lone standout in strong stock market performance over much of the last decade.

Funds investing in India were up almost 7% last month, the top showing for all fund categories, and are now up over 13% for the year, the only single country fund category up double-digits this year except for the US. The gap with China and Latin American funds is astounding over the last 5 years—double-digit annual returns vs. negative returns. Part of this is political risk, but much of it is what happens to hot markets. About 15 years ago, China and Latin America were the hot areas to invest with scorching hot returns over the early 2000s until they crashed hard. This should be a warning to investors in large-cap tech stocks now, as well as in India. There is no way to know when the reversal of stock market fortunes will happen, but it is usually close to when money starts flowing out of poorly performing areas into hot markets and a bigger performance gap appears between the hot and not areas.

Utilities took a dive last month, offering a possible re-entry point. The bubble in energy-intensive AI, on top of energy-intensive crypto mining, ongoing shifts to electricity-guzzling EVs, and higher temperatures seem to offer good fundamentals for energy consumption for the foreseeable future.

In our own portfolios, the only strong areas were shorting bitcoin and retailers and our stake in Franklin FTSE South Korea (FLKR), which was having a bad year until last month. Our other single country funds performed poorly, down between 3 and 5% for the month, much of this due to currency weakness. This is why Invesco CurrencyShares Euro (FXE) was down 1.13% and iShares JP Morgan Em. Bond (LEMB) was down 1.16%, even though lower rates pushed Vanguard Extended Duration Treasury (EDV) up 2.5%, clawing back losses for the year.

Somewhat wild swings in interest rates recently and steady tech stock booming could mean a rough late 2024.

Stock Funds 1mo %
Proshares Short Bitcoin (BITI) 12.51%
Franklin FTSE South Korea (FLKR) 6.32%
ProShares Decline of Retail (EMTY) 4.27%
[Benchmark] Vanguard 500 Index (VFINX) 3.58%
Vanguard Communications ETF (VOX) 3.08%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 2.17%
VanEck Vectors Pharma. (PPH) 1.13%
Homestead Value Fund (HOVLX) 0.09%
Vanguard Value Index (VTV) -0.48%
Franklin FTSE Japan ETF (FLJP) -0.72%
Invesco CurrencyShares Euro (FXE) -1.13%
Vangaurd All-World Small-Cap (VSS) -1.25%
Vanguard FTSE Developed Mkts. (VEA) -1.66%
Proshares Short High Yld (SJB) -1.80%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -1.91%
Vanguard FTSE Europe (VGK) -2.94%
LeatherBack L/S Alt. Yld. (LBAY) -3.25%
Franklin FTSE China (FLCH) -3.29%
Franklin FTSE Germany (FLGR) -4.69%
Franklin FTSE Brazil (FLBR) -4.87%
UltraShort Bloom. Crude Oil (SCO) -8.25%
ProShares UltraShort QQQ (QID) -12.53%
Bond Funds 1mo %
Vanguard Extended Duration Treasury (EDV) 2.50%
Vangaurd L/T Treasury (VGLT) 1.65%
[Benchmark] Vanguard Total Bond Index (VBMFX) 0.93%
Vanguard Long-Term Bond Index ETF (BLV) 0.90%
BondBloxx Six Month Treasury ETF (XHLF) 0.42%
iShares JP Morgan Em. Bond (LEMB) -1.16%

May 2024 Performance Review

June 5, 2024

The seesaw continued with most of what was weak in April rebounding in May. The economy and inflation seem to be cooling at a safe pace. Rising speculation in crypto and meme stocks didn’t seem to alarm investors even though it could mean the Fed is going to keep burning money a bit longer. Foreign markets are starting to participate more when US stocks go up, though in general, the economic situation in Europe isn’t impressive.

The S&P 500 is up about twice as much as foreign stocks this year with an over 11% return after May's rebound. Most of the world does not do 30-year fixed-rate mortgages, so it is likely rising rates will start dragging on other economies sooner than the US.

Our Conservative portfolio gained 2.83%, and our Aggressive portfolio gained 2.75%. Benchmark Vanguard funds for May 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 4.95%; Vanguard Total Bond Index (VBMFX), up 1.70%; Vanguard Developed Mkts Index (VTMGX), up 4.76%; Vanguard Emerging Mkts Index (VEIEX), up 1.94%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.43%.

Our best holding was Vanguard FTSE Europe (VGK) up 6.45%, followed by tech-heavy Vanguard Communication ETF (VOX) up 6.4%. Europe somehow beat the S&P 500 for the first time in quite a while during a strong month for stocks, helped by a tailwind of a rising Euro.

Falling oil boosted our oil short, but all other shorts were weak, notably our inverse Bitcoin stake as "stupid gold" cranked back up and gamblers dove back into meme stocks and other near-guaranteed long-term losers. Our long-short LeatherBack L/S Alt. Yld. (LBAY) performed well with a 2.68% return considering many junk stocks were on the move up and value stocks in general lagged growth. The fund may still have a larg(ish) short position in DoorDash [DASH] which slid pretty hard in May.

You have to wonder if Roaring Kitty—the GameStop manipulator and YOLO hero of the anti-hedge fund little guy who appears to have amassed some quarter billion dollars plus worth of his favorite dead-end stock—will single-handedly tip the scales in favor of 'higher for longer' rates as the Fed sees speculative bubbles that need addressing and could cause a global real estate collapse 2.0. The odds aren't zero. Maybe this time around he'll get his fans to actually buy more at GameStop locations (instead of downloading games) because merely buying the stock is only delaying the inevitable.

Brazil is having a rough year partially due to weakish commodity prices and more recently tragic flooding that will weigh on the economy. Franklin FTSE Brazil (FLBR) fell 4.01% last month, while China continued to rebound with a 4.48% jump for Franklin FTSE China (FLCH).

Bonds were strong but not strong enough to turn positive for the year. Vanguard Extended Duration Treasury (EDV) rebounded almost 4% last month compared to the total bond index return of 1.7%.

Inflation seems to be moderating, but there are many shifts going on that could maintain well above 2% inflation for longer than expected. Rising real estate prices both boost costs with rents as well as lead to wealth-effect spending by those with twin gains from stocks and their homes. Retired boomers are so far not spending down the equity as inflation fears and probably hits to bonds have scared many into more modest spending habits than the historical high levels of wealth would indicate.

Increasing tariffs on lower-priced goods from China while simultaneously subsidizing purchases, all while running recession-grade deficits, is ridiculous on multiple fronts. In addition, we're effectively cutting the federal gas tax every year as it doesn’t go up with inflation and is currently sitting at early 1990s levels of $0.18, which used to be almost 20% of the pump price when gas was around a dollar but is now around 5%. It would have been so much easier economically (though not politically) to reduce inflation and lead to EV car adoption by just scrapping the huge credits to buy pricey EVs and cranking up fuel taxes. This would also have reduced our yearly deficit. Moreover, the hit to global energy prices from such tax increases would have done more to slow Russia's financing of military adventures than half-baked sanctions and would be less risky than trying to figure out which of our weapons can be used by Ukraine against Russia without triggering Putin.

As we're not going to tighten any belts in America, no matter how high inflation or how important getting our finances in order for the next calamity is, it is possible we'll be back into energy funds again soon.

Stock Funds 1mo %
Vanguard FTSE Europe (VGK) 6.45%
Vanguard Communications ETF (VOX) 6.40%
UltraShort Bloom. Crude Oil (SCO) 6.00%
Franklin FTSE Germany (FLGR) 5.05%
[Benchmark] Vanguard 500 Index (VFINX) 4.95%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 4.76%
Vanguard FTSE Developed Mkts. (VEA) 4.66%
Vangaurd All-World Small-Cap (VSS) 4.56%
Franklin FTSE China (FLCH) 4.48%
VanEck Vectors Pharma. (PPH) 3.31%
Vanguard Value Index (VTV) 3.00%
LeatherBack L/S Alt. Yld. (LBAY) 2.68%
Franklin FTSE Japan ETF (FLJP) 2.42%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 1.94%
Homestead Value Fund (HOVLX) 1.88%
Invesco CurrencyShares Euro (FXE) 1.87%
Proshares Short High Yld (SJB) -0.58%
Franklin FTSE South Korea (FLKR) -1.03%
Franklin FTSE Brazil (FLBR) -4.01%
ProShares UltraShort QQQ (QID) -10.86%
ProShares Decline of Retail (EMTY) -11.94%
Proshares Short Bitcoin (BITI) -13.72%
Bond Funds 1mo %
Vanguard Extended Duration Treasury (EDV) 3.96%
Vanguard Long-Term Bond Index ETF (BLV) 2.97%
Vangaurd L/T Treasury (VGLT) 2.83%
iShares JP Morgan Em. Bond (LEMB) 1.89%
[Benchmark] Vanguard Total Bond Index (VBMFX) 1.70%
BondBloxx Six Month Treasury ETF (XHLF) 0.47%

April 2024 Performance Review

May 17, 2024

In April 2024 the financial markets experienced heightened volatility due to an increase in interest rates, which impacted bond prices. Our Conservative portfolio declined by 3.86%, while our Aggressive portfolio fell 3.06%.

Benchmark Vanguard funds for April 2024: Vanguard 500 Index Fund (VFINX) was down 4.09%, Vanguard Total Bond Index (VBMFX) declined 2.44%, Vanguard Developed Mkts Index (VTMGX) decreased by 3.35%, and Vanguard Emerging Mkts Index (VEIEX) posted a modest gain of 1.02%. Vanguard Star Fund (VGSTX), a global balanced portfolio, was down 3.38%.

Our longer-term bonds were the primary driver of our Conservative portfolio underperforming Vanguard's roughly 60% stocks/40% bonds portfolio. The main upside last quarter was shorting and funds with stocks in China, explaining how our Aggressive portfolio had less downside than our Conservative portfolio in a down month.

Proshares Short Bitcoin (BITI) surged 18.79%, benefiting from Bitcoin's significant price drop as the post-ETF launching craze flattens out. ProShares Decline of Retail (EMTY) rose 13.06% as consumer spending weakened amidst sticky inflation. Franklin FTSE China (FLCH) gained 4.63% due to China's improved economic performance and strong industrial output, plus months of poor performance turning around in February of this year.

Franklin FTSE South Korea (FLKR) dropped 6.33%, impacted by regional geopolitical tensions involving North Korea and China. FLJP fell 5.61% amid Japan's sluggish economic recovery. Franklin FTSE Brazil (FLBR) decreased by 4.20%, adding to a poor 2024. Vanguard Communication ETF (VOX) was down 3.98%, mainly due to poor performance in tech-heavy stocks pressured by rising interest rates. Communications funds are no longer just Verizon-type companies but contain around 50% mega-cap tech stocks like Meta (Facebook) and Alphabet (Google).

BondBloxx Six Month Treasury ETF (XHLF) slightly increased by 0.34%, as short-term bonds don't go up or down much with rising rates. On the other end of the yield curve, Vanguard Extended Duration Treasury (EDV) fell 9.12%, heavily hit by rising long-term interest rates affecting long-duration bonds.

In April 2024, some of the hottest areas in an otherwise down market were funds focusing on precious metals. These surged nearly 5% as gold and silver continued to do well on inflation worries and foreign central bank buying, and doom and gloomier fears over the collapse of money because of rising government deficits. Gold is "boomer bitcoin."
Strangely, Bitcoin had a terrible month even though both it at gold trade are attractive to anxious investors.

Chinese stock funds rose over 4%. Commodities funds, including oil and metals, gained around 3%, benefiting from resilient prices and a not slowing much U.S. economy. Indian equity funds increased over 2%, continuing a strong run as essentially the best performing foreign market over the last decade and the only country with near U.S. stock market returns over this longer period. On the downside last month, digital asset funds plummeted 20%. Real estate funds fell almost 7% because of rising interest rates. Small-cap growth, health, and mid-cap growth funds also faced declines in the high-interest-rate environment, dropping around 6% to 7%.

The economy and markets are still trying to thread the needle of reducing inflation without causing a recession. So far, so good. But it always is until it isn't.

Stock Funds 1mo %
Proshares Short Bitcoin (BITI) 18.79%
ProShares Decline of Retail (EMTY) 13.06%
ProShares UltraShort QQQ (QID) 7.83%
Franklin FTSE China (FLCH) 4.63%
Proshares Short High Yld (SJB) 1.46%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 1.02%
UltraShort Bloom. Crude Oil (SCO) -0.06%
Invesco CurrencyShares Euro (FXE) -0.88%
Vangaurd All-World Small-Cap (VSS) -1.92%
Vanguard FTSE Europe (VGK) -2.55%
VanEck Vectors Pharma. (PPH) -2.88%
LeatherBack L/S Alt. Yld. (LBAY) -3.24%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -3.35%
Vanguard FTSE Developed Mkts. (VEA) -3.41%
Vanguard Value Index (VTV) -3.91%
Franklin FTSE Germany (FLGR) -3.93%
Vanguard Communications ETF (VOX) -3.98%
Homestead Value Fund (HOVLX) -4.07%
[Benchmark] Vanguard 500 Index (VFINX) -4.09%
Franklin FTSE Brazil (FLBR) -4.20%
Franklin FTSE Japan ETF (FLJP) -5.61%
Franklin FTSE South Korea (FLKR) -6.33%
Bond Funds 1mo %
BondBloxx Six Month Treasury ETF (XHLF) 0.34%
iShares JP Morgan Em. Bond (LEMB) -1.90%
[Benchmark] Vanguard Total Bond Index (VBMFX) -2.44%
Vanguard Long-Term Bond Index ETF (BLV) -5.38%
Vangaurd L/T Treasury (VGLT) -5.89%
Vanguard Extended Duration Treasury (EDV) -9.12%

March 2024 Performance Review

April 16, 2024

March deviated from the norm with the S&P 500 index not beating 90% of fund returns — it was more in the middle of all stock fund categories with a still respectable 3.22% gain. It seems the longstanding outperformance of the top growth stocks may be waning. Bonds had a moderate showing, though recently, rising inflation fears have caused rates to spike, driving most bond funds down for the year.

Our Conservative portfolio gained 2.18%, and our Aggressive portfolio saw a 1.91% increase in March. Benchmark Vanguard funds for March 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 3.21%; Vanguard Total Bond Index (VBMFX), up 0.82%; Vanguard Developed Mkts Index (VTMGX), up 3.53%; Vanguard Emerging Mkts Index (VEIEX), up 1.57%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.41%.

The broader global market performance has bolstered our results, but troubling signs are emerging, primarily in the bond market. It’s been a volatile year for bonds, dipping to near 2022 lows in early April. Long-term government bond funds are now down about 10% for the year, following a 3% return in 2023 and a harsh 30%+ decline in 2022. Since the peak in 2022, longer-term bonds and bond funds have dropped nearly 50% from their high. Surprisingly, investment in bonds continues as investors rush to secure higher rates before a potential Federal Reserve rate drop.

Inflation has persisted longer than investors and the Federal Reserve had hoped. Commodities are surging, and interest rate hikes haven't quelled the housing market. Notably, investors are gravitating back towards speculative assets, from cryptocurrencies to high-risk growth stocks without earnings — sectors that plummeted after the Covid-related bubbles.

Recently, larger tech stocks have faltered, with Tesla [TSLA] down approximately 30% for the year after recovering from the last significant drop. Even the formidable Apple [AAPL] has seen declines this year. These stocks are influential in most indices. Some downward pressure comes from the ongoing debate over China, but there's also the potential for stricter global antitrust regulations that could hamper the aggressive business practices of market leaders.

Renewed inflation concerns drove precious metals funds up nearly 20% last month, outperforming even hot crypto-related funds. It's notable that the 15-year return on precious metals funds averages nearly zero, with the 10-year returns barely outpacing inflation.

Energy also surged as rising oil prices signal a robust economy that seems indifferent to rate changes or even a sluggish global economy.

In our own portfolios, we've seen some unexpected winners. Vanguard Value Index (VTV) was up 5.17% as investors seem to be embracing value once more. Our previously underperforming LeatherBack L/S Alt. Yld. (LBAY) leapt 4.73% as shorting popular stocks like Tesla began to yield results. This fund last performed well when lesser-quality stocks declined, but it's been lackluster during the resurgence of speculation. Vanguard Market Neutral (VMNFX), a fund we use in some client accounts, has adopted a more rewarding strategy of long positions in solid stocks versus shorting speculative ones, although this fund struggled during the speculative frenzy of the Covid era.

Most of our funds that focused on international markets outperformed the US market, except Franklin FTSE Brazil (FLBR), which was down 1.29%. Considering the relative weakness of the global economy compared to the US, this is a favorable outcome for us. The strengthening US dollar, bolstered by high rates compared to likely rate cuts abroad, has weighed on iShares JP Morgan Em. Bond (LEMB), down 0.26% last month.

Rising rates aren’t just bad for bonds. If long-term rates go back up over 5% and mortgages hit over 8%, we probably won’t see stocks hold up. The recent stock rally was built on hopes that inflation and rates would drop while the economy stayed solid.

Stock Funds 1mo %
Vanguard Value Index (VTV) 5.17%
LeatherBack L/S Alt. Yld. (LBAY) 4.73%
Franklin FTSE South Korea (FLKR) 4.59%
Homestead Value Fund (HOVLX) 4.50%
Franklin FTSE Germany (FLGR) 4.31%
Vanguard FTSE Europe (VGK) 3.82%
Vanguard FTSE Developed Mkts. (VEA) 3.65%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 3.53%
Franklin FTSE Japan ETF (FLJP) 3.40%
Vangaurd All-World Small-Cap (VSS) 3.23%
[Benchmark] Vanguard 500 Index (VFINX) 3.21%
Vanguard Communications ETF (VOX) 2.84%
VanEck Vectors Pharma. (PPH) 2.14%
Franklin FTSE China (FLCH) 2.07%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 1.57%
Invesco CurrencyShares Euro (FXE) 0.03%
Proshares Short High Yld (SJB) -0.43%
ProShares Decline of Retail (EMTY) -0.97%
Franklin FTSE Brazil (FLBR) -1.29%
ProShares UltraShort QQQ (QID) -1.95%
UltraShort Bloom. Crude Oil (SCO) -11.39%
Proshares Short Bitcoin (BITI) -15.05%
Bond Funds 1mo %
Vanguard Long-Term Bond Index ETF (BLV) 1.45%
Vanguard Extended Duration Treasury (EDV) 1.11%
Vangaurd L/T Treasury (VGLT) 0.98%
[Benchmark] Vanguard Total Bond Index (VBMFX) 0.82%
BondBloxx Six Month Treasury ETF (XHLF) 0.38%
iShares JP Morgan Em. Bond (LEMB) -0.26%

February 2024 Performance Review

March 9, 2024

The market booked another strong month for U.S. stocks. The only foreign market that outperformed the U.S. in February was China which rebounded nearly 10%. Interest rates drifted back up, sending bonds down. Our globally balanced portfolio was up but lagged behind U.S. stocks by a wide margin, as a handful of growth stocks continued to drive returns. Year to date the S&P 500 is up just over 7%, foreign markets as a whole are only up around 1%, and the U.S. bond market is down 1.6%.

Our Conservative portfolio gained 1.05%, and our Aggressive portfolio gained 1.65% in February. Benchmark Vanguard funds for February 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 5.34%; Vanguard Total Bond Index (VBMFX), down 1.39%; Vanguard Developed Mkts Index (VTMGX), up 2.83%; Vanguard Emerging Mkts Index (VEIEX), up 3.98%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 2.43%.

Our strong areas relative to the hot U.S. market last month were Franklin FTSE South Korea (FLKR) and Franklin FTSE China (FLCH), up 8.13% and 6.62% respectively, with a good showing in Homestead Value Fund (HOVLX) and Franklin FTSE Germany (FLGR). Most of our foreign stock funds were a relative drag, and it's better not to even ask about shorting Bitcoin as the crypto bubble flares up again.

Rates drifted back up, sending our three longer-term bond funds down over 2%. Inflation is going in the right direction, but with a mini trade war with China, sky-high real estate prices, and questionable work-at-home productivity, alongside ongoing massive deficit spending, it is unclear if we'll see stable low inflation without higher rates. Worse, it appears low rates could lead to an even bigger asset bubble than we had a couple of years ago before rates went up.

Stock Funds 1mo %
Franklin FTSE South Korea (FLKR) 8.13%
Franklin FTSE China (FLCH) 6.62%
Homestead Value Fund (HOVLX) 6.13%
Franklin FTSE Germany (FLGR) 5.41%
[Benchmark] Vanguard 500 Index (VFINX) 5.34%
Vanguard Communications ETF (VOX) 4.58%
Franklin FTSE Japan ETF (FLJP) 4.17%
VanEck Vectors Pharma. (PPH) 4.10%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 3.98%
Vanguard Value Index (VTV) 3.34%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 2.83%
Vanguard FTSE Developed Mkts. (VEA) 2.74%
Vanguard FTSE Europe (VGK) 2.40%
Vangaurd All-World Small-Cap (VSS) 1.57%
LeatherBack L/S Alt. Yld. (LBAY) 1.04%
Franklin FTSE Brazil (FLBR) 0.34%
Proshares Short High Yld (SJB) 0.29%
Invesco CurrencyShares Euro (FXE) 0.18%
UltraShort Bloom. Crude Oil (SCO) -3.83%
ProShares Decline of Retail (EMTY) -8.08%
ProShares UltraShort QQQ (QID) -9.44%
Proshares Short Bitcoin (BITI) -31.93%
Bond Funds 1mo %
iShares JP Morgan Em. Bond (LEMB) 0.36%
BondBloxx Six Month Treasury ETF (XHLF) 0.36%
[Benchmark] Vanguard Total Bond Index (VBMFX) -1.39%
Vangaurd L/T Treasury (VGLT) -2.32%
Vanguard Long-Term Bond Index ETF (BLV) -2.37%
Vanguard Extended Duration Treasury (EDV) -2.62%

January 2024 Performance Review

February 22, 2024

December's significant returns for stocks and bonds largely fizzled out in January, at least for non-US stocks. There were some bright spots, like Japan, but most foreign markets and bonds were down. An allocation to still-sinking China more than offset our gains in Japan, and longer-term bond funds were down more than the bond index, resulting in negative numbers.

Our Conservative portfolio declined by 1.76%, and our Aggressive portfolio by 0.90%. Benchmark Vanguard funds for January 2024 were as follows: Vanguard 500 Index Fund (VFINX), up 1.68%; Vanguard Total Bond Index (VBMFX), down 0.24%; Vanguard Developed Mkts Index (VTMGX), down 1.23%; Vanguard Emerging Mkts Index (VEIEX), down 3.53%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.26%.

Only around 5% of all fund categories outperformed the S&P 500 last month (and not by much), as large-cap growth stocks in the US continued to deliver all the significant gains worldwide. Only our Vanguard Communication ETF (VOX) holding benefited from booming tech stocks, with a 3.9% return for the month. Our best holding was VanEck Vectors Pharma. (PPH), up 5.23% — a large gain for a relatively low-risk sector. Investors are excited about high-profit medications dealing with obesity and the near-limitless growth such advancements seem to predict. In some ways, obesity medications are the AI chips of healthcare.

Japan has been on a strong performance streak after decades of essentially going nowhere, helping our Franklin FTSE Japan ETF (FLJP) holding climb 2.93%, not enough to make up for significant losses in Franklin FTSE China (FLCH) down almost 10%. Japan has been so hot that their stock index is about to break the highs hit in 1989. That’s right, when you invest at the top of a bubble, it may take 35 years to break the old highs. Unlike with our own example in 1929, where high dividends led to an acceptable return even though the index took more than 20 years to break the old highs. In Japan, dividends were scarce as P/Es were to the moon in 1989, so total returns have been poor. With falling consumer prices for decades, the inflation-adjusted returns in Japan were less disastrous.

Interest rates drifted back up as ongoing fears over inflation and the Fed's near-future response weighed on bonds. Our long-term bond funds were down more than the bond index, with Vanguard Long-Term Bond Index ETF (BLV) down 1.37%, Vangaurd L/T Treasury (VGLT) down 1.79%, and Vanguard Extended Duration Treasury (EDV) taking a big near 4% hit, but these numbers were all after sharply strong year-end figures as rates fell with falling inflation in late 2023. iShares JP Morgan Em. Bond (LEMB) dipped 1.85%, but this was more due to currency fluctuations, perhaps related to general fears of emerging markets, of which China is the largest component both in the indexes and in actual economic activity.

With all the positivity in US markets, investors may have missed signs that large regional banks are still having problems, with drops in stocks that make the recovery since the FDIC bailouts and seizures of early 2023 seem premature. Banks are making nice interest rate spreads now, borrowing at near zero from branch depositors and lending at over 5%, but previous low-rate loans, especially to troubled commercial real estate developers, may overwhelm the otherwise benefits of a strong economy.

Stock Funds 1mo %
[Benchmark] Vanguard 500 Index (VFINX) 1.68%
Homestead Value Fund (HOVLX) 1.29%
Vanguard Value Index (VTV) 0.87%
Proshares Short High Yld (SJB) 0.29%
LeatherBack L/S Alt. Yld. (LBAY) -0.38%
Vanguard FTSE Developed Mkts. (VEA) -1.09%
Vanguard FTSE Europe (VGK) -1.23%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -1.23%
Invesco CurrencyShares Euro (FXE) -1.92%
Franklin FTSE Germany (FLGR) -2.00%
Proshares Short Bitcoin (BITI) -2.43%
Vangaurd All-World Small-Cap (VSS) -3.13%
ProShares UltraShort QQQ (QID) -3.20%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) -3.53%
Franklin FTSE Brazil (FLBR) -5.56%
Franklin FTSE South Korea (FLKR) -8.90%
Franklin FTSE China (FLCH) -9.66%
UltraShort Bloom. Crude Oil (SCO) -10.00%
Bond Funds 1mo %
BondBloxx Six Month Treasury ETF (XHLF) 0.80%
[Benchmark] Vanguard Total Bond Index (VBMFX) -0.24%
Vanguard Long-Term Bond Index ETF (BLV) -1.37%
Vangaurd L/T Treasury (VGLT) -1.79%
iShares JP Morgan Em. Bond (LEMB) -1.85%
Vanguard Extended Duration Treasury (EDV) -3.99%

2023 Performance Review

January 12, 2024

The year began with several major bank collapses, necessitating FDIC intervention to ensure depositors for amounts well beyond the official $250,000 maximum. This action was crucial to prevent further bank runs. Subsequently, long-term interest rates soared, surpassing the highs of 2022 — a year of record setting losses for bonds. This spike in rates jeopardized the economy, real estate, and stock markets. However, towards year-end, falling inflation, a surprisingly robust economy, and expectations of reduced short-term rates led to a dramatic decrease in long-term rates and a significant stock market rally, especially in speculative sectors that suffered in 2022.

Overall, the bond market closed the year with slight gains, reversing what appeared to be another year of double-digit losses for long-term bonds. U.S. stocks experienced one of their best years, with the S&P 500 returning over 26%. Conservative strategies focusing on bonds and lower-risk stock funds underperformed, achieving less than half of the stock market's substantial gains. In December, our Conservative portfolio outperformed the robust S&P 500, while our Aggressive portfolio essentially matched it, benefitting from the bond rebound. However, the underweighting in U.S. stocks resulted in relatively modest annual returns of approximately 8% and 9.5% for our Conservative and Aggressive portfolios, respectively.

In December our Conservative portfolio gained 5.28%, and our Aggressive portfolio gained 4.43%. Benchmark Vanguard funds for December 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 4.54%; Vanguard Total Bond Index (VBMFX), up 3.69%; Vanguard Developed Mkts Index (VTMGX), up 5.70%; Vanguard Emerging Mkts Index (VEIEX), up 3.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 5.07%.

We expected near 8% mortgage rates and rapidly rising corporate and consumer borrowing costs would strain the economy and stock market. This prediction, too commonplace, did not materialize, as is often the case with too-popular predictions. The Federal Reserve may have mitigated Covid stimulus inflation without causing a larger crisis, deserving some credit for this outcome.

For 2023, our primary underperformers were investments in China, bonds, and short positions. We regret not purchasing more long-term bonds during the drop in bond prices and spike in yields, although yields did not reach our anticipated 5%+ on 10-year bonds. Many investors sought to lock in near 5% rates before expected Federal Reserve rate cuts, bringing into question if rates really have peaked. Currently, shorter-term and inflation-adjusted bonds, along with foreign bonds, present more attractive opportunities, particularly if U.S. rates continue to decline and the dollar weakens.

Our China ETF Franklin FTSE China (FLCH) was the weakest stock fund in our portfolio, down approximately 2% in December and 11.1% for the year. It was our only fund to post a yearly loss without involving short positions. Chinese stocks, being a significant component of emerging market funds, largely influenced the modest single digit returns of these indexes in 2023, despite stronger performances in other markets. China's economic challenges, including a faltering real estate market and trade tensions with the U.S., remain concerns. U.S. policies under Biden, maintaining Trump-era tariffs and focusing on domestic spending in infrastructure and environmental initiatives, complicate the trade dynamics. These protectionist measures may counteract efforts to control inflation, as China has been a key factor in keeping inflation low in the U.S. since the early 2000s.

Political risks in China, including the government's increasing control over tech companies, are also significant. These developments may make Chinese tech stocks, already discounted due to government intervention, more appealing than high-valuation U.S. tech giants, which might face similar regulatory scrutiny.

Other areas of modest performance in 2023 included value stocks and traditionally safer sectors like pharmaceuticals. Our long-term holding in Homestead Value Fund (HOVLX) yielded a 12.86% return, while VanEck Vectors Pharma. (PPH) returned a modest 6.53%. With the market's shift back to growth stocks, we are considering increasing our value stock holdings and possibly divesting from the high performing Vanguard Communication ETF (VOX). Utilities, the only other negative stock fund category besides China funds, may also see a resurgence in our portfolio. While commodities were down, natural resource funds that own stocks in these sectors were up by around 7%.

Our short positions universally declined. Notably, the small ETF LeatherBack L/S Alt. Yld. (LBAY), which had a strategy of owning value-oriented stocks while shorting overpriced growth stocks, fell 8.53% for the year, after a solid 2021 and 2022 with roughly 22% returns in each of those years when trendy growth stocks sunk hard. This result was due to the modest performance of value stocks compared to the substantial gains of speculative growth stocks in 2023.

Reflecting on 2023, it's crucial to remember the year's significant bank failures, a disaster averted by government intervention. This action protected the banking system by insuring deposits well above the FDIC limit. The relatively inexpensive bailout, funded by future bank earnings and higher insurance fees, was a necessary measure to prevent a grimmer scenario. It is unclear why it was necessary to bail out billion-dollar uninsured deposits that would have experienced some losses to stop a bank run spreading when these investors could have taken some losses and FDIC could have increased support for other banks that didn't collapse to prevent more bank runs and minimize the hit to the FDIC insurance fund. This government support also raises questions about risk-taking in the financial sector. The recent inflation and interest rate hikes may signal limits to future government intervention. We hope the emerging real estate and crypto bubbles can dissipate without requiring significant government action or the rebound train might not come in on time again.

Stock Funds 1mo %
UltraShort Bloom. Crude Oil (SCO) 7.02%
Franklin FTSE South Korea (FLKR) 6.68%
Franklin FTSE Brazil (FLBR) 6.46%
Vangaurd All-World Small-Cap (VSS) 6.02%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 5.70%
Vanguard FTSE Developed Mkts. (VEA) 5.56%
Vanguard Communications ETF (VOX) 5.47%
Homestead Value Fund (HOVLX) 5.39%
Vanguard FTSE Europe (VGK) 5.39%
Vanguard Value Index (VTV) 5.07%
[Benchmark] Vanguard 500 Index (VFINX) 4.54%
Franklin FTSE Germany (FLGR) 4.36%
Franklin FTSE Japan ETF (FLJP) 3.73%
VanEck Vectors Pharma. (PPH) 3.64%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 3.29%
LeatherBack L/S Alt. Yld. (LBAY) 1.70%
Invesco CurrencyShares Euro (FXE) 1.61%
Franklin FTSE China (FLCH) -2.02%
Proshares Short High Yld (SJB) -2.59%
ProShares UltraShort QQQ (QID) -9.63%
ProShares Decline of Retail (EMTY) -10.39%
Proshares Short Bitcoin (BITI) -10.67%
Bond Funds 1mo %
Vanguard Extended Duration Treasury (EDV) 12.50%
Vangaurd L/T Treasury (VGLT) 8.20%
Vanguard Long-Term Bond Index ETF (BLV) 7.56%
[Benchmark] Vanguard Total Bond Index (VBMFX) 3.69%
iShares JP Morgan Em. Bond (LEMB) 3.29%
BondBloxx Six Month Treasury ETF (XHLF) 0.08%

November 2023 Performance Review

December 12, 2023

November was a month for the record books. The bond market abruptly reversed course as investors collectively decided that 5% on a ten-year government bond was about as high as we're going to see. With inflation continuing to decline to normal levels and all the money in cash looking to lock in higher rates for longer, investors engaged in an "everything everywhere all at once" rally in global investments. We never even hit 5% in October before rates plunged, sending bonds and everything else up in November.

Our Conservative portfolio gained 7.60%, and our Aggressive portfolio gained 6.93%. Benchmark Vanguard funds for November 2023 were as follows: Vanguard 500 Index Fund (VFINX), up 9.13%; Vanguard Total Bond Index (VBMFX), up 4.50%; Vanguard Developed Mkts Index (VTMGX), up 9.01%; Vanguard Emerging Mkts Index (VEIEX), up 6.76%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 8.27%.

While the Federal Reserve appears to have stopped raising short-term interest rates, longer-term rates were heading higher, leading to another bad year for the bond market. With inflation heading back to the Fed's target rate of 2%, it seems that rates, both short and long-term, won't go higher and may go lower, making all sorts of expensive assets seem less expensive. The hardest-hit rate-sensitive areas rebounded sharply.

While the bond index was up 4.5% last month, funds that owned longer-term bonds had one of the biggest moves up in history. Our rate-sensitive ETFs, Vanguard Extended Duration Treasury (EDV), Vanguard Long-Term Bond Index ETF (BLV), and Vangaurd L/T Treasury (VGLT), were up 14.03%, 9.97%, and 9.1% respectively, beating almost all of our stock funds. On the stock side (not including short funds), only China lagged with Franklin FTSE China (FLCH) up just 2.08%. Franklin FTSE Germany (FLGR) was up 12.78%, Franklin FTSE Brazil (FLBR) 14.44%, and Franklin FTSE South Korea (FLKR) 15%. Much of the big moves was in funds that have above-average dividend yields as investors rapidly decided it was time to lock in higher yields in case rates went back down. There seemed to be little concern that if rates go back down, we might be in a recession and stocks and higher-risk debt could slide. Utilities had a good month but are still down for the year, as are long-term bond funds.

We didn't just see big gains in higher-yield options – Cryptocurrencies and questionable growth stocks that crashed in 2022 continued on their big rebound year. All this euphoria may make the Feds stick with higher rates for longer. The Fed won't say it directly, but it is likely that rising house prices and crypto speculation are reasons not to lower rates.

Home prices are around 20% higher than the very peak in the 2007 era bubble, even adjusting for high inflation. One reason for inflation subduing may be that home ownership is consuming ever more of the household budget. Either way, the Fed doesn't want to create an even larger speculative bubble that could crash because rates followed inflation down. In this way, the return to risk-taking could risk the economy as it is easier to damage the real economy with high rates than speculation.

While the Fed is probably wary of repeating the 1929 mistake of using rates to slow speculation when inflation is tame, that doesn't mean the Fed is okay with home prices going up another 20% from here, much less seeing crypto and speculative stocks booming again.

Stock Funds 1mo %
Franklin FTSE South Korea (FLKR) 15.00%
Franklin FTSE Brazil (FLBR) 14.44%
Franklin FTSE Germany (FLGR) 12.78%
Vanguard FTSE Europe (VGK) 9.76%
Vangaurd All-World Small-Cap (VSS) 9.37%
[Benchmark] Vanguard 500 Index (VFINX) 9.13%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 9.01%
Vanguard FTSE Developed Mkts. (VEA) 8.81%
UltraShort Bloom. Crude Oil (SCO) 8.75%
Vanguard Communications ETF (VOX) 8.09%
Homestead Value Fund (HOVLX) 7.60%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 6.76%
Vanguard Value Index (VTV) 6.68%
Franklin FTSE Japan ETF (FLJP) 6.03%
VanEck Vectors Pharma. (PPH) 4.25%
LeatherBack L/S Alt. Yld. (LBAY) 3.18%
Invesco CurrencyShares Euro (FXE) 3.08%
Franklin FTSE China (FLCH) 2.08%
Proshares Short High Yld (SJB) -4.21%
ProShares Decline of Retail (EMTY) -7.18%
Proshares Short Bitcoin (BITI) -8.43%
ProShares UltraShort QQQ (QID) -18.07%
Bond Funds 1mo %
Vanguard Extended Duration Treasury (EDV) 14.03%
Vanguard Long-Term Bond Index ETF (BLV) 9.97%
Vangaurd L/T Treasury (VGLT) 9.10%
iShares JP Morgan Em. Bond (LEMB) 4.62%
[Benchmark] Vanguard Total Bond Index (VBMFX) 4.50%
BondBloxx Six Month Treasury ETF (XHLF) 0.57%

October 2023 Performance Review

November 19, 2023

Rising rates impacted nearly all fund categories in October. A global balanced portfolio of stocks and bonds fell harder than the S&P 500, as foreign stocks and global bonds underperformed, with rising rates contributing to the strengthening of the US dollar. Although numbers showing continued progress on inflation in November have so far reversed the downturn experienced in October, speculation about when rates will decrease continues to influence market movements. The housing market, in particular, seems most reliant on the belief that the current higher rates will not persist.

Our Conservative portfolio declined 3.60%, and our Aggressive portfolio declined 3.25%. Benchmark Vanguard funds for October 2023 were as follows: Vanguard 500 Index Fund (VFINX), down 2.11%; Vanguard Total Bond Index (VBMFX), down 1.57%; Vanguard Developed Mkts Index (VTMGX), down 3.56%; Vanguard Emerging Mkts Index (VEIEX), down 3.44%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.95%.

The average fund category return was negative 2.26% in October, and the average fund category is now up under 1% for 2023. The strong returns are largely in larger-cap US growth stocks this year, as the S&P 500 is still up a solid 10.69% for the year with dividends, even with the drop in October. The only strong areas are risky debt as recession fears slip away, and stocks in Japan. The cryptocurrency bubble just won't die and is the hottest area this year, though still well off the 2021 highs.

With the strength in early November, The S&P 500 index is only about 5% away from all-time highs hit at the end of 2021. The bond market is still down about 20% from the highs, with longer-term government bonds down around 40% — the biggest drop ever.

In our own portfolios, what little gains we had in short funds were more than wiped out by drops in all stock funds and our long-term bond funds. The rising dollar particularly hit Franklin FTSE Germany (FLGR) hard with a 6.1% drop, and took down iShares JP Morgan Em. Bond (LEMB) 4.18%, a riskier debt fund that has actually done well relative to safe debt in recent years. Rising rates drove Vangaurd L/T Treasury (VGLT) down 7.31% and a whopping 11.41% hit to Vanguard Extended Duration Treasury (EDV). Rising rates have

Stocks are joining real estate in being priced as if the economy isn't going to slow down, inflation is heading back to target levels of around 2% a year, and interest rates will probably head down to around 3%. This could happen, but if it doesn't, there will be problems. Bubbling problems in commercial real estate also can't spread to the broader real estate market, much less the economy. Any deviation from this expectation will likely lead to lower real estate prices and stocks, but possibly higher bond prices as rates go down. The worst case for bonds is inflation settling into 3-4% as a new normal, the economy remains solid, real estate and stocks are okay with it as the Fed doesn't want to risk a crash and is comfortable with 5%-ish rates, and long-term rates go up to over 6% hurting bond prices again.

At this point in bond versus stock valuations, bonds offer a compelling risk-reward almost as good as in 2000 when stocks were a bit more pricey and bonds yielded closer to 6%, not 5%. There has been money going into longer-term bond funds lately, so investors aren't panic selling bonds after the losses, which would be the case if bonds were a true bargain today.

The renewed speculative energy by crypto and stock investors is a tough part of the economy to cool down with higher rates. The Fed faced the same problem in the 1920s when they raised rates not to cool inflation — which was low — but to cool speculation. When investors get it in their heads that stocks and real estate can't go down over a few years — reinforced by recent history — it doesn't matter if rates are 3% or 8%. Until it matters all of a sudden, as was the case in 1929.

Stock Funds 1mo %
ProShares UltraShort QQQ (QID) 11.43%
ProShares Decline of Retail (EMTY) 7.39%
Proshares Short High Yld (SJB) 2.06%
Franklin FTSE Brazil (FLBR) -0.65%
LeatherBack L/S Alt. Yld. (LBAY) -1.75%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) -2.06%
Franklin FTSE Japan ETF (FLJP) -2.36%
Invesco CurrencyShares Euro (FXE) -2.37%
VanEck Vectors Pharma. (PPH) -2.49%
Homestead Value Fund (HOVLX) -2.61%
Proshares Short Bitcoin (BITI) -2.86%
Vanguard Value Index (VTV) -3.27%
Franklin FTSE China (FLCH) -3.53%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -3.71%
Vanguard FTSE Developed Mkts. (VEA) -3.78%
Vanguard Communications ETF (VOX) -3.86%
Vangaurd All-World Small-Cap (VSS) -4.25%
Vanguard FTSE Europe (VGK) -4.49%
[Benchmark] Vanguard 500 Index (VFINX) -4.77%
Franklin FTSE South Korea (FLKR) -5.12%
Franklin FTSE Germany (FLGR) -6.10%
UltraShort Bloom. Crude Oil (SCO) -9.81%
Bond Funds 1mo %
BondBloxx Six Month Treasury ETF (XHLF) 0.38%
[Benchmark] Vanguard Total Bond Index (VBMFX) -2.49%
iShares JP Morgan Em. Bond (LEMB) -4.18%
Vanguard Long-Term Bond Index ETF (BLV) -6.31%
Vangaurd L/T Treasury (VGLT) -7.31%
Vanguard Extended Duration Treasury (EDV) -11.41%

September 2023 Performance Review

October 10, 2023

The hot US stock market couldn't handle the renewed slide in bonds, leading to a decline of over 4% for a balanced portfolio of stocks and bonds for the month. Despite this, the economy remains strong, even as 30-year fixed rate mortgages approach 8%, reminiscent of the worst of the bond market hit in 2022. Banks are showing signs of strain again, as they grapple with a portfolio of long-term, low-rate loans while needing to offer rising yields to depositors.

For September 2023, our Conservative portfolio declined by 4.71%, and our Aggressive portfolio fell 3.71%. Benchmark Vanguard funds for the month were as follows: Vanguard 500 Index Fund (VFINX), down 4.77%; Vanguard Total Bond Index (VBMFX), down 2.49%; Vanguard Developed Mkts Index (VTMGX), down 3.71%; Vanguard Emerging Mkts Index (VEIEX), down 2.06%; and Vanguard Star Fund (VGSTX), a global balanced portfolio, down 4.04%.

Despite its recent drop, the S&P 500 remains up around 13% for 2023. In contrast, longer-term government bonds have experienced significant declines. A 50/50 portfolio consisting of the S&P 500 ETF (SPY) and the long-term government bond ETF (TLT) is approximately flat for the year, dividends included. Our higher-risk portfolio has registered a 1.35% return, while our lower-risk portfolio has decreased by 1.13% year to date.

The primary areas that have been performing well in the market (though some are cooling down) include technology, which is still up around 20% YTD, and growth sectors in the US. While some foreign markets like Japan are performing strongly this year, most are lagging behind the US. The strength that value stocks displayed in 2022 has waned in 2023, with these funds now in the red. Small cap stocks are barely holding ground with a 3% return for the year.

The weakest performers include assets that investors previously favored when rates were near zero and below inflation — such as gold, high dividend stocks, and utilities. These so-called 'safe' inflation hedges or assets offering inflation-beating yields are now under pressure. Utilities have fallen by 12% this year, real estate funds by over 5%, and precious metal funds have declined around 10%. Investors don't need to look far for safe yields now, as T-bills are offering around 5.5%.

Why haven't higher rates stifled the economy or the stock market as anticipated? Perhaps many had envisaged a near future that mirrored the last 15+ years, with persistent low rates to support the economy where the risk averse are punished for being too conservative. This optimistic projection is rapidly changing as the possibility of enduring higher rates becomes more evident. For those purchasing homes at current peak prices with almost 8% mortgage rates, refinance opportunities at lower rates in the coming years might become scarce.

The US economy's resilience may be partially attributed to how many Americans having locked in low rates with 30-year fixed mortgages of around 3%. Rising inflation is simultaneously pushing up home prices and salaries, and with the surge in cash yields, those brave enough to move away from their zero-interest bank accounts are seeing over 5% yields. However, challenges could be on the horizon for commercial borrowers with short-term or adjustable-rate loans.

If the aim is to curtail consumer spending to combat inflation, then tax hikes and government spending cuts might be necessary – neither of which we're currently seeing. Relying solely on rising rates to cool down the economy could lead to a financial crisis, even when consumers are still splurging on luxuries like $1000 Taylor Swift tickets.

Another factor to consider is that, at some point, government bonds might outperform stocks over a lengthy period, perhaps decades. If an investor had purchased a 20-year government bond in 2000 and, upon maturity in 2020, reinvested in T-bills, the returns would have been on par with the S&P 500, dividends included. The catch is that one would have enjoyed the consistent 6%+ yields from bonds and avoided the recent bond market crash since the bond matured in 2020.

In the current scenario, we're nearing the 6% yield for 30-year bonds seen in early 2000, with rates currently hovering around 5%. While stock yields aren't as low as they were then (meaning stocks are not quite as overpriced), they are not far off, sitting around 1.5%.

The tech innovations from 2000-2020, including the spread of the internet and smartphones, resulted in an average annual return of about 6.5% in the S&P 500 stock fund. But we also saw government debt soar from 60% of GDP to 120%. Without a similar debt-driven boost in the near future and with an aging population, economic growth could be stifled, barring any significant shifts, such as a robot-driven economy.

Ultimately, the primary hesitation against heavily investing in 5% risk-free long-term debt arises from the potential for rates to climb even further, which could further depress longer-term bond prices. Although we haven't observed panic selling of bond funds—a sign that might indicate a good entry point—such a scenario might never transpire. This is especially true if there's significant demand for 6% government bond yields. After all, achieving returns better than 6% long-term government bonds is difficult, even under nearly ideal economic conditions.

Stock Funds 1mo %
ProShares UltraShort QQQ (QID) 11.43%
ProShares Decline of Retail (EMTY) 7.39%
Proshares Short High Yld (SJB) 2.06%
Franklin FTSE Brazil (FLBR) -0.65%
LeatherBack L/S Alt. Yld. (LBAY) -1.75%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) -2.06%
Franklin FTSE Japan ETF (FLJP) -2.36%
Invesco CurrencyShares Euro (FXE) -2.37%
VanEck Vectors Pharma. (PPH) -2.49%
Homestead Value Fund (HOVLX) -2.61%
Proshares Short Bitcoin (BITI) -2.86%
Vanguard Value Index (VTV) -3.27%
Franklin FTSE China (FLCH) -3.53%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) -3.71%
Vanguard FTSE Developed Mkts. (VEA) -3.78%
Vanguard Communications ETF (VOX) -3.86%
Vangaurd All-World Small-Cap (VSS) -4.25%
Vanguard FTSE Europe (VGK) -4.49%
[Benchmark] Vanguard 500 Index (VFINX) -4.77%
Franklin FTSE South Korea (FLKR) -5.12%
Franklin FTSE Germany (FLGR) -6.10%
UltraShort Bloom. Crude Oil (SCO) -9.81%
Bond Funds 1mo %
BondBloxx Six Month Treasury ETF (XHLF) 0.38%
[Benchmark] Vanguard Total Bond Index (VBMFX) -2.49%
iShares JP Morgan Em. Bond (LEMB) -4.18%
Vanguard Long-Term Bond Index ETF (BLV) -6.31%
Vangaurd L/T Treasury (VGLT) -7.31%
Vanguard Extended Duration Treasury (EDV) -11.41%

August 2023 Performance Review

September 13, 2023

With interest rates on the rise once again, stocks and bonds globally were down. The economy is not slipping into a recession so far, at least not in the USA. However, rates are expected to remain high due to escalating costs in energy and housing. Notably, only short-term bond funds exhibited growth last month, with almost all fund categories sinking. Some riskier bond funds were the exception, benefiting from a robust economy that supports higher default risk bonds.

Our Conservative portfolio declined by 2.66%, while our Aggressive portfolio saw a decrease of 3.14%. Benchmark Vanguard funds for August 2023 were as follows: Vanguard 500 Index Fund (VFINX), down 1.59%; Vanguard Total Bond Index (VBMFX), down 0.58%; Vanguard Developed Mkts Index (VTMGX), down 4.05%; Vanguard Emerging Mkts Index (VEIEX), down 5.69%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, experienced a 2.57% decline.

It appears we have navigated through the majority of the inflation spurred by excessive money creation during Covid, combined with demand and supply issues after months of lockdown. The lingering effects are primarily due to a burgeoning real estate bubble and the government’s inability to curb the budget deficit — even during prosperous times. This has resulted in a continuous stimulus program while the Federal Reserve attempts to dampen inflation and slow the economy.

Increasing rates are making it expensive for the government to manage its substantial debt. The options to navigate this predicament seem limited to tolerating above 2% inflation targets or raising taxes. Although our debt-to-GDP ratio has been steadily climbing since the early 2000s, low interest rates mitigated the impact on debt payments relative to GDP. Unfortunately, this era is nearing its end; with the mounting interest rates, the financial burden on government revenues is set to become increasingly difficult to bear.

Historically, we have countered recessions with significant deficit spending, as seen in the responses to the 2000 recession (peak 3.3% deficit to GDP) and the Great Recession (peaking just under 10%). The COVID-19 pandemic escalated this to an almost 15% deficit-to-GDP budget. Alarmingly, we observe a persistent trend of growing deficits, now exacerbated by the spiraling interest charges on national debt and inflation-indexed government spending. Under current tax regulations and automatic spending plans, we are drifting towards a deficit exceeding 11%, a gap that appears insurmountable, even without the onset of a new crisis.

Surprisingly, the irrational housing market remains unfazed by the mortgage rate surpassing 7% and home prices eclipsing their 2006 peak when adjusted for inflation. Theoretically, home values should plummet to equalize monthly payments with the higher mortgage rate, but a stalemate between reluctant sellers and priced-out buyers has led to an unstable yet high market plateau.

Earlier this year, the banking sector faced a mini-crisis, a situation that might recur if rates continue to ascend. Remarkably, banks that rectified their mistakes following the mid-2000 housing bubble are now finding their focus on prime fixed-rate loans to be problematic. Some banks that faltered this year might have weathered the storm with a more diversified portfolio that included adjustable-rate subprime mortgages. Consequently, banks wouldn't be constrained to a fixed yield of 3% on their investments while having to pay some depositors rates approaching 5%.

Current investor apprehensions are primarily directed towards foreign markets, mainly China, standing on the precipice of a obubble collapse. Our Franklin FTSE China (FLCH) bore the brunt of this, depreciating by 9.46% last month, while most emerging markets collectively fell over 5%. Most of the debt in China is in the private sector and local governments. The relatively low debt government can theoretically bail out the economy by essentially taking on the debt, probably with increased state control. Although the Chinese government retains substantial borrowing capacity, contrasting with many major economies, it’s ambiguous how the US government plans to mitigate the impending economic crisis, with our borrowing capacity nearing its limit.

Long-term interest rates zoomed back up to the highs of 2022, sending some of our bond funds down for the year. The Vanguard Extended Duration Treasury (EDV), the most sensitive to rate alterations, fell by 4.67% last month. The resurgence in the US dollar’s value led to a 3.25% dip for iShares JP Morgan Em. Bond (LEMB) last month, even in a month where higher credit risk bond funds experienced a slight uptick.

The temptation is to run from bonds and foreign markets and chase hotter US growth markets, fueled by AI optimism. This will likely lead to more risk and lower returns in the coming years.

Stock Funds 1mo %
Franklin FTSE China (FLCH) 11.18%
Franklin FTSE South Korea (FLKR) 6.77%
Vanguard Communications ETF (VOX) 6.21%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX) 5.91%
Vangaurd All-World Small-Cap (VSS) 4.93%
Proshares Short Bitcoin (BITI) 4.80%
Franklin FTSE Brazil (FLBR) 4.76%
Homestead Value Fund (HOVLX) 3.93%
Vanguard Value Index (VTV) 3.45%
[Benchmark] Vanguard 500 Index (VFINX) 3.21%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX) 3.17%
Vanguard FTSE Developed Mkts. (VEA) 3.14%
Vanguard FTSE Europe (VGK) 2.90%
Franklin FTSE Japan ETF (FLJP) 2.66%
VanEck Vectors Pharma. (PPH) 2.61%
Franklin FTSE Germany (FLGR) 2.52%
LeatherBack L/S Alt. Yld. (LBAY) 2.18%
NightShares 2000 (NIWM) 2.02%
Invesco CurrencyShares Euro (FXE) 0.92%
Proshares Short High Yld (SJB) -0.76%
ProShares Decline of Retail (EMTY) -2.25%
ProShares UltraShort QQQ (QID) -7.03%
UltraShort Bloom. Crude Oil (SCO) -24.01%
Bond Funds 1mo %
iShares JP Morgan Em. Bond (LEMB) 1.49%
[Benchmark] Vanguard Total Bond Index (VBMFX) -0.06%
Vanguard Long-Term Bond Index ETF (BLV) -1.14%
Vangaurd L/T Treasury (VGLT) -2.22%
Vanguard Extended Duration Treasury (EDV) -3.93%

Trade Alert

August 25, 2023

One of the ETF holdings in our Conservative portfolio, the NightShares 2000 ETF (NIVM), was liquidated last week. For now, we're shifting the 5% allocation to cash via an ETF specializing in 6-month T-bills. This means we're transitioning from a no-yield cash position to an actual cash-like fund with a much higher yield (5.19% 30-day SEC Yield / 5.39% Yield to Maturity) and low fees. We believe this is a move everyone at a brokerage firm should consider for their cash holdings. Vanguard stands out as the only major brokerage platform offering a solid money market fund sweep option, with Fidelity following closely. For others, trading into a cash-like fund is necessary, especially since the cash sweep accounts remain at sub 1% yield, which was acceptable when rates were near 0%. A sweep account is where cash is held between trades.

With risk-free yields now soaring above 5%, courtesy of the Federal Reserve's ongoing anti-inflationary measures, short-term treasuries or T-bills provide an almost risk-free opportunity. This yield is notably higher than the 100-year historical T-bill average return of around 3.5% and an inflation rate of approximately 3%. Moreover, these returns are significantly above the trailing 20-year averages, which are around 1.3% for T-Bills and 2.5% for inflation.

Our choice is the relatively new BondBloxx Bloomberg Six Month Target Duration US Treasury ETF (XHLF), which focuses on 6-month treasury bills. This fund has a minimal 0.03% fee and yields over 5%. It might slightly lag behind other shorter-term T-bill funds if rates keep rising. We believe such rate hikes will soon stop then settle into a historically high plateau until something breaks in the markets, real estate, or economy.

Another option is the iShares® 0-3 Month Treasury Bond ETF (SGOV), although its annual fee could rise from the current 0.07% to 0.13% next year once the fee reimbursement expires. Unlike SGOV, BondBloxx doesn't employ temporary introductory fees. Generally, these funds should outperform most house money market funds on brokerage platforms. The WisdomTree Floating Rate Treasury Fund (USFR) and the iShares Treasury Floating Rate Bond ETF (TFLO) are also worth noting. Though they have a higher fee of 0.15%, the returns on floating rate notes (FRN) might justify the cost, especially since FRNs typically offer a slight premium over short-term T-Bill rates. Also note the above funds are state tax free as the income is essentially 100% from the treasury.

In our client accounts, we do incorporate some direct T-Bill and FRN purchases. However, for the majority of situations, these above funds prove invaluable. Any minor fee concerns associated with these funds pale in comparison to the significant lost opportunities presented by bank or brokerage cash accounts in today's climate. It's crucial not to settle for sub 1% returns in a world yielding 5%, even if your bank or broker might prefer you to do so in order to offset their own loan losses from rising rates.

While these funds resemble almost risk-free cash-like instruments, short-term treasury funds such as the Schwab Short-Term US Treasury ETF (SCHO) can experience slight fluctuations with rapid rate rises. However, they might outperform lower maturity cash funds if rates start declining rapidly.

We're also rebalancing some holdings, as stocks have recently outperformed while bonds have lagged, with long-term rates revisiting their 2022 highs. For instance, if a stock fund's allocation increases from 10% to 12% and a bond fund decreases from 10% to 8%, we're making adjustments. In the case of our Vanguard Extended Duration Treasury ETF (EDV), we're making substantial purchases, implying our rebalanced portfolio will bear more interest rate risk in the near future. If rates rise further, we might pivot more towards bonds, especially if stocks continue their current upward trend.

Specifics about the liquidated fund:

The NightShares 2000 ETF (NIVM), which was recently liquidated by its sponsor, was based on the historical observation that stocks typically secure most of their gains overnight. The strategy was to buy stock index futures at market close and sell them the next morning, remaining in cash during the day. Unfortunately, this approach was less than successful.

We had initially reviewed this pattern over a 20-year span with our own research and found it promising, especially during bear markets. The potential downside was also less pronounced than with traditional stock indices.

However, the fund disappointed on multiple fronts. Our Conservative portfolio saw an investment of $5,908.82 on 06/30/22 or $29.99 a share, yielding a return of only $5,512.15 upon its liquidation on 8/15/23. This near 7% negative return was a letdown. Small-cap stocks like the Russell 2000 did underperform the S&P500 by about 7%, but this doesn't explain the fund's subpar performance as both small and large cap were up during this time frame.

NIVM's downfall can likely be attributed to two main challenges. Over much of the last year, the trend has shifted: buying the market in the morning and selling in the evening has produced similar results to holding onto the Russell 2000, but with less volatility. This night trading strategy failed to offer the expected rewards, though this has happened historically as well. Moreover, the fund seemed unable to effectively replicate even this modest night return, indicating implementation issues. Spotting a historical pattern is one thing, but real-world application, with all its inherent costs, is another.

In hindsight, shorting this fund while going long on the Russell 2000 would've yielded better results. However, in recent weeks, the pattern of nights outperforming days seems to be making a comeback, although it's uncertain if the fund would have capitalized on this trend if it remained active.