The US stock market rebounded strongly in October, rising over 8%. It was an even better month for value-oriented stocks and energy stocks, which helped push the Dow up 14%, its best month since the 1970s. The Federal Reserve’s interest rate increase and press conference in early November stoked fears of even higher rates to fight inflation, and reversed some of the gains. Bonds continued to slide, and 2022 is becoming the worst year in history for the bond market. Most large foreign markets did well, but not as well as the US. Emerging market funds were down, largely because of continued troubles in China.

As a sign of how strange this year has been for investors, as of October 31 the Vanguard STAR fund was down 20.53% compared to the S&P 500’s 17.75% decline. As this globally balanced fund is only around 60% in stocks, this is a remarkable development. Bonds have declined as much as stocks have in 2022. Foreign stocks are down more than US stocks, largely because of a sharply rising US dollar. The cumulative drag of bonds, China, and shorting weighed on our returns in October. Our Aggressive portfolio has fallen slightly less than the S&P 500 this year, with a negative 16.16% return. Our Conservative portfolio is more in line with the Vanguard STAR fund and is down 20.78%.

In October our Conservative portfolio gained 2.04% and our Aggressive portfolio gained 1.02%. The performances of benchmark Vanguard funds were as follows: Vanguard 500 Index Fund (VFINX), up 8.09%; Vanguard Total Bond Index (VBMFX), down 1.38%; Vanguard Developed Mkts Index (VTMGX), up 5.91%; Vanguard Emerging Mkts Index (VEIEX), down 3.45%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 3.66%.

Value stocks did well, lifting Vanguard Value Index (VTV) by 11.73% and Homestead Value Fund (HOVLX) by 11.45%. But that, and the handful of our other funds that beat the S&P 500 last month, didn’t make up for heavy losses in longer term bonds. Our move to increase long-term bonds in June was premature. Vangaurd L/T Treasury (VGLT) was down 5.2% for the month, while Vanguard Extended Duration Treasury (EDV) fell a whopping 9.08%. Long-term bond funds in general are now down over 30% for the year – far more than the S&P 500 and more akin to technology shares.

The only really hot area was energy, up 22% for the month as oil prices headed up again. This was an area we moved into during COVID-19, when the oil price collapsed and was sold way too early. Our Franklin FTSE Brazil (FLBR) fund was up 9.89% for the month and 20.97% for the year as the country is something of a natural resource play, but we’d prefer this year’s roughly 50% gains in energy funds. Energy, commodities, and Latin America are the only fund categories up this year. Most are down by double-digit percentages.

Except for so-called digital asset funds, which own crypto-related ‘investments’ and are down 58% in 2022, the worst category of funds this year (and last month) is funds investing in China. Our own Franklin FTSE China (FLCH) was down 15.83% for the month and 42.33% for 2022 as a grab bag of political and economic issues hit the already weak market.

Long-term interest rates at over 4% for government bonds and 6% for corporate investment grade bonds will be hard for stocks to beat over the next few years, unless the Fed is unable to get inflation under 3% and the economy and earnings keep inflating at the expense of bond holders, but with no recession. More likely we’ll eventually have a fairly deep recession, falling inflation, and a return to low interest rates. This will reward locking in some longer term high yields, and give some potential upside that can be shifted into stocks at even lower prices than are on offer today.

The rebound in stocks that started in mid-June ended in mid-August, and we’re almost back to square one – a bear market. The rebound was strong – a near 20% move up, but the drop is looking just as fast. As of September 6, the S&P 500 with dividends is down around 16.8% for the year, while the bond market is down a more surprising 11% – a big hit for bonds. Foreign stocks as a group are down over 20%; some much more.

Our Conservative portfolio declined 4.06% , and our Aggressive portfolio declined 2.35%. Benchmark Vanguard funds for August 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 4.08%; Vanguard Total Bond Index (VBMFX), down 2.77%; Vanguard Developed Mkts Index (VTMGX), down 5.52%; Vanguard Emerging Mkts Index (VEIEX), up 0.23%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 3.61%.

Our Aggressive portfolio is down 11.37% for the year, which compares fairly well to the stock market, particularly foreign markets. For reference, at the end of August the global balanced Vanguard STAR was down 16.81% year to date. Our Conservative portfolio had a poor month and is now down 16% for the year under the weight of foreign stocks and longer-term bonds, both down in the 20%–30% range. That said, most low-credit-risk bonds likely can’t fall that much more from here, unlike stocks, which could easily drop another 20%+ if the Fed has to engineer a recession.

Some of our safer stock funds were the hardest hit in August. VanEck Vectors Pharma. (PPH) dropped 8%, while Franklin FTSE Germany (FLGR) fell 7.34%. Meanwhile, risky emerging market funds did okay, with Franklin FTSE Brazil (FLBR) up 6.47%, as Latin American funds were the #1 category last month of any fund types and one of only a handful of categories in positive territory in August. Our recently added or increased shorts helped our Aggressive portfolio offset losses. Proshares Short Bitcoin (BITI) was up 16.75% and Proshares Short High Yld (SJB) was up 4.28%, while UltraShort Bloom. Crude Oil (SCO) was up 8.72%. LeatherBack L/S Alt. Yld. (LBAY), which does some shorting, was down less than 1%.

What likely ended the stock rebound this summer was interest rates heading back up from the end of July. Stocks and real estate are heavily dependent on low rates. High rates cut into the profitability of companies and real estate as interest costs have to be deducted from revenues, but the more immediate problem is just relative valuation. If you can get 5% in a government bond or 4% in cash and CDs, levels we are approaching if rate increases keep up, why mess around with risky stocks?

There is a lot of focus on the troubles in Europe, but there is not enough focus on the potential troubles in our own housing market.

Europe has made a series of miscalculations that seem to be coming home to roost. Cutting back on nuclear energy because solar and wind are more popular (and don’t produce radioactive waste), magnified by the nuclear disaster in Japan, was a bad call for a region short on non-Russian energy.

Some of the sanctions seemed more designed to shame Russia and don’t do significant economic damage that could reduce the money flow into Russia that is used to finance the costly war in Ukraine. Shutting down McDonald’s doesn't hurt Russia. We took a US-owned asset that was drawing profits out and essentially gave it to Russia.

The main thing that needed to get done was lowering the price of oil and natural gas to reduce the flow of money to Russia. The West didn’t take the tough steps that would have caused a crash in oil – engineering a recession by raising taxes on energy temporarily. Instead, various states in the US reduced gas taxes or, in the case of California, are sending checks out under the guise of “inflation relief." The Federal Government just extended the pause on student loans and is planning on eliminating $10,000 of student debt per borrower.

The trouble is, these things will increase energy consumption and prices compared to doing nothing. It may seem counter-intuitive to raise prices with energy taxes, but with a supply-and-demand imbalance, the price is going to go higher anyway with the excess profits going to those that sell energy – like Russia. Since Europe already has near 10% inflation, slowing the economy down by driving energy demand down would have served two goals: reducing demand for Russian energy, and reducing inflation as any new tax would do sucking money out of the system (so long as it’s not spent on some sort of half-baked relief).

By deficit spending during high inflation, governments are kicking the can to central bankers (who don't have to face reelection) to solve the problems. We spent it, Fed; you unspend it because we don’t have the political will to take money away from crazed consumers.

The Fed has essentially three ways to reduce inflation: 1) scare people into speculating and spending less by talking about all the economic damage they are going to do; 2) raise shorter-term rates, which pushes up all sorts of consumer and business debt costs; 3) burn the trillions of newly created money they used to buy the debt that funded mortgages and PPP loans, also known as qualitative tightening or QT.

The Fed is trying #1 and #2 fairly aggressively, but #3 is next, and that is the one that scares investors the most. As it is, mortgage rates are going to head back up to 6% after a brief drop in recent weeks. If we go to 7% mortgages, in all likelihood we’ll have a recession and mini crash in real estate of 20%.

Home prices are as high as the last bubble, adjusting for incomes and payments. The Fed is likely aware of this and is scared to get too aggressive and would likely prefer inflation to drift down over a few years than risk a collapse in the real estate market. The best thing going for real estate and stocks now is the high inflation as rents and earnings are going up with everything else – rationalizing current high prices. If inflation runs at 8% a year for a few more years, and stocks and real estate prices remain the same, they will both be bargains, especially if mortgages remain at lower rates than inflation.

It is possible the falling stock and bond market will discourage the Fed from taking more aggressive action. It is likely if the recent rebound in stocks kept up to the old highs, the Fed would already be burning the new money, which they do by selling the bonds they bought for cash then erasing that cash from the world – the opposite of QE, or quantitative easing.

Gold, commodities, and even stupid crypto have been heading down again recently, which is what would be expected if inflation had peaked and is on the way back down.

The best case is what happened post WW2 when we had fairly massive inflation that didn’t last more than a few years, unlike the 1970s. The Fed didn’t do anything, and bond investors took the hit as inflation ate away at their investment and everything else was peachy for the next few decades.

The worst case is ugly: inflation doesn't ebb and global central banks, in an effort to prevent another 1970s, takes even more aggressive action and we go right back to a 2008 style asset crash.

We made some trades in both model portfolios on June 30th, 2022. The end result was a slight increase in stock and interest rate exposure by moving from shorter-term bonds to longer-term bonds, which are more sensitive to interest rate changes. This means that a 1% increase in rates equates to a bigger drop in price. We also made some changes to our hedging to protect the portfolios from an increasingly likely drop in higher credit risk debt, aka junk bonds. There just isn't the kind of selling from funds going on to mark a great buying opportunity even with the bear market decline.

Before we get to the trade detail, here is a quick summary of June 2022 returns:

Our Conservative portfolio declined 4.77%, and our Aggressive portfolio declined 4.89%. Benchmark Vanguard funds for June 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 8.26%; Vanguard Total Bond Index (VBMFX), down 1.50%; Vanguard Developed Mkts Index (VTMGX), down 9.61%; Vanguard Emerging Mkts Index (VEIEX), down 4.43%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 6.25%.

Although it was nice falling roughly 60% as much as the S&P 500 and less than the Vanguard STAR fund, which is a total balanced portfolio of global bonds and stocks, this was still a pretty big hit for us as stocks and bonds are falling globally. We are down 9.85% for the year in our aggressive portfolio, or about half the S&P 500 drop. Our conservative portfolio at -13.93% is less impressive but is more interest rate sensitive and doesn't have offsetting short positions. Year to date, Vanguard Star Fund (VGSTX) is down 18.64% to the end of June.

The only fund category that was up in June was China region funds, which have been very weak until recently. Even hot commodity focused categories and countries like energy funds and Brazil funds have been down sharply. Gold, the supposed safe haven from global turmoil and inflation, is down about 15% from its peak a few months ago. Our only strong showing last month (other than short funds) was Franklin FTSE China (FLCH), up 8.59% and now "only" down 10.57% for the year. Compare that to Franklin FTSE Germany (FLGR), down 16.18% for the month and just under 30% for the year, and you can see how much more economic risk Europe is in than China with Russia and rising energy prices. It is unlikely China can avoid a recession in Europe and the United States, so these recent market moves are more the west catching up to the declines in China.

The reason for the turnaround in commodities-oriented investments is that the writing is on the wall and the Fed is likely going to keep raising rates until inflation starts definitely heading back toward 2%—which could take some time. Without the White House cutting spending or raising taxes, it will take high rates to suck back the maybe $10 trillion handed out globally as stimulus during COVID. It was dangerous and unnecessary for the Fed to keep buying mortgage bonds, recently sending the 30-year mortgage under 3% during what has been fast becoming another real estate bubble. The new higher mortgages could cause a real estate crash, particularly in commercial space that, in the case of offices, barely makes sense at current rent prices due to the new hybrid work schedule.

The S&P 500 is now in a bear market down around 20% for the year. Long-term bonds are down about as much, highlighting the difficulty for risk reduction with a balanced portfolio when interest rates are near zero with little room to go but up. Growth and tech areas are down around 30% or more. So far, it has been a good year to be in value stocks and cash.

Normally, this would be a good time to increase risk significantly as we did during the COVID crash in the early 2020, but this trade does not do that. We're holding out for another 10—20% drop and buying longer-term bonds while avoiding most higher credit risk bonds. It is likely we will be doing another trade in a few months if the market keeps sliding. If the Fed turns out to still be a so-called dove, inflation remains high, and short-term rates don't go much higher, we may miss a turnaround in the market, and this will be another 20% drop dip buying opportunity like during the end of 2018.

The Trades

All bonds are down this year, with longer-term bonds down around 20%. We cut back on longer-term bonds during the COVID crash, and our initial move to inflation adjusted bonds was a good call. Perhaps we got out of these bonds too soon fearing the risk of inflation expectations collapsing if the Fed got aggressive on fighting inflation, which didn't really happen yet.

Now with all rates rising rapidly, our shorter-term investment-grade mortgage bond fund is down a whopping 8.8% for the year through the end of the June. This was better than the even overall bond market down just over 10.35% and less than half the 21.40% slide in Vanguard Long-Term Bond Index ETF (BLV) a long-term bond fund that we cut back on post-COVID.

Long-term bonds have declined about the same as the S&P 500 (so far), down around 20% including dividends. Speaking of, the yield on the S&P 500 is up but still only around 1.65%, and the bond market as a whole now pays a far more healthy 3.5%. Although it is possible that interest rates will continue up to meet higher inflation, realistically the bulk of the hit to bonds is behind us, and any moves to say 4—5% will reverse when the next recession kicks probably from the higher shorter-term rates. If the Fed chooses to allow more high inflation, it is unlikely interest rates will rocket higher to say 7% just to continue to pay less than inflation—which is no great situation but still warrants owning 3—5% yielding bonds as the stock market risk is higher than bonds if the Fed overshoots.

We've discussed this poor situation in bonds since early 2020. When cash yields zero and the bond market yields less than 2%, your offsetting gains from a stock slide are essentially nil. This is why a bond and stock blend did so poorly in the early 2020 COVID crash, and this year (so far). In hindsight, when we reduced our stake in long-term and inflation adjusted bonds (for this very reason), we should have just gone to cash and not for the paltry yields in mortgage bonds. This is easy to say now, but earning zero while the Fed decides what to do isn't a great solution. It would have made more sense to own more stocks, less bonds, and more hedges.

If stocks go significantly lower from here, it is more likely that bonds will do well (not junk bonds, but investment-grade and government debt), so the benefit of a balanced portfolio will return.

NEW HOLDINGS ADDED TO BOTH PORTFOLIOS

Leatherback Long/Short Alternative Yield ETF (LBAY)

Aggressive Portfolio from 0% to 3%

Conservative Portfolio from 0% to 5%

This new fund was launched last year and broadly speaking is somewhat similar to a fund we've used off and on in client accounts, Vanguard Market Neutral (VMNFX). These funds mostly own value-type stocks and short high-flying growth stocks with questionable fundamentals like Carvana (CVNA) to name one of hundreds. This strategy can work in normal markets but is best during deflating bubbles. It is a disaster during times like 2020 and 2021 when hot bubble stocks get hotter, as you can see from the bad performance of Vanguard Market Neutral (VMNFX). We're pretty late in the deflating tech bubble game with roughly 80% declines across the board, but this strategy still offers potential for a late-stage decimation and 99% drops in many speculative tech names. VMNFX is the lower risk (less overall market exposure) and probably the better choice but has a high minimum, so we are not using it here. LBAY probably has more upside (and downside) risk. Unlike most of our holdings, we may not keep this fund for over a year, so consider it in an IRA in case there are short-term gains. Also the fund has a regular dividend payout strategy, which is basically a marketing gimmick.

Vanguard All-World Small-Cap (VSS)

Aggressive Portfolio from 0% to 9%

Conservative Portfolio from 0% to 5%

Foreign stocks are now very cheap, though they face high risks from a deep recession as many do not have secured domestic energy supplies and rely heavily on Russia. This, plus rising rates and slowing economies as well as dealing with multidecade high inflation, makes times look even rougher abroad than here. This is also why these prices should work out in the longer run. Many of these markets are almost in single-digit PE ranges, and dividend yields are more than double the United States. Small cap stocks abroad are even more out of favor probably because of the large cap index focus of most investors when investing abroad.

Proshares Short High Yield (SJB)

Aggressive Portfolio from 0% to 5%

Conservative Portfolio 0% to 7%

High-risk bonds will fall hard if the economy slides into a deep recession. Safer bonds could actually improve in price, so it is possible that we'll make money on this fund and our longer-term investment-grade bond funds. There is little risk in the short run of this fund falling significantly and losing money in investment-grade bonds, which would require the spread between low- and high-risk debt to shrink.

We don't usually have inverse funds in our Conservative portfolio, but we need protection from further troubles in the bond market. This fund is a safe way in the short run to do that. See Aggressive portfolio for more explanation.

SELL ALL IN BOTH PORTFOLIOS

Vanguard Mortgage-Backed Securities (VMBS)

Aggressive Portfolio from 20% to 0%

Conservative Portfolio 30% to 0%

While we were right to cut back on longer-term bonds and go to shorter-term safe bonds, there was still too much interest rate risk here, and we should have just stuck it out in cash or 1-year bonds. We could continue to hold this fund, but we're going to move more to long-term bonds (which have more downside risk if rates keep going up). The fund was down 8.88% for the year.

Vanguard Utilities (VPU)

Aggressive Portfolio from 10% to 0%

Conservative Portfolio from 10% to 0%

We're cutting back on lower-risk stock funds that are yield focused. These funds are attracting too much money as investors shift out of growth. This fund was down just 1.23% for the year, so it served its purpose during this bear market.

AGGRESSIVE PORTFOLIO ONLY

Overall: 62% stocks to 63% stocks, bonds from 34% to 21% (but more rate risk) alternative from 0% to 3%, and inverse 4% to 11% (largely from adding inverse junk bonds).

Click here to visit the Aggressive Portfolio's trade center.

AGGRESSIVE PORTFOLIO ADD NEW HOLDINGS

Vanguard Telecom VIPER (VOX) from 0% to 10%

We've owned this fund for years but cut it loose long ago as a too-early exit from tech bubble valuations. The issue was that the communications indexes started adding Facebook and Google, which does make sense on some level but also exposed the fund to high-risk stocks instead of the usual Verizon- and AT&T-type holdings.

Fast forward to today, and these stocks are all way down. A few days ago, this fund was down around 40% from the highs last September. Keep in mind more speculative tech names are now down 50—90% pretty much across the board. Can they go lower? Definitely, earnings are going to be a problem at even tech monopolies as ad spending from money-losing bubble-era startups gets cut in a desperate attempt to get profitable. Still, these prices are attractive, and we can add more if this isn't the bottom.

ProShares Short Bitcoin Strategy (BITI) from 0% to 2%

Too bad this inverse Bitcoin fund wasn't launched before the 70% drop in bitcoin, as we've been noting this bubble for years here. It would seem this bubble is almost fully popped, but Bitcoin, unlike say a tech index, can go far lower. This fund should do well as inflation fears disappear as the whole narrative of 0% rates is fast ending. Since there are few ways to short commodities and inflatable assets, this offers an, albeit strange, deflation bet. In many ways, sharply falling inflation is worse for stocks than high inflation and is outright deadly for real estate. That said, crypto investors have cultlike behavior and may not sell even in the face of 70% declines and crypto accounts being frozen or falling 99%.

Leatherback Long/Short Alternative Yield ETF (LBAY) from 0% to 3%

This new fund was launched last year and broadly speaking is somewhat similar to a fund we've used off and on in client accounts, Vanguard Market Neutral — VMNFX. These funds mostly own value-type stocks and short high-flying growth stocks with questionable fundamentals like Carvana (CVNA) to name one of hundreds. This strategy can work in normal markets but is best during deflating bubbles. It is a disaster during times like 2020 and 2021 when hot bubble stocks get hotter, as you can see from the bad performance of Vanguard Market Neutral Fund (VMNFX). We're pretty late in the deflating tech bubble game with roughly 80% declines across the board, but this strategy still offers potential for a late-stage decimation and 99% drops in many speculative tech names. VMNFX is the lower risk (less overall market exposure) and probably the better choice but has a high minimum, so we are not using it here. LBAY probably has more upside (and downside) risk. Unlike most of our holdings, we may not keep this fund for over a year, so consider it in an IRA in case there are short-term gains. Also the fund has a regular dividend payout strategy, which is basically a marketing gimmick.

Ultrashort Bloomberg Crude Oil (SCO) from 0% to 2%

This fund generates K-1 partnership tax paperwork, not a 1099, so it should be in an IRA. Unfortunately, there are very few ways to short commodities with ETFs or funds anymore—most are too small or too leveraged. This is too bad as the real risk now is a collapse in the economy and the new commodity bubble. Bottom line, if stocks fall another 20%, it will likely happen as oil falls back to $50. There is some risk of the Russia situation sending oil up to $150, in which case we may double down on this position. We owned a similar fund during the last great recession-era commodity crash and did well.

AGGRESSIVE PORTFOLIO REDUCE HOLDINGS

Vanguard Value Index (VTV) from 14% to 6%

The value boom relative to growth might not be over, but we don't need such a big weight here anymore. This fund was only down 9.29% for the year, or about half the S&P 500. We're not ready to get back heavy into the Vanguard Growth ETF Vanguard Growth ETF (VUG), which was down around 30.37% for the year, but perhaps soon.

AGGRESSIVE PORTFOLIO INCREASE HOLDINGS

iShares JP Morgan Em. Bond (LEMB) from 4% to 7%

We cut this fund back from 8% to 4% back in late February 2021 as it was riding high after the COVID rebound. We probably should have gone to zero like in the Conservative portfolio. Anyhoo, now that the fund is down sharply (around 15% for the year and about 25% since we cut it back) with over 7% yields, it is time to go increase the position, though there are big risks in high-yield bonds that hopefully we're covering with our new short high-yield bond ETF. There is potential to make money here when our dollar sinks from multidecade highs. In general, reaching for yield in a potentially teetering economy is a bad idea.

CONSERVATIVE PORTFOLIO ONLY

Overall: 42% stocks to 44% stocks, bonds from 48% to 32% (but more rate risk) alternative from 10% to 17%, and inverse 0% to 7% (from adding inverse junk bonds).

Click here to visit the Conservative Portfolio's trade center.

CONSERVATIVE PORTFOLIO ADD NEW HOLDINGS

NightShares 2000 (NIWM) from 0% to 5%

This new fund (launched in the last few weeks) is a bit of a gimmick based on a historical anomaly. Typically we don't like data mining to create a fund because, by the time you get around to marketing a fund, the money that has been made in this anomaly goes away—or even reverses . Many things work on paper until enough people start doing it. Sometimes such patterns work during certain markets and do the opposite during others—the Dogs of the Dow strategy where you simply focus on the highest yielding stocks in the Dow worked great, until growth stocks started to lead the market in the late 1990s (and again until recently).

That said, this anomaly may not go away for another year or so, and this strategy should be lower risk than owning a straight small cap stock fund as we did post-COVID crash. We're going to have to watch it closely for a possible sale. This fund should be tax-inefficient from constant realized short-term capital gains, so consider it in an IRA.

The fund only owns stocks (through futures) at night, in this case the small cap Russell 2000 index. The pattern has been that, if you buy stocks near the end of the market close, say 3:50 p.m., and sell the position at 9:30 a.m. when the market opens, you earn a better risk adjusted return than the market. There are hypotheses and white papers about this, which doesn't make it any more certain as a strategy for the future of course. Our theory is that it is partially the result of day traders coming into stocks in the morning often with leverage and getting out by the end of the day, artificially boosting prices in the morning, depressing them near the end of the day, and causing a generalized irrational fear of the overnight. But retail day traders have largely been destroyed since the 2021 peak in growth stocks. We'll have to watch this one closely for asset growth or the end of the era of this scheme working. There are other problems like tax inefficacy that almost require this in an IRA.

Vanguard Long-Term Treasury Index (VGLT) from 0% to 8%

Not much to explain here—as rates go up and bonds tank, we're moving into longer-term bonds that have the most upside if rates go back down, say in the next recession. The only way long-term rates go much higher from here is if the Fed stops raising short-term rates and doesn't sell off many of the bonds acquired with newly created money and essentially remains a dove. It could happen, but it is not that likely. Meanwhile, 3%+ yields are worth some risk, unlike 1%.

CONSERVATIVE PORTFOLIO INCREASE HOLDINGS

Vanguard Extended Duration Treasury (EDV) from 10% to 14%

This is the recession buster holding because the interest rate exposure is so extreme, meaning changes in interest rates lead to huge changes in the fund price. The fund does best when rates go down for safe bonds as is often the case in a recession and when inflation expectations decline. We sold some of this fund post-COVID when rates were ultralow then bought some back early in 2021 (too early as it turns out). This fund is down 28.11% YTD more than the S&P 500 and almost exactly what the Nasdaq is down from the highs. If long-term rates go up more, we'll increase our position again.

Invesco CurrencyShares Euro (FXE) from 10% to 12%

Eventually we're going to stop raising rates, and then other countries with rising inflation are going to go up and our hot dollar is going to sink back down. In the meantime—go to Europe on a trip as the Euro is around parity (1 USD — 1 Euro) with the dollar, the best deal in decades for travelers.

Vanguard Long-Term Bond Index ETF (BLV) from 8% to 10%

This has a similar explanation to new holding Vanguard Long-Term Treasury Index (VGLT), only we don't want to increase our corporate bond position that much quite yet—this fund includes government and corporate investment-grade bonds, which explains the slightly higher yield.

Franklin FTSE South Korea (FLKR) from 5% to 7%

Our last trade here was cutting back in February 2021 after a big move up (basically a double). Now with a slide of 25% YTD in 2022 and about a 36% drop since we cut back, we're increasing the position again. The fund portfolio has yields of over 3% and a P/E ratio under 10 or about half the valuations of the S&P 500—not that cheapness magically saves you from losses in a global panic or recession, but it can reduce your losses when bubbles burst, at least compared to other options.

Ouch. Global markets are not in the mood to fight inflation, and the market reaction to the Fed press conference of May 4th only highlights the growing fear of the world of waning global monetary stimulus. Stocks and bonds were down sharply across the board in April as inflation shows no signs of abating without action — the kind that slams the economy and markets. The real story isn't the near-double-digit hit to stocks, but the near-double-digit hit to bonds. These fears are rational. Inflatable assets like commodities, real estate, and stocks often do very badly when inflation heads back down. Bonds do badly when inflation isn't in check. If both are down, then the assumption is that the higher rates in the bond market are going to "work" in cooling inflation.

Our Conservative portfolio declined 5.72%, and our Aggressive portfolio declined 5.54%. Benchmark Vanguard funds for April 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 8.72%; Vanguard Total Bond Index (VBMFX), down 3.85%; Vanguard Developed Mkts Index (VTMGX), down 6.55%; Vanguard Emerging Mkts Index (VEIEX), down 5.55%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 7.43%.

In hindsight, when we cut back on inflation-adjusted bonds (which we went into last year when rates and inflation were low), we should have just parked half the portfolio in cash instead of mortgage bonds. Like everyone, we were scared of nearing zero on cash for years waiting for higher rates or lower stock prices. Well, higher rates came fast — about as fast as the 1994 and late 1999 bond mini crash. Long-term government bonds were down about 9% in April — more than stocks — and are down around 20% for the year as of now. The good news for investors is now you can earn 3% safely. Over time, this is better than if rates remained 1%.

Before you get too scared, keep in mind the bond market isn't going to fall 50% like stocks can from here. Some ultra-long-term zero coupon government bonds may fall briefly. If bonds fall much harder, it will be brief, at least for government bonds. In such a crisis, the Fed would switch to money creation and bond buying again (and hasn't even started selling off the bonds purchased with new money during the COVID crash).

This is a leveraged world with sky-high asset prices based on low rates. The U.S. government can't afford our debt at 7%, and neither can anybody else. The "good" news for the government is they just inflated away 10% of the debt or maybe $2 trillion. Without almost guaranteed inflation of over 5% a year, nobody can afford to buy a high-priced home with a 7% mortgage. Sure we've had 10% mortgages "in the past," but then homes were priced at 2 times average incomes; today it is more like 4 times. In many hot real estate markets, that number is 10 times.

Current bond yields are actually not a bad deal in the long run as we will likely, hopefully, return to sub-3% inflation, and in general low default risk bonds probably won't pay more than inflation for long periods of time ever again — as we've noted here before.

Some commodity funds were up a little last month, but 99% of fund categories were down. Commodity funds won't do well if inflation heads back down and we get a recession, but they will do well if inflation remains above 4% with the economy remaining hot. The hardest hit areas included foreign stocks and growth stocks. Tech stocks are in a bear market, and technology category funds are down close to 25% for the year. As noted before, this doesn't even capture the full-on 2000 grade crash in stocks of the future or so-called innovation investments. These are now down 50% to 90%. Many will go to zero.

Our inverse Nasdaq fund is finally paying off with a 45% gain YTD. This has partially offset big losses in bonds and stocks, notably in our remaining long-term bonds and foreign stocks. Our China fund Franklin FTSE China (FLCH) is down 19.46% for the year. As proof of the pain in bonds, our Conservative portfolio is down 10.95% for the year, while our Aggressive portfolio is down just 5.54%, as opposed to the near 13% drop in the Vanguard 500 fund and a whopping 13.81% year to date drop in Vanguard Star Fund (VGSTX), which highlights the hard hit to bonds and foreign stocks this year. That's right, diversifying into bonds and foreign stocks actually increased downside in 2022, so far. Our strongest areas include VanEck Vectors Pharma. (PPH), down just 2.25% for the month and up 1.31% for the year, followed by utilities, which were basically flat for the year after Vanguard Utilities (VPU) slid 4.38% for the month.

The Federal Reserve Chairman press conference from April 4 made little sense. Initially, there was a massive spike in stocks, which (so far) abruptly reversed on April 5 during one of the wildest two-day sessions in a long time.

The Fed is in a tough spot. They probably feel that this inflation is sort of phony as it results from distortions in supply and demand and that if they react to aggressively it will cause a depression, yet they can't keep saying "transitory" and doing nothing. Imagine if the government decreed three-day weekends for workers for a year and sent bonus checks to all workers every few months. We'd have inflation. Should the Fed raise rates and cause a recession to fix it? Isn't the fix either get used to higher prices as supply and demand adjust or go back to work 5 days a week and stop sending stimulus checks (or deferring loan payments)?

The gist of the message from the first in-person Fed press conference since COVID was that the legislators aren't to blame even though they are the ones who handed out checks and encouraged working less during shutdowns. The high inflation is all the Fed's world — and the Fed will deal with it. No more Mr. Nice Rate Guy — inflation must be brought down to save the little guy. We don't work for Goldman Sachs! This strong message was followed up with fairly weak action and a near guarantee that shorter term rates won't go up that fast or that much — because we sure don't want to cause a recession to fight the worst inflation in 40 years.

The wild card to higher rates is the increasingly bizarre government support of stretched consumers and borrowers. There is no telling what a pandering state or federal government will do if mortgage rates hit 6% on a 30-year fixed rate mortgage — already well over 5%, which is a big move up from around 3% or lower just a few months ago. Perhaps we'll get checks in the mail to subsidize bigger mortgage payments for new home buyers — why not? We got oil released from the Strategic Petroleum Reserve and essentially handouts to car owners in CA and gas tax breaks in Republican states because gas prices went up. The consumer must always be coddled! Higher prices and rates won't work in slowing demand if we get subsidized for high prices.

Bottom line, in the short run, rates may go up more to counter the Fed's lazy response to inflation caused by Congress. Bond holders are getting nervous. This will start hitting stocks harder than bonds, though we could see a bond fund rush to the exists (again). Ultimately we'll slide into a recession if rates get too high, and bonds will go back up with rates down as inflation fears morph into deflation fears (again).

If the federal government isn't going to address inflation caused by supply and demand imbalances, the Fed needs to raise short-term rates faster than planned to prevent long-term rates from going up too fast — basically reassuring bond investors that inflation is going away so you can safely buy a 3% government bond. Losing the long end means 6% mortgages and recession.

Just when it felt like we were exiting one global economic problem, we're confronted with another. Within just a few days, the Russia—Ukraine war has already decimated Russian stocks and now seems to be spreading into other markets, notably Germany, the most strongly linked economically to Russia, likely foreshadowing economic problems to come. The S&P 500 was down 3%, and with the action in early March is down over 10% for the year, joining other markets and indexes already down that much or more. Bonds were weak as well, particularly foreign and emerging markets bonds. Once again, bonds offer no offsetting gains from falling stocks, just less downside. Such is the dilemma of low rates.

Our Conservative portfolio declined 2.21% and our Aggressive portfolio declined 1.63%. Benchmark Vanguard fund movements in February 2022 were as follows: Vanguard 500 Index Fund (VFINX), down 2.99%; Vanguard Total Bond Index (VBMFX), down 1.13%; Vanguard Developed Mkts Index (VTMGX), down 2.47%; Vanguard Emerging Mkts Index (VEIEX), down 4.27%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 2.42%.

Our Aggressive portfolio did well against the market for the month and is doing well for the year. But our Conservative portfolio, without the benefit of shorts and with too much exposure to Europe, given the rising risks in the region, fell by almost as much as the broader market. At the end of February the S&P 500 was down 8.02% in 2022 (with dividends, as measured by the Vanguard 500 fund) while our Conservative portfolio was down 5.03% and our Aggressive portfolio just 2.52%.

It was a month in which we wished we still owned our energy fund, as that fund category's 20% return was about the only strong area in the global market last month. The second best area was Latin American stocks, which we do own. They are an energy and commodity play of sorts, though this region is falling with emerging markets now.

Energy is at the center of this crisis. Europe is not really capable of getting by without Russian oil and gas, given the tight supplies and strong economies globally. Everything that goes in and out of Russia seems liable to attract punishing sanctions, except its primary source of revenues — energy. Limited sanctions won't keep Russian commodities off the market entirely anyway, they'll just be sold to different buyers.

Our dollar has climbed, as it often does during a crisis, which hurts foreign investment returns. This will eventually create even better opportunities to invest abroad. It is possible we will cut back on European stocks and increase our foreign stock stakes in coming weeks or months, but the timing will be a crapshoot. China was weak, as were emerging market stocks and bonds. Nobody knows where economic contagion will appear.

It is noteworthy that the last time Russia had a financial crisis, in 1998, it wasn't the hit to the Russian stock market that was the issue so much as hedge funds that were gambling on risky debt. It ultimately led to a bailout of sorts, orchestrated by the Federal Reserve, and a brief but significant slide in stocks worldwide.

Unlike Russia, which has been shoring up its finances for years in preparation for trouble (apparently of its own making), America and Europe borrowed and spent to support the last crisis. The notion of supporting another recession this soon is not in the financial cards. Another wild card is the Federal Reserve, which until a few weeks ago was going to raise interest rates to end the worst inflation in decades. Before this latest slide, U.S. stocks were actually rebounding on hopes we don't get a rate increase because of the Russia situation, as if slightly lower rates can magically support stocks regardless of serious global economic problems. The case can be made that rates should go higher, to slow the economy and inflation and drive energy and commodity prices down.

There will be some opportunities but this problem is likely to get worse before it gets better. Most high-flying, low earnings growth stocks were already down around 50% from their peaks last year. This new trouble is driving down the rest of the global market.