In the three months to the end of October, the market was slightly down. Historically (almost 9 times out of 10), this correlates very well with the incumbent party losing the White House. This sort of makes gut sense: if stocks are dropping, there may be issues in the economy, and voters seek change when the economy is weak. With Biden on the edge of a win, you can chalk up another success for stocks predicting the outcome of elections. While not scientific, it's probably a better indicator than any number of expert predictions or even polling, in some cases. For the record, Hillary Clinton was leading in the polls in 2016, but the stock market was down before the election—and we all know about that surprise turnout. October was weak for both stocks and bonds.

Our Conservative portfolio declined 1.71% , and our Aggressive portfolio declined 1.19%. Benchmark Vanguard funds for October 2020 were as follows: Vanguard 500 Index Fund (VFINX), down 2.66%; Vanguard Total Bond Index (VBMFX), down 0.61%; Vanguard Developed Mkts Index (VTMGX), down 3.73%; Vanguard Emerging Mkts Index (VEIEX), up 1.94%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, down 0.96%.

We don't want to over-analyze political correlations with stocks, but some goings-on are worth noting, especially since the stock market took a strange turn to the upside in early November, even given the oddities of this election developing results.

As for the three-month market indicator being right again, if any year would have made this indicator worthless, this was it, given the wild gyrations from pandemic shutdowns and massive stimulus programs by the White House and Federal Reserve. The recent huge climb from the abyss to new records (at least for larger cap growth stocks) was probably due for a fall back anyway.

In the days right before the election and during the election on November 3, the market started to take off—presumably on the assumption that Biden would win and that with Congress and the Senate going blue all sorts of massive stimulus programs would be passed. On top of massive Federal reserve support, stocks seem to like that. Note that the market doesn't really care much about 10 to 20 years down the road when such programs have to be paid for, or maybe the market figures we'll be inflating our way out of this mess and that could also be good for stocks, especially companies with debt.

It appears Biden is winning by only a squeaker and the Democrats seemed to have lost the chance to gain real power though the Senate, even losing seats in the House. Remarkably, the stock market took this as a great thing because it basically means all Trump-era policy is locked in place and we won't see a truly massive stimulus (just a massive one by, say, 2009 standards). This means low corporate taxes as well as low income taxes for all brackets are here to stay, at least until some expire years from now. It doesn't seem to bother anyone that this is a long-term disaster, financially speaking, with no major spending cuts or offsetting tax increases. Interest rates are heading back down, perhaps because without the truly massive spending plan that was being hatched by Democrats there is ample demand to buy just a few trillion a year in extra borrowing.

But if the market likes a Biden win, with our without full power, then it would have liked a Trump win losing power in the Senate as well. What about a Trump win with full control of both houses? Maybe the market just wanted to go up because really we are in a speculative bubble now, and without major riots in the streets or double-digit unemployment the drift is up, up, and away. This is how crashes happen.

In our portfolios, our only upside (not including short funds) last month was in small cap stocks, utilities with newly added Vanguard Utilities (VPU) up 4.89%, and—of all places—China, with Franklin FTSE China (FLCH) up 5.01%. Vanguard Small-Cap Value (VBR) gained 3.14%. Perhaps the great turnaround after years of large cap growth outperformance is upon us. With all the momentum and Covid economic benefits to big tech, this could be too soon, but then stocks tend to move before reality catches up.

We had some fairly large losses abroad as a resurgence in Covid cases leads to new lockdowns. Franklin FTSE Germany (FLGR) was down 10.28% as the formerly reasonably successful Covid fighter slipped. Europe in general was weak, with Vanguard FTSE Europe (VGK) down 5.42%. It is possible our political stalemate and slow grind to economic disaster will start hurting the dollar again and boosting foreign holdings, but with trouble abroad this may not materialize. All of our bond funds were down, but by less than 1%.

Bottom line: stocks seem to love low interest rates (actually negative adjusting for recent inflation in many cases) and huge deficit spending and couldn't care less about the longer-term problems we're creating. This could all be very wishful thinking by investors not considering the risks of political gridlock going into what could be a very dicey winter with the economy and Covid. Perhaps we did stumble into the best possible situation. Historically, stocks do best with a Democrat in the White House and 10 of the last 11 recessions happened with a Republican as president. You have to go to the 1800s to find a Republican who didn't have a recession in their first term. These patterns could be coincidences and don't seem to match the generally pro-business policies from Republicans.

We placed a few trades in both our model portfolios late on Friday, September 11th. The relatively minor changes were primarily to shift us out of some areas that had been hot and to add some lagging stock categories.

The rebound in stocks from the crash levels earlier this year has been a little too fast and furious, even adjusting for the low interest rates—if you can ever really adjust for low interest rates! This issue is particularly a problem with U.S. technology stocks, which are rapidly getting expensive, even beyond what incredibly successful near monopolies can be worth with near zero interest rates.

In our Conservative portfolio, we added a 5% stake in Vanguard Utilities ETF (VPU), a previous holding that has lagged recently relative to the tech-fueled stock market and is now worth buying again given its yield of around 3.4%, which should be inflatable over time and is very attractive compared to bonds today. You could get a higher yield in energy stocks (which we still own), but these represent a riskier yield. Real estate fund dividends aren't as attractive either and are possibly the most at risk of serious trouble as we possibly approach a once-in-a-generation downward adjustment to rents—at least in cities. We also dumped our 5% stake in iShares Edge Quality Factor (QUAL) after a roughly 31% gain since April. Cash-rich and low-debt companies benefit from being well positioned to manage best in a Covid-troubled economy. This positioning also means lots of tech holdings, but we don't want that exposure right now.

Specifically, in the Aggressive portfolio, we added a Brazil ETF, Franklin FTSE Brazil ETF (FLBR) to be exact, for a 6% allocation and purchased an "oldie but goodie" Utility ETF Vanguard Utilities ETF (VPU) for a 5% stake. We cut back our BRIC (Brazil, Russia, India, China) ETF iShares MSCI BRIC (BKF) from 6% to 0%, because it is now cheaper to own the countries we want to be in directly, partially thanks to the newish, very low fee, single-country ETFs from Franklin.

We also cut back our stake in Schwab US TIPS (SCHP) from 14% to 9%, because inflation expectations are rising and inflation-adjusted bonds now need pretty high inflation just to break even with regular treasury bonds. Typically, these bonds are purchased when investors are not worried about inflation, as was the case a few months ago. In fact, too high an inflation expectation can accelerate losses in a stock market crash as investors start to think that deflation is more likely. Overall, the bond market is becoming increasingly dangerous with so much money being put in by investors despite corporate bonds barely yielding more than Government debt, even with a high default risk from Covid-related economic disruptions.

We also sold our now almost nonexistent stakes (from massive declines) in an inverse leveraged Nasdaq ETF and an inverse gold mining stock ETF. Basically, we only made money by shorting oil in recent years. The Nasdaq deserved some of the increase as the world moved even more toward a plugged in Internet-based world (sadly) thanks to Covid, but it could still fall from these high levels. We need a new fresh position (which will also decline if Tesla and the other big names climb to even more ridiculous levels) with less leverage, in case we get big rebounds on the way down.

Gold mining stocks should do what they have done over the last 30 years—which is to go nowhere—and gold itself is only going up because holding money and short-term bonds is a loser position now. Covid has sent the demand for jewelry down by almost half—all the excess production has been picked up by ETFs that own gold and other speculations (future supply …). The short-term risk here is too high, especially with negative inflation-adjusted interest rates and a new gold bubble forming. Buffett's Berkshire Hathaway just bought a stake in a gold mine—even though Buffett has been a long-time critic of gold as an investment—after selling off an airline at a loss that he had only recently added to—that is how weird a world we are in at the moment.

We added an inverse offline retailers ETF as a possible good hedge against a second slide in stocks brought on by a potential fall in Covid cases. The concept is a little strange as all the retailers in the fund sell online as well has have big retail footprints, but then they could be hit with the double whammy of lost retail traffic and trouble competing with the ever-growing Amazon and other online tech giants squeezing the smaller retailers selling online.

As ETF trading is now free at TD Ameritrade (where these model portfolios are traded with real money) and basically all the other major brokers, we did some small rebalancing trades just to get our allocations back to where we want in some positions, but avoided cutting back in other areas that are up in order to avoid having too much in short-term capital gains (relative to the losses in inverse funds realized with this trade). This includes Franklin FTSE South Korea (FLKR), up around 50% since bought in our Conservative portfolio in April. In general, you almost never want to realize short-term taxable gains as no trade is worth the extra tax bite unless you have losses or could have losses elsewhere to offset the gains. Use your own tax situation and account type (IRA or taxable) to judge how much rebalancing you should do or to decide if you should hold off on some sales until short-term gains become long-term gains.

One area with a risk of future underperformance for us here is if U.S. stocks keep going up and up, notably tech stocks. By having larger foreign stock allocations we are basically avoiding tech stocks as most foreign countries have few top tech companies. In the longer run, it really depends on how much of the global economies' profits are going to be sucked up by a handful of tech giants that are increasingly in the middle of everything (so much for disintermediation) before regulations or taxes change the game significantly for these giants.

The main case for increased stock prices is almost guaranteed negative real (inflation adjusted) interest rates for years. This means Central Bankers are targeting say 2% inflation yet manipulating interest rates to around zero (some of this is just massive bond buying by the public). Losing 1%—2% of your money every year with the potential for 10%—30% hits if rates go up fast is not an appealing investment and makes even the most expensive stock make sense over time. Imagine if we had a 10% guaranteed negative real interest rate, say 0% interest rates and 10% inflation, is there any price that Apple stock would lose money over 10 years relative to bonds? Apple can just charge 10% more each year for iPhones and their cut of app sales will inflate with everything else and they could increase their dividends by 10% a year with no real change in their business. Deflation is far worse for business, and the Fed knows it.

In targeting 2% inflation with negative interest rates, the Fed creates almost limitless upside to inflatable asset prices—yet still will have trouble getting real world inflation to 2% when considering things like rents and energy and food. It would be much safer for the markets and economy to just create money and give it to people to spend and slow the Fed debt buying with newly created money or 'quantitative easing', but as creating money to spend directly is the historical recipe for rampant inflation in various countries, Central Banks are naturally scared of that strategy, but creating money that flows into investment speculation could be even more dangerous. Does it really make sense for companies to borrow their way out of the Covid mess because rates are low instead of issuing stock?

In closing, any market that pushes up a Tesla wannabe (Nikola...are you kidding me with this name?) that smells like a penny stock scam on steroids to a market value greater than Ford with no real path to profitability is a sign of a dangerous market distorted by low rates and a Robinhood-trading-app-stock-gambling culture.

With interest rates near zero and property owners facing potentially massive problems with occupancy and rent collection, stocks are becoming the only game in town. But it is an increasingly expensive game to play. The U.S. economy shrank by around 10% this past quarter, taking us back to the GDP levels of about five years ago after adjusting for inflation, but the stock market continues to rise to almost record highs. While it is common for stocks to move ahead of the economy, both down and up, there are no previous cases of GDP being this far below its all-time high but stocks near all-time highs.

Our Conservative portfolio gained 2.05% and our Aggressive portfolio gained 2.72%. Benchmark Vanguard funds performed as follows in July 2020: Vanguard 500 Index Fund (VFINX), up 5.64%; Vanguard Total Bond Market Index Fund (VBMFX), up 1.55%; Vanguard Developed Markets Index Fund (VTMGX), up 2.64%; Vanguard Emerging Markets Stock Index (VEIEX), up 8.38%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 4.39%.

Our strongest areas were emerging markets, notably China, with FRANKLIN FTSE CHINA (FLCH) up 9.46%. The now large-cap-tech-dominated S&P 500 did better than almost everything else worldwide, with particular weakness in energy stocks in our portfolios, as VANGUARD ENERGY (VDE) fell 4.19%. As for bonds, a falling dollar and a continued rebound in risky debt helped iSHARES JP MORGAN EM BOND (LEMB) climb 3.78%, while our safer bond fund VANGUARD ST INFLATION PROTECTED (VTIP) gained just 0.76%, which was only half the return of the overall bond market last month.

The stock market's total value is about double the new lower annual GDP of $19.4 trillion. This is a record level, in what is one of Warren Buffett's snapshot measures of valuation of a national stock market. This ratio of market value to GDP is lower in every other country.

The previous high for this ratio was about 150%, in 2000, followed by around 140% in 2007. In both cases, slides of roughly 50% in stock prices followed. The 2007—09 slide took the stock market down to around 90% of GDP, which would equate to maybe a 55% slide in the market from current levels — if the economy stops shrinking. But such a slide in stocks is a long shot, because during the last two crashes you could still earn a decent return in bonds, whereas today stocks are likely your only chance of positive inflation-adjusted returns. Such a drop would be more likely if rates were to climb fast hitting bond prices hard.

At this point the Federal Reserve isn't so much creating long-term future earnings growth so much as removing short-term downside. We saw this explicitly a few months ago when it started supporting bond prices across the board as investor panic selling began. This support is the main reason to own bonds at all, with the risk of a slide due either to interest rates going back up or corporate (and maybe state) defaults rising in a weak economy. The Fed has your back and will support prices, directly. It is doing much the same thing with stocks, indirectly for now, which is why a 1.75% yield in the S&P 500 — which could be cut in half or more at this rate of economic trouble — is not shabby at all, if you remove the risk of losing more than maybe 25% in the short run.

Imagine if the Fed said it would print money and buy stocks if they go down 25%, take them back to their old highs, then slowly sell. What would the correct price for stocks be? With 1% interest rates, perhaps double their current levels, as stock dividends grow (most of the time) and are taxed favorably.

The only reason NOT to own stocks, with the Fed covering your losses and downside risk, is opportunity cost: what could you have earned elsewhere? To do better somewhere else would require interest rates to rise, but the Fed has already said in essence that it will not let rates go up either. So you are back to stocks again. The Fed's behavior could cause inflation, which is bad for bonds and maybe for the U.S. dollar, but not necessarily bad for stocks or real estate. But other major countries are in this same boat unless they can avoid longer-term lockdowns and continuing monetary support. The real risk is still deflation, such as Japan experienced after its 1980s bubble. But with aggressive money creation, is that possible? Stagflation is more likely: higher inflation with slow economic growth.

Investors aren't buying into this market recovery, and really haven't since the 20% drop in stock prices in late 2018, which also rebounded quickly. Over the last couple of years, around $400 billion has departed stocks for bonds. These days investors are putting tens of billions into bonds each week, with near guaranteed low returns, and pulling as much out of stock funds. Normally this is a huge positive for future stock prices and a huge negative for bonds, but these are not normal times. Much of this is likely just rebalancing because stocks are climbing faster than bonds, and much of it is on autopilot in index funds these days. But there were signs of panic selling of stocks on the way down, and huge outflows from bonds (the highest on record, it seems) when they briefly tanked in March. True rebalancing would have seen money go into stocks and probably into bonds, and out of cash.

For reference, in 2000 everybody was gaga about U.S. stocks. There was about 20% more investor money in stocks relative to bonds and cash, and all the new money was going into U.S. stocks. This was the beginning of poor returns in stocks and very good returns in bonds. In fact stocks still haven't caught up with long-term Treasury bonds purchased in 2000, and might need another decade or more to do so. This highlights the problem with buying stocks at valuations near all-time highs.

The 20-year annualized return on the Vanguard 500 stock fund Vanguard 500 Index Fund (VFINX) is around 5.8%, but it is a whopping 7.7% for the Vanguard Long Term Treasury fund (VUSTX) — a huge difference over 20 years. The chance of stocks underperforming long-term Treasuries over the next 20 years is about zero, unless we go into a Japan-style bubble deflation period, which is possible. But for stocks to catch up will require a big spread over bond returns for years to come.

At this point, at best, sluggish earnings growth (inflation-adjusted, after tax) is pretty much going to be here for years. Even with a relatively fast return to semi-normalcy in the global economy, paying down the trillions of borrowed money will require some mix of tax increases and less borrowing by governments worldwide, which by itself should wipe out much of the already slow growth rates in recent years.

The bottom line is that stocks are not a good deal at these levels, but cash, bonds, and real estate are worse. Sharp drops in stock prices, even if not to historically good valuations, are opportunities to buy, but from all-time highs, future returns will be low.

If your only news was stock prices, you'd never suspect that America was slowly and not very carefully emerging from one crisis only to quickly slide into another. Another headscratcher is how our stock market is currently down less for the year than other countries that have fared better during the health pandemic and economic shutdown.

In May our Conservative portfolio gained 3.03% and our Aggressive portfolio gained 2.65%. Benchmark Vanguard funds ended the month as follows: Vanguard 500 Index Fund (VFINX), up 4.76%; Vanguard Total Bond Market Index Fund (VBMFX), up 0.54%; Vanguard Developed Markets Index Fund (VTMGX), up 5.56%; Vanguard Emerging Markets Stock Index (VEIEX), up 2.33%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 4.18%.

Much of the rebound has been in the same giant tech companies that have dominated the markets in recent years. This makes some sense, since between the COVID crisis and the riots, staying home Livin' la Vida Aburrido (living the boring life…sorry, Ricky Martin, especially because I'm unsure of my Spanish here) seems to be the new normal. And what better way to spend the time than using the internet and various tech companies to deliver every form of good and service we could possibly imagine?

It makes one wonder if artificial intelligence, or AI, is already here and already taking over the world, with the first major attack on humanity being to figure out a way to keep us in our homes using more technology and destroying the physical world so the robots don't have to do it.

The main explanation for the positive stock action is optimism. The alternatives in bonds and cash are very bleak, with essentially guaranteed negative inflation-adjusted returns for years ahead. The trillions of dollars that have accumulated globally have to earn a return, even if it turns out to be a high-risk, low return. It is possible that this is the darkest period just before the dawn, and this all goes away fast, leading to strong earnings growth with the support of low interest rates and a trillion in new spending. The world's shortest depression then disappears as quickly as it appeared. Poof.

It hasn't helped so far, but it is possible that this was the month foreign markets started to outperform our market, if our economy remains in a semi-shutdown induced by COVID-19 and rioting while others reboot. Even if we have the best tech companies to plug in to, there could still be a drop in our dollar as our low interest rates, scary economy, and sloppy government pandemic spending catches up to us. So far, this move could be merely that these foreign markets have more to go to return to old highs than a sea change in investor sentiment.

These two crises are probably related. A depression — even a temporary depression created to fight a health crisis — creates a fertile environment for revolution or worse. One side effect of the response which makes it unsustainable even if it leads to better health outcomes is that society has deemed some workers (mostly on lower wages) to be doing essential work, while others get to stay safe at home, having food delivered and Netflixing.

A problem that catches your attention in the moment can then blow up. The media thrives on your attention and on sensationalism. It isn't concerned with actual probabilities and boring long-term problems so much as interesting anecdotes.

Both sides are guilty of focusing on individual examples. It leads to the belief that drugs with side effects that won't help cure a disease are worth trying, as well as the belief many healthy young people are dying from a virus. This is because readers are more interested in such stories than in news about a new drug flop or another death of a 95-year-old. The media has a way of making some problems seem worse than they are and making other, larger problems seem ordinary. Airline crashes versus drunk driving. This is a troubling area, as it is often the large, dull, long-term problems that are easier to fix for better outcomes for more people.

As foreign non-emerging markets did well last month, many of our stock funds had a good run, but the drag of emerging markets and sub-1% return bonds kept our returns at the so-so level. At the top of the heap was our new German stock ETF Franklin FTSE German (FLGR), up 9.64%, with a big performance spread over the rest of Europe. Germany seems to be managing its economy and health crisis well, relative to the rest of Europe.

There are still serious dangers in European markets stemming from the problems of having a single currency during a crisis. It may require magical thinking by central banks in the form of money creation policies looser than we have ever seen, at least on this side of broken economies with 1,000% inflation.

Call it MMT light, after the 'modern monetary theory' that claims you can just print money to pay bills until you have inflation, and need not worry much about borrowing and taxing (don't worry about it, sweetheart). Whatever is done, it will be harder to pull off in a region that shares a currency. Only a single country can get away with such an adventure into the monetary unknown.

All this fear and money mischief is boosting gold and killing our gold stock short, but if we actually get inflation we're protected somewhat with our new TIPS bonds funds. The possibility of real deflation is what investors should worry about.

At the bottom of our non-short fund heap was Vanguard Energy (VDE), up just 1.66% after a strong rebound previously, as oil prices seem to have been boosted artificially back up to levels that can prevent a massive extinction event in the U.S. oil business. If oil prices go any higher we may short crude oil again, while keeping this stock fund that owns actual oil companies.

In bonds, only our riskier bond fund iShares JP Morgan Emerging Bond (LEMB) delivered returns over 1%, with a 5.81% pop, though it is still down since purchase this year. Elsewhere in funds almost nothing was way up or down this month, with the best fund categories up around 10% and the worst down just under 2%. That near 2% drop was in long-term government bonds, so we're glad we're out of that category for now.

We executed trades in both portfolios on April 3 (just over one month after our previous trades on February 28th) to cut way back on corporate bonds and deal with the cash from a liquidated inverse 3x oil ETF that the fund company shut down on March 27. This ETF returned around 90% since our buy at the end of February and at least offset huge losses in our inverse gold miners ETF (which declined significantly even though gold mining stocks were down in March). So wild were the oil swings in March that at one point when the Dow was in freefall on March 19, we were up about 379% from our buy, which did briefly offer a performance offset to our declining stock funds.

Right now, corporate bonds have far more downside than upside. If we're going to take double-digit decline risk, we want more upside. While it is possible that the Fed can make this debt problem go away (or at least get lucky if we can reopen the economy sooner rather than later), there is also a chance of either serious corporate defaults or inflation resulting from distributing trillions to everyone in desperate need yet allowing production to drop. More demand, less supply is not a good mix.

The safe move with bonds is inflation-adjustable government debt or Treasury Inflation Protected Securities (TIPS). In general, we don't like this innovation because the government invented these bonds to save the treasury money, not to reward investors. Bond investors have historically required an irrational premium to own regular government debt because of the risk of inflation, a hangover from the 1970s. As we have said for years, there is not much risk of inflation above 2%, and your real danger is deflation, like in the Great Depression.

This is why regular government bonds have beat TIPS for years. That said, TIPS won't get stung much if we get depression-grade deflation from these levels (they don't pay a negative inflation adjustment, although they should). They have already underperformed as inflation expectations (correctly) have come down in this crisis, as they did in 2008. We still have some significant credit risk with our recently added emerging market bonds in case we walk away from this crisis—and the returns should be better than U.S. corporate debt in that situation.

The bulk of the trades are getting out of bond funds and into two TIPS ETFs: Vanguard Short-Term Infl-Prot Secs ETF (VTIP) and Schwab US TIPS ETF (SCHP). We are also adding a pharmaceutical ETF, mostly because they have underperformed for years and should do well in a coronavirus-slowed economy, and generally won't have trouble making debt payments (though many drug companies have lots of debt). There are some risks the government could crack down on pricing.

In our Conservative portfolio, we are adding iShares Edge MSCI USA Quality Factor ETF (QUAL), which hasn't done any better than the S&P 500 but in theory may be positioned to benefit as riskier competitors fail and are acquired by stronger players, sort of like what happened in banking in 2009. That said, these types of ETFs that try to screen for success—so-called smart beta funds—are generally bad ideas compared to the S&P 500. We also added tiny Franklin FTSE South Korea ETF (FLKR) in our continued effort to shift to countries that seem to be managing the crisis better or have more financial resources available to stimulate the economy. Somebody is going to come back online fully and fill orders, and it isn't looking like that will be us, for a variety of reasons.

In summary, we are increasing our stock risk (as we typically do during big drops), yet decreasing some of our bond credit and duration risk, and shifting more to foreign stocks that could recover faster.