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

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

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

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

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

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

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

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

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

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

Trade Alert

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

Conservative Portfolio

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

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

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

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

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

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

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

Aggressive Portfolio

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

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

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

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

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

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

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

What a year. The market doesn't typically (as in basically never) drop as far as it did early this year only to gain back the losses and end the year with gains.

In one of few months of the year we were proud of, in December our Conservative portfolio gained 3.34% and our Aggressive portfolio gained 3.86%. Benchmark Vanguard funds for December 2020 were as follows: Vanguard 500 Index Fund (VFINX), up 3.85%; Vanguard Total Bond Index (VBMFX), up 0.15%; Vanguard Developed Mkts Index (VTMGX), up 5.81%; Vanguard Emerging Mkts Index (VEIEX), up 5.89%; and Vanguard Star Fund (VGSTX), a total globally balanced portfolio, up 3.62%.

Usually such slides take longer to drop and even longer to fully recover. This is the fastest recovery to new highs since the 1990 slide, which was only down 20%—not the nearly 40% we just saw. The closest parallel was the 1987 market with a short 30%+ bear market featuring a one day crash of 20% but with a positive year overall for stocks — though new highs took more than a year.

But then usually the Federal Reserve doesn't create trillions of dollars of new money to support panicked debt markets and the government doesn't send checks out to basically every American and incur trillions in deficit spending. It almost seems that Great Depressions are a thing of the past, like high inflation, or even short-term interest rates above 2%. All in, the total US market actually picked up about $6 trillion in total value for the year to a record of roughly 185% of the US GDP of $22 trillion, or $40 trillion.

How did we create $6 trillion in market value in a Covid economy? Well, 10% of that figure is basically due to the performance of Tesla (TSLA) alone—a bubble in a bubble. Beyond that, the Federal Reserve created around $3.2 trillion in new money and the federal government incurred about the same amount in pure deficit spending, largely financed by said Fed and global investors. We're not alone — other major economies are doing basically the same thing.

As much new money was created from the 2008 crash to last year in only about four months this year. This isn't an anti-Fed rant—if they can stop a depression and not cause massive inflation they are doing yeoman's work even if the end game is looking more and more like MMT or Modern Monetary Theory, in which the Fed basically says, "F it, we're never shrinking this balance sheet; in fact, the government doesn't owe us any interest either on these bonds we purchased with new money—we waive it." The bigger worry is how we pay for the stimulus spending: the $3.2 trillion in deficit spending this year is about 10 times last year's (pre-Covid) corporate tax take by the US Treasury. The government only takes in about $1.8 billion in income taxes per year, which means that we're not paying it off with tax revenues. Perversely, nobody seems to be as angry like they were in 2009 when the US borrowed half as much to fight the last economic crisis.

For the year our Conservative portfolio was up a pretty solid 10.4%. Because bonds were hit hard in the slide, we were down just over 20% peak to bottom, which can be compared to the S&P 500 sliding around 34% (the Dow and many foreign markets where down more). The S&P 500 with dividends as measured by VFINX was up an amazing 18.36% for 2020 (thanks mostly to tech and growth stocks). Our Vanguard Value Index was up just 2.28% for the year. That is a growth-to-value stock gap of 1999 proportions. We know where that went for growth stocks in 2000 of course—it was eventually over 50% down. We moved our Vanguard Growth ETF Vanguard Growth ETF (VUG) too soon—the fund delivered 40.22% for the year. Amazing. Our Aggressive portfolio had a terrible year, up only 4.9%, which of course seems good in a recession year until you look at the stock market. We didn't even miss as much downside as we did in all the past bear markets because bonds tanked as well (briefly) and the quick rebound in stocks wiped out our shorts, which were in the wrong areas to boot. Our 25% slide top to bottom in our Aggressive Portfolio wasn't enough downside protection in the absence of big upside here, frankly.

Until the end of the year we were lagging with a too low-risk portfolio that was too light on US growth stocks. We were prepared for the recession and a 50% stock slide that never came, but certainly not for a recession with record stock highs. Near the end of the year, our holdings picked up as investors starting piling into laggards and the US dollar started to slide harder. Ideally for our portfolios vs the S&P 500, we'll get some sort of 2000 crash 2.0 in which tech slides and foreign and value does relatively alright. This is likely wishful thinking in a Covid- stimulus-driven zero rate market.

In December, momentum was building in some areas that have way underperformed but are now leading—this is largely why our returns are coming back. Latin American funds, still down over 15% for the year, were up 11.29% for the month. Small cap value funds , barely positive on the year with a 4% return, were up 7.41% for the month. Foreign stocks and energy stocks also led the charge. The weakest areas were safer bonds with little to no credit risk, up around a half of a percent in December. Inflation-protected bonds did well as inflation fears continued to boost their price, which means that if inflation comes in lower than 2% in coming years, returns will be worse than the already-likely-to-be-poor returners because of low rates on regular treasury bonds. We may have to exit or cut back here but—and this is the dilemma that is pushing stocks ever higher—what to buy? Certainly not tech stocks, which just did a 56% year and a 7%+ month. It is mesmerizing how this area went from completely dominant in the late 2000s to a crash to mostly lagging after the value boom of the mid 2000s fizzled—now, they are once again at the top of the long-term charts.

Our hottest funds last month were Franklin FTSE South Korea (FLKR), up 13.58%, and Franklin FTSE Brazil (FLBR), up 12.33%. South Korea is clearly doing well fighting Covid, but the other, out of favor after a terrible decade (which followed an amazing decade), not so much. It almost had to go up. In bonds, all of our funds beat the bond index last month because rising risk tolerance lifted iShares JP Morgan Em. Bond (LEMB) 3.59%, while our safe inflation-protected bonds benefited from rising inflation fears, which boosts prices even with no change in actual interest rates. Our bond portfolio is now at risk of declines should there be another slide in the economy typically causing renewed fears of deflation.

Falling inflation expectations would hit our inflation indexed bond funds harder than regular government bond funds which benefit from falling rates and inflation. Our emerging market bond fund has credit risk and performs poorly in a downturn, though had the potential to do well as it has with renewed hunting for yield by investors.

There are two main possible future scenarios from here, each of which has wildly differing outcomes.

One is a return to normalcy, in which is that the virus is kicked out the door by vaccines and by an increasing percentage of people who receive immunity the risky and old fashioned way—by catching it. Under this scenario, everybody will be so gaga to get out and do stuff with trillions of stimulus dollars floating around and negative interest rates, and we will be off to the races (until the bills come due years later). A boom and an even bigger bubble!

Another is that we don't get a handle on the virus because we don't get to high levels of immunity fast enough, and we never fully get out of semi-shutdown mode, and those with previous immunity from vaccines or infection lose slowly lose immunity.. In this world, bailouts will eventually no longer be affordable, as the lack of proper targeting, waste, and outright fraud from previous spending catches up with us. Crash! 50%+ down!

Then there is sort of the default, in which nothing changes and we earn pretty paltry dividends. The alternative is negative inflation-adjusted returns from cash and bonds…

Sad!

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.