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May 2020 Performance Review

June 3, 2020

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.

Stock Funds1mo %
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)5.56%
Franklin FTSE South Korea (FLKR)4.96%
[Benchmark] Vanguard 500 Index (VFINX)4.76%
VanEck Vectors Pharmaceutical (PPH)4.52%
Homestead Value Fund (HOVLX)4.48%
Vanguard Value ETF (VTV)2.88%
iShares MSCI BRIC Index (BKF)2.72%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)2.33%
Bond Funds1mo %
[Benchmark] Vanguard Total Bond Index (VBMFX)0.54%
Schwab US TIPS (SCHP)0.49%