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December 2020 Performance Review

January 6, 2021

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…


Stock Funds1mo %
Franklin FTSE South Korea (FLKR)13.58%
Franklin FTSE Brazil (FLBR)12.33%
Vanguard Small-Cap Value (VBR)6.80%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)5.89%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)5.81%
Vanguard FTSE Developed Mkts. (VEA)5.63%
Vanguard Energy (VDE)5.30%
Vanguard FTSE Europe (VGK)5.02%
Franklin FTSE Germany (FLGR)3.98%
[Benchmark] Vanguard 500 Index (VFINX)3.85%
Vanguard Value Index (VTV)3.50%
Homestead Value Fund (HOVLX)2.77%
VanEck Vectors Pharma. (PPH)2.20%
Franklin FTSE China (FLCH)2.01%
Vanguard Utilities (VPU)0.91%
ProShares Decline of Retail (EMTY)-3.44%
ProShares Short QQQ (PSQ)-4.88%
Bond Funds1mo %
iShares JP Morgan Em. Bond (LEMB)3.59%
Schwab US TIPS (SCHP)1.25%
Vanguard S/T Infl. Protect. (VTIP)0.97%
[Benchmark] Vanguard Total Bond Index (VBMFX)0.15%