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March 2021 Performance Review

April 3, 2021

The stock market moved back up on increasing optimism that the upcoming roaring post-COVID economy is going to lift all boats, and plenty of yachts, too. This wasn't good for bonds, which have been struggling for months now (except for inflation-protected bonds), as the consensus is that inflation is going to take off with interest rates. This move in stocks was mostly US stocks, as the S&P 500 beat 90% of fund categories last month with only a sub-5% return. Technology stocks were weak last month as more value oriented stocks continued to lead this latest stage of the post-COVID crash-booming market.

Our Conservative portfolio gained 0.81%, and our Aggressive portfolio gained 1.90%. Benchmark Vanguard funds for March 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 4.38%; Vanguard Total Bond Index (VBMFX), down 1.38%; Vanguard Developed Mkts Index (VTMGX), up 2.61%; Vanguard Emerging Mkts Index (VEIEX), down 1.03%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.51%.

Considering how relatively lousy foreign stocks and bonds did globally in March, our returns were not too bad, as noted by performance relative to the Vanguard STAR fund benchmark, which was up less than even our Conservative portfolio. We are in no position now to perform well relative to the US market if mega cap US growth stocks return to leading the way and rates keep going higher from these levels. Moreover, higher rates here are helping push up the dollar, along with a relatively good current COVID situation compared to the rest of the world, which could drag on our foreign funds.

Most of our lift was from market beating returns in value-oriented stock funds. Vanguard Utilities (VPU) was up 10.29%, astounding for a relatively conservative utilities fund, as investors are piling into whatever offers good inflation protection and yield. There is also the future story: who is going to power this electric economy? All five of our S&P 500-beating stock funds had solid yields, as did many of the pretty good returners. The drags were from shorting the leading Nasdaq stocks, and our Euro currency fund, both down by single digits. Except for Vanguard S/T Infl. Protect. (VTIP), which was up 0.42%, all of our bond funds were down evern more than the bond index.

Our recent portfolio changes didn't help, as the stocks we cut back on for rebalancing kept going up and inflation-adjusted bonds that we largely sold were flat, while our newly added non-inflation-adjusted bonds sank as rates moved higher. Inflation probably won't live up to current high expectations—it generally never does. The government didn't launch inflation-adjusted bonds to pay more than regular bonds, but to pay less.

The implied inflation rate by 5-year inflation bonds is now 2.55%, meaning you won't beat regular government bonds unless inflation comes in higher than 2.55% on an annualized basis over the period (at least if you purchased the bond directly and held to maturity). This seems unlikely, as the Federal Reserve has more power to stop inflation than possibly at any time in history: simply selling some of the trillions of bonds purchased with new money would quickly cause a deflationary situation to develop. Worse, if we get another economic slide, this inflation expectation will collapse, potentially sending longer term inflation bonds down by double digits. These types of bond funds did terribly during the early Covid crash for this reason (we didn't own them then).

Anything but a booming year could cause problems for the stock market. It is now looking like other countries are going to have continued COVID problems as vaccine rollouts won't be robust, for the twin reasons of lack of supply and lack of demand. Vaccine skepticism is surprisingly high in many countries.

While the recently slowly rising COVID numbers here and more frightening numbers abroad are a concern the underlying boom in speculation is the potentially destabilizing force in the market at this time, not COVID or even government debt in the shorter run.

Investors are high on the market again, in late 1990s style. We're seeing lots of trendy new ETFs launching with overly optimistic ideas of the future of growth and story stocks, and investors are signing up by the billions—just like in 1999. Worse, when not day trading on new apps that gamify stock betting, more are getting sucked into the wonders of cryptocurrencies, because apparently the last 80%+ Bitcoin crash three years ago didn't end this speculative mania for long.

The only question: is this 1999 or 2000? Can it go on for another exciting year (or two) where those questioning these goings-on are labeled "old-fashioned" investors who don't get it?

Could Bitcoin continue an upward move and not just be worth $1.1 trillion dollars as it is now, but $10+ trillion—more than all the gold that has ever been mined over the centuries—as many of the Bitcoin cult predict? Anything is possible with mass hysteria. In many ways gold shouldn't be worth $10+ trillion, either.

If enough people want to place a high value on something, it doesn't actually have to have any fundamentals to be a collectible—just desire. The trouble is in what happens if some want to sell to buy actual things so they can enjoy their newfound crypto coin riches. If more capital goes into crypto coin hording, mining, and related endeavors, and less into supplying goods and services, and all these millions of bitcoin buyers become bitcoin millionaires, who is going to supply the stuff they want to buy? Ultimately this is how a crash happens, and the fear of losing will exceed the fear of missing out.

The total value of all crypto collectibles (they don't deserve the dignity of being called currency or coins) is now just over $1.6 trillion. This was about the value of all subprime mortgage debt in 2007 when the total residential mortgage market was around $15 trillion. This is probably a good relationship to how much over-valuation there is in hot investments today. While the trillion plus in crypto is dangerous, it is really a sign of an entire market that is over-speculated, so to speak. Crypto needs to fall 90%+ and growth stocks including startups need a 50%+ haircut. How much impact such a collapse will have on the economy remains to be seen, but it will ultimately be worse the bigger the boom gets. The housing market—which was saved from a complete depression scenario with ever lower rates and favorable refinance deals backed by the government—reinflated and could itself follow this speculative bubble down when it collapses.

We're about at a point where, if the cryptocurrency bubble gets any bigger, when it does eventually come crashing down it will take the whole economy with it, much like the housing crash a decade ago. If creating an economy around collectible hording was such a great idea, Spain would have remained an empire as a big gold player hundreds of years ago, exploring the world for more shiny wealth, rather than collapsing in bankruptcy multiple times.

The value of collectibles, be they gold, Bitcoin, Beanie Babies, or Van Goghsare a side effect of an economy that grows in wealth from producing goods and services of value, not the cause of growing wealth in the economy.

Stock Funds1mo %
Vanguard Utilities (VPU)10.29%
Vanguard Value Index (VTV)6.65%
Vanguard Small-Cap Value (VBR)5.31%
Homestead Value Fund (HOVLX)5.09%
Franklin FTSE Brazil (FLBR)4.90%
[Benchmark] Vanguard 500 Index (VFINX)4.38%
Franklin FTSE Germany (FLGR)3.82%
Vanguard FTSE Europe (VGK)3.32%
Vanguard Energy (VDE)3.06%
Vanguard FTSE Developed Mkts. (VEA)2.78%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)2.61%
VanEck Vectors Pharma. (PPH)2.21%
Franklin FTSE South Korea (FLKR)1.66%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-1.03%
Invesco CurrencyShares Euro Currenc (FXE)-2.89%
ProShares UltraShort QQQ (QID)-5.46%
Bond Funds1mo %
Vanguard S/T Infl. Protect. (VTIP)0.42%
[Benchmark] Vanguard Total Bond Index (VBMFX)-1.38%
iShares JP Morgan Em. Bond (LEMB)-2.56%
Vanguard Long-Term Bond Index ETF (BLV)-3.28%
Vanguard Extended Duration Treasury (EDV)-6.27%