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July 2021 Performance Review

August 5, 2021

In July, the S&P 500 was in the top 5% of fund categories as market cap-weighted investing in US companies continued to dominate global investing after a brief pause in leadership. The few hot areas that did slightly better last month were yield oriented, as rates drifted lower again in the face of rising inflation and investors snapped up any yields over 2%. The big losers were some recent big winners abroad. A crackdown in China on tech power — and perhaps capitalism itself — hit emerging markets hard, with China down around 10%. Emerging market indexes were down over 6%.

Our Conservative portfolio gained 0.60%, and our Aggressive portfolio declined 1.41%. Benchmark Vanguard funds for July 2021 were as follows: Vanguard 500 Index Fund (VFINX), up 2.37%; Vanguard Total Bond Index (VBMFX), up 1.21%; Vanguard Developed Mkts Index (VTMGX), up 0.54%; Vanguard Emerging Mkts Index (VEIEX), down 6.29%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 0.51%.

Our recently increased exposure to some of the yield-focused areas like long-term bonds and utilities didn't make up for the big losses in emerging markets like China and Latin America, so our Aggressive portfolio, with more exposure to these riskier areas, was down. The other big drag was energy. We should have cut back on energy and shifted more to utilities, as discussed recently. China and Latin America warrant consideration for more buying on recent weakness.

Two things that became clear in recent weeks were 1) a slowing economy is more likely in future than ongoing inflation and rapid economic growth, and 2) tech power might finally be up against global regulations. This can hit market cap-weighted investments hard.

If the economy is going to be so hot and inflationary, interest rates are unlikely to head back down, much less take energy stocks down as well. A strong economy and rising prices are great for energy companies but terrible for longer-term bonds. Perhaps investors are wrong, but it is possible rising prices and our economic boom are merely the result of massive deficit spending globally. That party is about to end and/or rising Covid numbers are about to put a damper on global growth, but not enough of a damper to warrant more aggressive government Covid-related spending.

We've seen the economic limits of increasing demand and reducing supply: prices go up. Moreover, lately it seems consumers are in a semi-permanent hoarding mode. Call it the toilet paper effect. If prices of used cars start going up, it wouldn't take many to defer this purchase for prices to slide — yet they don't. Same with domestic air travel and tourism, which by many measures is a semi-nightmare right now, with trip costs and hassles rising. The consumer doesn't back down. Instead, they get jacked up, as if in a crazed bidding war on a home.

Consumers always felt that inflation was higher than government numbers when, in fact, the opposite was true. Yet it may be true now, if consumers want to buy more of the things that go up the most in price. Since the late 1990s, government statisticians have assumed consumers are rational and switch to cheaper alternatives — substituting oranges for apples if apples go up in price. Time to update your models.

But this frenzy has an end date, if not from consumers backing down at the cash register. It can end in a few ways. Eventually, supply will come back and excess government spending diminish. If prices keep going up, the Fed will tap the breaks and just a tap can cause a pile-up these days. The Federal government can decide it is time to pay for the spending with taxes, though this timing is the most debatable with election issues.

The other area of concern is tech power and government crackdowns. China recently decided tech power has crossed over to the abusive side, even briefly allowing a state-owned news outlet to call video games "opium of the mind." Hyperbole aside, this tech addiction doesn't have the clear health problems of actual drug addiction, but its damage to society is clear if we look at the rise in mass delusions, widespread gambling often in the disguise of investing, increased depression, obesity, and other manifestations. Perhaps it's more correlation not causation, but that won't stop regulators.

The China crackdown hit Chinese stocks and our own holding Franklin FTSE China (FLCH) hard, down 13.42%. We'll never know if this crackdown by China is legitimate concern for citizens or just worry tech power is encroaching on government power. It does highlight what a sizable percentage of market cap-weighted index is now tech companies that have until now largely been allowed to do as they please, as if they don't control many areas of your life.

China is raising interesting issues: How many hours a day should a child be allowed to play a video game, and should 10-year-olds be able to make in-app purchases? In the US, where the government doesn't get to say much about child rearing, this sort of regulation isn't in the pipeline. But how many hours of your time can one tech company control before the government can influence what big tech charges you or those trying to sell you a product that must go through these intermediaries.

As noted previously, the irony is the internet was supposed to be about disintermediation. Yet transactions that in the past were between consumer and company now have a tech overload in the middle of everything, tracking behaviors to sell to the highest bidder or asking for a cut of the transaction between you and another software company.

Stock Funds1mo %
Vanguard Utilities (VPU)3.92%
VanEck Vectors Pharma. (PPH)2.87%
[Benchmark] Vanguard 500 Index (VFINX)2.37%
Vanguard FTSE Europe (VGK)1.86%
Homestead Value Fund (HOVLX)1.26%
Vanguard Value Index (VTV)1.01%
ProShares Decline of Retail (EMTY)0.92%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)0.54%
Vanguard FTSE Developed Mkts. (VEA)0.50%
Invesco CurrencyShares Euro (FXE)-0.03%
Franklin FTSE Germany (FLGR)-0.19%
Vanguard Small-Cap Value (VBR)-1.65%
Franklin FTSE South Korea (FLKR)-5.01%
ProShares UltraShort QQQ (QID)-5.77%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-6.29%
Franklin FTSE Brazil (FLBR)-8.07%
Vanguard Energy (VDE)-8.70%
Franklin FTSE China (FLCH)-13.42%
Bond Funds1mo %
Vanguard Extended Duration Treasury (EDV)4.95%
Vanguard Long-Term Bond Index ETF (BLV)2.98%
Vanguard S/T Infl. Protect. (VTIP)1.31%
[Benchmark] Vanguard Total Bond Index (VBMFX)1.21%
iShares JP Morgan Em. Bond (LEMB)-0.46%