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July 2022 Performance Review

August 4, 2022

The stock market dip buying kicked in after a 20% drop (what is usually considered a bear market) driving the S&P 500 up almost 10% in July. Some of the excitement was that interest rates drifted down as inflation fears receded, sending the bond market up about 2.31% (with interest). Emerging markets were down, and the US dollar strengthened anew as our rates are quite a bit higher than other major economies, leading to inflows of money.

Our Conservative portfolio gained 1.77%, and our Aggressive portfolio gained 0.68%. Benchmark Vanguard funds for July 2022 were as follows: Vanguard 500 Index Fund (VFINX), up 9.22%; Vanguard Total Bond Index (VBMFX), up 2.31%; Vanguard Developed Mkts Index (VTMGX), up 5.28%; Vanguard Emerging Mkts Index (VEIEX), down 0.87%; and Vanguard Star Fund (VGSTX), a total global balanced portfolio, up 6.08%.

The growing mentality of “the worst is behind us” is going to make it more difficult for the Federal Reserve to chip away at inflation by slowing the economy through higher rates. The Fed already achieved much by scaring speculative assets down 50-80% in crypto and so-called innovation stocks trading at sky-high valuations. Real estate even started to show signs of cooling off when mortgage rates pushed 6%. July’s market action sending interest rates back down and speculative assets back up — 20% or more in many cases — isn’t going to help lower inflation.

One problem with the “inflation is coming down soon theory so the Fed won’t have to go nuclear with rates” rosy scenario is that this indicates a weak economy. If prices stop going up with all the work at home and Covid productivity issues globally, then the consumer is tapped out and has cut demand to meet lower supply. How is that economy going to raise earnings to higher levels than the previous stock boom? The super rosy scenario model then must be that supply comes back to normal everywhere to meet still-high demand before the demand is hit too hard.

If home prices keep going up and crypto and speculative stocks get even close to levels of last year, we’re likely going to need even higher rates to stop inflation from being closer to 10% than the supposed target of 2%. It would be in everyone’s best interest if consumers cut back on spending (and we’re seeing some signs of that) and investors didn’t go back into full gambling mode. If the Fed doesn’t care about asset prices and inflation starts heading down from the current level of higher interest rates, then stocks (and real estate) will work out for investors from these levels. This is a somewhat risky proposition that doesn’t warrant significantly more money shifted to stocks at this time.

Our biggest drag in our funds last month (not including inverse funds) was China, the single worst fund category of the month out of over a hundred fund categories. Our Franklin FTSE China (FLCH) holding was down 10.44% for the month. Our recent shifts in the portfolio didn’t benefit us, and our portfolios had lackluster returns relative to the market, notably our aggressive portfolio. As the S&P 500 beat more than 90% of funds last month, this is somewhat to be expected, but our new positions didn’t do well, so far.

While the S&P 500 was way up near 10%, newly (re)added Vanguard Communication ETF (VOX) was only up 3.71% compared with the QQQ ETF up 12.55% last month. This ETF now owns some hard-hit tech names, notably a 35% combined stake in just Facebook and Google. One big difference is that the S&P 500 and QQQ have large stakes in Tesla, which is enjoying a stock resurgence back to near $1 trillion after a 50% drop from the top reversed course with a 50% increase from the bottom a few weeks ago (which still leaves the stock down 25% from the highs last year or worse than the S&P 500). Tesla now is worth more than double Facebook (META) while Facebook trades at just 13x earnings, and Google 21, compared with Tesla’s 100+.

This is how valuable perceived future growth is relative to current earnings and the possible lack of potential growth in what is still clearly a market obsessed with the future.

Speaking of the future, crypto and related stocks were up around 30% last month. This is particularly strange given that the inflation story is supposed to be behind us and we’ve seen at least a dozen significant hacks and Ponzi grade collapses in the last few months in various crypto projects and funds. This is on top of some research noting that around 80% of all crypto coins or tokens were scams that went to near zero.

One thing the Fed learned in 1929 is that kicking up interest rates doesn’t shake speculative confidence that quickly. Does it matter if rates are 1% or 5% if you think you just bought the next Apple or the digital money of the future? If you think homes can go up 10% a year forever, is a 6% mortgage expensive?

Stock Funds1mo %
[Benchmark] Vanguard 500 Index (VFINX)9.22%
Homestead Value Fund (HOVLX)6.69%
Franklin FTSE Brazil (FLBR)6.41%
Franklin FTSE Japan ETF (FLJP)6.12%
Vangaurd All-World Small-Cap (VSS)5.92%
Vanguard FTSE Developed Mkts. (VEA)5.29%
[Benchmark] Vanguard Tax-Managed Intl Adm (VTMGX)5.28%
Vanguard Value Index (VTV)5.06%
Vanguard FTSE Europe (VGK)5.00%
Franklin FTSE South Korea (FLKR)4.09%
Vanguard Communications ETF (VOX)3.71%
Franklin FTSE Germany (FLGR)2.57%
LeatherBack L/S Alt. Yld. (LBAY)1.06%
VanEck Vectors Pharma. (PPH)0.40%
[Benchmark] Vanguard Emerging Mkts Stock Idx (VEIEX)-0.87%
NightShares 2000 (NIWM)-1.46%
UltraShort Bloom. Crude Oil (SCO)-1.53%
Invesco CurrencyShares Euro (FXE)-2.55%
Proshares Short High Yld (SJB)-6.58%
ProShares Decline of Retail (EMTY)-7.58%
Franklin FTSE China (FLCH)-10.44%
ProShares UltraShort QQQ (QID)-22.36%
Proshares Short Bitcoin (BITI)-25.16%
Bond Funds1mo %
Vanguard Long-Term Bond Index ETF (BLV)4.44%
Vangaurd L/T Treasury (VGLT)2.62%
Vanguard Extended Duration Treasury (EDV)2.39%
[Benchmark] Vanguard Total Bond Index (VBMFX)2.31%
iShares JP Morgan Em. Bond (LEMB)-0.20%