It’s official: the Bear Market of 2022. The S&P 500 has now fallen 20.9% from its high in early January, the largest decline for the index since March 2020. The question everyone’s asking: what happens next? To answer that, we often look back at history, attempting to find parallels with the past. But even a cursory glance at a table of prior bear markets reveals the difficulty in doing so, as the lack of any consistent pattern is evident.

A great look at prior bear markets.

Some strippers on Twitter said they think recession is guaranteed - because the strip clubs are suddenly empty.

On Thursday (9 May), a woman who goes by @botticellibimbo on the platform said the following about the clubs: "The strip club is sadly a leading indicator, and I can promise y'all we r in a recession, lmao."

"Me getting stock alerts just to decide whether it's worth it to go to work," she further wrote in a subsequent tweet.

Calling the current environment a “crucible moment,” Sequoia Capital warned that the good times are not only over, there’s no indication when they’ll return.

Sequoia laid out the case for a long and drawn-out recession, and instructed founders to “do the cut exercise” immediately if they haven’t already done so by examining ways to conserve cash through eliminating or scaling back projects, R&D, marketing and other expenses.

Over six days last August, one crypto wallet amassed a stake of $360,000 worth of Gnosis coins, a token tied to an effort to build blockchain-based prediction markets. On the seventh day, Binance—the world’s largest cryptocurrency exchange by volume—said in a blog post that it would list Gnosis, allowing it to be traded among its users.

Token listings add both liquidity and a stamp of legitimacy to the token, and often provide a boost to a token’s trading price. The price of Gnosis rose sharply, from around $300 to $410 within an hour. The value of Gnosis traded that day surged to more than seven times its seven-day average.

Four minutes after Binance’s announcement, the wallet began selling down its stake, liquidating it entirely in just over four hours for slightly more than $500,000—netting a profit of about $140,000 and a return of roughly 40%, according to an analysis performed by Argus Inc., a firm that offers companies software to manage employee trading. The same wallet demonstrated similar patterns of buying tokens before their listings and selling quickly after with at least three other tokens.

The jury is still out on whether or not blockchain is usefull technology that will someday lead to differentiated and genuinly useful consumer products/experiences. I am highly dubious, and certainly no 'killer app' use case has yet presented itself. What is absolutly undeniable is that cryptocurrency as it exists today has only been useful as a means of transfering wealth from people who want to get-rich-quick over to scumbags, profiteers, and criminals.

Luna’s total value ballooned to more than $40 billion, creating a frenzy of excitement that swept up day traders and start-up founders, as well as wealthy investors.

Mr. Kwon dismissed concerns with a taunt: “I don’t debate the poor.”

Last week, falling crypto prices and challenging economic trends combined to create a panic in the markets. The price of Luna fell to nearly zero. As critics had predicted, the price of TerraUSD crashed in tandem, dropping from its $1 peg to as low as 11 cents this week. In a matter of days, the crypto ecosystem Mr. Kwon had built was essentially worthless.

Much of the pain of the collapse has ... been felt by regular traders. On a Reddit forum for Luna evangelists, users shared lists of suicide hotlines, as people who had poured their savings into Luna or TerraUSD expressed despair.

Retail investors saw are absolutly getting crushed by cyrpto pipe dreams, while primarily the already-rich are getting even richer from them. It is a zero-sum transfer of wealth from the poor and middle class to the wealthy.

From an interview with Nicholas Weaver of UC Berkeley and the International Computer Science Institute:

Weaver:
You hear about people making money in Bitcoin or cryptocurrency. They only make money because some other sucker lost more. This is very different from the stock market.

I’m a savvy investor, and by “savvy investor,” I mean I put my money into index funds and ignore it for several years. During that time, there are dividends and share buybacks where the companies put their profits into me. I then eventually sell it to somebody else. And my gain is not just the difference between what I bought it for and what somebody else bought it for, but that plus the benefit of all the dividends and interest.

So the stock market and the bond market are a positive-sum game. There are more winners than losers. Cryptocurrency starts with zero-sum. So it starts with a world where there can be no more winning than losing. We have systems like this. It’s called the horse track. It’s called the casino. Cryptocurrency investing is really provably gambling in an economic sense. And then there’s designs where those power bills have to get paid somewhere. So instead of zero-sum, it becomes deeply negative-sum.

Effectively, then, the economic analogies are gambling and a Ponzi scheme. Because the profits that are given to the early investors are literally taken from the later investors. This is why I call the space overall, a “self-assembled” Ponzi scheme. There’s been no intent to make a Ponzi scheme. But due to its nature, that is the only thing it can be.

But amid the morsels of value, the broader market looks to be buckling as recession creeps more and more into the conversation. And even as growth worries mount, the inflation focus at the Federal Reserve and other central banks means investors can’t count any more on the monetary elixir that’s helped to keep alive the long-running bull market.

I don't presume to know exactly what happens next. Maybe the market recovers from here? But looking at past market cycles, the large downturns that end bull markets tend to revert significantly below historical valuation trends. And per most models, we're not even close to that yet. So I would say that there is at least a very good chance that this downturn continues.

Sure enough, it happened.

Between November 2020 and January 2021, GME's stock price exploded from $12 per share to more than $400. At its peak, GameStop was worth an astounding $22B.

Retail investors won. Several hedge funds suffered catastrophic losses, most notably Melvin Capital, which experienced a 53% drawdown in January 2021. Retail investors must have closed their positions to book million-dollar profits, right?

This is a pitch-perfect summary of confirmation bias and the shellacking that many new retail traders are taking this week.

A record 537 million credit card accounts were opened in the first quarter, a jump of 31 million over the past year, according to the Federal Reserve Bank of New York’s quarterly report on household debt and credit. Meantime, mortgage originations totaled $859 billion in the first three months of 2022, the lowest in nearly two years.

...

A separate report last week showed US consumer borrowing soared in March by the most on record as credit-card balances ballooned and non-revolving credit jumped, underscoring the combined impact of solid spending and rising prices. That’s a good sign in that spending is the largest contributor to the economy, but could be worrisome if Americans can’t keep up on payments.

This is an absolute train wreck.

Four key indicators to pay attention to as our economy teeters.

Nursing losses in 2022 that are worse than the rest of the market’s, amateur investors who jumped in when the lockdown began have now given back all of their once-prodigious gains, according to an estimate by Morgan Stanley. The calculation is based on trades placed by new entrants since the start of 2020 and uses exchange and public price-feed data to tally overall profits and losses.

This comes as a huge surprise to literally no one. I hope Robinhood goes out of business.

Even with the worst April slump in the S&P 500 since 1970, money keeps pouring into ESG-labeled funds at a seemingly unrelenting pace.

More than $1.2 billion went into ESG-focused exchange-traded funds last week as the S&P 500 dropped 3.8%, bringing the index’s full-month decline to 8.8% on concerns about inflation, rising interest rates and Russia’s war on Ukraine.

So far this year, ESG funds have attracted more than $22 billion, including almost $5 billion for U.S. offerings led by BlackRock Inc.-managed funds, according to data compiled by Bloomberg.

You love to see it.

Overiview of I bonds, which are quite in vouge now with 10% interest. The deets:

• $10,000 max, per person, per year.
• Currently paying 10%
• Interest rate adjusts every six months
• It's a 30-year bond. You can withdraw funds any time, but there is a small penalty if you do it prior to 5 years.
• Risk-free
• You need to open an account at treasurydirect.gov

The Fed chair, Jerome H. Powell, and his colleagues are expected to raise interest rates half a percentage point on Wednesday, which would be the largest increase since 2000. Officials have also signaled that they will release a plan for shrinking their $9 trillion balance sheet starting in June, a policy move that will further push up borrowing costs.

...

“In hindsight, there’s a really good chance that the Fed should have started tightening earlier,” said Karen Dynan, an economist at the Harvard Kennedy School and a former Treasury Department chief economist. “It was really hard to judge in real time.”

All this negativity and this spike in bearish sentiment makes me wanna buy equities with both hands. But alas, prudence requires a more thoughtful approach. Regardless of your desires, any one indicator by itself is rarely sufficient to drive a substantial change in portfolio allocations. There simply are too many moving parts to rely on a single variable.

Barry seem to think things are turning around...

On the most recent quarterly earnings conference call on Thursday, the company announced it has now built out the capacity it needed. It is even overstaffed with excess warehouse capacity, and plans to pull back on hiring and investing in the short term while it waits for demand to catch up.

This is probably the best leading indicator you can get that general inflationary pressures in the economy should begin easing over the next couple of quarters.

It would help, in making that case, if Twitter’s board and managers had a long-term plan. What is strange here is that the richest person on earth came in out of the blue with a not-particularly-preemptive offer to buy a service that he is obsessed with and that seems crucial to his success. Hearing that, you might think things like “huh this product must be pretty valuable.” You might sit down and try to think of ways to extract value from it, other than selling it to Musk at the first price he proposed. Twitter’s board had no ideas.

Meanwhile you know who does? Elon Musk. Maybe? He seems to think that he can make Twitter worth more than $54.20 per share: He has publicly denied wanting to make money from this deal, but he has pitched his banks on how he will improve Twitter’s economics. Perhaps he is wrong, but he has a decent track record. And he just got here! He started buying Twitter stock this year, and declined to do any nonpublic due diligence. Some random interloper has a plan to make Twitter worth more than $54.20, and has bet $33 billion of his own money that it will work. Meanwhile Twitter was trading in the $60s in October and Twitter’s board cannot fathom ever getting it back to those levels. Their position is pretty much “well we destroyed some value for shareholders and we’re gonna go now, bye.”

But it is worse than that.

If you aren't reading Matt Levine's (free) daily column, you aren't living.

CNN's Fear & Greed market sentiment indicator was updated recently, and it's better than ever - a huge improvement in design and legibility. A great bookmark to check in on market momentum and sentiment.

The Fed chair and his colleagues want to lift rates expeditiously to a neutral level this year that neither stimulates nor restrains growth -- around 2.5% -- and then slow the pace of tightening.

But in crises, central banks that pause typically lose as the forces they’re battling -- be it spreading financial panic or broadening inflation -- gain more momentum.

A lot of these sentiment indicators seem to just be pointing straight down, sounds like we're in for an ugly Q2.

“I really struggle to come up with a parallel to this,” said Benjamin Keys, a professor at the Wharton School of Business, trying to identify a moment when this many people gained this much wealth in this little time.

The scientist found that if global temperatures increase around 4.9° C by the end of the century and continue to rise, it would trigger mass extinction on par with the end of the Permian Period.

"Mass exitinction" sounds like something that would highly correlate with poor stock market performance, among other unpleasent things.

After complaining for years that high valuations were thwarting his stock-buying efforts, Warren Buffett’s Berkshire Hathaway Inc. is back hoovering up other companies’ shares.

The conglomerate made roughly $41 billion of net purchases in the first quarter, including a boost to its Chevron Corp. stake that vaulted the investment into Berkshire’s top four common stock holdings. Buffett also disclosed that the company now holds an expanded 9.5% stake in Activision Blizzard Inc. stock -- an arbitrage bet on the video-game maker in the midst of being acquired by Microsoft Corp.

Berkshire hasn’t been this significant of a net buyer of common stocks in any quarter in data going back to 2008.