“You make most of your money in a bear market, you just don’t realize it at the time.”
— Shelby Davis
Friday Horror Show Charts
I hate horror movies. Friday the 13th was the last one I saw, and I saw it so long ago I don’t remember the first thing about it. But even just thinking about thinking about it is enough to give me the heebie-jeebies.
I hate bear markets, too. But those I remember all too well. For anyone fortunate enough to not remember the Great Financial Crisis or the dotcom crash, I can tell you how it felt: It felt like this week. Except that it felt like this week FOR TWO STRAIGHT YEARS.
It was not fun. But, as per Shelby Davis, bear markets are ultimately when investors make most of their money.
So, are we making money yet? Let’s see if some charts can help us figure it out.
We may just be getting started:
The traditional threshold for bear markets is 20% off the highs. By that measure, the S&P, 16% off its highs, is still only in correction territory. Nasdaq is off 31%, so I guess you could at least say it’s a bear market in tech stocks. What about crypto? The sample size is small, but with bitcoin having only the third-worst drawdown of its short career, I’m not sure we’re there yet, either.
It maybe feels worse than the headline numbers would suggest:
Many retail investors have lost all of their gains from the COVID lows. To me, this makes 2022 feel more like 2000 than 2008 — tech (and pandemic winners) are getting crushed, but the rest of the market is fine. The dotcom bear market in tech was a bull market in value. That could prove to be the case this time around, too.
Oh, and add crypto to the list of crushed things.
The only thing rising faster than inflation is the number of LUNA tokens in circulation: There are now 6.9 trillion LUNA tokens in existence, up from 775 million tokens just three days ago.
The same numbers look even more dramatic in table form:
Talk about running the money printer. Wow.
Here’s the chart of a more successful stablecoin:
That’s IRON, an algorithmic stablecoin that failed almost exactly a year ago. In that case, the burn token, TITAN, went to zero, same as LUNA has done. But because the stablecoin was 75% collateralized by USDC, it only traded as low as 75c. (And then drifted somewhat inexplicably back up to $1.) I’m not sure why we had to relearn that lesson, but hopefully this week’s debacle has hammered it home:
Rightly or wrongly, re-learning that lesson has shaken confidence in all of crypto:
Case in point: Coinbase’s 2031 bonds have fallen almost $40 below par. That’s pushed the yield up to a rather junk-looking 10%.
It’s not just crypto, however:
High-yield bonds are starting to live up to their name again, with yields back up to 7.5%.
Government bonds are starting to do less bad, however:
This week’s sell-off has decoupled Nasdaq (orange) from Treasurys (purple). If bonds stop going down, stocks probably should, too.
Why would bonds stop going down?
Inflation breakevens have fallen ~30 bips from their highs, suggesting the market believes the Fed is on track to keep inflation under control. Or that inflation is about to get under control on its own. Either way, lower inflation expectations should mean higher risk assets. Unless they get TOO low, in which case it could mean even lower risk assets.
As per Shelby Davis, there is money to be made in bear markets. But he never said it would be easy.
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