So US markets have officially entered a bear market. The Fed has given the markets the 75 basis point hike it wanted. And the next shoe in crypto seems to be falling.

That’s a lot to unpack so let’s pull on each of those threads one at a time.

US markets enter a bear market

On Monday, 13 June 2022, the S&P 500 closed at 3,749.63, marking a drop of more than 20% from the all-time highs (ATH) of approximately 4,800 that the S&P 500 reached in early January 2022. For those in the markets, it seems like markets have already been in a bear market for a while now and this official drop below 20% is merely just making it official.

No one knows exactly what’s going to happen because markets are really just a reflection of the cumulative expectations of all the participants in it and these expectations change depending on the perception of the latest events and happenings in the news.

But if you expect history to rhyme, then it pays to look at what happened over the last bear markets. According to the stats compiled by Ben Carlson, the average peak-to-trough decline was 32.7% and lasted 351 days.

Now, the problem with stats like these is that the sample size is super small (only 13, if you include the current one that we’re in) and these averages are easily influenced by outliers. The biggest drop on the list is -56.8% and the longest bear market lasted 929 days. In case you’re wondering, those records belong to the Global Financial Crisis and Dot-com bear markets respectively.

Whether you think this bear will end up anything like those or more like the average bear really depends on whether the current fall in financial markets ends up infecting the economy in a larger way. Right now, it certainly doesn’t seem that way but in a couple of months, who knows?

The fall of crypto

(Update 17 June ’22: I found this great post by Amy Castor that gives a great overview of the various pieces to look out for in this space.)

While there have certainly been excesses in some parts of the financial markets (think Zoom, Pelaton, or ARKK), there can be no doubt that there have been excess in ALL parts of the crypto space. After the LUNA/TERRA debacle, the latest story making its way in the crypto-verse is about Celsius and Three Arrow Capital (3AC).

The irony of Celcius’s troubles is that despite trying to throw shade at the traditional banking system, Celcius is getting killed because it faces a classic bank run. And this happened because Celcius was doing all the things that a traditional bank wouldn’t have been able to do if there were regulators.

With the 3AC story, it appears that how they were making returns was to stake its capital to earn high yields (essentially locking in their capital for promised high returns). Under any circumstances, losing your own capital is one thing but with leverage, the fall in crypto prices meant that the value of its collateral decreased, causing lenders to require more capital otherwise its stake would have been liquidated, leading to even lower prices and more liquidations.

The big question now is whether the fallout in crypto will have major spillovers in the economy and financial markets. It’s one thing if Michael Saylor’s bitcoins go to zero. It’s another if Michael Saylor’s bitcoins going to zero causes a systemic failure in the financial markets.

Will this happen? Only time will tell.

The 75 bps hike

All of the above is stuff related to the financial markets. If losses in the financial markets or crypto-verse are just contained within those realms, then it’s not so bad. The thing is, inflation in the economy has turned out to be not so “transitory”.

The war in Ukraine and China’s continued zero-Covid policy has no doubt caused disruptions on the supply side. The other part of the equation is, of course, that demand for goods and services remains high.

Housing prices in the U.S. have been on a tear, as with prices in Singapore. Travel-related demand has come back in a more significant way as most of the world relaxes covid measures. More importantly, unemployment numbers have remained low across all major economies.

It appears that the story the Fed is hoping for is to cool demand off enough while the supply-side issues take time to get sorted out. The 75 bps hike is really about cooling off demand and hope that the war in Ukraine ends soon and/or that China manages to keep Covid in check so that their economy can also hum along.

Now, if US markets face another leg down, I think it will be because the Fed has tightened so much that something breaks. Now, it’s not the intention of the Fed to crash the economy but their first priority is going to be to get inflation under control. If they can do it while keeping job and profit losses to a minimum, that’s going to be a bonus.

Meanwhile, look to the credit markets for the next signs of stress. If credit markets remain fine, then this bear won’t be anywhere near as bad as the most recent two.

The S&P 500 fell briefly into bear territory yesterday but closed flat-ish to keep the big bad bear away. More importantly, what was just a tech sector crash now seems to be filtering through to other more defensive sectors. Retailer stocks such as Target, Walmart, and Costco all got hit after Target and Walmart reported earnings that missed estimates.

In other news, Tesla’s stock is having a moment of weakness. When you have a Tesla whale making calls to support the stock, you know that the drop in share price is hurting them really bad. Meanwhile, Elon Musk is doing all he can to stay in the headlines with his Twitter deal, allegations of sexual harassment, and flying to Brazil to meet the Brazilian president about a Starlink deal.

What really matters

The S&P 500 is at 3901.36 which translates to a TTM PE of 19.72. You can argue that a TTM PE doesn’t matter much because if earnings crater, then the PE will spike like it did in 2009, which in hindsight, was a terrific buying opportunity. However, my counter to that is that in most periods, TTM PEs are fairly instructive since P changes a lot quicker than E and I don’t think we’re in one of those times where earnings will crash across multiple sectors. Anyway, based on this measure, the historical mean and median are about 15x.

Another way of valuing the S&P 500 is to use a DCF model and reverse engineer the model to see what the current market price implies about expected returns. I’ve used a Dividend Discount Model (DDM) since Shiller provides dividend data and based on a constant-growth DDM, I find that at current levels, the market is pricing in an expected return of 7.65%. and an implied Equity Risk Premium (ERP) of 4.7%. According to data from Professor Aswath Damodaran, the historical ERP in the US is 5.13%. In short, at current levels, the market is still slightly expensive.

Now, you can argue whether a constant growth DDM is too blunt a tool or whether the assumptions used in the model are accurate but the point of using a simple model like this is to get good sensing of whether the market is over-or -undervalued.

Right now, it doesn’t exactly seem like a bargain to me.

What’s an investor to do?

Once again, I don’t know whether the markets will fall further or whether we’re going to see a sustained rebound from here.

In my previous post, I mentioned that now wouldn’t be a bad time to start Dollar Cost Averaging in the markets. Here’s some data from Ben Carlson on what doing that in bear markets will help you with. What you’ll notice in that post is that the best returns come from buying in bear markets.

For whatever reason, if you dislike DCA because it feels like catching a falling or death by a thousand cuts, then it might be helpful to stick to some pre-defined plan or commitment device.

For example, selling put options on the market at levels you think are cheap is a great pre-commitment device. Put options give the holder the right to sell the underlying at the strike price of the option (this is the price at which the underlying will be transacted as stated on the option contract). The key here is that you need to have the cash on hand to buy the underlying should the option buyer decides to exercise the option. This strategy is known as a cash-secured put.

Note that selling options like this don’t get you full exposure to the markets. For example, if the underlying never reaches below the strike price, then the buyer of the option would never exercise it.

For example, assume you sold a contract on the SPY (the S&P 500 ETF) which would oblige you to buy 100 units of SPY if the price of SPY fell below the strike price of the option contract. However, at expiry, SPY’s price doesn’t reach below the strike price. You would keep the premium for selling the option (less any fees) and you would still have the cash that you set aside to buy those 100 units. However, if SPY’s price goes up from those levels, you wouldn’t have any SPY and therefore, you wouldn’t gain any increases in the market.

Another option besides DCA is to have a pre-written plan that you will invest $X when the markets reach Y levels. It’s rather informal so you would still need the gumption to pull the trigger when the time comes.

Good luck fellow investors!

It’s been a while since I last posted anything.

Since then, there has been a lot going on in the markets so let’s take a look at where we are now.

Dow: -13.9% from 52-week high (also ATH)
S&P 500: -18.3% from 52-week high (also ATH)
Nasdaq: -29.9% from 52-week high (also ATH)

Markets have clearly tanked since the Fed started hiking rates and trimming its balance sheet (quantitative tapering).

On the other side of the coin, the economy seems healthy. While the inflation situation is getting ugly, the jobs market is strong and unemployment remains low. There are a few headwinds such as inflation and the potential of rate hikes eventually feeding into the real economy (mortgage rates in the U.S. have risen sharply to above 5% p.a.) but as of now, that doesn’t seem to be built into the market expectations.

Cheap but not dirt cheap

With the pullback in markets, the natural question that many people have is: Is this a good time to buy?

This is by no means financial advice. My own take is that markets have not overreacted that much. The drop so far is just a natural outcome of rates increasing while also reflecting the expectation of a few more rate hikes in the months ahead.

Anyone who has done a finance 101 course will know that the value of equities is just the present value of all expected future cashflows. This means that any drop in value could be due to a combination of these THREE things – (1) an increase in the discount rate, (2) a drop in future cashflows, or (3) a drop in the expected growth rate of future cashflows.

In my opinion, what we’re seeing right now is just the market reflecting an increase in the discount rate due to rate hikes.

What’s the evidence?

According to the latest Revenue, Earnings & Margins briefing by Yardeni Research, the revenues, earnings, and profit margins of the S&P500 are expected to continue growing (in the case of revenue and earnings) or at least remain stable (in the case of margins).

Furthermore, the drop in the Nasdaq versus the Dow and S&P proves that the rerating is happening to growth stocks that had most of their value derived from cashflows far out in the future. Even within tech, the 30% fall in the Nasdaq papers over the fact that the most speculative (chart 1 in link) and meme-y of stocks have fallen anywhere from 70-90%.

Another piece of evidence that I would like to submit is this:

Source: Novel Investor

Notice anything about 2008?

Of course, the difference is that in 2008, the financial sector had a meltdown that threatened to spill over into every other part of the economy. But that’s the lesson – when the real economy gets hit bad, there’s nowhere to hide.

Right now, there’s a bright spot within the S&P which is Energy. And even within certain sectors like Consumer Staples, brewers and tobacco are doing well. The downer is that Industrials, Consumer Discretionary, and Transportation and also down which could be a harbinger of things to come. You can check out the lovely charts here.

Last but not least, look to the Straits Times Index. Our good ol’ STI hasn’t gone anywhere (up nor down) in a major way which suggests that the global economy is not at serious risk of tanking. If anything, the STI is full of old-economy stocks that depend largely on the outlook of the world economy.

What’s an investor to do in these times?

Well, if you don’t have bullets left, then what else can you do but ride out the waves?

If you do, now might be a good time to slowly start Dollar-Cost Averaging (DCA) in the markets. You shouldn’t be surprised if markets drop further and you also shouldn’t be surprised if it takes a while to find a bottom.

If you’re wondering what to DCA into? I would start with a broad-based index fund. If you really have to scratch the stock-picking itch, then pick only high-quality stocks that only rely on modest amounts of debt to produce reliable free cashflows to equity.

A word on crypto

It’s pretty clear by now from all the crypto experiments that cryptos are just another currency. Currencies depend a great deal on the faith of the holders of the currency and when that faith disappears, you can expect that same currency to do so.

The story currently unfolding is about the Luna and Terra coins. Despite all the hype surrounding the concept of Terra being an algorithmic stablecoin, it has quite quickly become destabilized. I’m shocked at how many people online are saying that they put their life savings or substantial amounts into this thing.

Hopefully that most people only lost what they could afford and the “wealth” that disappeared is merely the illusionary paper gains that they saw in their wallets as the price of Luna climbed. Anyway, it’s times like these when economics act like gravity and pull these things down.

In short, don’t be a Lunatic.

US markets have had a rocky start to the year. Meanwhile, the STI seems to have cracked a ceiling. We shall see.

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What A World
(Collaborative Fund)

Morgan Housel is such a great writer. I love this story in particular:

BlackRock CEO Larry Fink once told a story about having dinner with the manager of one of the world’s largest sovereign wealth funds.

The fund’s objectives, the manager said, were generational.

“So how do you measure performance?” Fink asked.
“Quarterly,” said the manager.

The gap between ideals and reality.

Efficiency makes you happy
(Klement on Investing)

Klement points out a study that shows a negative relationship between GDP per capita and hours worked per year. I think Singapore might be an outlier on the chart though. But the more important point of the post is that if we’re more efficient, it leaves us with more time to do things that we actually want to.

Why I think Stocks will Drop in 2022
(Financial Horse)

It’s usually not very smart to put out a forecast (particularly one based on macro views) that will live on the internet forever. I’m not saying that this forecast is going to be right or wrong (then, I would be making a forecast as well, no?) but I’m saying that this forecast could turn out to be entirely meaningless in the larger scheme of things.

Living Through a Crash
(The Big Picture)

Speaking of the larger scheme of things, Barry Ritholtz runs through some points on lessons learned from the big tech bear. Good lessons to heed which makes having a plan and sticking to it all the more important.

Exposing the Fraudulence of Elon Musk and Tesla
(Current Affairs)

How dare someone question the brilliance and supremacy of the great overlord, supreme leader, exalted patron of the dogecoin, and builder of rockets that will take us all to Mars?!

Photo by olia danilevich on

Gosh, time flies. Many things have changed but some things still remain.

For one, Covid is still with us. For the everyday person, we’ve moved from Covid to the delta variant and now, to Omicron. We’ve done as much as we can as far as protection is concerned. Most people are already vaccinated and boosted. We’ve still kept our masks on and limitations on group sizes and certain activities (anyone remembers what clubs and KTVs are anymore?) are still a thing.

I hope 2022 will be the year where we move another step closer to the way things used to be. Maybe we’ll still have to keep our masks on (hopefully, we’ll move to masks on when indoors only) for a while more but at least we should be able to start to move back towards having the government take a more hands-off approach to things.

The markets

Things have gone splendidly well for the markets this year. What was it? 70 new highs for the S&P500? I don’t know if things will go as well next year but let’s hope they will. I haven’t positioned my portfolio for aggressive growth but I’m not positioned for a crash either.

However, the three scheduled rate hikes coming in 2022 should provide some pause. Will it crash the markets? I don’t think so. The market now is a completely different beast from the 2000s or in the lead-up to the Global Financial Crisis.

If anything, 2021 has actually taken some steam out of the more speculative areas of the market. Take Ark Invest for example. 2021 has been Ark Invest’s flagship fund worst year since inception with the fund falling 20%. With the coming rate hikes, it’s going to be even less attractive to be in the more speculative areas of the market.

What about the broader market like the S&P500? Some people argue that the S&P 500 is becoming increasingly concentrated in the big tech giants like Apple, Alphabet, and Microsoft. They aren’t wrong. However, those companies also account for the lion’s share of the profits in the S&P 500. (see the graph titled “Top 25 Firms” at this link)

Is that particularly speculative? I think not.

Personal Stuff

This year has been fairly quiet on the personal front. Life has been peaceful and while the delta variant made things suck for many people, I rather enjoyed the fact that Work-From-Home was the default for most of the year.

This was offset by the burdens that work placed on me this year. On top of the additional duties from a new appointment, I have been involved in one big project and was also asked to join a task force that involved some very senior people.

To be fair, no one does more work because they want to and the people I’m surrounded by are really smart people. The problem is when you’re a cog in a large machine and for whatever reason, someone far removed decides to make some changes and it cascades down. In fact, it would be a lot easier if we were dealing with machines because machines are a closed system.

The work itself isn’t difficult but it involves doing many little, annoying things. And I particularly hate doing annoying things. This is why my experience over the past year only further strengthened my resolve. I need to take my portfolio more seriously.

The good news is despite my relative inaction, the portfolio grew by 20-odd percent. However, it’s hit the limits of how fast it can grow even after constant contributions to the portfolio. Going forward, the portfolio will need to see more contribution from investment returns or growth will be minimal.

I’ve been looking into various portfolio strategies and coding little helper scripts that will help me manage my portfolio more effectively.

Next year, you’ll hear about how it’s turned out.

Hello 2022

So here’s my wishlist for 2022:

  • Markets will be neutral to bullish
  • Living with Covid will converge even further to Life before Covid
  • Less emails and MS Teams meetings
  • Good health and wealth for my loved ones

No matter what’s happened in 2021, I hope that 2022 will be good for you and your portfolio.

Happy boxing day!
Final weekend of 2021. Are you ready for 2022?

Photo by Mikes Photos on

Wood’s flagship ARK fund deep in the red, yet investors stay loyal

Was 2020 peak Cathie Woods? The jury’s still out for now but I had a nagging suspicion that ARK was overhyped when I started seeing Cathie Woods featured on the panel of some event organised by a local investment forum. Then of course, Stashaway and Syfe both started offering funds that invest in ARK ETFs.

How well will the 2022 Stock Market Do? A look at Midterm Years and A Few Interesting Data Charts
(Investment Moats)

Tom Lee is still bullish. I don’t know what the future holds but I daresay that despite the S&P at record levels, I don’t feel like this is a top. No one I know is making easy money from this market. Everyone has been doubting the markets for a while now.

Or maybe everyone is in crypto.

How’s your paper thosai private degree doing ?
(Growing your tree of prosperity)

People that get a degree from a private university and succeed* do so in spite of their degree. This is a hard truth. So if you happen to be a someone thinking about whether you should get a degree from a private university, please do so knowing that the money you spend doesn’t guarantee getting a job that pays well. At the same time, getting a degree from one of these institutions doesn’t necessarily condemn you to a career of mediocrity either. It just means that the correlation is probably closer to zero.

*I use the word “succeed” in the conventional sense. By all means, if you have a different definition of success, you do you.

Last weekend before Christmas! Time to wind down for the year and think of what lies ahead.
Happy holidays everyone!

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Robots reduce income inequality, just not in the way we want
(Klement on Investing)

Uh oh…will we all become luddites?

A Tiny Number of Stocks Drive the Entire Gain in the Stock Market in the Long Run
(Investment Moats)

Gem is in the infographics.

Which degrees offer more/ less value for one’s money
(Thoughts of a Cynical Investor)

I’m not terribly surprised at this list. I guess computing will move to the top in the next decade.

Maureen Farrell on WeWork’s Investments
(Bloomberg – Masters in Business Podcast)

I love business stories like this. Very tempted to get my hands on a copy of the book to read the finer details on how ridiculous things were at WeWork when Adam Neumann was in charge.

Sorry! There wasn’t a “Best Things” last week because I was busy the whole of last Saturday. Anyway, what an exciting week it’s going to be with major markets seeing increased volatility due to the emergence of a new Covid-19 strain.

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This is why you don’t run off and join the circus
(The Reformed Broker)

Josh Brown’s take on the emergence of the Mu variant of the virus and its impact on markets.

No, the real inflation rate isn’t 15 percent
(Full Stack Economics)

This is also why you shouldn’t give two hoots about what smart people think outside their field of expertise.

Animal Spirits: The High Beta Crash
(A Wealth of Common Sense)

Looks like Omicron is just the straw that broke the camel’s back. The camel’s back was already straining under the weight of inflation fears and the fatigue from a party that has gone on for quite a while now.

No, it’s not the aging population
(Klement on Investing)

The money shot from this piece:

But this post is not just a rant about how economists make predictions based on flawed models. That’s really not news. Instead, this is a post about the solution to declining natural real rates proposed by this research: Rising inequality.

Going forward, this also means that as long as income inequality remains high, the natural real rate of interest should not rise. It requires a substantial ‘levelling up’ and reduction in income inequality to push the natural real rate of interest up significantly in the long run. And I for one, don’t see this kind of reduction of income inequality happening in the next couple of years.

Mid-November is always a reflective period for me.

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Experts From A World That No Longer Exists
(Collaborative Fund)

Morgan Housel makes a good point about how experts of the past may not be the best guide going forward, especially in areas where the whole environment is undergoing a seachange. Some behaviours are timeless (such as the pursuit of ‘fashion’) but certain things will change (e.g. what is ‘fashion’). Therefore, it may be useful to figure out what changes and what remains the same.

Which brings me to…

What Is Web3 and Why Are All the Crypto People Suddenly Talking About It?

I’ve been seeing a LOT of attention being paid to this space by those in their 20s and even early 30s. Most of it is really because there is easy money to be made. However, I haven’t exactly seen a lot of focus on what the economics of this will look like. From this article and this video on YouTube, it seems that the basic principle of web3 is about lots of competition and taking control away from a central authority or any one company. And I’m not sure if anyone realises that if that’s going to be the case, then ultimately there’s not going to be much economic profit to be made from such businesses. I’m optimistic about the future but I’m not sure if anyone who has an idea about what Web3 is about has thought through what it implies for the economics of it all.

MAS’ Ravi Menon on crypto, stable coins and CBDCs: is a “digital Singapore dollar” feasible?
(Vulcan Post)

You can be sure that Singapore’s version of a cryptocurrency is the furthest thing that is from the original intention of what a cryptocurrency should be. Not saying that it’s all bad. Just saying that it’s probably not what the original founders of this movement meant when they came up with the idea.

More than 50% of Young Singaporeans Surveyed Want Passive Income or Early Retirement
(Investment Moats)

I’ve been telling those I know that the older folks (boomers and Gen X) don’t realise that younger folks (millenials and probably Gen Z as well) aren’t in it for a lifelong career in a single place. I’m saying this from the perspective of a public servant and the corporate ladder in the public sector isn’t set up for younger folks (think promotions spaced many years apart and rigid HR rules). The underlying assumption is that if someone is in the service for a 30-year career, then early promotion will only lead to many years of stagnation because very few will end up rising to the ranks of senior management. Therefore, the solution is to space the promotions apart.

If anything, the bull market in equities and crypto has probably has inspired younger folks to develop a wealth machine or secondary income stream outside of their core work, making their primary income less and less important. Of course, the bull market will eventually disappoint but those skills and early barriers (such as having a brokerage account) will not be lost. Hopefully, there won’t be a major crash that mentally scars a generation of investors the way the Great Depression did.

It’s already November! Markets are roaring and at this point, the valuations on some companies make absolutely no sense. However, I don’t get the sense that insanity is widespread. While sentiment has been generally optimistic, I don’t get the feeling that we are in the endgame where everyone is making easy money.

Right now, it only seems that sensible people are starting to get FOMO at seeing their dumber neighbours (e.g. those all-in on TSLA, NFTs, and SHIB) make more than them.

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This why we need fiat money
(Klement on Investing)

This is why we need experiments like these – to demonstrate that certain ideas should just remain ideas. I also wonder how many of those crypto tokens out there actually have economists advising them on the economics behind those coins?

The United States Has Been Going Broke For Decades
(A Wealth of Common Sense)

Ben Carlson weighs in on US government spending and its debt.

Fear and Loathing in Cryptoland
(Of Dollars and Data)

I like Nick Maggiulli’s take on the state of what’s going on right now in cryptoland. In case you haven’t realised, I come from the old school where we think that investment returns must follow economic returns in the long run. Therefore, returns like those seen in DOGE or SHIB are obviously the work of unpredictable mania and for laughs.

Does that mean that all things crypto are useless? Of course not. It just means that we haven’t figured out what crypto is going to mean for the real economy (crypto hodl-ers cashing a little out to buy Teslas don’t count). Until then, expect lots of volatility in cryptoland.

Evergrande: Not So Grand Financial Statements?
(CFA Institute blog)

Great piece that picks apart some parts of Evergrande’s financials and how investors could have seen it coming. I personally think short-sellers are the top of their game when it comes to this.