My Amazon Review of Michael Lewis' "Going Infinite: The Rise and Fall of a New Tycoon"

Crypto Kid

 

Sam Bankman-Fried (SBF) viewed himself as the J.P. Morgan of crypto currency, instead he was far more like P.T. Barnum; a huckster of the first order. He is now on trial for multiple counts of fraud. I didn’t like crypto currency before I read this book; I now like it even less. Author Michael Lewis really let me down in his trying to make a hero out of SBF. Nothing could be further from the truth as SBF comes off as the pampered child of the Stanford bubble he grew up in with his too indulgent law professor parents. Even at age 31 he held on to his childhood stuffed animal.

 

Lewis chronicles his career from MIT to Jane Street Capital where he earns his trader chops and then on to trading crypto currency in Hong Kong. He then formed his Alameda Research and his market maker FTX. Because there were no financial controls it was very easy to intermix customer deposits at FTX with his hedge fund which was nominally run by his on and off paramour Caroline Ellison, another piece of work.

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Some of that money was invested in Bahamas real estate for his firm and for a fancy house for his parents. The money also found its way to Washington D.C. where SBF became a leading contributor to the Democratic Party and anti-Trump Republicans and boy did that buy him access.

 

SBF had an unusually high degree of tolerance for risk. All he cared about was a positive expected value, no matter how high the probability of losing was. Thus, he totally ignored the Kelly Criterion for the proper sizing of investments. His goal was to get as rich as possible so that he could give away his fortune to save the world. He operated under the principal of “effective altruism” in order to maximize the greatest good for the maximum number of people. He professes to love humanity, by he really doesn’t like people as individuals. Further he virtue signals by his vegan diet, unruly hair, and dressing in shorts.

 

To me his effective altruism is nothing but a marketing hype to justify the huge fortune he was creating which peaked at around $40 billion before the collapse. Somehow, he managed to lose $8 billion of client funds and therein lies the core of his fraud.

 

Too conclude Michael Lewis was snowed by Sam Bankman Fried. A more critical look would really have improved this book.

For the full Amazon Review see:  Crypto Kid (amazon.com)

The Crypto Crash and the Bear Market in Stocks

When historians look back at the post-pandemic performance of stock prices and crypto currencies, they will wonder what we were thinking. After all the excesses were there for all to see as we thought the free money policies of the Federal Reserve would last forever. Along the wild ride we witnessed a more than doubling of stock prices from their March 2020 pandemic low to early January 2022, a flurry of speculation in so-called meme stocks, the Wall Street underwriting machine spitting out blank check SPACs on a daily basis, and the beatification of Cathy Wood in her investing in money losing 50X-100X sales companies. Most of which have crashed and burned.

 

As I wrote last week the stock market entered the “anger” stage of a bear market, now down around 24% as measured by the S&P 500. ( Shulmaven: The Bear Market Enters the Anger Phase ) Nevertheless, the real poster child for the bear market is Bitcoin, the standard bearer of the cryptocurrency market. As I write this Bitcoin is trading at $18,300 73% below its November 2021 high of $67,800. All cryptocurrencies combined have declined by over $2 trillion since November and with the failure of such so-called stable coins TerraUSD and Luna along with the suspension of withdrawals at faux crypto banks Celsius and Babel, the decline continues to accelerate. While it took an almost 20% decline for stocks to enter the anger stage of its bear markets, it took more than a 50% decline in cryptocurrency to enter its anger stage and my guess it is still far from the acceptance stage as margin calls accelerate. Further, it is my guess that we are about to witness a flood of litigation and a big-time Federal investigation similar to what happened after the Dot.com bust of 2000.

 

Why is Bitcoin relevant to the stock market? The answer is that it is first a symbol of the recent mania and second many aggressive stock investors held positions in Bitcoin. With the collapse of Bitcoin those investors effectively faced margin calls on their entire portfolio and in order to meet the margin call they were forced to sell what they could sell thereby selling equities to fund margin requirements on their collapsing Bitcoin positions. I did mention in my yearend review that “Sometime during the year a leveraged player in the Bitcoin market will fail triggering a mini-financial crisis” (Shulmaven: Some Non-Consensus Thoughts about 2022 ) Little did I realize then how leveraged the Bitcoin market was. I guess we are here.

 

What this means to me is that until the Bitcoin unwind is largely complete, stocks will have a difficult time rallying and the bear market will continue.

 

 

We are in a Bear Market

Forget about what the financial press said on Friday and Saturday with The Wall Street Journal headline of May 22 screaming “S&P 500 Briefly Dips into a Bear Market.” The story below the headline noted that on an intraday day basis the S&P 500 was trading 20% below its all-time high reached on January 3. There is nothing magical about a 20% decline defining a bear market. In the 1990’s while I was Chief Equity Strategist at Salomon Brothers, I helped popularize the notion that a retreat of 20% by a broad market average constituted a bear market. A 20% decline was not a hard and fast definition, but rather a rule of thumb. There is little difference between the 18.7% decline on Friday’s close and 20%.

 

Further evidence that we are in a bear market is that the Dow Jones Industrial Average has decline for eight weeks in a row. The last time that streak happened was in 1932. The S&P 500 has declined for seven weeks in row, the first time that happened since 2001. Needless to say, both 1932 and 2001 were bear market years. Just to note a bear market is also defined as a sustained drop in stock prices from its recent high.

 

Indeed, if you look at the 29% decline in the NASDAQ Composite, the 27% decline in the Russell 2000 and the 21% decline in the Wilshire 5000; stocks as whole are deeply in bear market territory. Further the 50%-90% declines in a host hitherto high-flying and non-earning technology stocks reminiscent of the 2000-02 bear market and the break the SPAC stocks, a dubious Wall Street invention, the carnage is visible for all to see.

 

Further evidence of the bear market is the fact that recent market favorites such as large cap technology and consumer staple stocks were taken out and slaughtered over the past few weeks. Remember when the police raid a whorehouse, the good girls and the bad girls alike are taken in the paddy wagon.

 

Adding to the carnage is the collapse of the crypto currency market. Total global losses there are estimated at $1.5 trillion with some so-called stable coins rendered worthless. More than a few hedge funds were caught off-sides in this market which converted their losses in crypto currency into margin calls against their stock positions. Even legendary investor and longtime bull on Bitcoin Bill Miller on CNBC admitted to selling part of his position due to a margin call.

 

So, forget the headlines, the carnage all around us is obvious. How long the bear market will last and how deep it will be remains unknown. However, my guess is that we are closer to the end than the beginning in terms of price, but not necessarily of duration. My biggest worry remains that the stock market decline is signaling the start of a new thirteen-year economic cycle bringing with it heightened uncertainty. (See: Shulmaven: The U.S. Economy is Entering a New Thirteen Year Cycle )