Oh $SNAP! This is organized crime.

$3.46 trillion in market capitalization gone YTD!

Ho hum. Another day, another former market leader wipes out tens of billions of market capitalization in just a few hours. This week (May 24th) it’s Snap Inc. ($SNAP). On Monday it was valued at $38 billion. On Tuesday it was worth $21 billion. Just last September it was worth $130 billion. Snap is now officially below its IPO price from February of 2017!

The collective market capitalization of seven technology mega-caps ($AAPL, $AMZN, $FB, $GOOGL, $MSFT, $NVDA, $TSLA) peaked at $10.81 trillion on January 4, 2022. As of today, they are collectively valued at $7.35 trillion. That’s $3.46 trillion in market capitalization gone YTD.

According to CoinMarketCap[.com], total cryptocurrency market capitalization peaked on November 10, 2021, at $2.96 trillion, while today it stands at $1.24 trillion. That’s down by nearly 60%. Coinbase was worth $90 billion back then. It’s worth $16 billion today. Cryptocurrency Terra ($LUNA) was valued at over $30 billion just a month ago. Now it’s all gone. Since those disgraceful Super Bowl crypto commercials, crypto has lost $750 billion of value alone.

A bored ape from the Bored Ape Yacht Club ($BAYC) would have set you back $437,000 on OpenSea on May 1, 2022. Just a few weeks later you can buy an ape and join the BAYC for a mere $195,000. (Still too steep for me!)

Former Facebook “growth hacker” and now “Pied Piper of SPACs” Chamath Palihapitiya brought four companies public via SPACs – $SPCE, $CLOV, $OPEN, and $SOFI. In early June 2021, they had a collective value of $50 billion. Today they’re worth just $12 billion. This is the same Chamath that pioneered human psychology hacking at Facebook.

Yawn. It’s all just business as usual in the stock market. This is just how free markets work, right? We only have ourselves to blame, right?

Wrong. There is no reasonable scenario under which investors should have to endure these levels of madness, and this should never become normalized. This is insanity. It’s unhinged, unmoored, and unethical. This isn’t collective confusion; it’s organized crime. Don’t believe me? Flip through this slide deck on organized crime and tell me if it doesn’t feel familiar. I’m not saying that what’s happening is technically illegal, but it’s definitely a well-organized racket.

Folks, we live in a world where lying has become completely normalized, even lionized. As Jaron Lanier, the virtual reality pioneer put it in The Social Dilemma, “We’ve created an entire generation of people who were raised within a context where the very meaning of communication and culture is manipulation. We’ve put deceit and sneakiness at the absolute center of everything we do.”

Financial markets are at the heart of this culture of deceit. Financial markets, in collaboration with financial media, are pioneers of this deceptive technology because when it comes to finance, narrative can be completely disconnected from reality. Value is whatever the collective herd can be convinced it is. Until it isn’t – and then the next cycle begins.

Silicon Valley picked up on this “narrative-based-values” business model starting with Google and brought us into the age of surveillance capitalism where human behavior itself is now engineered and bought and sold.

If you’re new to these writings or you need any refreshers on how this all works, you can review some past issues of Risk Rituals, including Weapons of Mass Addiction, The Super Crypto Heist or Who Will Rule the Metaverse. If you thought I was a little too extreme back then, hopefully it’s clear now that I’m only scratching the surface.

So now that we better understand how the world works today, what should we do about it? Should we band together on WallStreetBets and perpetrate the same insanity on the establishment that they have been perpetrating on us? That hasn’t worked out too well for the would-be-rebel buyers of GameStop ($GME) (down 72%) and $AMC (down 82%). Sure, Melvin Capital collapsed, but it’s a pretty hollow victory if you ask me.

Professor Scott Galloway coined a meme worth spreading today – NO MERCY/NO MALICE. No mercy: We see it for what it is – organized crime (though we don’t expect anyone to go to jail). No malice: Our enemies want our attention, but we will not give it to them. Let’s move on.

I love technology, and I still have high hopes that technology, rightly applied, can improve our lives both individually and collectively. But we have to understand that this digital/financial world is not what it appears to be. It is not a place of freedom, choice, empowerment, and decentralization. It is a place where values and valuations can be manipulated exclusively by narrative. It’s a place where the writers of the code and the owners of the software and distribution channels are in control. Sure, we have plenty of choices, but they are engineered choices. “You can choose between A or B.” Apple or Microsoft? Instagram or TikTok? Democrat or Republican?

Well, what if we don’t want either A or B? That’s not a question that we’re supposed to ask. As long as we don’t ask that question, we’re tools of technology instead of the other way around.

I’ve mentioned Epsilon Theory (ET) many times in these pages, and Ben Hunt has another great piece that is well worth your time if you want to understand the persuasion technology behind narrative-driven values and valuations. I also mention it because over on the ET member forum (well worth the price of admission), I posted something that I’d like to share with you. It all started with a thesis that “nothing true scales.” Here’s what I said:

I do have a thesis about why “nothing true scales.” I think that it has to do with our bodies. We are embodied beings and yet we have been culturally consumed with disembodiment. What is the so-called metaverse if not the ultimate disembodiment? Bodies don’t scale.

I think back to the mortgage crisis. It never would have happened if lenders had to still KNOW their borrowers and SEE the properties that they loaned against. Instead, financial engineering made it possible for the whole process to be disembodied. No one needed to KNOW anyone else. No one needed to LOOK at anything. Everyone could screw everyone else with impunity because we didn’t KNOW each other.

Finance seems to be the ultimate form of a disembodied society. Which seems to me to be why finance is increasingly consuming the whole economy (and why the internet itself is financial). Financialization has gone too far, and the pendulum is now swinging back in the other direction – deleveraging, less complexity, more locality, more embodiment.

It’s a painful process but I think that it’s the right direction in the end. We have to better understand the networking limits of embodiment and start integrating those limitations into our economic systems.

I share this because it is the best thing that I’ve written that summarizes my overall investment thesis at this moment in time. In a nutshell, I believe that digitization, disembodiment, and financialization are in retreat, and I don’t think that they’re coming back to their former dizzying heights anytime soon.  They’re not going away, but we saw the peak of their influence in November 2021.

Embodiment, on the other hand, is reasserting itself with a vengeance these days. We have a land war in Europe over control of resources. We have supply chains breaking down and not recovering. We have a novel virus still ravaging people across the globe. Cost of living and inflation are soaring – especially energy and food.  We all need to eat, stay warm, and move around – and that’s not going to change.

One chart that comes to mind which beautifully tells the story of “revenge of the bodies” today is Peabody Energy Corporation ($BTU). BTU primarily generates energy from coal. Coal was left for dead back in November 2020 when BTU traded as low as $0.80 per share. It was literally a penny stock. Today, it’s nearly $25 per share. The idea that we were going to completely eliminate a major source of energy in the economy was a disembodied fantasy.

While I do think that the current state of despair has reached a bit of an extreme and I wouldn’t be surprised to see a strong counter-trend rally, I don’t think that we’ve seen the end of the pain that we’re all in for following the excesses of the recent leverage-and-cheap-money-fueled bull market. My gut feeling is that we’re likely about half way done.

Moreover, I don’t think that there are likely to be any great places to hide. I think that we are in a massive deleveraging cycle right now where anything that can be sold to raise cash is at risk of being sold to raise cash. My investing mantra today is: How do I lose as little as possible and survive long enough to see daylight on the other side. 

The one thing you absolutely cannot afford to do right now is think you’re going to dig yourself out of a big hole with some well-timed leveraged buys. If you’re hoping to pick the bottom and grab a triple-leveraged Nasdaq ETF ($TQQQ) on your way back to new highs, you’re going to be sorely disappointed. That is a recipe for disaster.

Daniel Kahneman won a Nobel Prize in economics for pointing out that we are risk-seeking when we’re losing. The markets are merciless and ruthless with this particular behavioral bias. They will chew you up and spit you out if you get overleveraged. Don’t even think about it.

On the other hand, if you do have some powder dry, it’s a decent time to be starting to dollar-cost average into some longer-term positions. Warren Buffett and Charlie Munger are on a buying spree, and that’s never a bad time to start looking for opportunities ourselves.

I don’t think this is a backup-the-truck moment in the markets, but it’s not a bad time to start slowly acquiring investments that you like and that you’re comfortable holding for years. It’s important to remember that you don’t have to buy everything at once! My personal strategy is to build positions over the next six months.

In alignment with my “embodied economy” thesis, I favor companies that are doing valuable things in the real world – logistics companies, energy companies, agricultural equipment companies, gold and silver miners, timber companies, land companies, etc. When it comes to technology, I like companies that empower small businesses, like Shopify ($SHOP) and Etsy ($ETSY), but I think they’ll be cheaper before they’re more expensive. For what it’s worth, I still loathe big tech.

Whatever your preferred investment style is, the most important thing you can do right now is get yourself into a position of strength. That means that you understand the risk you’re taking, and you’ve assembled a risk-savvy portfolio of diversified assets you’re comfortable holding for at least a couple of years.

I can’t remember where I heard this, but someone recently said that successful investing was best described as, “average performance for an above average period of time.” I absolutely love that, and if you’d like to know what that looks like, here’s a chart of Robinhood ($HOOD) vs. Berkshire Hathaway ($BRK-B) since the date of Robinhood’s IPO (and a few months after Robinhood CEO Vlad Tenev called Charlie Munger “elitist”).

This is a chart to remember. Maybe even paste it to your monitor or make it the desktop wallpaper on your computer!

Bottom line, this isn’t a time to be a hero, but it isn’t a time to be fearful either. The only place I know where you can easily build your own robust risk-savvy portfolio is RiskSmith – and it’s free. We’re also building a community of investors. If you haven’t already, join our Discord.

Remember this rule: Intuition cannot be trusted in the absence of stable regularities in the environment.

Daniel Kahneman, Nobel Prize-Winning Psychologist