The Clues You Missed: 5 Super-Obvious Signs We Were in a Financial Bubble

Photo: Rich Fury/Getty Images

We should have seen it coming. At least that’s what a lot of investors (big-time ones and Robinhood speculators alike) are telling themselves right now with financial assets of all sorts in freefall this year. More than ten years of a bull market, a flood of money from the Federal Reserve, and a new world of technology in everything from money to cars and even art made the future seem limitless. Only now are some people finding out — many of them for the first time — that the laws of the market have not been repealed. Inflation, the war in Ukraine, and rising interest rates are pummeling the markets, and no one knows when it will end.

The S&P 500 — the stock index that most likely is in your 401(k) — is down 19 percent this year to date. That is perilously close to the official definition of a bear market: 20 percent or more from the peak. Meanwhile, the NASDAQ, where the lofty tech names trade, is down 28 percent this year, SPACs and crypto have collapsed, and private markets are seizing up.

Small wonder that searching for the market-top signals most people missed has become a favorite pastime among the financial mavens looking for black humor as a salve for their losses. This list is far from comprehensive, but from crypto to meme stocks to SPACs and beyond, here are some of the tells that are making the rounds among investors.

Crypto is perhaps the most obvious place to look for missed signals that things had gone too far. For most of last year, bitcoin seemed impervious to the critics who called it a Ponzi scheme and the regulators around the world who threatened or enacted restrictions. In the end, though, the market top in crypto was foretold by one of the most famous curses in a financial bubble market: arena-naming rights.

In early November — just as bitcoin was peaking — the Staples Center in Los Angeles said it would change its name to Crypto.com Arena after selling the rights to crypto.com for $700 million, which ESPN called “the richest naming rights deal in sports history.” That was just months after the crypto exchange FTX bought the naming rights to the Miami arena where the NBA’s Heat play. Such deals have become a red flag to investors who remember that Enron went bust shortly after the high-flying energy firm snagged the rights to name the Houston Astros’ ballpark. The New England Patriots’ stadium outside Boston was, at the tail end of the dot-com bubble, briefly named CMGI Field after a then-high-flying internet incubator — but within a matter of months, everyone agreed that the deal no longer made sense.

Naming-rights deals are “generally the crossroads of hubris and arrogance and management believing their own b.s.,” says former financial journalist Herb Greenberg, who jokes that his decision last summer to abandon a plan to become an activist short seller was also a market-top indicator. After writing research for short sellers for several years, Greenberg crossed over to the long side, taking a job penning stock tips for a financial research firm.

Then there is the NFT craze. At Anthony Scaramucci’s SkyBridge Capital SALT convention last September, former hedge-fund manager and current crypto kingpin — though one recently humbled by big losses — Michael Novogratz brought up Jeff Koons’s goofy Balloon Dog sculptures to explain the economic rationale of NFTs, digital tokens on a blockchain that act like a certificate of ownership. “Why is the Balloon Dog worth $30 million? Because we say it is. We’re doing the same thing with NFTs,” said Novogratz, the CEO of Galaxy Investment Partners, a crypto investment firm.

(No surprise that Koons, a former Wall Street commodities broker who honed those skills to sell his kitsch art, has also jumped into the NFT market.)

But the market-top signal for NFTs came January 5, just days after the stock market peaked. That day, OpenSea, the dominant auction marketplace for NFTs, hit a $13.3 billion valuation. Sales of NFTs have also collapsed, down more than 90 percent since the peak.

Meanwhile, OpenSea is still selling Bored Ape Yacht Club NFTs, though prices are way down. And recently, a CryptoPunk NFT that was bought for $1 million six months ago went for $139,000.

While the Koons Balloon Dog comparison might not be completely insane, it’s also a classic example of the kind of thinking that tends to happen at a market top — smart people trying, at some level, to convince themselves that a thing that is clearly way overvalued might actually be undervalued. Read about any bubble in history and this kind of logic becomes commonplace. In the cold, hard light of late May 2022, however, it seems clear enough: A mass-produced cartoon jpeg is not, in fact, a Koons.

The bubble wasn’t only in crypto. The original meme stocks were brick-and-mortar companies GameStop and AMC Entertainment.

But they did not turn out to be the class revenge against Wall Street that captured the media’s attention after retail investors on the sub-Reddit WallStreetBets took down hedge fund Melvin Capital by learning how to squeeze heavily shorted stocks such as GameStop. Although Melvin, which was short GameStop and AMC, failed to recover and is now shutting down, the whole episode is something of a Pyrrhic victory for the Reddit crew. A recent Morgan Stanley report found that retail traders who just began investing in 2020 have been hit the hardest by the recent downturn since the market’s peak.

Should we have seen their demise coming? Perhaps the digital billboards and banners floating from airplanes in the skies above New York and L.A. insisting “AMC We Love the Stock” might have been a clue. These ads, paid for via GoFundMe accounts, began running as the stock hit a high of $60 a share last summer. Even after AMC CEO Adam Aron sold his holdings into the run-up, the AMC Apes continued to believe — and continued running their digital ads, most recently on the side of a mountain. Meanwhile, the stock keeps falling. It is down more than 50 percent this year, to about $12 per share.

“Laughable then, though maybe tragic today,” says Josh Wolfe, a co-founder of the venture-capital firm Lux Capital. “TikTok accounts of young people talking stocks, many of them buying options or investing through Robinhood in record amounts, and it all working for them, which virally induced social proof and their peers to pile in, too — none of them having any clue on how to actually read an annual report, dissect a 10-K or 10-Q, reconcile a cash-flow statement, or explain why WeWork’s ‘Community Adjusted EBITDA’ was basically like fraud.”

More than anyone else, VC entrepreneur Chamath Palihapitiya gets credit — and blame — for igniting the mania in special-purpose acquisition companies, or SPACs. Palihapitiya’s first SPAC took off when it merged with Richard Branson’s financially strapped spaceship company Virgin Galactic in late 2019. Soon others joined the rocket launch, and Palihapitiya, anointed the “king of SPACs” by Bloomberg, would go on to sponsor ten SPACs.

But on February 21, 2021, just days after the stock prices for SPACs peaked, he shot off an enigmatic tweet: “Im about ready to fuck some shit up…just fyi.” (A Financial Twitter user who goes by the handle @ItaliGino called this tweet the most obvious sign of the top, saying, “This was it … exactly.”)

Although Palihapitiya never made it clear what he was referring to, losing money probably wasn’t what he had in mind. Just three days later, however, he said he was down $1 billion that day alone as SPACs continued their descent. By March 5, Palihapitiya disclosed that he had sold his entire personal stake in Virgin Galactic for a profit of $200 million. The overall SPAC market has been in free fall since then, including the ones that Palihapitiya sponsored. In February, he stepped down as chairman of Virgin Galactic.

As Wall Street lore has it, when the critics give up, the stock market has clearly reached its pinnacle.

During the long bull market, short sellers faced one of their most trying periods ever and quit trying to predict when the market would turn in their favor. Then dozens of short sellers found themselves part of a far-reaching probe by the Justice Department that began last year (but so far has not produced any indictments).

One after another, the shorts retreated. Andrew Left of Citron Research quit writing short reports. A well-known perma-bear hedge-fund manager, Russell Clark, told investors in November that he was shutting down his hedge fund — and did so right before high-flying tech stocks began to fall, just as he had been predicting.

Then, in January, Jim Chanos — who famously called the demise of Enron 20 years ago and has repeatedly referred to the past several years as “the golden age of fraud” — changed his fund’s name from Kynikos Associates to Chanos & Co., quietly shutting down several of his funds and consolidating others.

Although Chanos’s assets had diminished from several billion dollars at their peak to under $300 million by year’s end, the legendary short seller is still in the game. So far, 2022 is looking like a very good year for him.