Years from now, we’ll look back and say it was obvious.
That the signs of a historic mania were clear as day, with a billion a day in SPACs being the most prominent.
You read that correctly: $1 billion per day has been raised in the SPAC IPO market this year, an astounding figure. At the current pace, we’ll surpass last year’s record total before the end of March.
There are many rationalizations for the current boom:
- Zero percent interest rates and the easiest monetary policy in history.
- Investors flush with stimulus cash and promises of more free money to come.
- A private market filled with maturing companies whose transition to the public markets is long overdue.
To be sure, these factors all play a role. But the most important variable by far? Surging risk appetite.
The type of risk-seeking behavior that leads to a billion a day in SPACs does not occur in a vacuum. It can only happen in the latest stages of a cycle when investors view risk as an afterthought, focusing only on the boundless gains that await them.
On that front, the first-day gains of SPACs this year (+6.5%) have been unprecedented, creating a positive feedback loop that has convinced speculators that this is another “can’t lose” proposition.
What about the can’t lose proposition in GameStop (which fell over 90% in a few weeks after peaking in January)? That’s old news; they’ve moved on to greener pastures…
And with bags of endless money sitting on the table, celebrities and athletes are increasingly joining the party. Like any other consumer product, SPACs have become a game of promotion. The more attention you can garner, the more you can sell.
Why are there so many SPACs and why are they coming to market at such an unrelenting pace? Charlie Munger put it best:
“The investment banking profession will sell s— as long as s— can be sold.”
Which means that the only thing that will ultimately slow down the SPAC boom is the inability of bankers and promoters to sell it.
What would cause that to happen?
Investors starting to think about risk again, after losing money in the many SPACs that don’t live up to their inflated expectations.
When will that happen?
It may have already begun.
One of the most storied SPACs (Churchill Capital IV, $CCIV) is down 63% from its high just a few weeks ago after announcing its merger with Lucid Motors.
Another (Clover Health, $CLOV) has been cut in half and is now back below its initial offering price.
No one rings a bell at the top. But years from now we’ll look back and say the signs were all there, clear as day.
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