Fortunately, or unfortunately, I have had the privilege to live through a few market cycles. I’ve seen the highs and lows of each cycle. Speculative bubbles, in particular, do not repeat themselves exactly. They are always a little different and the asset class they take hostage also changes. Be it the junk bond boom in the 80s, the tech wreck in 2000, or the real estate mania of 2008. Speculative bubbles are nothing new to the markets.
The speculative bubble of 2020 and 2021 seems to have taken the form of these blank check investment vehicles called “SPAC” (which stands for “special purpose acquisition company”). I have written about these SPACs before because they raised a tremendous amount of money last year. Flush with all this cash, they now have two years to go find a unicorn to take over. One such unicorn is the financial firm called Social Finance, or SoFi. The company’s lending model has become quite successful. So much so that they reportedly spent $30 million to have their name on the new football stadium for the Los Angeles Rams and Los Angeles Chargers.
SoFi is still a private company and has been rumored to be looking to do an IPO in the near future. Thus, it came as little surprise when they announced they would go public by getting bought out by a SPAC called the Social Capital Hedosophia Holdings Corp V (IPOE). IPOE was able to slay a massive unicorn. Upon the news, shares of IPOE shot up dramatically and gained over 50% that day.
The fund company behind this, Social Capital, has started a few other SPACs to chase this hot market. The crazy thing is that some of Social Capital’s other SPACs also jumped on the news of the SoFi deal; funds that have nothing to do with SoFi. Fund IV (IPOD) shot up double digits that day, and Fund VII (IPOF) also gained more than 20%. These two SPACs have nothing to do with the SoFi deal, yet speculators piled in. I hope the new investors in IPOD and IPOF know what they are getting into.
There are some other signals that we are in the speculative phase of this market cycle. Recently, Tesla CEO Elon Musk tweeted to his 40 million followers to “Use Signal”.
Given Musk’s Midas Touch, it sent the shares of Signal Advance (SIGL) up from $0.60 to over $7 in less than a day. Signal Advance (which makes technology to reduce signal deduction delays for physical sensors) is an odd company for even Mr. Musk to tweet about. It’s more likely Mr. Musk was referencing Signal Messenger (a new competitor to Facebook, Twitter, WhatsApp, and Parler) given his distaste for big brother. I hope the new shareholders of SIGL know what they are getting themselves into.
This “Irrational exuberance” is nothing new for markets. It has existed well before former Federal Reserve chair Alan Greenspan coined it back in the 90s. It is not something we should try to avoid or ignore. It’s a part of the market cycle. But we should still be cognizant of it. Most importantly, investors need to truly understand what they are investing in and why they are investing in it. Be it a large American company, or a multifamily rental unit. The details matter. Something the investors in IPOD, IPOF, and SIGL will surely find out soon enough.