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The headlines are filled these days with the news about Sam Bankman-Fried and the failure of TFX.
The stories are about a 27-year-old MIT physics major who started the cryptocurrency exchange TFX in 2019. The valuation of the company rose to $32 billion and then collapsed in November 2022.
The stories are about an inexperienced young man starting up a company in a time when lots and lots and lots of money was available, much that could be used for just about anything that seemed to be promising.
More and more the evidence is showing that experiences like these resulted from the monetary bubble that the Federal Reserve created to fight the situation resulting from the spread of the Covid-19 pandemic and subsequent economic disruptions.
The cryptocurrency world is filled with examples of how young, aggressive individuals built upon the Fed’s asset bubble to invent and expand innovative companies that grew from the new technologies spreading through the world.
But, the bubble has burst as the Federal Reserve has moved to combat inflation.
Now, we are on the other side, and companies like TFX are paying the price. And, the numbers continue to grow.
But, others are also paying the price as well. And, there will be more…many more.
The SPAC Space
We are also now seeing the collapse of the SPAC market.
SPACs being Special Purpose Acquisition Companies or “blank check companies.”
SPACs list on stock exchanges and raise money from investors and use the funds to buy private companies.
SPACs have a primary backer…a sponsor…when they are listed.
The primary backer could be Martha Stewart or Shaquille O’Neill.
The SPAC finds a company to acquire. The SPAC acquires the company and takes it public.
By 2020, SPACs had become a very legitimate route to the public market. And, these companies went public with much less regulatory scrutiny than a company following the traditional path to public listing.
And, the SPACs took advantage of all the wash of money that was being provided by the Federal Reserve.
In fact, one venture capitalist leading the spurge, Chamath Palihapitiya, is very explicit about the success that SPACs had in 2020 and 2021.
“It was the Fed’s fault!”
To Mr. Palihapitiya
“the Fed created the mania around SPACs when interest rates were low and investors were hungry for returns.”
Mr. Palihapitiya got heavily into the game in the late 2010s.
“He launched 10 SPACs–one before the pandemic and nine since.”
“His Twitter following rose grew from about 147,000 in 2019 to more than one million in 2021.
For the sector as a whole, in 2021 66 SPACs raised $163 billion. Wall Street banks took in $4 billion in fees.
Now, the tables are turned.
“Some of the stocks of Mr. Palihapitiya’s SPACs have dropped nearly 90 percent from when they were listed. “
But, according to Michael Klausner, a professor at Stanford Law School,
“Sponsors make a killing, and public shareholders take a bath.”
The game.
Mr. Palihapitiya and other backers get in at the start.
“A backer can put up a small amount of money but still gets 20 percent of the shares, essentially for free.”
“Ordinary investors don’t get the same terms.
For example, “Even as he was pitching his newest SPACs Mr. Palihapitiya was selling out of his older ones.”
Investors don’t usually move in this way.
“In March 2021, Mr. Palihapitiya sold his personal stake in Virgin Galactic for roughly $200 billion, according to public filings.”
He was out of the game. And, some of the stocks, as mentioned above, “have dropped nearly 90 percent from when they were listed.”
But, according to Mr. Palihapitiya, he is out of the game because the game has changed.
“At a conference in Manhattan in late October, he told the crowd that SPACs weren’t the problem.”
“Instead, he blamed the Fed for creating the mania around SPACs when interest rates were low and investors were hungry for returns.”
The fault rests, obviously, with Fed Chairman Jerome Powell.
And, the game goes on.
There Is More To Come
To me, however, we are still in the early stages of the bubble collapse.
There is more to come.
History shows that more will come.
The asset bubble created by the Fed was enormous. The Fed has plans to cut into the massive amount of liquidity it pumped into the economy, but, it is still very early in the inflation fight and there is concern about just how far the Federal Reserve will be able to go.
Furthermore, there are still other areas that have weakened and are on the brink of providing a few more cases of firm failure. The cryptocurrency world and the SPAC world are just a part of the surface.
The private sector continues to borrow and borrow. But, the public sector also continues to borrow and borrow.
There is still lots and lots of money floating around, thanks to the Fed.
But, people seem to be pulling in from their overcommitments. Losses have a way of doing that.
And, the “looseness” in the way the financial markets have been regulated and controlled over the past several years does not lead one to have a lot of confidence in industrial control.
As I have stated before, the economy, the financial markets, and world markets are all in some form of disequilibrium now.
But, the bubble is collapsing now. Keep your eyes open for where the next “pop” will come from.
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