The Roaring 20's

During the period from 1914-1918, the first world war gripped Europe. It was the war to end all wars. Wars are inflationary. The first world war was no exception. The US entered the War in 1917. The consumer price index was first developed in 1919, to track to the big inflation of the previous several years, an artifact of wartime, under which the prices of ordinary things available in 1913 had more than doubled. In the 1920s, prices settled a little, to about 170% of the pre-Great War 1913 level.

The permanent erosion of the dollar, the reality of which first became clear in the 1920s, forced savers to find some instrument that would pay them back in the old way, in money that held its value. The choice was made to capture, via stocks, the forthcoming profits of businesses.

During the 1920s, the booming stock market roped in millions of new investors, many of whom bought stock on margin. If a new offering came into the market, investors would pile into the stock causing it to shoot up in value. At the height of the 1920’s, there were so many initial public offerings that some of the companies didn’t even have an operating business underneath them. Nevertheless, investors piled in and their newfound paper wealth was cause for celebration. Those company founders who initiated the offering got to cash in on the wave of capital being thrown at the company.

Of course we all know from the history books how this turned out. On October 29, 1929 it all came crashing down. At the time, only about 1/3 of the banks were part of the Federal Reserve system. Thousands of banks that were not part of the Fed became insolvent. Investors who had margin accounts had to cough up the cash to cover their margin calls. Most didn’t have the liquidity to do so. Banks and brokerage houses called in loans on a massive scale.

We know that investing in companies that don’t have any income, nor any underlying operations is craziness. We know that high rates of leverage to purchase items that have high price volatility makes no sense.

So here we are in the year 2021. There have been a number of high pinitial public offerings this past year, despite the pandemic.

Some of these IPO’s have been different than the traditional IPO.

A special purpose acquisition company (SPAC) is a company with no commercial operations that is formed strictly to raise capital through an IPO for the purpose of acquiring an existing company. In 2020, as of the beginning of August, more than 50 SPACs have been formed in the U.S. which have raised some $21.5 billion.

So investors are being told to put up their cash to invest in a business that will complete acquisitions of come unknown companies in the future. You won’t know if the underlying company is a good buy at the time you make the investment. Just trust that the folks making these acquisitions know what they’re doing.

The securities and exchange commission created the securities act of 1933 for the purpose of protecting the investing public. There are stricter rules around how offerings can be made than existed in 1929. At the start of the 1920’s there was a global pandemic that killed more people than the preceding war.

Am I the only one who is seeing a parallel between the environment today versus the 1920’s? I realize that a blank check company isn’t exactly the same thing as a shell company with no business, but it sure looks the same from a distance.

History may not repeat itself exactly, but perhaps it rhymes.