Wednesday Briefs – 6 January 2021

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This week: 2021 Good or Bad; SPACs Frenzy; Cryptocurrencies.

2021 Good or Bad

World events and deadly viruses are oblivious to the calendar. But 2020 was a low in so many ways that it is easy for us to paint a positive scenario for 2021: after a difficult winter, the virus will subside in the spring due to seasonality and the vaccines. At that juncture, the dormant arm of the K economy that has suffered the most in 2020 will see a strong revival, with retail, hospitality (hotels and restaurants) and travel improving quickly into an excellent summer. The pent-up demand for travel, social events and other summer activities will boost the fortunes of airlines and other providers.

It is also not difficult to paint a less positive scenario. New strains of the virus could prove more difficult to tame, turning the pandemic into a rolling event from winter to spring to summer until herd immunity widens or until researchers ultimately conquer the disease in all its forms. This version of 2021 would take a toll. The economy would dip again and markets would suffer. But here again the end of the year should see a resolution. The question then is whether the pandemic is mostly neutralized in 2021 or in 2022. The current best bet is on 2021.

SPACs Frenzy

SPACs (special purpose acquisition companies) were all the rage in 2020. As many as 250 launched in 2020 or four times the number in 2019. Average sums raised per SPAC rose to $335 million according to this New York Times article. For the uninitiated, a SPAC is a shell entity that raises money from investors, lists itself on an exchange and then acquires an operational company within the subsequent two years. It is called a ‘reverse ipo’ by some because it allows a company to go public faster and more easily. A traditional ipo has more regulations and requires more time from planning to listing, as much as a year or longer. By contrast, a company can go public by selling itself to a SPAC in as little as four months.

The SPAC concept is a rerun of 1980s ‘blank check’ companies, but with added regulations to protect investors. As is often the case with financial innovations, the biggest winners here are likely to be the sponsors, investment managers who run the SPACs. When investors buy into a SPAC in an ipo before the SPAC has acquired a company, they are doing so because of the managers’ expertise in a certain sector or area. For the company being acquired, a SPAC is an attractive buyer as SPACs tend to bid higher than private equity funds. SPACs can also be desirable buyers for private equity funds looking to list some companies.

It is an exciting area of the market. As these things go however, few managers will prove to be worth their 20% take. Expect a three-tiered outcome: 1) some highly successful SPACs with good returns to investors, the flag bearers that others will seek to emulate; 2) a majority of SPACs delivering pedestrian or below market returns; 3) some spectacular misfires or scandals. In the past, investing in a team of people has rarely been as good as investing in a team of people and a known product with clear prospects. A SPAC tries to address this concern by allowing investors to withdraw their money if they dislike the proposed acquisition. In normal times, few will do so.

We will write about specific SPACs, their prospects and performance in coming weeks.

Cryptocurrencies

Bitcoin, the leading cryptocurrency, had reached $20,000 in 2017 before crashing to $4,000 in 2018. It ended 2020 at a record high near $29,000. The one sentence explanation for this crypto bull market is that the massive stimuli enacted to fight the pandemic, and the accompanying record low interest rates, have devalued national currencies and boosted supranational ‘currencies’ such as precious metals and cryptocurrencies to new highs. Gold up 30% and silver up 47% had a respectable year 2020 but not nearly as respectable as Bitcoin’s quadrupling in twelve months and rising 50% in December alone.

Sal Gilbertie, President of Teucrium Funds and an expert in commodities, believes that there is more to go and that Bitcoin will continue to outpace gold. He makes his case in this Forbes column. Gilbertie believes that the projected supply of Bitcoin is more limited than that of gold and that Bitcoin as a cryptocurrency has an obvious advantage over gold as a means of exchange for online transactions.

How likely is it that Bitcoin will over time displace the dollar or others as reserve currencies? It depends on whom you ask. The dynamic of ever rising deficits and the (alleged) rise of a multipolar world conspire to a move away from national currencies. On the other hand, governments don’t give up their poles of power easily. Note for instance the efforts to contain the rise of gold after it spiked in 2011. Similarly, while Bitcoin scored big in 2020, the dollar and its custodians won’t be disenfranchised without putting up a good fight.

Bitcoin is the largest cryptocurrency with a current market cap of $610 billion. The second is Ethereum ($124 billion) and it also quadrupled in 2020. Other contenders are significantly smaller as of now.

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