Lorna Tilbian Columnist Different this time? W of the 41 SPACs that have completed transactions since the start hat do 1989, 2000, 2007 and (maybe) 2021 of 2020, only three are even within 5% of their share price have in common? They are all years of irrational peaks, 18 of them have more than halved, and several are down exuberance that marked the top of the cycle by more than 80%. The average decline is 39%. Another name followed by recession, sparked and exacerbated for a SPAC is a blank cheque company would you ever hand by wild speculation and high leverage. over a blank cheque to somebody? The past two cyclical peaks 2000 and 2007 were followed Second, cryptocurrencies. Bitcoin plunged after Elon Musk by the dot.com bust in 2001, triggered by the terrorist attacks announced Tesla had suspended vehicle purchases using Bitcoin, of 9/11, and the global financial crisis in 2008, prompted by citing environmental concerns over the so-called computational the bankruptcy of Lehman Brothers. Global markets fell, on average, by about -50% on each occasion and did not bottom out cryptocurrency market, with bitcoin hitting a low of $30,000 until March 2003, after the invasion of Iraq, and March 2009, before bouncing back. The sharp drop reversed the gains after the banks stress tests. Recovery eventually came in both made since Teslas announcement of its purchase of $1.5bn instances, but only after locking in huge losses. in bitcoins, which drove the How do you avoid these nearcryptocurrency to a record high existential, but seemingly regular, of $65,000. Janet Yellen, the US crashes that cause huge losses? You secretary of the treasury, pronounced need to remember two aphorisms A heavy dose of common bitcoin as highly speculative, while about the markets to keep yourself sense is helpful; nothing goes Jerome Powell, chair of the Federal out of financial harms way: the laws up for ever and trees do not Reserve, called cryptocurrencies of supply and demand, which began grow to the sky vehicles for speculation. Would with the Romans, and the basic you ever swap a bar of 24-carat gold emotions of fear and greed, which for a bitcoin? began with Adam and Eve. Third, Archegos Capital. Six global banks that acted as prime In other words, be ever vigilant and mindful of economic brokers to Archegos Capital allowed it to make highly leveraged reality and human nature. A heavy dose of common sense is bets, and when the firm defaulted on margin calls instructions also helpful; nothing goes up for ever and trees do not grow to add more collateral to its broker accounts the banks to the sky. Armed with this prescription, what to make of the current resulting in some of the worst losses on Wall Street in more volatility in 2021, with several indicators flashing red, than a decade. Now, the $64,000 question is how much suggesting the clock is about to strike midnight and all will turn hidden leverage is there in the financial system? Would you into pumpkins and mice? Lets take three examples: specialpurpose acquisition companies (SPACs), cryptocurrencies, and financial history? high leverage. Sky-high SPAC valuations, frenzied trading of There are currently 534 SPACs in the US, such is their cryptocurrencies and highly leveraged market bets what could popularity, but what are the chances of them all finding good possibly go wrong? To quote Dorothy from The Wizard of Oz: businesses in which to reverse? Are there 534 quality operations Ive a feeling were not in Kansas any more. We must be over in existence and in search of a shell company, or will the the rainbow. majority be left disappointed? According to the Financial Times, 43 Impact ISSUE 34 2021_pp42-43_Lorna_Tilbian.indd 43 18/06/2021 13:55