The Poster Child : Part 2
Don't Fight TINA
Gundlach’s Poster Child
Back to Gundlach’s thesis on the poster children for this bubble and how safe then not so safe ratings lead to precipitating sell offs:
Do the majority of Crypto holders currently believe crypto is AAA+ rated corporate paper? If not it can’t be the poster child. Every other day there is a another report about Bitcoin’s volatility being too high.
It goes like this.
Something new hits the scene.
Traditional institutional investors avoid it.
It proves itself by generating superior returns for a sustained period. Say about half a decade. If something has proven itself stable over a certain period of time then it is viewed as safe whether rightly or wrongly by groupthink and not rating agencies. Unfortunately, once the supposed safety has been demonstrated, the hot returns are gone, and those last in get screwed. It is taking unusual, higher risk, in the unproven that generates outsized returns that if they persist draw in more money.
There is all this Fear of Missing Out (FOMO) theory as being some kind of mass psychology driver in the crypto markets. What’s important is that the number one driver among the institutional money out there is Fear Of Loss. When a risky product is viewed as safe, but it turns out not to be, Fear Of Loss kicks in and selling begins.
Gundlach mentions crypto as the potential poster child, but for the reasons mentioned above (that pretty much all market participants acknowledge the risk openly, and many just put their yolo bucks, i.e. money they can afford to lose) crypto seems unlikely to fit the bill. However, there is a another strong candidate for a poster child.
Just 4 years ago I was pursuing a rollup strategy in a space that was in distress, but it involved large complicated transportation equipment. There was too much of it, and every single company that engaged in it was approaching some form of restructuring (the civil word for going broke). Restructuring involves swapping debt that firms cannot pay back for equity, or in the worst case discharging those debts through bankruptcy.
Sensing an opportunity, I convened a meeting of 3 of the global heads of the divisions of the 8 biggest investment bank. I had an idea. Lets put them all under one roof using a SPAC.
There was stunned silence. Then a kind of “we’d still like to have you as a client so we won’t make fun of you”, but SPAC? Are you serious? No one has done a SPAC in like 30 years and we could never raise money for that.
Now they are not only on every street corner, but also the quality of these deals is questionable. I will give two examples.
Imagine you and your family owned a clothing company. Then a guy from Wall Street came in one day and said “Hey, I have a way for you to withdraw $500 million USD+ from that company, and retain 60% ownership of the combined entity”. You’d laugh. Because for that to be true there would have to be investors wiling to participate in such a deal.
This the exact final terms of the Zegna SPAC. Do you think the management team still has the proper incentives with a $500 million ATM withdrawal and retaining 60% ownership? That is insane. Who bought that?
The second deal was announced but it is unclear whether it has been completed. It has reached the prospectus stage. And reading the ridiculous prospectus is worth a moment of time for a laugh. Essentially, a Miami plaintiff’s lawyer and a real estate developer want to take a law firm that excels at tracking down Medicare unpaid bills, and unleash it on the market at a $45 billion (billion with a B) valuation.
Are we in a general bubble across asset classes? I agree with Grantham and I think so. “The markets can remain irrational longer than you can remain solvent” is an oft quoted saying because it is true. Also, the trend is your friend (until it isn’t), so don’t fight the trend. Don’t fight the fed.
AND NOW DON’T FIGHT TINA (There Is No Alternative).
Do I agree with Gundlach’s theory on the cycle? Yes. Could Bitcoin, Ethereum, and other DeFi tokens be in a period of over-valuation? Definitely. But there’s no one that can withdraw $500mm from a Bitcoin ATM and own 60% of the remaining market. That’s the whole point. That’s part of what makes it unique.
Look at the picture on the back of the milk carton and you’ll see it’s a SPAC.