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I've been contemplating this thread for some time, but having a hard time thinking through how I want to present it. "It's complicated" is a good summary.
My basic thesis is this: Money seeks money, and the financial markets will invent or exploit any available means to get their cut, even if that creates volatility and eventually crashes "the market." We've seen serial applications of this principle in operation over the last century plus - Subprime Mortgages; Derivatives (Mortgage Backed Securities); Junk Bonds; Leveraged Buyouts - the basic concept is that where there is loose money sloshing around, financiers will find ways to sop it up. In doing so, they tend to create huge bubbles - in real estate, in tech, Crypto, in whatever-seems-pretty-at-the-moment. In gambling this is referred to as "betting on the come" - betting that something in the future is going to bring your ship in.
A SPAC (Special Purpose Acquisition Company) is the "investment vehicle" realization of the gambling concept. "A SPAC is referred to a “blank check company” as it’s a company without any external commercial operations that is formed solely for raising capital through an IPO for the purpose of investing the pooled money. [6] The SPAC sponsor, given a two-year deadline, then searches for a private company to merge with and ultimately take public — thereby skirting certain SEC regulations required for a traditional IPO. [7] Typically, SPACs are formed by prominent investors or sponsors who are knowledgeable about a particular industry. [8]" SPAC to Reality: The Rise, Fall, and Possible Future of SPACS In contrast to an IPO, a SPAC has no assets, no history, no commercial operations. It is formed to buy something else, a way to park money looking for opportunity.
Digital World Acquisition Corp (DWAC), which is looking to "merge" with Trump Media (Truth Social) is just such an entity, although it broadcast its intent from the outset. Usually SPACs are much more opaque. This is inside money, you're not supposed to give away the game. The way the initial investors/sponsors make their money is as the stock price jumps on speculation, they cash out leaving the sucker public to take the losses. DWAC was "offered" at $10/share, but is trading at $44 based entirely upon speculation. The target, Trump Media, is a financial black hole - it lost $49 million dollars on $5 million in revenues last year - but the speculators are betting (literally), that an infusion of this huge amount of capital will make it a market juggernaut, despite the clownish management.
SPACs became very popular post-COVID, but led to a rash of losses and bankruptcies - just like Subprime Mortgages; Crypto; and overleveraged bubbles of the past. They are, however, a great way to extract money from sucker investors while the original investors chortle all the way to the bank - literally. Trump, BTW, is a master at this play: "I’ve written about Trump Hotels & Casino Resorts before. Ordinary investors, drawn to the stock by the perceived, by them, allure of the Trump name, ended up relieved of their shirts, pants and shoes and were left standing on the Atlantic City boardwalk in their undergarments.
Yes, Trump himself pocketed millions. Stockholders pretty much lost everything." So too, Trump Vodka, Trump Shuttle, Trump Steaks, Trump University... the list is long. But, I digress.
My point is not to talk about Trump, but the concept of the SPAC and its risk to the markets. DWAC is just a prime example of the risk.
My basic thesis is this: Money seeks money, and the financial markets will invent or exploit any available means to get their cut, even if that creates volatility and eventually crashes "the market." We've seen serial applications of this principle in operation over the last century plus - Subprime Mortgages; Derivatives (Mortgage Backed Securities); Junk Bonds; Leveraged Buyouts - the basic concept is that where there is loose money sloshing around, financiers will find ways to sop it up. In doing so, they tend to create huge bubbles - in real estate, in tech, Crypto, in whatever-seems-pretty-at-the-moment. In gambling this is referred to as "betting on the come" - betting that something in the future is going to bring your ship in.
A SPAC (Special Purpose Acquisition Company) is the "investment vehicle" realization of the gambling concept. "A SPAC is referred to a “blank check company” as it’s a company without any external commercial operations that is formed solely for raising capital through an IPO for the purpose of investing the pooled money. [6] The SPAC sponsor, given a two-year deadline, then searches for a private company to merge with and ultimately take public — thereby skirting certain SEC regulations required for a traditional IPO. [7] Typically, SPACs are formed by prominent investors or sponsors who are knowledgeable about a particular industry. [8]" SPAC to Reality: The Rise, Fall, and Possible Future of SPACS In contrast to an IPO, a SPAC has no assets, no history, no commercial operations. It is formed to buy something else, a way to park money looking for opportunity.
Digital World Acquisition Corp (DWAC), which is looking to "merge" with Trump Media (Truth Social) is just such an entity, although it broadcast its intent from the outset. Usually SPACs are much more opaque. This is inside money, you're not supposed to give away the game. The way the initial investors/sponsors make their money is as the stock price jumps on speculation, they cash out leaving the sucker public to take the losses. DWAC was "offered" at $10/share, but is trading at $44 based entirely upon speculation. The target, Trump Media, is a financial black hole - it lost $49 million dollars on $5 million in revenues last year - but the speculators are betting (literally), that an infusion of this huge amount of capital will make it a market juggernaut, despite the clownish management.
SPACs became very popular post-COVID, but led to a rash of losses and bankruptcies - just like Subprime Mortgages; Crypto; and overleveraged bubbles of the past. They are, however, a great way to extract money from sucker investors while the original investors chortle all the way to the bank - literally. Trump, BTW, is a master at this play: "I’ve written about Trump Hotels & Casino Resorts before. Ordinary investors, drawn to the stock by the perceived, by them, allure of the Trump name, ended up relieved of their shirts, pants and shoes and were left standing on the Atlantic City boardwalk in their undergarments.
Yes, Trump himself pocketed millions. Stockholders pretty much lost everything." So too, Trump Vodka, Trump Shuttle, Trump Steaks, Trump University... the list is long. But, I digress.
My point is not to talk about Trump, but the concept of the SPAC and its risk to the markets. DWAC is just a prime example of the risk.
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