Manic "SPAC"-ulation: For Our Long-Time Readers, the Crash Came as No Surprise

In 2020, SPACs topped Wall Street's wish list. And now, they're scraping the bottom of the bearrel. The warning signs were there

by Editorial Staff
Updated: March 13, 2023

In June 2021, the global art world let out a collective "What the fork!?" after an Italian sculptor sold his latest creation titled "Il Sono (I Am)" for over $18,000. The sculpture, pictured below, was set inside a 5-by-5-foot wide square taped off on a cobblestone street on the Piazza della Scala in Milan, Italy.

Yes, you're seeing it right, or rather, not seeing it right. There is nothing actually inside the taped-off square. In fact, the sculpture is invisible, although according to the artist, "You don't see it but it exists; it is made of air and spirit."

Now you might be saying to yourself, who in their right mind would spend 18 grand on an intangible piece of art with a value defined purely by the artist's subjective imagination?

To which I'd say, have you heard of SPACs?

SPACs, known as Special Purpose Acquisition Companies, are the financial equivalent of this invisible sculpture. They're shell companies (as in empty husks) with no profit, product, or prospectus, that create a sponsor team to raise pools of cash to go public, only to then purchase some to-be-determined company. Think of it as a blank check for a billion dollars (or two, or three). The newly-merged conglomerate then has 24 months to return a profit to shareholders or liquidate.

In turn, SPAC creators go around taping off squares on Wall Street, asking investors to look inside and see the invisible spirit of potential within. And guess what? In 2020 and early 2021, that's exactly what they did. These "blank check" companies were the must-have investment with everyone from hedge funds, politicians, financial professors, and professional athletes climbing over each other to give millions of dollars for a SPAC of their own.

On December 19, 2020, the New York Timeswrote: "This year, the hottest trend on Wall Street could be summed up in one strange and unfamiliar word: SPAC."

Forbes followed with "How SPACS became Wall Street's Money Tree."

2021 kicked off with no of easing of manic SPACulation. On January 26 Money.com described the "attractiveness" of SPACs, writing:

"[They're] basically a money-back guarantee, plus potential upside on the warrants if the future merger strikes gold. That is why hedge fund traders, known as the 'SPAC Mafia,' have piled into the sector as a convenient place to park money."

And in February, rapper Cassius Cuvee's song "SPAC Dream" literally sang the companies praises:

"My man Randy first told me Draft Kings would go public/ It's mergin' wit' a SPAC and the market gon' love it/ I'm like a SPAC, what's the hell's that?/ You get in on the ground floor/
It paid big, so I searched and then I found more."

But that song didn't last long. In March 2021, Draftkings, Inc. (DKNG) peaked and plunged 80%-plus into this January.

Which brings us to the second part of the SPAC story. The invisible spirit held within that speculative square went from high-holy to low-down. In February 2021 the IPOX SPAC index, which tracks the aftermarket performance of U.S. SPACs, peaked and also turned down in a very visible crash.

The rapper Cuvee's "SPAC Dream" turned into a nightmare, one shared by all who bought into the investment vehicle's misleading "money back guarantee" promise.

But for our long-time readers, the SPAC crash came as no surprise. Our flagship publication Elliott Wave Financial Forecast began warning of the sector's imminent reversal from the start as these excerpts from archival Elliott Wave Financial Forecast publications illuminate:

October 2020 Elliott Wave Financial Forecast (EWFF, for short):

"IPO Market Parties Like It's 1999... The preponderance of Special Purpose Acquisition Companies, a.k.a. "Blank Check Offerings," places the current IPO craze head and shoulders above all prior IPO binges in terms of cavalier indifference to the undesignated use for the capital being raised.

"Thanks to the white-hot heat of speculation in the summer of 2020, there are now so many SPACs that 'investors can watch the hottest trend in IPOs through an index, the IPOX Spac Index which went live on July 31.' In keeping with the optimism of 2020, the index has continued to rise in the wake of the Dow's September 2 high.

"It's a perfect capstone to the pyramid of financial paper produced over the course of The Great Peak."

January 2021 EWFF:

In 2020, funds raised by SPACs totaled $80 billion, more than in all prior years combined. 'That's pretty bubbly stuff,' says a global macro strategist with a Wall Street research house. In one more sign of an imminent bubble burst, celebrity investors are now flocking to SPACs."

February 2021 EWFF:

"The volume of SPAC deals progressed from non-existent in 2009 to hundreds in 2020. The chart shows what happened in just the month of January 2021: 101 deals hit the market. Prior to 2020, the most IPOs in any full year was 59 in 2019. The Wall Street Journal on January 13 reported, 'SPAC Deals Give Early Investors Steady Returns with Little Risk.' The article quotes an assistant professor of law at New York University, 'It's a free lunch -- there's no way around it.'

"Actually, the old saying, which became popular during the Great Depression of the 1930s, is There's No Such Thing as a Free Lunch, which Milton Friedman borrowed for the title of his book of 1975, in a recession. Apparently, SPACs will be part of the re-learning process."

March 2021 EWFF: "In the annals of the coming bear market, many stories of SPACtacular failures will be told."

Flash ahead two years and one massive crash and the March 2023 EWFF resumes its analysis of SPACs. Its chart of the IPOX SPAC Index confirms that "many of those failures are rolling in now."

Described by Bloomberg on Dec. 14 as "The Great SPAC Crash of 2022," the reversal of blank-check companies fortunes was, unlike its invisible upside potential, evident to all:

"For firms that went public so far in December, an astonishing 96% of shareholders elected to redeem their stock on average. That's on pace for a record spate of redemptions.

"It all threatens to quicken the industry's collapse to a rate that's faster than even its biggest detractors predicted just months ago, a reversal from the cheap-money era that created more than 900 firms since 2019."

When it comes to financial manias, the ability to discern reality from the imagined hopes and dreams of the masses is difficult. Too often, the difference becomes clear only after an undeniable undoing.

One way to see the truth of where the leading financial sectors are headed is through the purely objective lens of our Elliott Wave Financial Forecast.

See below to learn more about what insights our brand-new March 2023 Elliott Wave Financial Forecast has in store.