Front-Running Collective Irrationality

I have to tell you: What interests me isn’t always what “sells” for the financial media or for sites that seek to monetize various manifestations of hysteria.

On weekends, I often delve into theory and venture into political philosophy, sometimes bolstered on that journey by guest posts like Saturday’s “Rage Kapital.”

As much as it may make sense for most portals to eschew meaningful analysis in favor of ready-made content crafted to appease an American public that would sooner inject bleach than engage with intellectually challenging material, part of my raison d’être is to deliver daily missives that matter. And that means that click generation is nowhere on the list of factors that influence editorial decisions.

With that caveat, I’m going to throw anyone who enjoys an occasional easy read a bone and talk (briefly) about IPOs.

Normally, I don’t care too much about the latest “hot” IPO story, in part because each one is conceptually inseparable from the last. It’s the same song and dance every time. Everyone involved is keen to reap an absurd windfall from a liquidity event in a tech-ish unicorn that’s “disrupted” some previously stodgy industry or market.

Usually, the machine works. Last week, we hit something that felt like peak absurdity for this cycle, when Airbnb more than doubled in its debut, valuing the company in excess of $100 billion.

There are exceptions where the story is more nuanced and hence more interesting to folks like myself. Aramco’s IPO, for example, came with all manner of tangential geopolitical narratives, every, single one of which was compelling. And while I can’t say this for sure, I imagine the dozens of Airbnb stories that ran last week were more lucrative for the media (from a click-harvesting perspective) than almost anything written on Aramco in late 2019.

It’s possible that recent activity is “ringing the bell at the top,” so to speak, which makes this story worth another mention, as repetitive as it is. For example, average first-day returns are the highest since the dot-com bubble.

At the same time, the percentage of IPOs from unprofitable companies (which has been elevated for years) hit 80% in 2020. According to Jay Ritter, at the University of Florida Warrington College of Business, that figure has been higher just two times: In 2018 and 2000.

Again, it’s difficult for me to editorialize in a meaningful way because the dynamics (i.e., the drivers) and the read-through in terms of sentiment are so glaringly obvious, that none of this lends itself to in-depth treatment.

As usual, Bloomberg’s Sarah Ponczek does a good job of capturing the zeitgeist in a few sentences. “For stay-at-home tech plays and cloud computing upstarts to just about anything a blank-check impresario can dream up for a special-purpose acquisition company, there has virtually never been a better time to sell a private business to public shareholders,” she wrote Friday, adding that Fed “stimulus and the reemergence of individual investors as the market’s biggest force” are fueling the fire, which is, in turn, “sowing anxiety among Wall Street pros while making a generation of entrepreneurs rich.”

That’s really it — the whole story. The figure from Goldman (below) helps drive home the point.

“SPAC IPO capital raising in 2020 totals a record $70 billion, a remarkable fivefold increase from last year’s record high that was itself up 44% from 2018,” Goldman’s David Kostin wrote on Friday afternoon.

“The acceleration in retail trading activity has increased investor appetite for non-traditional and early-stage businesses,” he added, noting that “SPACs offer an alternative route to the public markets for firms [and] have low opportunity cost for investors when policy rates are near zero.”

So, yeah. This whole story is rife with froth. And, like other manifestations of froth in 2020 (and during bubbles past), it’s been whipped up by monetary policy and retail investors, with the latter being either totally irrational or else geniuses, if only because they recognize an opportunity to make money by front-running the market-moving potential of their own collective irrationality.