NFTs
Moving on from cryptos, let’s examine another one of the truly bizarre manifestations of Bubble 3.0 and the tens of trillions of global central bank funny money – NFTs. For my more “mature” (and conservative) readers, this stands for Non-Fungible Tokens. That helps a lot, right?
Maybe a peak into the art world might help convey (sort of) what these things are. To quote Barron’s on those that are art-related: “NFTs are unique digital works encrypted with an artist’s signature that prove authenticity and ownership.” The artist Beeple discovered the joys of NFTs in March 2021 when a digital collage of his creations, “Everydays: The First 5000 Days”, sold for $69 million. It had been minted as a digital token and stored on blockchain (the previously mentioned cyber-ledger widely used for crypto trading).
While Beeple’s NFT was certainly the blockbuster, it wasn’t a fluke. There was subsequently a string of million-dollar-plus NFT transactions. One involved Twitter founder Jack Dorsey’s first tweet, which fetched nearly $3 million in March of 2021. Showing how mainstream NFTs had gone by 2021, Barron’s ran this cover story on them in their Penta special supplement, oriented toward the high-net-worth set.
Consider these illuminating comments by Evan Beard, national art services director at BofA’s Private Bank in Barron’s Penta. First, he noted the advantages, and then just a bit of a problem. “Art gives you utility and NFTs have been lacking in the utility delivered to the client—in the aesthetic value, the pleasure, the status.” Then, the not-so-hot news: “We believe 99.9% of NFTs being minted right now will go to zero.” That seems a bit extreme to me but in the approximate disastrous neighborhood (and reminiscent of what is probably in store for almost all those 6000 or so cryptocurrencies).
On a much more mundane, but quite humorous, level, Charmin, (yes, the maker of the cotton-ball soft TP), auctioned rolls of its signature product accompanied by some artistic designs. It immediately received a bid for $2100. Personally, I’d rather buy mine at Costco and they can keep the art.
In another crypto echo, NFT artists can generate one design and then replicate it 10,000 times. Call me old-fashioned but I don’t think that has the makings of a scarce investment. The venerable bubble-buster Jim Grant cited the example of an NFT series by some outfit called EtherRocks. With eerie resemblance to Dogecoin, one fan referred to its NFT collection accordingly: “It’s so stupid that it’s perfect.” Forrest Gump might have quipped about how: “Stupid is as stupid does.” And someone did something incredibly stupid, at least in my mind, with another NFT called the Bored Ape Yacht Club. Per Mr. Grant, a pair of their tokens, along with a warrant (like an option) to create new ape variants, went for a cool $26.2 million at a Sotheby’s auction in September 2021. The buyer clearly went ape… sorry, I won’t use another four-letter word.
Again, quoting Grant’s Interest Rate Observer (IRO), one of my favorite research reads, “Some vendors offer images to which they have no rightful claim.” That seems like a problem, but maybe I’m being picky.
EtherRocks’ website, once more courtesy of Grant’s IRO, also channels Dogecoin’s Markus by advising that its assets: “…serve NO PURPOSE beyond being able to be brought (sic) and sold.” Maybe it wasn’t a sloppy typo; perhaps it meant bring it and we’ll sell it — no questions asked. Somehow, I strongly suspect EtherRocks takes a cut of the transactions it processes.
EtherRocks also managed to pay homage to its name by cleverly resuscitating the 1970s pet rock rage. Several of these sold for $100,000, or more, in the summer of 2021. The first half of 2021 turned out to be a golden age for NFTs with $2.5 billion in transaction volume (realizing this pales in comparison to cryptos).
But the much bigger NFT money involves CryptoPunks (if you’ve heard of it, I’m impressed; or worried about where you spend your spare time… and investment dollars). According to Wikipedia, each one has been algorithmically produced via computer code. Allegedly, no two images are precisely alike, but some have more unusual characteristics than others. They were originally free and could be acquired by anyone with an Ethereum wallet.
Like Bitcoin, they have a hard issuance cap. In this case, it is far lower at 10,000. 1000 of those existing images are shown below. Apparently, most of these images are of humans but there is also a smattering of Zombies, Apes (it seems as though the NFT world is “Planet of the Apes”) and Aliens. It’s nice to know humanity keeps such good company.
Figure 4
But don’t laugh — a CryptoPunk that was purchased for $443 in 2018 sold for almost $4.4 million, at least in Ethereum (which is theoretically convertible into US dollars). And all of you crypto traders reading this thought you were crushing it with Bitcoin!
SPACs
The craziness doesn’t end with NFTs, of course. There is another acronym that is in some ways yet more outrageous, if nothing else for the large sums involved. This initialism is SPAC and it stands for Special Purpose Acquisition Company. SPACs are basically so-called “blank check” entities. They are funded by investors who are willing to trust that the SPAC will make wise investments with the capital they raise. Typically, the actual investment is unknown at the time of funding, hence the blank check nomenclature.
SPACs became enormously popular in 2021 despite their opacity. In the first quarter alone, SPACs represented $170 billion in mergers and acquisitions, commonly known as M&A, amounting to roughly 25% of all M&A activity.
SPACs themselves raised nearly $80 billion in fresh capital in 2021’s first three months, slightly more than for all of 2020, almost totally on U.S. exchanges (befitting America’s status as the world’s most overvalued and wildly speculative investment venue). This early year hyper-popularity caused me to warn in my January 1st, 2021 EVA that SPACs were due for a serious spanking. Since that time, the SPAC ETF (of course, there’s an ETF for them!) swooned by 35%, even though the S&P 500 has vaulted roughly 20%.
Trusting in SPAC sponsors to intelligently and carefully deploy capital in an environment where almost everything has been driven up to ridiculous valuations by trillions of central bank liquidity creation is another remarkable leap of faith. The SPAC insiders have a great deal: If they get lucky and their SPAC explodes higher — as many have done, often before imploding — they make a killing; if it flops, they still make good returns due to their rewards for establishing the SPAC. Thus, their incentive is to launch these deals and hope they find a solid investment… or, more likely, a sexy story that they can spin to push up the market price. This allows them to sell at least a portion of their ownership interest that they typically received at no cost.
Starwood CEO Barry Sternlicht had this to say about SPACs during the heady days of their amazing craze: “You can’t compete against stupidity. It’s a little out of control. No, it’s a lot out of control. Don’t expect Wall Street to regulate the launch of SPACs. They’re making too much money. If you can walk, you can do a SPAC.” As the old Wall Street idiom goes: When the ducks are quacking, feed them.
90-year-old Sandy Robertson built his investment career as a stockbroker helping Warren Buffett accumulate a 5% stake in American Express in the early 1960s, when that iconic U.S. company’s stock had been pummeled. (For an interesting nugget of Buffettology, please refer to the Appendix.) Sandy went on to become one of Silicon Valley’s earliest and most renowned dealmakers, helping to co-found two of the Valley’s leading investment firms: the eponymous Robertson Stephens and Montgomery Securities. Thus, he’s seen his share of bubbles and busts.
When SPAC mania was still raging in the first half of 2021, he told The Financial Times: “This SPAC thing is very indicative of the later stages of a cycle.” (He could have also said “bubble” instead of “cycle”.) “There are some that are pretty good, but at the bottom there is a lot of junk.” (He could have also used another four-letter word that would be much stronger than “junk”.)
After noting that there were far too many buyers chasing after a limited amount of worthwhile takeover targets, he went on to say: “The seller has the advantage on the price. They (the SPACs) are going to pay too much. It’s the proliferation of them that I’m worried about.” He was alluding to the fact that SPACs have a limited time to make their play; otherwise, they need to return the uncommitted funds back to investors, a most unlucrative outcome for the sponsors. Thus, they are in a hurry to find targets and rushing is a recipe for making imprudent investments. Based on how hard these have been hit since their early 2021 apex, Mr. Robertson’s warnings were well founded.
Before moving ahead to the next example of 2021’s casino conditions, I’ll end this section with one of the most incredible case studies in SPAC absurdity. A SPAC by the name of Hometown International managed to raise $2.5 million, including from the universities of Duke and Vanderbilt. Perhaps that sounds like a modest amount, but its market value was anything but in May of 2021 when it hit $100 million. What was truly modest was the SPAC’s lone asset (other than its rapidly depleting cash): a delicatessen in Paulsboro, New Jersey. This was not exactly the second coming of Carnegie Deli; it’s total sales in 2020 were $13,976. That’s right—no zeroes after the number.
Hometown International’s CEO also serves as the wrestling coach at the local high school. He grandly told The Financial Times that: “We will not restrict our potential candidate target companies to any specific business, industry, or geographical location.” Perhaps a wrestling coach’s skills are exactly what’s needed for a tiny deli to do a takedown of a much larger entity… which would be just about any company.
As Columbia law professor and takeover expert John Coffee told the FT, referring to Hometown International, sounding a lot like Sandy Robertson: “(It) is a self-parody of a SPAC. And that’s what I would expect at the end of a bubble.” Hedge fund legend David Einhorn, marveling at this monstrous disconnect between true value and market value—even by 2021’s outrageous standards—quipped: “The pastrami must be amazing.”