During the 1720s South Sea Bubble, hundreds of speculative companies emerged with no revenue or clear business plans, mirroring the 2020-2021 SPAC boom. One notorious company was pitched for an "undertaking of great advantage, but nobody knows what it is." This highlights that financial vehicles designed to capitalize on market euphoria are not new.
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The South Sea Bubble wasn't just a market mania; it was enabled by government corruption. Directors secretly gave shares to government officials who, in turn, had a direct financial incentive to keep the share price rising, regardless of the cost to the nation. This highlights how state actors can be complicit in creating systemic risk.
The SPAC structure, which allows early investors to redeem shares before a merger, creates high uncertainty. Because of this risk, any company strong enough for a traditional IPO will choose that route. By definition, this leaves SPACs with a pool of weaker companies that cannot go public otherwise.
The proliferation of billboards for highly specialized, unintelligible B2B companies along Silicon Valley's Highway 101 signals market froth. When advertising shifts from consumer brands to obscure B2B2B services, it suggests excess capital is flowing deep into the tech stack, a classic sign of a potential bubble.
During the bubble, a lack of profits was paradoxically an advantage for tech stocks. It removed traditional valuation metrics like P/E ratios that would have anchored prices to reality. This "valuation vacuum" allowed investors' imaginations and narratives to drive stock prices to speculative heights.
The dot-com era was not fueled by pure naivete. Many investors and professionals were fully aware that valuations were disconnected from reality. The prevailing strategy was to participate in the mania with the belief that they could sell to a "greater fool" before the inevitable bubble popped.
Rules designed to curb wild projections from the 2020-21 SPAC boom are proving ineffective. Companies in speculative fields like nuclear fusion can make bold, 10-year-plus claims that are impossible to regulate in the short term. This allows them to sidestep the spirit of new rules meant to align SPAC disclosures more closely with traditional IPOs.
The South Sea Company, the British government, and investors were all incentivized to push the stock price higher. The company could issue fewer shares, the government reduced interest payments, and investors saw immediate paper gains, creating a circular logic where a rising price justified itself.
Bubbles provide cover for fraudulent activities, as rising prices mask underlying problems. In cases like the South Sea Company and Railway Mania, it wasn't until after the collapse that the full extent of financial engineering, corruption, and deception came to light, by which point it was too late for most investors.
A macro strategist recalls dot-com era pitches justifying valuations with absurd scenarios like pets needing cell phones or a company's tech being understood by only three people. This level of extreme mania highlights a key difference from today's market, suggesting current hype levels are not unprecedented.
Marks argues that speculative bubbles form around 'something new' where imagination is untethered from reality. The AI boom, like the dot-com era, is based on a novel, transformative technology. This differs from past manias centered on established companies (Nifty 50) or financial engineering (subprime mortgages), making it prone to similar flights of fancy.
