Investors are getting angsty about inflation and its implications on the economy. Google searches for inflation are now at their highest levels since late 2010. The stock market has never responded favorably to inflation.
Historically, inflation means rising interest rates, a slowing economy, and receding bottom lines – all leading to stock declines. We’ve gotten a glimpse the past couple of weeks of what may be on the horizon when the Dow shed nearly 1,200 points between May 7th and May 12th.
Inflation is sending many investors scrambling from not only the stock market but from the crypto markets as well.
In just ten days, beginning on May 9th, Bitcoin plunged more than 40%. Reeling from such a steep fall, Bitcoin investors are reassessing the value of investing in something intangible with little value other than what investors are willing to pay for it. You can’t touch it or feel it, and as a currency, it’s lousy – not widely accepted as payment anywhere other than the dark web.
Inflation is setting the stage for an exodus from the stock and crypto markets towards two types of assets:
- Hard Assets.
- Inflation-Friendly Assets.
Why Hard Assets?
Besides possessing underlying value that would prevent the complete loss of an investment, the right tangible asset that generates income in lockstep with inflation is also an ideal hedge against inflation.
There are certain goods that consumers are always going to need, like food, shelter, and fuel, no matter the economic environment. Hard assets tied to these essential goods that are minimally impacted by price increases are essential for protecting any investment portfolio against economic shocks.
Just as the right asset can be an ideal hedge against inflation, the right SPACs invested in these types of assets can also hedge against eroding buying power.
Already a hot market, SPACs may gain even more momentum in an inflationary environment. Why?
Stocks are deemed high risk in an inflationary environment, but SPACs may be ideal for market jitters. That’s due to the way SPACs are structured. Because investors have to approve a merger target, they ultimately have a say in what the SPAC essentially invests in.
A SPAC specifically targeting a merger candidate invested in hard assets – especially those that are inflation-resistant – would offer advantages that companies invested in intangible assets don’t.
Besides veto power, an investor could always sell his/her shares in the SPAC for whatever reason but could hold onto the warrants to benefit from any upside from a future merger. This explains the appeal of and significant interest in SPACs – the relatively low risk that they present.
Besides all of the other advantages of SPACs, there is one advantage that specifically counters inflation. SPACs generally have two years to find an acquisition target and to complete a deal or face liquidation. In the meantime, the money SPACs raised in the IPO is placed in an interest-bearing trust account that invests in treasuries.
In short, your investment capital that is put in a holding pattern while a SPAC identifies a merger target is invested in treasuries, which only rise with inflation.
With SPACs, There’s No Need To Fear Inflation.
SPACs offer the investing public tremendous opportunity to get in on the ground floor of a public company.
With the decline in IPOs in recent years, opportunities to invest in the next Facebook, Google, or Amazon have diminished noticeably. SPACs fill this void with little risk to the investor.
In the worst-case scenario, if a merger isn’t completed within the two-year deadline, investors get their money back, but with interest earned from treasuries shielded from inflation.