Trump and Pump
Just this morning I read that the plan to take Truth Social public through the Digital World Acquisitions (DWAC) SPAC (Special Purpose Acquisition Company) was getting derailed by one aberrant investor that wanted to get a bigger piece of the pie. There was a certain ironic justice in that potential outcome of derailing Trump’s latest get-rich-quick scheme, but alas, I see that the vote went through anyway, which means that someone prevailed on this outlier and got him to vote to let the deal go forward. In other words, undoubtedly, someone bought the man off. This deal is said to be giving Trump a potential windfall in the realm of $3 billion if the price of the stock of this newly public entity holds its head up. As a recent article in the Wall Street Journal noted, the history of the intersection of Trump and public markets has not been a particularly successful combination in the past, so it should prove to be an interesting exercise.
I spent a good deal of time when I was teaching Advanced Corporate Finance at University of San Diego a few years ago on the SPAC phenomenon. SPACs were all the rage in the 2021 era and had died a quick, but perhaps premature, death by 2022. I had three guest speakers with substantial knowledge in the space talk to my class in 2021 and had none address the topic in 2022. I might add that this was not the first incarnation of the SPAC mechanism on Wall Street. Its a vehicle that has been used several times before, but it always falls out of favor because it is simply not rooted in any sort of financial common sense. It is basically a formula for giving people with minimal domain expertise a blank check to go take a flyer on something. The people who have always benefitted the most in SPAC world are not the investors in this slippery vehicle, but the organizers of the vehicle. That is why the latest iteration of the sport has involved getting brand name celebrities to hype the SPAC and draw in wide-eyed small investors that have gotten their hands on some play money to energize their otherwise apparently boring lives.
Back in the early part of the Millennium, when asked about the real estate bubble and why banks like his own Citibank invested so heavily in highly structured and arcane products, Chuck Prince famously said, “As long as the music is playing, you’ve got to get up and dance.” When I asked my savvy financial friends why people were still putting together SPACs, they pretty much told me the same thing. If everyone is doing it, why not do it and make a few bucks on the back of the less savvy? It’s a shitty way to think about public markets because it is the extreme version of the greater fool theory.
When I saw that Donald Trump set up Truth Social, it made sense given his displeasure at being boxed out by Twitter after January 6th, 2021. Setting up the company with Devin Nunes at its head caused me to chuckle because it seemed to me that such a move just made success that much more unlikely. Truth Social has about 2 million users, which is a pittance compared to Twitter, Instagram or Facebook, but it does get mentioned almost every day in the press since Trump is using it as his megaphone even though Elon Musk has let him back on the Twitter (X) platform. The company (technically called Trump Media & Technology Group) is being valued at $6 billion in the current offering environment despite performing horribly as a business. In fact, the company is typical of every Trump business he has ever started. It is all smoke and mirrors and very little if any substance to it as a business. With DWAC trading at $40 per share compared to normal IPO issuance prices of, say, $13, its fair to suggest that there is something like a 3X hype premium. My raw guess is that the real economic value of the stock is closer to something in the range of $4, making this a more like 10X pump and dump scheme like those pushed by Stratton Oakmont in The Wolf of Wall Street.
What that generally means is that just like the electorate base feelings about Donald Trump that are illogically boosted by his misinformation and outright lies, the reality that will eventually set in will leave those that have been most enthusiastic in the ash heap of despair and failure. The small investors that are pumping the value of DWAC to $40, depending on when they exit, will either make a small trading profit or lose their shirts. The rewards will go to the shrewd and nimble and the dregs will go to the slow and faithful. The big question for the world is whether Donald Trump, who owns about 60% of Trump Media & Technology Group, will really pocket the $3+ billion that current market pricing implies. I should note that when the public offering is complete, as is the convention with SPACs, the DWAC name and ticker will be replaced by the DJT ticker. It is prophetic to note that DJT was the ticker for Trump’s ill-fated casino public venture that tanked several decades ago.
The way SPACs work, there is generally a lock-up period during which holders of the founding stock cannot sell their shares. In this case, that lock-up is for six months. During the dot-bomb era, lock-ups were often twelve months. I know that all too well in the case of a company I invested in called Six Degrees, which was an early predecessor to Facebook. During the lock-up period, rationality set in and the traded stock price fell to a mere fraction of its intended value and what was supposed to be a $1.5 million investment fell to $50,000 or about a third of what I had invested. C’est la Guerre with the travails of investing in the latest greatest stock hype. Had I put that $150,000 into Facebook at IPO, it would be worth about $750,000 today. So, I think it is fair to say that the idea was right, but I just picked the wrong horse to back.
It will be fascinating to see if the small investors that have pumped up the price of DWAC and will be the holders of DJT going forward will grant Trump a waiver to sell his shares early. He will undoubtedly ask for that and in some ways, his brinksmanship over the whole $500 million bond, is a perfect set-up for that ask. Trump’s supporters love to throw money at him for apparently no reason, but it will be interesting to see if they will let him front-run them so blatantly in this SPAC pump and dump scheme that is getting so much press attention. In some ways, its a perfect scenario for Trump. He can get their permission, sell out to solve his personal liquidity problems, wave goodbye them and then claim innocence when the market ultimately moves against them. He once again gets a free pass to blame something or someone (in this case the “market”) while he skips off into the sunset with other people’s money, like always.
Overall, this just makes the whole Trump story all the more dramatic and sets up 2024 like the final act of a very suspenseful play. We all know how it will end, we just don’t really know who will get killed along the way in the final scene. There is little doubt that the faithful that put money behind Trump will get slaughtered. It would take a miracle and an end-of-the-real-world situation for Trump to pull off all that he is balancing on his nose at the moment. One thing teeters on another. If he prevails in the election, then his criminal indictment issues mostly go away for the time being. If that happens, he will undoubtedly figure out a way to mitigate his civil penalties. Then his Truth Social platform would likely prevail either naturally due to his ascendancy to the throne of King of the World or through his regulating his competitors out of existence (making the current anti-trust litigation against Apple look like an opening act). This will all allow his faithful followers to probably monetize his lunacy and temporarily prevail in a world gone mad for the moment.
The more likely scenario in my opinion is that Trump will prevail in part or in whole in getting permission to take some cash out of his DJT interest with the faithful paying that price when it all comes crashing down, likely within the confines of 2024. Since I am a person who believes that the world is coming to its senses (much too slowly, but very assuredly) and they will not let Trump off the criminal and civil liability hook and that the election will fade away into a tragic rout that will have Trump get his ego-bursting comeuppance that will be so complete that a repeat of January 6th and the Big Lie won’t even be remotely possible. In a strange way, the salvation of Trump through DJT may become the straw that breaks the camel’s back. Let’s hope so.