As the bellweather for global resource investment, the TSX Venture exchange is as reliable a measurement of sector health as there is in the global financial system. Its continuing anemia is driven by two factors: 1.) the highly destructive fabrication of currency and credit by major governments, and 2) the Canadian government’s utter complacency with the undermining of its resource sector such quantitative easing causes.
Let’s leave aside for the moment any discussion about what motives and intentions may or may not be at work behind the scenes in Canada’s financial and political landscape. The reality is that the resource exploration sector, which has historically financed almost 50% of the world’s startup mining operations, is in a state of catatonic depression. The S&P TSX Venture index has shed 60% of its value since March 2011, and since touching a low of 859.31 in late June of this year, has done little but wallow along sideways, evidently waiting for the inevitable shedding of companies that will start in earnest in 2014 as companies fail to raise meaningful quantities of capital, and, unable to meet their listing maintenance fees, succumb.
Engineering Positive Economic Data
At the current rate of $85 billion a month in tier one capital-eligible securities creation, the United States Federal Reserve and the United States Treasury are in effect distributing the economic velocity of up to 12 times that amount, assuming the entire quantity is fractionally expanded according to Bank of International Settlements guidance.
The effects of such explosive capital and credit expansion is evident: Stock prices are soaring to new highs, and billionaires are being minted at an unprecedented rate. Yet, at the same time, some of the US’ biggest cities are bankrupt, or nearing bankruptcy, and the unfunded liabilities of social security are looming larger than ever with no tenable solution even having been proposed by either party.
So how does the $85 billion a month in Tier 1 capital fabrication – or potentially over $1 trillion a month in new credit – benefit the larger economy, if it doesn’t even address these key financial issues?
U.S. Strategy is Predatory on Trading Partners
The U.S. is waging a covert war against the likes of Canada, Mexico, the United Kingdom, Europe, Australia, New Zealand, Japan, China and virtually every other developed economy by trying to absorb all of the world’s available risk capital into the U.S. markets. The trillions of dollars in cash and credit acts as an advance bailout, essentially transmitting to investors that relative to all other markets in the world, the United States is the backstop and floor on every U.S. asset class.
Thus, investors are driven into U.S. equities because their own governments are either too naive – as in the case of Canada, Britain and the Euro zone – to understand that they are the intended victims, or simply too poor to matter in the world financial pecking order. In other words, if Argentina just started printing money in the U.S. style, it wouldn’t do them any good, because there’s not an investor with a functioning brain cell that would sink money into the uber-corrupt Argentinian financial system. Same goes for Russia.
But Canada? Canada is notoriously smug in its globally-appointed image of world’s most trustworthy banker. While it is true that our conservative banking sector avoided the reckless lending practices of U.S. banks, it fails to recognize that the crisis inflicted upon the world by the U.S. financial services sector has enabled the United States to climb upward on the financial food chain using the backs of complacent and conservative nations who good-naturedly provide the lift.
Invest, Canada, Invest!
Instead of criticizing the U.S. for its reckless and destructive fiscal and monetary policy, Canada stands there like a stunned deer in the headlights while its resource exploration sector is systematically destroyed by such policy. Instead of acting to counteract the G7 race to the bottom, as Bloomberg aptly (although a little late to the realization that that’s what it is alright!) puts it, Canada feebly begs for pipeline access to the U.S. refining infrastructure while selling off its own energy legacy to Asian bidders.
Canada could easily do one of a few things to encourage a return to its beleaguered resource sector:
1) Tighten up the rules regarding anonymous selling of insider’s and institutions’ positions Currently, retail investors have no recourse to determine which institutional investors or major shareholders have lost faith in companies, and they only find out after millions of shares have been dumped through house anonymous and they’re investment is in tatters. The government needs to align the interests of institutional investors more closely with those of retail investors to ensure the success of retail investors. If they win, then the whole sector benefits. The current setup where institutions get in at a huge discount and are standing ready by the dumper at four months plus a day (or 4 months minus 10 days for shorts) has caused the vast majority of Canadians to say “Never Again.”
2) Tighten up the rules on management’s pay, options, and ability to sell stock. The Canadian market attracts more than its fair share of charlatans for the simple reason that CEO’s and their cronies can pay themselves through the nose, exercise and blow off options, before they’ve even created $0.05 in shareholder value. Thats just plain criminal. Reigning in the pay of CEO’s who are operating and paying themselves on investor dollars should really be job 1.
3) Equalize the benefit of Flow-through shares for foreign investors.. There are a good many foreign institutions and high net worth investors who have learned the hard way since the advent of Flow-through financings that the playing field tilts dramatically in favour of Canadian investors when flow-through is employed. Imparting a zero-cost basis for Canadians through tax breaks in many cases, Canadians are incentivized to sell faster and for cheaper than foreign holders. A lot of market participants in Canada don’t really comprehend how much this undermines the attractiveness of resource investing in Canada.
4) How about a sovereign wealth fund for Canada? The fact that we don’t have a sovereign wealth fund to protect the proceeds of our massive resource legacy is just plain stupid. Besides providing a method of diversifying Canada’s reliance on resources, there’s no reason why it could not be brought to bear on the resource sector directly in difficult times such as those we are in right now.
5) The Central Bank should make direct investments into Canadian industry to offset the American QE subsidy. There’s no reason for Canada not to do it. We’re not going to be in a financially superior position of the rest of the world destroys their currencies through hyperinflation and buys all Canada’s future resource product with dollars and yen and euros and pounds that are going to be worthless in 10 years. Plus, that would emulate the floor the US has put on its markets with our own floor.
Now why wouldn’t we do that?
