The Evisceration of the Risk Investor

Had a conversation last night with a somewhat legendary mining promoter who was calling to tell me that he was in full agreement with yesterday’s missive about Reg A+ offerings. He was worried though that my broadcasting the existence of Reg A+ was going to attract the attention of the exact breed of market pariah that has been responsible for the demise of junior public markets.

But that ilk is already circling Reg A+ like recently woken vampires to virgin necklines.

And as I discuss in yesterday’s piece, they will drive the ratio of negative investor experiences relative to positive ones way higher. But I’m kind of counting on that. It will provide the roadside carnage through which the real deals will glide.

They will come and manufacture Reg A+ deals galore, 99% of which will flop spectacularly like hippos off of diving board in a wading pool.  They will go public too soon, and there will be outright frauds. There will be CEOs buying Lamborghinis, and the full range of bad corporate behaviour risk investors have come to expect.

They’ll come to Reg A+ because there are no risk investors left in the public market. Those poor sods have been sucked dry by the vermin who prey on them like killer whales on penguins.

But there are other factors that are causing the risk investor out of risky opportunities.

My friend outlined a conversation with his broker who advised him to mortgage his portfolio of unencumbered real estate and put the funds raised into large cap index derivatives that could generate a reliable 10 percent. Or close to it. Every year.

That is an enticing proposition.

Mortgage the real estate at 2 or 3 percent and, if the portfolio is worth $100 million, cash in $10 million a year. And pay the tax on it as a capital gain instead of income.

That is such a powerful argument, that lots of former punters are doing something approximating just that.

There are so many ETFs, ETNs, and other lower risk, extremely liquid derivative asset products that are more liquid than the asset class from which they are derived. With no liquidity risk, and no single issuer risk, the prevailing logic is starting to question why take a risk on a junior in a sector when you can play the sector?

This, in combination with the use and abuse by the value-subtract intermediaries in public markets, is what’s driving the risk liquidity drought.

The advent of the derivative security and the Exchange-Traded Product has catalyzed a shift in interest

James West

Editor and Publisher

James West founded Midas Letter in 2008 and has since been covering the best of Canadian and US small cap companies. He covers global economics, monetary policy, geopolitical evolution, political corruption, commodities, cannabis and cryptocurrencies. As an active market participant, James is not a journalist and is invariably discussing markets...
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