Collapse of Junior Markets Signals Opportunity


It’s a HUGE paradox that global indices are at all time highs while nobody in the junior markets can raise one thin dime. Its as though the market is punishing cannabis for its impudence in creating billions in wealth and then yanking the rug out from underneath.

Resource stocks have been oscillating between life support and dead cat bounce since 2012, rendering one of Canada’s historically most prolific value creation industries a near pariah.

Technology in Canada is also generally a non-performer, as is biotech, energy, transportation, and consumer goods.

How did this happen? Why do Canadian startups suffer to the point of collapse from capital starvation while behemouth American firms gobble up vast swaths of market share in anything they approach with what seems like limitless capital?

The market as an entity is much like the universe, though. It doesn’t actually care about nationality or you or me or anyone.

It happily submits to the distortive effects of government welfare in the form of Quantitative Easing and Zero Interest Rate Policy. The sheer volume of subsidies that these two financial sleight-of-hands represent occurred from 2010 to 2015 primarily in US dollars, and since then, has shifted into Euros.

There are no QE programs conducted in Canadian Dollars. Canadian central bankers are too focused on sound economic management, and missed the opportunity to print Canadian dollars with the abandon of Europe and the US.

Today, the times are defined by a bi-polar, paradoxical universe.

Half the world hates Trump, half love him.

The large cap indices are breaking records to the upside, the small cap indices are plumbing new depths.

Governments are giving money away for nothing, but small companies can’t get their hands on any of it.

Welcome to the supremely distorted financial system – the result of huge power imbalances in the geopolitical universe that brought us to this point.

Canadian companies are starting to feel the pinch most acutely. Even to the point of bankruptcy.

Thanks to the compressed timeline of cannabis’ rise and fall, there is a trepidation about investing in anything in Canada that is also symptomatic of another bifurcation: those who got out of cannabis in time – probably mostly through no particular genius – and those who did not and rode it into the ground.

Thus, the most affluent segment of the Canadian start-up investor has been hived in half, with those who lost out too poor to invest, and those who won, too jumpy to deploy capital. The entire start-up, resource and tech universe, in Canada has gone into paralysis….again.

The relationship among US dollar proliferation through QE and ZIRP, and the absence of capital in Canadian and other G7 markets for start-ups, is lost on most market participants.

But all this leads me to the point I’m trying to make here, and that is this: nothing goes up forever, nor does anything go down forever. The biggest winners in a bull market are those who go first, not last.

And as we can see by the recession consuming half the population of the United States while markets set new highs, the stock market has nothing to do with the economy in those issuers who are the ultimate destinations of all that fabricated capital. Liquidity breeds upside breeds disinterest in sectors and markets that don’t participate.

And pray for financial mayhem in the banking sector! We need a disruption in the status quo to reignite markets in real things.

Merry Christmas, anyways.

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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