A broad spectrum and non-biased analysis of business and economic headlines reveals just how fast the global economic picture is deteriorating. Record unemployment in the Euro zone, US unemployment in real terms consistently worse, global housing market stagnant, corporate lending all but frozen, while subprime rears its ugly head yet again.
In the United States, quantitative easing ensures that the top layers of the economic food chain continue to enjoy the high life, while those lower down suffer from undeclared austerity in the form of reduced employment, diminished public sector services, and deteriorating public infrastructure.
Here in Canada, the collapse of the mining exploration market is the first manifestation of an austerity of sorts that is the direct result of the U.S.-dollar fuelled distortion of markets and the economy. By injecting billions into the financial services sector each month, the U.S. stock indices are able to set records, thus creating the very real returns on investment in U.S. equities that attract continuous stream of foreign investment – at the direct expense of domestic markets in countries who are unwilling and/or unable to fabricate capital arbitrarily and in quantity.
Take Canada, for example. If we were to pump exactly the proportional amount of dollars into our own stock markets to offset the subsidization by the United States of its market, we would have a vibrant resource exploration sector, near full employment, and robust economic growth. Instead, we stand idly by while our resource sector collapses as capital flees to the supercharged U.S. market where the subsidies are delivering returns to investors.
We can do nothing to stop the United States from undermining global trade through quantitative easing. Their strategy of undermining faith in world markets while creating the appearance of health in their own is a brilliant plan. However, Canada can and should act immediately to thwart the total collapse of its exploration sector. Direct investment in companies with viable proejects by a specially configured federal fund would not only boost the companies who were beneficiaries of such investment – it would send a clear signal to investors that the Canadian resource exploration market – just like the U.S. equity markets – will be protected and when necessary, subsidized by our government to ensure its viability and future.
The confidence that has been destroyed could thus be won back. But we also need to reform the structure of our equity markets. There is too much advantage handed to domestic investment banks at the direct expense of individual and foreign investors. These advantages need to be curbed.
Some of the key deficiencies in Canadian equity markets included:
1) Absence of transparency: Investment banks are able to unload large positions accumulated at a discount through distributed accounts that conceal the identity of the seller. Canada needs a system that identifies and tracks the sales of large institutional sellers in real time – not after the fact. The existence of House “anonymous” in the system is an embarrassment to market participants who support full transparency and market integrity. The ability to offload large positions anonymously is one of the key benefits to larger sophisticated investors that is a pure assault on the idea of transparency.
2) Related Parties: There is wholly insufficient oversight of the ownership or control of combined positions of equities in accounts held by family members and other related parties by large sophisticated investors in the Canadian marketplace. While it is true that this is a traditional and long-standing situation where only a direct holder of 10 percent or more of any equity needs to file as an insider, creating a framework where insiders were defined as having 5 percent or more would be a step in the right direction as concerns transparency. That in combination with the requirement that all family, spouse, domestic partner and related comapny holdings be categorized as a single insider for reporting purposes would completely revise the level of transparency, and would encourage foreign investors to return. Sophisticated market participants will fight such rulemaking every step of the way – they hate the idea of sacrificing any advantage that allows them to operate anonymously. But we need a regulator with balls who is not a former or current owner of any interests in any investment banks or similar institution to make it happen and enforce it.
3) Flow-thorugh: Canadians love their flow-through, and there are more than a few Canadian multi-millioinaires who made their fortunes on the back of the flow-through structures. But flow-through shares create an immediate and permanent disadvantage for foreign investors, in that they must compete in their exit for equity holders with a near-zero cost basis share. And poeple wonder why stocks go from a buck to ten cents when large flow-through financings are part of a comapany’s capitalization. Flow-through, originally deployed as a way to inventivize investors during the doldroms of mining in the first part of the 2000′s was a successfull if not very well thought-out subsidy for the market. But its flaws are now all too obvious, and the disadvantage to foreign investors plain. Its time to dump flow-through and replace it with some other form of incentive that is available to all investors in Canadian resource projects.
4) Algorithmic Trading: Needs to be banned. Period. The ability of computer systems to probe and evaluate weaknesses in share prices has brought many otherwise viable companies to their knees. Ban it. End it. Outlaw it. End of story.
5) Short sales: In combination with algorithmic trading, short sellers are typically sophisticated, large and institutional parasites. The whole argument that they provide market efficiencies by identifying the weak is certainly true to some extend – Muddy Waters and Sino Forest a perfect example. But in the cases of junior companies, who have no revenue and advance solely on the confidence investors have in management, short selling is deployed as a destructive opportunistic mechanism for profit, and creates the appearance of weakness, which then quickly transforms into very real weakness, and a run on the bank ensusues. Canada needs to recognize that it is not NASDAQ, and it needs to find ways to regulate short selling into a more benign mechanism.
As the TSX Venture heads to the sub-1,000 point range, the Canadian government’s complacency will one day be identified as the missed opportunity to save the country’s near-monopoly on mineral exploration and finance. Conversely, if the government steps up now, and acts, it will be remembered as the crucial moment when a decisive government saved tens of thousands of jobs and an entire industry.
If the United States can leap in with over a trillion dollars in “bailout” funds to save their banking sector, and then continue to subsidize their stock markets at the direct expense of Canadian markets, how can we stand idly by and not come up with some kind of solution to stabilize the market, revise the structure of the whole resource finance game so that the deficiencies are eliminated and the confidence of investors both foreign and domestic is