Will this Junior Bull Market Continue? The Micro and Macro Perspective

Today, I want to answer one broad question that I have been getting asked by many:

“Will this bull market run in Canada continue?”

Let me tell you why I think it’s only getting started, from both a micro and macro perspective.

I urge you to read this Letter in its entirety.

The Inside View

Over the last few years of our Canadian junior bear market, it was rare to see industry professionals lurking about in the financial districts during the summer months.

Even in previous junior bull markets (when the money was good), those in the investment world took advantage of every bit of time off in the summer for fancy vacations.

But this summer things are different.

Walk into the core of the Canadian financial districts and you’ll see people making deals, talking about financings, and pursuing every opportunity available.

There is money – tons of it – still waiting to be deployed into junior projects.

We’re going to see some big buyouts, big deals, and more big financings in the coming months. This isn’t just a gut feeling – this is the noise and chatter I hear from those directly involved.

Companies are no longer struggling to find money but are now turning it away.

But don’t just take my word for it.

On a year-to-date basis up to the month of June, financings on the TSX Venture for 2016 has already surpassed 2015 by over 100 financings and a whopping CDN$280 million.*

*Update: I wrote this earlier last week. Total financings up to July 2016 year to date is now 943 vs. July 2015’s 793.

We haven’t seen this type of bullish sentiment for a very, very long time.

And while there are those still wondering if it will last one, six, or twelve months, what I am seeing is that new groups are just beginning to pile in. This shows me that we’re only getting started.

Every day I am getting pitched new deals and every day there is a group asking me to tell their story through this Letter. All of sudden, everyone has the next big project and the money to pursue it.

While this attracts a lot of the filth that was weeded out over the last few years during our Canadian junior bear market, it can also be a time where a lot of money can be made.

And we should be taking advantage of this opportunity as best as we can – even with the not-so-strong companies.

What do I mean?

Upside in Lesser Assets?

I have always been candid with the things I write in this Letter; I tell it how it is, even if it means getting into trouble with those who have opposing views. Perhaps that is why many of you have supported this Letter, and perhaps that is why I sometimes also lose subscribers.

When times were tough, I said to invest in companies with strong fundamentals and strong management because when things turn, they will be the first to move higher.

They have moved higher and will continue to if the market keeps going.

But now that the market is moving, even the not-so-great companies can see tremendous upside.


Yes, a rising tide lifts all boats. But that’s not all.

In this market, there will be companies that start out with no-so-strong fundamentals but end up with great projects and a strong performing stock.

I am not telling you to invest in every company that’s being promoted, as you will likely be inundated with numerous pitches.

But what I am saying is that liquidity can lead a good company to greatness.

Let me explain.

If You Build It, They Won’t Just Come

If you ask any fund, 9 times out of 10 they will choose a company with medicore fundamentals and a heavily traded stock, over a company with good fundamentals that trades little volume.

Liquidity in a stock allows funds an easier exit – that’s obvious.

But liquidity also gives a company the ability to use its stock to purchase assets or hire great management and employees.

Just look at what Keith Neumeyer, Chris Osterman, and Patrick Donnelly have been able to do with First Mining Finance (TSX-V: FF)(OTCQX: FFMGF).

They were able to acquire phenomenal gold assets with barely any cash – not only because of their reputation to get things done but because they were aggressively pounding the pavement promoting their story.

This has allowed their team to acquire millions of ounces of gold and raise millions of dollars – they just closed a CDN$27 million financing and now have over CDN$37 million in the bank.

Their efforts created one of the most highly traded Venture stocks on the market today. And that alone is worth a lot.

My point is this: success doesn’t just come from a great asset – it comes from a management team’s hard work and their ability to continually expose their story to a wider audience.

There are much better beers than Budweiser, but its one of the best-selling in the world because of great marketing.

The same applies to junior stocks.

So before you go and invest in the next junior,

ask their management this:

“What will you do to market your story?”

Any illiquid stock can rise a few percentage points if there are no sellers and a few buyers, but it’s much more important to have a few sellers and a lot of buyers.

Of course, none of this would matter if gold and other commodities take a dive. And in this scenario, weaker companies will fall much faster – especially those without liquidity.

On that note, let’s look at the macro perspective.

The Outside View

We’re now in a time where billionaire hedge funds are buying gold, while shorting stocks (Stanley Druckenmiller buying gold; Carl Icahn’s unprecedented net short stock position of 149%).

While the timing of their positions has yet to prove themselves as big wins, the underlying factors playing a role in their positions are becoming more prominent.

As I mentioned in a previous Letter, world debt is accumulating at the fastest pace in history, while business debt will likely climb to $75 trillion from its current $51 trillion level by 2020, according to S&P Global Ratings.

From a consumer level, the Fed just released its quarterly update on both auto and student loans – both of which have set two new records: an all-time high in car loans at US$1.1 trillion, and a new high in student loans at $1.4 trillion.

On the other side of the world, the Bank of England cut interest rates for first time since 2009, expanded QE by £60bn over six months, added a £170bn package of additional measures designed to stimulate the economy, and will begin to buy corporate debt starting in September in a bid to drive down corporate funding costs.

And guess how this will all be paid for?New money creation courtesy of the Bank of England.

In other words, anyone talking about global deleveraging anytime soon is living on another planet – especially when you consider that the Bank of England’s goal is to

allow commercial banks to borrow a proportion of their outstanding lending to UK businesses and households for four years at rates close to 0.25%.

In fact, according to the Bank of America, following the BOE relaunch of QE, “around 45% of the global fixed income market is now “compromised” by central bank buying.”

That means nearly half of the global fixed income market is owned by central banks!


Because there isn’t enough demand to take on the risks associated with these low yield bonds.

As Bill Gross put it:

“Low yields mean bonds are especially vulnerable because a small increase can bring a large decline in price.”

And according to Fitch, if yields were to go back to July 2011 levels, it would trigger losses of as much as $3.8 trillion for $37.7 trillion worth of investment-grade global sovereign bonds:

“Fund managers that have been counting on returns of 7 percent to 8 percent may need to adjust that to around 4 percent, Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, said during an Aug. 5 interview on Bloomberg TV. Public pensions, including the California Public Employees’ Retirement System, the largest in the U.S., are reporting gains of less than 1 percent for the fiscal year ended June 30.

It’s no wonder “The Bank of England’s expanded quantitative-easing program ran into a stumbling block on just its second day as investors proved unwilling to part with their holdings of longer-dated bonds.”

Via Bloomberg:

“The central bank said it received offers to sell 1.118 billion pounds of gilts due in more than 15 years on Tuesday, compared with a target of 1.17 billion pounds. The scarcity led to the BOE accepting all submissions, even as some investors offered prices above the prevailing market. The highest accepted price for the 4 percent bond due in 2060, for example, was 194.00, compared with a weighted average of 192.152.”

If this doesn’t prove just how yield-starved funds are becoming, I am not sure what will.

In other words, in a global negative-rate environment, if you are looking for yields, the only place on the curve to be is longer-term bonds.

Or better-performing assets such as gold.

Of course, money can also be deployed to where interest rates are expected to rise…

The United States of America

We’ll likely see the price of US bonds shoot up as investors chase higher yields.

In the short term, this makes sense.

The US just announced a glowing jobs report and all signs point to a small rate hike this year.

Of course, if this were to happen, gold – the other asset investors are flocking to – could take a hit on the strength of the dollar.

But don’t think that it will undoubtedly decide gold’s fate.


First off, I have already discussed how job numbers rarely tell the real story – and the recent glowing jobs numbers were no different.

While the news was that the U.S. economy added 255,000 jobs during the month of July, a closer look tells a different story.

Remember a few years back when I told you about the labor participation rate?

In short, the U.S. economy has to create at least 150,000 new jobs just to keep up with population growth. If we go by the unadjusted numbers, that threshold wasn’t met which means employment actually got worse last month – not better.

And the proof of the pudding is in the eating.

Not long after the jobs report, we were just told that the longest slide in worker productivity since the late 1970s is here.

Via WSJ:

“Nonfarm business productivity-the goods and services produced each hour by American workers-decreased at a 0.5% seasonally adjusted annual rate in the second quarter as hours worked increased faster than output, the Labor Department said Tuesday.

It was the third consecutive quarter of falling productivity, the longest streak since 1979. Productivity in the second quarter was down 0.4% from a year earlier, the first annual decline in three years. That was a further step down from already tepid average annual productivity growth of 1.3% in 2007 through 2015, itself just half the pace seen in 2000 through 2007, and the trend shows little sign of reversing.”

But that’s just a small part of the American story.

American Politics

The battle between Hilary Clinton and Donald Trump is heating up.

Regardless of whoever ends up leading the US, the incoming President will likely have to announce a massive fiscal policy that will lead to the debt ceiling being raised again.

Trump just proposed a plan to rebuild U.S. infrastructure in a massive new government program that will cost a whopping half a trillion dollars. And given he has also promised to give Americans the biggest tax decrease, this money has to come from somewhere.

Clinton, on the other hand, is expected to give the US a combined deficit effect of nearly $2.2 trillion over the next decade, according to Gordon Gray, the Director of Fiscal Policy at the American Action Forum.

Via American Action Forum:

“…Based on…estimates, Secretary Clinton’s proposals would, on net and over a ten-year period (2017-2026), increase revenues by $1.3 trillion, increase outlays by $3.5 trillion, for a combined deficit effect of nearly $2.2 trillion over the next decade.”

If Trump wins, he’ll spend and decrease taxes, which means the US will have to borrow an exuberant amount of money.

If Clinton wins, she’ll spend and increase taxes, which is likely to hurt consumer spending, leading to potentially lower tax revenues.

That means that no matter who wins, the US will have to borrow MORE money. If interest rates rise, the cost of borrowing for America will too…

US 30-Year Yield to Zero?

Which is likely why Toshihiro Uomoto, Nomura Holdings’s chief credit strategist forecasted last week that the yield on 30-year US Treasuries could plunge to zero in two years as a result of yield-starved “Japanese money” flooding the US and chasing returns of US Treasuries.

Via Bloomberg:

“The yield on 30-year Treasuries could plunge to almost zero within two years as investors seeking higher income streams shift funds from Japanese government bonds into the U.S., according to the Asian nation’s biggest brokerage.

“Japanese money” will move into the sovereign securities of other major economies as about 900 trillion yen ($8.9 trillion) of JGBs offer negative yields, Toshihiro Uomoto, Nomura Holdings Inc.’s chief credit strategist in Tokyo, wrote in a report on Monday. The decline in global yields will weigh on consumer sentiment, put pressure on banks’ interest income, and may result in more stimulus from central banks, according to Uomoto, ranked as Japan’s top credit analyst by Nikkei Veritas for three of the past four years.”

His forecast came true in just a few short days:

“Last month, yields on U.S. 10-year notes turned negative for Japanese buyers who pay to eliminate currency fluctuations from their returns, something that hasn’t happened since the financial crisis. It’s even worse for euro-based investors, who are locking in sub-zero returns on Treasuries for the first time in history.”

Translation: The cost to borrow dollars to invest in US Treasuries has gone up so much that any gain that a foreign buyer could get from higher US yields are wiped out by currency fluctuations.

It’s no wonder Bill Gross is telling people to buy hard assets such as gold and real estate.

Via Bloomberg:

“I don’t like bonds; I don’t like most stocks; I don’t like private equity,” Gross, who runs the $1.5 billion Janus Global Unconstrained Bond Fund, wrote in his monthly investment outlook Wednesday. “Real assets such as land, gold and tangible plant and equipment at a discount are favored asset categories.”

Too Much Money

The world is awash in money and debt – so much so that the governments of the world will eventually own more than we will. Just ask Japan who is now the largest shareholder of Japanese stocks.

There is so much free money that we don’t know what to do with it; yields are practically non-existent with global negative interest rates.

But there is one solution: give it away.

Recall in my June Letter, Secret Government Experiments:

“…Money is cheap and will likely remain cheap, and the cost of holding money is more than it would be to deploy it in riskier assets.

So what’s the solution?

The only way out is to either raise taxes exponentially, which hurts the economy, or the last and final resort: helicopter money.

What is helicopter money?

Helicopter money is exactly what it sounds like: free money from the skies.

To make things simpler, imagine a tax break, or a tax refund given directly to you by the government, who borrows it from the central bank.

Of course, it’s only temporarily free. The money is still owed by the government to the central bank.

And government debt equals taxpayer debt.

It’s essentially forcing you to borrow money from the central bank.

Don’t think for one second that this is a far-fetched idea.

In fact, not only did Janet Yellen not raise rates this week, she actually alluded to the fact we could see helicopter money coming.

…In Europe, lawmakers are already urging the central bank to deploy free money to citizens.

…Don’t think Canada is out of the question. In fact, basic income experiments are underway – an experiment whereby the government gives people money for free, for nothing.

Don’t believe me? Check Trudeau’s pre-budget report, it’s in there.

In Japan, this is already happening through government asset purchases of stocks.”

And not a week after that Letter from June 19, 2016, we get a headline from Ontario stating exactly what I said would happen:

Ontario Moving Forward with Basic Income Pilot

Via Ontario.ca on June 24th:

“…The province has appointed the Honourable Hugh Segal to provide advice on the design and implementation of a Basic Income Pilot in Ontario, as announced in the 2016 Budget.

Basic income, or guaranteed annual income, is a payment to eligible families or individuals that ensures a minimum level of income. Ontario will design and implement a pilot program to test the growing view that a basic income could help deliver income support more efficiently, while improving health, employment and housing outcomes for Ontarians.”

And in Japan, just months after that Letter?

Via FT:

“Shinzo Abe has put Japan at the forefront of a global shift away from austerity and back towards looser fiscal policy as he launched a new ¥4.6tn ($45bn) stimulus to boost a struggling Japanese economy.

…Few precise details are available – the package contains a laundry list of measures for ministries to spell out later – but the welfare spending is expected to include childcare subsidies and a payment of ¥15,000 ($147) each for 22m low-income individuals.”

Debt-to-EBITA Unmatched Since 2000

Of course, you could always just put all of this free money into stocks. Which is precisely what’s been happening as witnessed by the continued climb of the US markets.

But according to Barclays, that too is getting frothy:

“The median debt-to-EBITDA ratio of the non-financial companies in the S&P 500 has reached 2.3x, a measure unmatched since 2000, which is the earliest year that we have reliable data.”

Their conclusion:

“Similar to our view on payout ratios limiting dividend growth, we believe debt-to-EBITDA has reached a point where it is becoming a constraint on additional leverage.”

Of course, then there’s the one asset class that’s beating them all…

All that Glitters

While gold may have just taken a hit from the “incredible” jobs report before rebounding as a result of poor US productivity numbers, gold’s climb could just be beginning.

I haven’t even begun to talk about the US trade deficit which somehow got swept under the rug.

Via Yahoo Finance:

“The U.S. trade deficit increased to the highest point in 10 months, driven up by a big rise in imports of oil and Chinese-made computers, cell phones and clothing.

The deficit rose to $44.5 billion in June, 8.7 percent higher than a revised May deficit of $41 billion, the Commerce Department reported Friday. It was the biggest gap between what America sells abroad and what the country imports since a $44.6 billion deficit last August.”

If the strength of the US dollar continues, you can expect this deficit to climb – one that will surely weigh on the US economy and add another roadblock for a September rate hike.

When the dust settles, gold could once again turn higher – especially considering that the ECB is once again expected to boost stimulus during that same time.

And let’s not forget that from a historical seasonality standpoint, gold generally does well from late August to early October as demand increases as jewelers stock up ahead of the seasonal wedding event in India.

So from a macro perspective, I expect gold to rise – which means we still have tons of fuel for the boom in the Canadian junior market.

Lastly, during a time where countries are fighting their way out of financial uncertainty, tensions are bound to rise.

And they are…

Global Front

On the global front, tensions continue to rise amongst world super powers with nuclear weapons now the centre of focus – yes, we are back to nuclear war talks.

I mentioned this before in my Letter last year, Nuclear Arms Race Threatens the World:

“…We are now closer to global catastrophe than we have been for nearly seventy years.

Since the decision by the United States to use an atomic weapon against Japan in 1945, nuclear weapons have been thought of as the technology that could one day wipe out humanity.

Today, nuclear weapons are making a comeback.

While the media have you focused on other things – stock market, police brutality, leaked celebrity photos – countries around the world have been contributing to a renewed nuclear arms race.”

If you think I was out of line for writing that Letter, think again.

Via the Guardian in April 2016:

“Ahead of the 50-country Nuclear Security Summit that met in Washington DC this past week, President Obama publicly touted his administration’s alleged progress towards “a world without nuclear weapons”. In reality, his administration’s record on reducing nuclear weapons is largely a dismal failure.

Early in his presidency, Obama memorably gave a speech in Prague in which he described “America’s commitment to seek the peace and security of a world without nuclear weapons”. Not only has the administration barely made a dent in the gigantic nuclear arsenal the United States has, it has committed more than $1tn over the next several decades to further entrenching the system into permanence, potentially sparking a dangerous new arms race.”

Last month, we witnessed Putin give a stark warning to America during a press conference regarding this particular subject that now has millions of views.

But Russia isn’t the only combatant.

In China, tensions in the South China Sea continue to escalate.

Via Xinhua News earlier this month:

“Chinese Defense Minister Chang Wanquan has warned of offshore security threats and called for substantial preparation for a “people’s war at sea” to safeguard sovereignty.

Chang was speaking during an inspection of national defence work in coastal regions of east China’s Zhejiang Province.

He called for recognition of the seriousness of the national security situation, especially the threat from the sea.

Chang said the military, police and people should prepare for mobilization to defend national sovereignty and territorial integrity. He also asked to promote national defence education among the public.”

Again, I stress this is only the beginning of world tensions that we should take very seriously.

Seek the truth,

Ivan Lo

The Equedia Letter


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