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What’s Next for the Cannabis Economy?

What’s Next for the Cannabis Economy?

Two more U.S. states voted to legalize recreational marijuana during the primaries: Michigan and North Dakota.

Michigan voted for it. North Dakota against it. That brings the number of states that allow recreational marijuana to 10.

Approximately 1⁄4 of Americans have voted to legalize recreational marijuana.

Almost all states now allow medical marijuana today.

A Gallup poll showed the bulk of Americans now favor legalization. The social stigma that marijuana is harmful continues to fade away to nothing.

Even 64% of Republicans are in favor of legalizing it. Why? Because of the tax revenue.

California generated $75M in tax revenues in the 2nd quarter of 2018. On
track to deliver a cool $300M in extra money in 2018. (And that’s only the beginning: although legal, access is severely restricted.)

Even our law enforcement are disregarding marijuana as an issue..

In Florida, Lee County Sheriff Mike Scott said “Marijuana is probably the least of our problems.” (Even better, law enforcement officials see cannabis tax revenues as a welcome boost to their own budgets. As a telling example, Colorado’s law enforcement officials requested 10% of the State’s gross cannabis tax revenues.)

And it goes without saying that businesses love marijuana too. Retail recreational sales of cannabis are now $6.5 billion (bn) across the 10 states.

So what will happen when marijuana becomes legal across all 50 states? Expect a straight-line up and to the right – to the tune of $30bn in recreational pot. Add another $20bn in marijuana related products and medications.

Federal Government: THE Big Impediment

However, marijuana is a Schedule 1 drug for some reason. That means, per Federal law, it is absolutely illegal and no prescriptions can be written for it. Also included in that list: Heroin, LSD, and quaaludes (among
others). The Alice in Wonderland situation: pot is illegal by Federal mandate and legal in most
States.

The key here is the restriction is mandated by a Federal agency: the DEA (Drug Enforcement
Agency). The DEA decides what drugs are on the restricted list. Removal can be determined by either:
(1) Congressional vote or (2) Executive action.

If States now legally sell marijuana, Why does Federal legalization matter?

One word: banking.

Inter-state commerce is illegal which prevents banks and credit card companies from engaging.

This simple obstacle creates a world of pain for the pot business. Retailers are cash-only, and
become lightning rods for crime. In turn, local legislation mandates costly security. And on and
on and on.

Without Federal legalization, cannabis is radioactive to banks. Legalization leads to big
opportunities. For example, a national market will lead to the rapid emergence of marijuana
futures.

My Prediction: Trump Will Legalize Marijuana

Politics suggest Trump will legalize marijuana.

The process is incredibly easy: the Executive branch can direct the DEA to reschedule it as a less controlled substance. Poof – pot becomes legal.

He won’t see any opposition either. We have a remarkable convergence in favor of legalization coming from social, political, and business interests.

Legalizing marijuana is consistent with various Trump agenda items:

• Trade: Canadian pot is legal and entering the US. Trump would prefer a home-grown source
• Mexican cartels: Pot is a major revenue source for the cartels. And Trump hates the
cartels
• Law Enforcement: A lot of resources get tied up in prosecuting marijuana crimes.

Why legalize now?

With an economy likely to slow in 2019, enabling an offsetting $50bn market is very attractive. Given that it takes time to emerge, better start now and have a win to discuss for the 2020 election.

Politics is really the main reason to move forward now.

First, it undermines the Democrats. Legalization is a progressive move that steals thunder from the Democratic party (the party that tends to be branded as progressive).

The Dems can’t possibly vote against it. Meanwhile, the Republicans will get the credit.

Second, and probably most important, pot legalization would be an incredibly welcome distraction.

Legalization would dominate the airwaves and political environment. And Trump may need that distraction with a Congress bent on attacking him and his agenda.

Take Russia, for example. Which is more likely to generate popular support: a move to legalize pot or a 3rd year of Russia investigations?

It was a fortuitous coincidence that Jeff Sessions was just forced to retire. He was the lone voice
in the Administration against cannabis legalization, and as Attorney General, his voice mattered.

Now he is gone.

How To Invest In The Cannabis Industry

My suggestions is to invest in pot stocks with a very short-term perspective (2~3 quarters).
As background, consider history and the uncanny resemblance to what happened when alcohol was legalized in the U.S. following prohibition.
At the time, alcohol was legal in Canada and illegal in the U.S.  In the run-up to legalization in the U.S., Canadian liquor companies saw their stock prices surge. After all, they had the production facilities and brand names.
But then reality set in. The barriers to entry were actually low: alcohol distillation is a simple industrial process and the U.S. had plenty of raw materials for the process. Prices would drop from competition.
The result: the Canadian companies stock prices collapsed.
Compare that to the cannabis market and you will see an identical set up.
Another problem is choosing the winners.
If you must, avoid names and buy into cannabis with an ETF like MJ.
KEY POINT: Legalization of pot in the US is actually a very bad thing for currently traded pot stocks.”

Sincerely,

Andrew Zatlin

Editor of Moneyball Economics

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