The cannabis complex, buoyed by the tailwinds of favorable legislation, social acceptance, medical recognition and the CBD craze, continues to grow at a rate only eclipsed in the last century by internet adoption. Investor dollars, stymied by the headwinds of the federal-state conflict, flow in at a rate certain to be dwarfed by the capital tsunami that will follow its resolution. While many current investors will experience outsized benefit from organic growth and corporate acquisition, far more are likely to experience unfavorable outcomes as investments are impacted by federal legalization.

Cannabis companies today face one of three outcomes in a federally legal environment – survival, acquisition or dissolution. While the clear goal is to survive or be acquired, the unfortunate outcome for many will be dissolution – a natural process as this emerging market continues its march toward maturity. The cannabis industry a decade from now is likely to have a fraction of the 32,000 businesses in existence today. Of course, the industry will employ far more than its current 250,000 participants, will have impacted virtually every other industry as we know it, and is likely going to prove to be the best performing asset class in any well diversified portfolio.

Float More. Steer Less.

Cannabis investment strategies are well served to accommodate the following:

Legalization Inevitability: The House of Representatives vote on the SAFE Banking Act is imminent. This legislation would prevent federal regulators from punishing financial institutions for providing services to cannabis-related businesses operating in compliance with state laws. Federal agencies continue to educate themselves and many are preparing to support the industry. The DEA has previously stated that cannabis has ‘no current accepted medicinal value in the United States’, while the U.S. Department of Health and Human Services holds patent 6,630,507 which covers ‘the potential use of non-psychoactive cannabinoids to protect the brain from damage or degeneration caused by diseases such as cirrhosis.’ The resolution of this hypocrisy became easier to prognosticate as the DEA’s notice, published in the federal register on August 27th, 2019, officially expanded scientific and medical cannabis research and removed hemp from its definition of cannabis. (Hemp and marijuana share the same genus and species within the Cannabaceae plant family. If a cannabis plant has THC content below 0.3% on a dry-weight basis, it is considered hemp and is therefore legal in the U.S. Conversely, THC content above 0.3% is considered marijuana or non-hemp cannabis and illegal). The space between perceived and actual risk to legalization is often where investment alpha resides.

Free Trade: Cannabis remains an odd commodity. It is both an intoxicant and a medicine, embraced as well as vilified depending on the century and year; with those who have sought a commercial relationship enjoying corporate boardrooms and enduring criminal detention. It is legal in many states and illegal in many others - unless one considers hemp, also accurately called cannabis, which is legal as a result of the 2018 Farm Bill. While it is legal to grow and transport hemp throughout the country, non-hemp cannabis remains illegal to move across state borders. Could it become the only federally legal substance under such a harsh travel ban?

It is possible that tax revenues will continue to provide supply-chain insulation incentives and thus lead to balkanized marketplaces. It is also possible for it to take decades for cannabis to be allowed to freely move about the country. After all, it was only in 2005 that the Supreme Court struck down laws in New York and Michigan prohibiting the consumer import of out-of-state wine. Given this new precedent, we think it far more likely that cannabis trade barriers are removed along with prohibition with the north-west regaining its historical place as the overwhelming supplier of the nation’s cannabis. In the words of the classical economist Frédéric Bastiat, “To sever natural interrelations is not to make oneself independent, but to isolate oneself completely.”

Asia: China remains the global cannabis super-power with over half the world’s hemp production, where licenses for CBD extraction and product manufacture have already been issued to a privileged few. India, another country that has embraced cannabis for thousands of years, has also begun issuing licenses and its deep Ayurveda-based cannabis roots provide further confidence in a move toward expanded medical use. Japan boasts the oldest recorded cannabis use dating to 8,000 BC as well as the oldest population with 27% currently over the age of 65. Cannabis was made illegal in Japan only in 1948 when the Cannabis Control Act was passed under U.S. occupation after WWII and is likely to reverse course with the alleviation of the exported pressure of propaganda and prohibition. Given the impending changes in the region, the Asian markets will certainly challenge and likely surpass North American markets over the next decade.

Global Medical Markets: A consistent precedent to adult-use legalization around the world remains medical acceptance. We continue to marvel at the pace of legal change with twenty-three countries having introduced laws governing medical use. Australia, Germany, Italy, Israel, Greece, Norway, Poland, Switzerland, Luxembourg, Chile and Colombia are examples amongst this group, many of which are expected to move toward adult-use as their medical markets mature. Many more countries will join this group as governments begin to accept the vast medical, social and tax benefits that accompany such moves.

Global Adult-Use Markets: Canada followed Uruguay as the second nation to legalize the adult use of cannabis, and Mexico along with New Zealand seem poised to follow. Luxembourg recently announced plans to become the first European country to legalize cannabis production and consumption, while South Africa decriminalized personal cultivation and consumption on September 18th, 2018. Israel and Thailand are each making bold moves in their regions as positive global shifts in attitude become more prevalent.

The cannabis movement offers unprecedented opportunity and positive change as it impacts our food, fuel, fiber, paper, medicine, environment, social justice, civil rights and cognitive liberties. A world with freely traded cannabis is also a world with less alcohol, fewer opioids, lower prison populations and decreased domestic violence; a world with compassion, compatibility and perhaps a gentler form of consciousness. Cannabis thus represents a multi-generational opportunity for wealth creation along with social impact. As investors create diversified portfolios within the cannabis complex, a view over the arc of time can be informative and profitable. Know what you own and know why you own it.

The Grass is Greener Where You Water It.