A Big Cannabis Compromise in the Works?
By Dan Ahrens, chief operating officer of AdvisorShares and portfolio manager of the AdvisorShares Vice ETF (Ticker: ACT)
The upside potential of the cannabis industry remains enormous. However, the fact of the matter is that marijuana remains federally illegal in the United States. While sensationalism may appear to constantly dominate the news cycle, we may have received more clarity during the last week and a half regarding the prospects of the broader U.S cannabis industry perhaps than any other time in recent history. We’re not referring to Dennis Rodman’s well-publicized appearances in Singapore surrounding an unprecedented summit between the heads of state of the United States and North Korea, which involved an unabashed promotion of a certain cryptocurrency sponsor. Instead, the introduction of a bicameral, bipartisan piece of legislation on June 7, an impromptu press availability by the president of the United States on June 11, and comments by the U.S. Federal Reserve chairman on June 13 brushed strokes of remarkable definition across a landscape that may be more quickly evolving than realized.
Investing in cannabis must be exercised with extreme caution. As mentioned, marijuana remains illegal in the United States at a federal level despite its allowance under select circumstances across a number of states, the District of Columbia, federally-recognized tribes and U.S. territories. The Strengthening the Tenth Amendment Through Entrusting States Act, or STATES Act, was introduced by Senators Cory Gardner (R-Colo.) and Elizabeth Warren (D-Mass.) and Representatives David Joyce (R-Ohio) and Earl Blumenauer (D-Ore.) to address an increasingly blurry boundary regarding marijuana policy and law enforcement.
The STATES Act is not a federal legalization of marijuana per se, but instead amends the Controlled Substances Act. The bill aims to shift the marijuana policy debate firmly into the domain of states—allowing those states, tribes and territories to decide how to approach marijuana within their borders. Two essential components of this proposed legislation include 1) protecting marijuana users as long as they’re acting in compliance with state, territory or tribal laws, and 2) addressing financial issues caused by federal prohibition by stating that compliant marijuana transactions are not trafficking and do not result in proceeds of an unlawful transaction. The press release announcing the proposed legislation, a fact sheet and the bill text can be viewed by visiting here.
Reading the tea(pot) leaves further shows an interesting picture with enhanced clarity. President Trump made news during a spontaneous media availability on the South Lawn of the White House prior to boarding Marine One beginning his long journey to Singapore, stating that he would support the proposed legislation co-introduced by Gardner. Gardner, a Republican senator in a purple state that has established itself as a poster child for attempting to responsibly embrace marijuana use, previously blocked U.S. Department of Justice (DOJ) nominees, which he eventually lifted, due to lingering concerns about the cannabis industry. The good faith efforts made publicly suggest the continued nurturing for a potential compromise.
As previously noted on this platform, headlines were made earlier this year when DOJ announced it would rescind prior guidance from the Obama administration that largely ignored federal prosecution of marijuana offenses. Gardner’s previous block on DOJ nominees was done in response to that reversal seeking to enforce marijuana policy, which would have impacted his home state. The DOJ situation eventually relented, also compounded by its lack of resources to fully enforce federal laws strained by legislative actions like the Rohrabacher-Blumenthal amendment, which offers certain protections for medical marijuana use. The STATES Act would effectively prohibit DOJ and the federal government from interfering with states over their self-determined approach to cannabis.
In a chaotically charged environment even by Washington, D.C. standards, a lot of integral parts are lining-up that suggest a meaningful, bipartisan compromise can be reached regarding cannabis. The proposed STATES Act also calls for the legalization of hemp, which Senate Majority Leader Mitch McConnell (R-Ky.) has publicly supported given the economic impact it can bear on his home state. Additionally, Senate Minority Leader Chuck Schumer (D-N.Y.) has been a public advocate for the decriminalization of marijuana use. With Sens. Gardner and Warren working together, and the posturing exhibited by leadership on both sides of the aisle, a consensus appears to be building in the Senate.
While the Senate gains momentum, could this type of legislation realistically hold-up through the U.S. House of Representatives? Considering the upcoming election cycle, and President Trump’s recent support for the bill, the environment may be ripe for passage. While marijuana remains polarizing to a substantial contingent of the populace, that view has evolved largely due to the economic impact, as well as a better understanding of certain health treatments, driven by cannabis-related industries. Conservative, and by extension Republican, voters are guided by principles of limited federal government and allowing states to determine their own policy regarding important matters, which the proposed STATES Act would grant. Already upward to 40 House Republicans are either retiring or not seeking re-election in the upcoming mid-term election. If the president supports the legislation and applies pressure within his own party – especially if an ally like House Majority Leader Kevin McCarthy (R-Calif.) becomes the next speaker of the house either during the current Congress or if the GOP retains their majority after the November election – then the timing could carry significance. In reality, House leadership must support any bill that comes to vote on the House floor. Despite the perception that both sides of the aisle often seem intent on inaction, cannabis of all issues right now could be one to get accomplished.
Another important wrinkle of the great cannabis debate relates to banking, which is a requisite ingredient for sustained success and growth across its related industries moving forward. While the STATES Act addresses those financial issues caused by current federal prohibition, perhaps the most telling indicator of all came from U.S Federal Reserve chair Jay Powell during his press conference on June 13. When asked about the ability for banks to serve businesses in states where marijuana is legal, Powell presented an unambiguous response:
“This is a very difficult area because many state laws permit marijuana use where federal law doesn’t, which puts federally chartered banks in a difficult area. We think it would be great if that could be clarified. It puts the supervisor (the Fed) in a very difficult position. Of course our mandate has nothing to do with marijuana but we’d love to see it clarified.”
One could easily suggest that not only is the Fed keenly aware of the proposed STATES Act but is further signaling that more clarification would be welcomed concerning a primary hazard surrounding marijuana: the ability to successfully provide banking services without any concerns, restrictions or interruptions from the federal level.
The irony of how a historically polarizing area has evolved into a clear area of potential compromise is telling of these times. And whereas other legislative initiatives can get weighed down by debates over spending, cannabis legislation would trigger a revenue windfall.
We remain big believers in the long-term potential that investing in cannabis-related industries may bring and maintain a close eye on all aspects that could affect the space. Our approach has been guided by investing only in exchange-listed, U.S. federally-legal cannabis-related equities. Blindly investing in any ETFs that track a marijuana index that includes speculative, over-the-counter stocks, which are not federally compliant can only increase investment risk pertaining to cannabis exposure. For if and when a normalization may occur, delivering a wider swath of cannabis-related industries into a clearer legal standing – particularly surrounding recreational use – we believe larger, well-established companies will be positioned accordingly for such a transition, especially select companies within alcohol and tobacco. Stay tuned. The STATES Act as currently presented does not represent a federal legalization of marijuana, but the bill does provide considerably more definition than ever witnessed. At the halfway point in a year of unexpected twists and turns, who would have predicted that cannabis serve as a catalyst for government compromise and a potential boon to both the economy and markets?
The information, statements, views and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but not representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.