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California Marijuana Dreams May Go Up In Smoke.

madhedgefundtrader's picture




 

One issue to be decided on November 2 will be proposition 19, the latest effort to legalize marijuana in California. This is another one of those “Be careful what you wish for” stories. Advocates claim that passage of such a measure would solve the state’s budget crisis, as it would bring in tens of billions of dollars of tax revenue while cutting the cost of our prison budget by billions more. Up to a third of the state’s 170,000 prison population are there for possession of small quantities of drugs.

Proponents are right on the second point, but miss on the first one by a mile. In 1933, the 21st amendment to the constitution repealed the 18th amendment, rendering the Volstead Act unconstitutional, ending prohibition. Tens of thousands of small time backyard distillers, basement breweries, and bathtub gin makers rejoiced at the prospects of a larger market. Instead, legalization caused the price of their products to collapse, driving them out of business. Today, the industry for alcoholic spirits is dominated by a handful of globally integrated marketing giants running volume driven businesses on razor thin margins, like Anheuser Bush (BUD) and Diageo (DEO).

The same would happen to the pot industry. An Internet search reveals that potent Mary Jane today sells for $200 an ounce wholesale, or $400 retail. Legalize it, and that price might drop to the $20 that I heard prevailed during my college days. Your typical Mendocino underground farm or Oakland grow house with its $3,000 monthly electricity bill, doesn’t fit anywhere in this picture.

The same would happen to anticipated state tax revenues. Right now, California smokers pay $1.05 in federal taxes per pack, and 87 cents in state taxes, bringing the average retail cost of cigarettes to $5.05 a pack.  I doubt actual marijuana tax revenues would exceed what it currently earns from cigarette taxes, or $839 million a year.

There is another matter proponents aren’t focusing on. US Attorney General Eric Holder last week said that his Justice Department would continue to prosecute pot dealers, even if the proposition passes, as federal law trumps state law. Federal prisons are already full of former growers who were deluded into thinking they were growing pot legally because they had licenses from the state.

My guess is that the state’s pot industry lobbyists have been smoking too much of their own product when preparing their budget forecasts.

To see the data, charts, and graphs that support this research piece, as well as more iconoclastic and out-of-consensus analysis, please visit me at www.madhedgefundtrader.com . There, you will find the conventional wisdom mercilessly flailed and tortured daily, and my last two years of research reports available for free. You can also listen to me on Hedge Fund Radio by clicking on “This Week on Hedge Fund Radio” in the upper right corner of my home page.

 

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Thu, 10/28/2010 - 16:59 | 684525 Azannoth
Azannoth's picture

This has nothing to do with taxes, its all about Personal Freedom u dushe, just look what happened in Portugal after they legalised it 

Thu, 10/28/2010 - 16:41 | 684480 badnews...buyspus
badnews...buyspus's picture

Oh, mhft, you make things so easy...

The same would happen to the pot industry. An Internet search reveals that potent Mary Jane today sells for $200 an ounce wholesale, or $400 retail. Legalize it, and that price might drop to the $20 that I heard prevailed during my college days.

Your "Internet search" as you call it, or what you paid for your last 1/4 was $100 - $150 (stop denying that you have ever used).  The same price it was 5, 10, 15 yrs ago yet today's weed is much more potent (think absinthe vs peach schnapps). So, we have already seen price decline (productivity gains or marijuana acceptance reaching critical mass) in an environment where almost every other commodity has seen huge price gains. Every time a large seizure takes place, prices remain flat - so for you to predict a price drop to $20 (for what, btw, a joint?) is as credible as those saying that the Fed doesn't buy spus on every dip. 

Since marijuana is much less harmful then alcohol, we will eventually see this natural plant legalized (not required to plant by every land owner as it was in the 1800's), but at least our government will not waste $10 billion enforcing a law that was created with racial undertones.

If you are such an astute investor, then look at this as a tremendous opportunity to invest in a US manufactured good.

Btw, Holder molests collies.

Thu, 10/28/2010 - 17:10 | 684548 Saxxon
Saxxon's picture

LOL by the way, career politician\asswipe\suckup Jerry Brown runs against 19 and will be the next Gov.  But he can't do jackshit - he doesn't have the political will or the finances to do a goddamn thing to this marvelous development.

Truly, the whole MJ story in CA is one of the most fascinating populist efforts to come down in years.  And I am a natural pessmist so it is hard for me to type my 'effusiveness' into this message!

So spark up; and go Giants. 

Thu, 10/28/2010 - 19:49 | 684808 Bob
Bob's picture

IMO, the increasing number of states legalizing "Medical" marijuana reveal the true popular sentiments of Americans.  It is not politically correct to just come out and say you have nothing really against legal pot, so all you get are public condemnations.  Yet put it on a ballot, and it's a whole different story. 

BTW, the fastest growing smoker group is the 50-59 year old cohort.  Celebrating old times!

Thu, 10/28/2010 - 19:38 | 684796 Sunshine n Lollipops
Sunshine n Lollipops's picture

Let's hope it creates a domino effect that eventually repeals these backward laws nationwide.

Next up: Magic mushrooms! Cuz everyone needs a little shroom-induced awareness expansion from time to time. I'm way overdue for some myself!

Honestly, can you believe we put up with a gov't that outlaws the ingestion of PLANTS? It's fucking insanity. Land of the free my ass! Goddam overreaching nanny-state motherfuckers! Jesus, now I'm gettin' all wound up. Thankfully we have a socially acceptable and completely legal treatment for stress and anger in America--BOOZE! As much as you fucking want! What? Underage? No problemo! Just get into dad's liquor cabinet or call your buddy with the fake ID! Booze for everyone! Just don't get caught with that devil-weed, boy, or there'll be hell to pay.

Christ on a fucking donkey.

Thu, 10/28/2010 - 16:19 | 684412 downrodeo
downrodeo's picture

duplicate

Thu, 10/28/2010 - 16:14 | 684409 downrodeo
downrodeo's picture

In a free society, the state has no right to tell you what you may or may not put into your own body. We should drop at least one of these pretenses. Either it is okay for each individual to decide what they do with their own bodies, or we must admit that it is not the case that we live in a free society. Sorry, just had to state the obvious there.

Thu, 10/28/2010 - 15:58 | 684350 iconoclast63
iconoclast63's picture

The truth about Prop 19:

The law, upon actually READING it, makes NO provision for large scale industrial production. It authorizes consumers to make use of a 5' square plot of ground to grow their own, 3-6 plants typically, and it continues to allow the dispensaries/collectives to grow their own product. The truth on the ground however, is that the majority of product purchased from the shops is now grown by underground experts in black market grow rooms. Nothing in the new law changes that. Since these grow rooms are illegal and they ultimately control the price, don't expect any sharp decrease in the prices.

Further, once the cities, counties and states levy all the taxes and fees their mouths are watering for, expect the final cost to the actual user to go UP. At least with the MJ purchased legally. This means that the black market will still flourish.

Finally, all this is moot anyway. According to California law, if Prop 19 cancels out any part of Prop 215, then the new law will be null and void unless it passes with a greater majority than Prop 215. 57% is the number. I don't see Prop 19 polling with anything close to that kind of majority.

To give a couple of examples of how the new law changes the old one. It put limits on the amount a medical patient can grow for himself, it limits consumption to your own home or private space, and it limits the medical patients ability to consume his meds in his own home if their are minors present. None of these limitations were present in Prop 215, therefore Prop 19 is not much more than theater when all is said and done.

To "legalize" a product, but not legalize a mechanism for a truly industrialized means of production is simply ridiculous.

Thu, 10/28/2010 - 16:11 | 684398 RiotActing
RiotActing's picture

California created dispensaries but no way to supply them? You sure about that? I find that hard to believe. The initiative on the ballot up here in Oregon that would create dispensaries also allows people to become suppliers to said dispensaries. I cant believe California doesn't have a system set up to legally supply the shops.

Furthermore PROP 19 doesn't legalize MJ, it just decriminalizes it. Which means guidelines and laws enforce he usage.

Do you even live in California?

Thu, 10/28/2010 - 19:42 | 684798 Bob
Bob's picture

Same in Michigan.  The Medical Marijuana Act addressed dispensaries in no way whatsoever.  Yet Ann Arbor is fast approaching Oakand in availability of top grade product via storefront commercial operations. 

I found it hard to understand how they could be getting supplies, too. I mean, cops shouldn't have any trouble noticing those trucks pulling up with shipments, right?   But, trust me, they're getting plenty and it's the very best. 

Thu, 10/28/2010 - 16:31 | 684453 iconoclast63
iconoclast63's picture

I live in Orange County California. I also have many friends who have medical cards and actually own dispensaries. The existing law, 215, allows dispensaries to create their own product, but licenses no entity to engage exclusively in the cultivation and production.

To cultivate the kind of quality that the typical California user expects the dispensary owners find it much easier to defer to the black market experts who already have the experience and operation to supply them.

Thu, 10/28/2010 - 15:57 | 684349 MarketTruth
MarketTruth's picture

The article misses an important point, brewing really good beer can be difficult, growing what is literally a weed using good seeds is very easy and inexpensive. So the market might indeed collapse, yet that could be due to the rise in home growers.

Thu, 10/28/2010 - 16:04 | 684374 RiotActing
RiotActing's picture

"...growing what is literally a weed using good seeds is very easy and inexpensive."

Again someone that really doesnt know what they are talking about. Any idiot can put a seed in the ground and hope it bears fruit, doesnt mean its going to happen. Creating high grade MJ in ones home is not EASY and not inexpensive realitivly speaking. $1000 minimum to get going and that is a small operation.

Thu, 10/28/2010 - 15:29 | 684243 crosey
crosey's picture

Soros is not donating to the cause because it is a good thing, intrinsically.  Ask yourself, why would Soros be donating?

Thu, 10/28/2010 - 15:08 | 684133 NonAggressionPr...
NonAggressionPrinciple's picture

How messed up is it that its a serious argument to convince individuals is to say "you should vote for this because the government will get more money."

 

What a bunch of whipped dogs our country has become.

 

Thu, 10/28/2010 - 15:34 | 684263 Saxxon
Saxxon's picture

NonAg, true that's lame but it's to get mom 'n pop to vote for it.  The ignorance around MJ in this country is still profound and many need coaxing.

Thu, 10/28/2010 - 14:54 | 684075 fredquimby
fredquimby's picture

Yeah but if it's legal theres no point fighting over it.

Stop the war on drugs in its entirety and you would save both millions of $ and millions of lives. Who are you protecting here? A few tokers and perhaps some idiots who can't google "dangers of cocaine" ? Quit the pointless war and educate the population to the risks in a grown up manner. Do cocaine, you will die. Do heroin you will die. Drink alcohol, you will die. Smoke a few spliffs, chill out, die. live clean, live long, timeline etc die.

May as well enjoy it while we are here I say.

Skin up bitchez!

Thu, 10/28/2010 - 15:10 | 684136 SoCalBusted
SoCalBusted's picture

Right on!  Clearly the "war on drugs" has been a failure.  It's time to mix it up and try something different.  All the anti prop 19 adds are built around the Reefer Madness propaganda theme.  It's no surprise Mexico is against prop 19.

Thu, 10/28/2010 - 14:54 | 684073 notadouche
notadouche's picture

I don't know where you got the idea that Diageo has razor thin margins.  I know for a fact that razor thin margins aren't a part of the vocabulary unless you are talking their lowest quality brands.  

Thu, 10/28/2010 - 14:54 | 684071 tmosley
tmosley's picture

I guess MHFT never heard of microbreweries.  MJ lends itself to that model far more so than beer or liquor.  All you need is a few good seeds and some basic farming equipment.

Also of note is that a microbrewery type establishment will be much less likely to be raided than a gigantic megacorp MJ farm.

Thu, 10/28/2010 - 14:52 | 684062 apberusdisvet
apberusdisvet's picture

If this really passes, remind me never to drive on the freeways again.  Stoners are not good drivers especially with the THC level now available.

Thu, 10/28/2010 - 15:04 | 684117 SoCalBusted
SoCalBusted's picture

I worry more about female asian drivers on cellphones than stoners on the freeway... now stoner female asian drivers on cellphones are another story!

Thu, 10/28/2010 - 15:44 | 684293 OnTheWaterfront
OnTheWaterfront's picture

+1

Thu, 10/28/2010 - 15:05 | 684116 RiotActing
RiotActing's picture

Another person who really doesnt have any idea what thay are talking about.

Thu, 10/28/2010 - 15:31 | 684253 Saxxon
Saxxon's picture

I have to agree, RiotActing.  I am sitting here with a medical MJ card in my wallet, obtained frankly for recreational purposes in Oakland earlier this month.

No one sensible is saying this will solve CA's fiscal problems.  That's a straw man argument.

The prohibition against marijuana use (which MHFT carefully makes clear he has no practical knowledge of, whatsoever, on any level deeper than a GOOG search) was manufactured by the Hearst Press in the 1930s.  The Hispanic monicker 'Marijuana' was deliberately chosen to negatively associate the herb with black and brown field hands - which were known to toke up.

It is perpetuated by Big Pharma, who only wants America using IT'S drugs (see the Chris Rock routine).

We took a jaunt through Stanislaus, Merced and Fresno counties last weekend.  Shocking conditions.  The downtowns reminded me of Tijuana.  Hydroponics supply stores on the main drags.  MJ is about the only healthy Growth industry in California.

I salute the efforts and will vote for Prop 19 with both hands on the levers!

Thu, 10/28/2010 - 17:18 | 684573 calltoaccount
calltoaccount's picture

demonization of pot was also spurred on by Nixon who totally countermanded his own commission's decriminalization recommendations in order to further demonize hippies, blacks and jews -- whom he saw as the main threats to his maintaining political power.

Thu, 10/28/2010 - 15:54 | 684337 RiotActing
RiotActing's picture

I just got my card here in Oregon. The industry is booming up here too. Grow shops are seem to be thriving as well. We have a dispensery ballot prop we are voting on this go around. It will be interesting to see what happens with that.

Thu, 10/28/2010 - 17:06 | 684542 doolittlegeorge
doolittlegeorge's picture

reading this makes me think it's legal already and the government is the one "playing catch up."

Thu, 10/28/2010 - 14:54 | 684076 deliciousirony
deliciousirony's picture

I think stoners are far less likely to drive than alkies.

Thu, 10/28/2010 - 17:20 | 684578 calltoaccount
calltoaccount's picture

only narcs or alkies would have junked you for speaking that absolute truth.

Thu, 10/28/2010 - 14:51 | 684056 RiotActing
RiotActing's picture

$3,000 a month electric bill? What are YOU smoking? Any experienced grower can grow pounds under a few lights for a marginal increase in a single family homes electric bill. Do you have any idea how big an operation would be to create an electric bill like that? Obviously not. We are talking warehouse size, not "house" size. You also fail to realize that you can grow outdoors, in fact Marijuana thrives outside and you can grow huge plants for minimal cost. I really expect I higher level of knowledge on Zero Hedge. This post is a FAIL.

Thu, 10/28/2010 - 14:55 | 684080 apberusdisvet
apberusdisvet's picture

In the 80's, the Feds and locals busted dozens of grow houses in NC just by subpoenas to the utilities for all residential customers with an electric bill in excess of $300/month.

Thu, 10/28/2010 - 15:07 | 684126 RiotActing
RiotActing's picture

These days your electric bill no longer mkaes you guilty, it can be used as evidence against you but it cannot be used as principle cause to raid someone's house. Just like law enforcement cant fly helicoptors over peoples houses looking for grow ops with IR cameras. They have to have warrants to do so now.

Thu, 10/28/2010 - 15:41 | 684288 knukles
knukles's picture

LOL

All they have to do is declare you a terrorist for no other reason that they decide you're one and your ass is in Baghram for eternity.  The only electric bill gonna be to your nads, dude.....

They can come bust you for any reason anymore.  The Bill of Rights, Habeaus Corpus, right to an attorney and trial by jury be quaint objects of the past.

Thu, 10/28/2010 - 15:59 | 684358 RiotActing
RiotActing's picture

Im white from a wealthy family with a medical marijuana card. The FEDs have no intrest in me. You really think POT is a high priority to them?

On October 19, 2009, the United States Department of Justice (USDOJ) issued a memorandum to provide clarification and guidance to federal prosecutors in states that have authorized the medical use of marijuana. The guidance makes it clear that USDOJ is committed to prosecuting enforcement of the Controlled Substances Act, but that, as a general matter, federal resources in states with medical marijuana laws should not be focused on individuals who are "in clear and unambiguous compliance with existing state laws providing for the medical use of marijuana." Prosecution of commercial enterprises that unlawfully market and sell marijuana for profit will continue to be a priority of USDO.

Thu, 10/28/2010 - 15:59 | 684356 QQQBall
QQQBall's picture

Yeah, or go through your bank records to see did a transaction above $3,000 or whatever. You will be lucky not be vacationing in Cuba.

Thu, 10/28/2010 - 16:00 | 684361 RiotActing
RiotActing's picture

All you people really this stupid?

Thu, 10/28/2010 - 15:05 | 684119 Bob
Bob's picture

Obviously pre-LED days. 

Thu, 10/28/2010 - 14:53 | 684068 deliciousirony
deliciousirony's picture

it's called "weed" for a reason - it will grow anywhere.

Thu, 10/28/2010 - 15:02 | 684106 RiotActing
RiotActing's picture

Not exactly true. Modern day strains need the care of any other fruit bearing plant if you want quality.

Thu, 10/28/2010 - 15:14 | 684162 LostWages
LostWages's picture

Zactly.  I know people in the industry, and great care, the proper nutrients and constant monitoring to protect against mold and insects are needed to grow a quality product.

The people I know in the industry are against Prop 19 as they fear "big tobacco" will move in a put all the small growers out of business.  Rumor has it that Philip Morris already has a brand name ready to go....Marlies.

If legalized, the "Wal-mart types" of the world will move in and quickly take over the industry and crush the little guy once again, although it would take the Feds to remove cannabis from the Class A narcotic list. 

The Prop 19 passing won't mean anything as long as the Feds promise to tie it up in court.  Who gives a rat's ass what the people mandate....the goobermint knows what's best for all (barf).

 

Thu, 10/28/2010 - 17:10 | 684550 flattrader
flattrader's picture

Back in the late 1960s my hippie brother in law who was a graphic artist was under a private contract with one of the Big Tobacco companies to develop designs for packs and cartons.  All very hush-hush.

Saw one of his designs that reminded me of Peter Max.

BT has been preparing for this for years.

If MJ should ever be legalized, the real money out side of production, sales and marketing will be in employee drug testing...real BIG money.

 

Thu, 10/28/2010 - 17:03 | 684535 doolittlegeorge
doolittlegeorge's picture

won't the employees be able to buy it then?  i mean "that is the problem with the beer boyz."  they distribute their own product the way they do for a very good reason and see a threat in California Weeding since "the wine industry will now have another revenue source."

Thu, 10/28/2010 - 15:58 | 684352 QQQBall
QQQBall's picture

Dude, in the 60s you could get 4-finger lid for 10 bucks; 2 fingers sans seeds and stems. No one was worrying about mold. I forget the prices of Thai Sticks, but same idea. Do use drugs so have no idea of current potency, but my I think the prices quoted theer are low.

Thu, 10/28/2010 - 17:15 | 684564 e1618978
e1618978's picture

You could also buy a nice new car for $3000.  $10 in 1960 is the same as $72 today.

Thu, 10/28/2010 - 14:50 | 684050 pizzgums
pizzgums's picture

it may not pass but Prohibition has never worked and will never work.

Al Capone is laughing from the grave.

Thu, 10/28/2010 - 14:49 | 684039 zot23
zot23's picture

madhedge, you're being an idiot here.  Alcohol takes materials, time, labor, and quality ingredients to create fine spirits, the finest weed in the world will grow (well, like a weed) right next to the cheapest, skankiest Mexican skunk.    

Compare that to alcohol.  Let's say I have a potato crop I want to turn into vodka.  I have to plant the potatos, grow them, harvest them (that can be a PITA alone), clean them, chop them up, buy or build a still, process the potatos over a fire (dangerous!) For good vodka, you have to re-still the product 3-4 times, with less and less coming out the other end.  This is why alcohol is dominated by huge players, it's a PITA to make at home.  

Now weed you just put the seed in the ground, water it, and by the end of the summer you harvest the buds.  Dry them out, ready to go.  No harder than growing a tomato bush or thyme.  Also, you can buy the best seeds in the world for $10 a pack (or just get them free from someone with some).  There is no intensive labor, therefore no reason (or justifiable way) to have a monopoly on the product.

Yeah, there would be some growers going out of business, but more likely from a thousand smaller growers undercutting the market than a single corporate overlord crushing the competition.  Why do you think the corporations are so desparate to keep this substance illegal?  It's uncontrollable, easy to produce, and hard to corner (the DEA can't shut down the market now, what hope does a single corporation have?)

Really man, you need to think this through a little more.  

Thu, 10/28/2010 - 15:31 | 684248 Millivanilli
Millivanilli's picture

I completely agree. Stupid points, mad hedge fund trader.   Weed, is, after all, just a weed.  The gubmit hates things it can't control and tax. Period.  Regardless of the fact that Bush jr, Clinton, and Obama all smoked it and snorted coke, they've still got to do the bidding of their masters.   Like AG place Holder said, if California legalizes it, we'll send the army, navy, and airforce in yo asses!

 

Fucking America is god damn corrupt police state.

Thu, 10/28/2010 - 15:27 | 684229 jdrose1985
jdrose1985's picture

I hear you.

People really need to understand that the only thing keeping prices elevated is the fact that it's illegal.

Once everyone and their brother are growing the shit, watch prices collapse.

"The Great Recession" is having it's very own effects on MJ, whereas a pound was selling for around $5,000 only two years ago I can go to any number of people selling singles of the same exact stanky for $2,000 ballpark.

Thu, 10/28/2010 - 14:49 | 684035 deliciousirony
deliciousirony's picture

who cares if the tax revenues do not materialize.

The savings in prison costs will be more than worth it.

stoners are typically non-violent and keep to themselves.

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