We’re Gonna Build US Pot Legalization Strategy, And Trump/Sessions Ineptitude is Gonna Pay For It!

It’s only difficult to understand what President Deals’ administration is thinking on US pot legalization if you make the mistake of projecting the eventual consequences of their policy moves. Twitter and pop-news sites are so full of stories of White House disorganization and incompetence that they’re getting boring.

The reaction from the West Wing to this Wolff book was a sure Streisand-Effect inducing cease and desist letter confirming reports of their idiocy, and nobody thinks they ever knew what they were doing in the first place.

Clearly, this administration hasn’t considered the potential impact of a hardened marijuana stance on the capital markets, and they never cared in the first place about its effect on American communities.

Most relevantly, the Trump White House and Sessions DOJ are wholly unprepared for the embarrassing disaster that would come from a court challenge by any of several states where the drug has been legalized for adults.

The tunnel vision here appears to be a misguided allegiance to the “law enforcement industrial complex” of police unions, private prisons and their suppliers, especially the police unions, whose support for a Presidential candidate was unheard of before 2016. But what, if anything, this order is in strategic service of hardly matters. The rights of states to govern their own affairs is a well-fought battle that doesn’t often end well for the Feds.

The States Will Get Their Day In Court

Successful Supreme Court challenges to medical marijuana enforcement activity thus far have leaned on the commerce clause of the constitution, and its interpretation in Wickard v. Filburn.

Roscoe Filburn was a WWII era Ohio Farmer growing more than his wartime allotted fair share of wheat, and feeding it to his cattle. The court held that such wheat production at scale could cumulatively affect interstate commerce, so the Feds were allowed to make him stop.

That same principle was applied in Gonzales v. Raich, when the court held that the DEA destruction of California car accident victim Angel Raich’s six marijuana plants was justified under the commerce clause, as it could have an effect on illegal interstate trafficking, and on congress’ effort to ban the drug. That was in 2002. Congress subsequently passed legislation protecting states rights to set their own medical marijuana policies in 2014.

But this is America, and the statewide legalization and commercialization of the drug in 8 different states may prove to be a different matter. The Supreme court made it clear that the Feds can’t meddle in a state’s rights to govern the carrying of handguns in US v. Lopez. They also held that the Federal courts not be used to seek redress by victims of sex assault where state laws don’t allow for it in US v Morrison. The tack towards the rights of states is clear, and a multi-state challenge by a coalition of motivated state governments, jealously guarding present and future tax revenue, is the sort of thing that this clown show of a Justice Department is uniquely equipped to lose.

There’s No Leadership Without Respect

This administration is losing whatever clout they ever had tweet by tweet, and it isn’t just the outwardly crazy self-embarrassment. These guys are on an island. The FBI is unravelling the Russia thing despite being undermined. Department heads openly buck back against stated policy all the time. The Pentagon made it immediately clear that they weren’t changing their policy on enlisted transgendered people for any amount of retweets. As Stephan pointed out, Colorado’s top Federal prosecutor rushed out a statement behind the DOJ proclamation making it clear that they weren’t going to change what they were up to.

And that’s about the speed of it. Sessions appears to be yelling into the wind to let everyone know that he hates Obama as much as you do, and will undo anything he did out of spite. It’s not the kind of office that is likely to even be taken seriously by the Supreme Court  when lined up against a coalition of responsible policymakers in State Governments, let alone command their respect.

What Does This Have To Do With The Price of Tea in China?

The Sessions DOJ just put these companies on sale.

Nevada Licensee Friday Night (TGIF.C) got smoked, losing all the ground they gained after announcing an all stock deal for fellow NV licensee Body and Mind (BAMM.C), but his news hit valuations hard in all listed Canadian companies in the Marijuana sector, regardless of whether or not they had business in the States. The big cap cultivators were down 5%-10%, and I don’t think that investors were handicapping their potential for export.

More likely, investors were respecting the fact that a hardened DOJ stance would further complicate US institutional investment in Canadian cultivators. While anything could happen, it’s difficult to imagine a hedge fund being taken to court on federal drug trafficking charges for owning Canopy Growth (WEED.T) or Aphria (APH.T). Nonetheless, they’d be foolish to take the chance.

That bears repeating: this sector has achieved mega-valuations without US institutional money. None of those big Toronto weed stocks that tripled and quadrupled in valuations last year are listed on a single US Hedge Fund’s Form 13G. You’d better believe that every other big cap stock in Toronto is, but not weed.

One day, and likely one day soon, this will blow over. Sessions will either give up or lose, and the states will all get the ability to regulate and tax marijuana, probably just in time to make up for the revenue that went walking in this horrible tax bill. Unencumbered by the threat of jail, US institutions (including US private equity, who love high-margin income plays) will be fighting each other for these stocks and investors will be looking back fondly at back in 2018, when that dolt Jeff Sessions put them all on sale.

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