Some prominent Tweeters have even warned of the risk of a “stock market crash”. But such opinions are not entirely objective.
Prudent investors always prepare for adversity. What if “recession fears” are realized? What if current market turbulence translates into an extended correction (or even a crash)? What then?
Investor options are perhaps more limited today than at any other time in history. Western government bonds have remained perched near all-time highs even while markets were strong. No shelter here. Corporate bonds pay some yield but are still priced for fair weather. No shelter.
Real estate (in urban centers) is at bubble prices.
Blue-chip stocks (especially in the U.S.) are at bubble prices.
Precious metals offer one attractive option to investors in such circumstances. And unlike most asset classes, precious metals prices are still at depressed levels (just look at the mining stocks).
However, unless investors want to go “all in” on gold and silver, that still leaves a large percentage of their capital in need of a (safe) home. The cannabis sector.
Recession-proof in three ways
In uncertain economic conditions, the cannabis industry represents one of the safest options for investor capital – at least in Canada where cannabis companies enjoy regulatory certainty. There are several strong reasons why this is so.
- Cannabis Prohibition
- Cannabis as medicine
- Cannabis as a recreational drug
It is now widely recognized that cannabis Prohibition was a massive failure in public policy. There was never any justification for it.
However, it is an historic fact. And because of Prohibition, the world’s most useful commercial crop is now a brand-new industry, being built from scratch.
Was the alcohol industry a “risk” or an “opportunity” when alcohol Prohibition ended in the United States? History tells us it was a massive economic opportunity. Today, the global alcohol industry is a $1 trillion revenue pie.
Alcohol only has one use. Cannabis (including hemp) has hundreds of uses. Just one of those commercial applications is as a much safer recreational drug than alcohol.
Over the long term, it is inevitable that the global cannabis industry will reach a larger overall size than the global alcohol industry. Yet today this industry is still in its infancy. An unprecedented opportunity.
Even if cannabis was already a mature industry, it would still be highly recession-proof for several other reasons.
Cannabis as medicine
Cannabis is increasingly being recognized as one of the most useful medicines in our healthcare system. It is being prescribed for hundreds of different medical conditions.
For both chronic pain and a number of neurologically-based conditions, it is becoming an indispensable tool for physicians. Many of these medicinal patients don’t merely need their medicinal cannabis, they depend upon it.
The recreational side of the cannabis market may ultimately be the biggest revenue-driver over the long term. Today, however, medicinal use still leads the way both in numbers of consumers and overall revenues.
In a recession, spending on health is one of the very last areas where people engage in budget-cutting. As noted, much of this medicinal spending isn’t discretionary. It is absolutely essential. And compared to prescription medications and other medical therapies, cannabis is cheap.
Medicinal cannabis is extremely recession-proof.
Cannabis as a recreational drug
Recreational drugs (and other consumer “vices”) are also traditionally viewed as recession-proof. Obviously, the reasoning here is much different than with respect to medicines.
People don’t need their vice products like they need medicines. However, as a matter of human psychology, in conditions of economic stress the consumption of vice products tends to rise rather than fall.
It’s the same as how people turn to “comfort foods” when they are having a bad day. Several of the properties of cannabis make it a particularly attractive vice product for consumers.
- Cannabis is vastly safer than either tobacco or alcohol. Consumers pondering an increase in their cannabis consumption (during times of stress) won’t be as concerned about health consequences as they would with increased tobacco or alcohol consumption.
- Cannabis is widely known for its potent relaxation properties, one of the reasons why it is becoming the drug-of-choice among educated professionals. In times of economic stress, people are especially in need of relaxation aids.
- Cannabis is also a potent sleep aid. Insomnia is already at epidemic proportions in our society. It will worsen in any sort of economic downturn. And consumers will be even more motivated to reach for a cannabis product to help them sleep.
Consumer spending generally falls during a recession as lower- and middle-income consumers tighten their belts. However, for the reasons above, more affluent consumers will generally increase their recreational consumption of cannabis products in any period of economic stress.
A new industry.
A potent medicine.
A safe (and popular) recreational drug.
Any one of these three factors would tend to make the cannabis industry recession-proof. The cannabis sector boasts all of these factors in its favor.
For consumers becoming increasingly nervous about economic and/or market conditions, think “cannabis”. For investors becoming increasingly nervous about their portfolios, think “cannabis stocks”.
While many other asset classes currently sit fully valued (despite recession fears), cannabis stocks are heavily discounted across the board. This makes cannabis one of the few “value opportunities” for investors.
Just ask Warren Buffett.
The Oracle of Omaha currently has more than $120 billion of Berskhire Hathaway cash sitting on the sidelines, because he doesn’t see anything remotely attractive at current valuations. That’s the most cash Buffett has ever held, by several multiples.
Warren Buffett won’t touch cannabis. The companies are still too small (and not “respectable” enough) to even appear on Buffett’s radar. But for investors whose investment profile is less restrictive, cannabis stocks are beckoning.