Investments

“Puff, Puff, Give”: The New Way to Wealth

By David Stockman  |  October 3, 2018

What, me worry?

– Alfred E. Neuman, Mad #24(1956)

Wall Street is hitting it hard again today – it is sssooo high, another all-timer…

An armistice on the North American front of the Trade War, the Federal Reserve’s confidence in its course, and fair to middling data have the major stock indexes up near new records.

That matter of tit-for-tat tariff escalation between the two biggest economies on Earth… tighter money in the 111th month of an old and weak “recovery”… a decline in a key manufacturing index due to what a purchasing manager calls the “state of chaos” in global trade…

No sweat…

Alfred E. Neuman

Here’s what passes for “sufficient” analysis in these doped-up, dumbed-down days:

The Chinese trade issue has been hanging over the market for quite some time and the market has become adept at shrugging it off. While some industries and companies are feeling the impact, the overall implications to the global economy have been minimal.

The uncertainty is certainly a negative for businesses and planning. But the robust U.S. economy and record-high corporate earnings continue to provide markets with the gas to move higher.

We’ve talked about the Red Ponzi and its impending implosion. And we have a pretty clear picture of what’s really going on with Corporate America’s numbers.

But – because sometimes it’s better to laugh than to cry – let’s take a look at a slightly more amusing sign of Wall Street’s euphoria.

These earnest, cocksure folks – at both ends of the Acela Corridor, really – have no idea they’re actually starring in a laugh-riot stoner comedy.

What better evidence than Tilray’s (Nasdaq: TLRY) recent hotbox experience.

Tilray posted $28 million of revenue and an $8 million net loss in 2017. But – for a few moments there – it had a market cap north of $22 billion and a valuation of 785 times sales.

We do reckon, of course, that, startups of true technological brilliance, with patent-protected moats, might be worth something like that multiple during the early days.

Tilray – basically a weed guy with no discernible competitive advantage – is not.

It grows its stuff in greenhouses. It sells thru pharmacies and online. It has no patents. It has no recognizable brands. It’s created no new barriers to entry – or even bolstered existing ones – in a market that’s exploding with newcomers.

The legalization wave has “venture capitalists” all over it; some know what they’re doing, some are just plain goofy-footing around.

Sure, Tilray has modest ambitions to expand, just like the rest of the cannabis herd.

But that stock rose 40% the morning of September 19, a neat $9 billion market-cap expansion in a single gulp.

If there were ever a hot new product headed for rapid commodification, cannabis is it.

As a Colorado resident, I’m well acquainted with going prices for the product at hand. I’ve also seen what the free market can do when we let it be…

After three years of legalization, in fact, the wholesale price has already dropped by 50%, to about $1,000 per pound.

Average Market Rate per pound of Flower in Colorado's Adult-Use Market

In other words, Wall Street managed to value Tilray at about 1,000 times the going per-pound price of its product.

Once it’s basically legal in North America, cannabis will end up on the same competitive ground as corn, soybeans, lentils, and lettuce. Current wholesale prices will come tumbling down.

Cultivation is not the thing. Distribution and branding are, and Tilray hasn’t got them.

It’s about as close to pure reefer madness as you can get.

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan.MORE FROM AUTHOR