Has the cannabis bubble burst?

Has the cannabis bubble burst? Stocks are in the doldrums, funds are drying up and balance sheets are in disarray. Assets under management by cannabis funds are down 45% in 12 months. They reportedly lost $2.6 billion, up from $4.6 billion last year.

Morningstar, an investment research firm, provided the data.

What happened?

Investors blame multiple factors for a bursting cannabis bubble. First, the repeated failed attempts to pass federal legalization legislation in the United States. But funds focused on legal cannabis markets have also declined. Data shows that 23 ETF funds have lost between 44.2% and 72% over 12 months.

Investors are also seeing inflows drying up. In the first three months of 2022, they invested $95.6 million in cannabis mutual funds, compared to $1.7 billion a year earlier.

However, last year’s activity is likely to have more to do with new listings on the London Stock Exchange. In the first five months of 2021, Oxford Cannabinoid Technologies, Kanabo Group and MGC Pharmaceuticals doubled the size of the cannabis market.

Of course, as with the rest of the industry, shares in these groups have fallen by 60% and 80%. Canadian LPs have performed slightly better but are still down over the same period. Aurora Cannabis is down 57%, Canopy Growth is down 74%, and Tilray is down 68%.

Putting your trust in Joe Biden

Photo by: Gayatri Malhotra

However, the performance of cannabis funds does not seem to follow fundamentals. Cannabis money soared in late 2020 as media conglomerates declared Joe Biden the winner of the US presidential election. Funds continued to grow until the inauguration, when investors assumed Democrats would make cannabis legalization a top priority. As well as passing legislation to give cannabis companies easier access to the banking sector in the US.

“Everybody’s watching that one data point right now,” says Nawan Butt, manager of the Medical Cannabis and Wellness ETF. “Whether or not the Senate can pass the SAFE bill, which is expected to go through the Senate. If the SAFE Act is passed, financial institutions can begin helping the industry. Essentially, this means that industry participants will have better access to finance and better access to financial services. Also, we’ll finally have investors in this space who aren’t afraid of being prosecuted under federal law for owning cannabis stocks.”

Blaming consumers for a bursting cannabis bubble?

According to Morningstar numbers, Global X is the worst-performing cannabis ETF. Alec Lucas, a research analyst at Global X, accused consumers of seeking “cheaper cannabis options from illegal markets, which has contributed to a slowdown in sales in markets like Colorado, Illinois, Massachusetts and Pennsylvania.” He added, “Canadian companies have been unable to raise prices to remain competitive in illicit markets, resulting in disappointing profits.”

However, the truth might be more complex than that consumers prefer legacy markets to pharmaceutical-grade cannabis.

Ethanol prices are up 35% and this is affecting entrepreneurs using ethanol as a solvent for cannabis derivatives. Higher gas prices are also weighing on margins for cannabis delivery services, including wholesale delivery.

Guilty easy money for the bursting of the cannabis bubble?

The cannabis bubble could burst as the easy money era comes to an end. Central banks around the world are trying to raise interest rates after keeping them close to zero for over twenty years. Many economists suggest that this manipulation of interest rates acts as an unnatural price control of the money supply. The result is a capital market that is decoupled from consumer demand.

In other words, market rates reflect consumer demand and the relative scarcity of capital. A central bank that lowers interest rates below the market rate creates the illusion of more wealth and thus more money for the realization of long-term projects. However, as we are now realizing, printing more money does not create more resources. Banks and governments can blame COVID or the Russians for supply chain disruptions, but there is evidence that monetary policy, namely easy money, is to blame.

An economy abounding with easy money explains how Canada’s cannabis bubble grew to unprecedented heights. Large LPs have negative cash flow and struggle to compete with the legacy market and smaller craft businesses. Despite their popularity in the financial world, the fundamentals are not there to support their business model. And with major LPs closing facilities and laying off employees, it’s becoming clearer by the day that the cannabis bubble has burst.

Have you invested in the cannabis market? Were you able to profit from this? How do you assess current market trends? Please share your comments below and don’t forget to follow us @cannalifenet!