There are certain signs in financial markets that you might reasonably call "red flags" for investors.
Perhaps the most obvious is when asset prices are excessively high. This is exactly what preceded the last two major market downturns in 2008 (real estate bubble) and 2001 (dot-com bubble).
We're experiencing this kind of "irrational exuberance" once again in a fast-emerging asset class: cannabis, more commonly known as marijuana.
Premium On Pot
Many local governments in the West have been relaxing their laws against medical cannabis. The entire country of Canada, in fact, recently decriminalized the plant that has prominently featured as the villain in decades' worth of "after-school specials."
In response, there has been an explosion of entrepreneurial activity based on greater acceptance of marijuana for medical applications as well as recreational use. In addition to the arrival of numerous private companies that (now quite legally) sell products made from cannabis, the stock market has seen astronomical gains in the share prices of these enterprises.
In short, pot stocks have been skyrocketing. Despite an uncertain regulatory environment, they're the "next big thing." Sound familiar?
The evidence of an asset bubble in this new market should give investors pause, nonetheless.
Worth Its Weight In Gold?
You'll actually find the most alarming signs of a cannabis bubble beyond the stock markets. Betting heavily on the growth of marijuana stocks because they are new and exciting is pretty standard investor behavior. If there is too much pure speculation, it wouldn't take much for a correction to bring share prices back down to earth.
Copyright: serezniy / 123RF Stock Photo
But the impact of all of this money flowing into pot stocks seems to be having a tangible secondary effect on the ground-level of the commodity trade, particularly in countries where the laws regarding marijuana are not as friendly.
One glaring example from the U.K. suffices to illustrate the problem.
In Britain, a handful of the most potent strains of cannabis on the market are actually selling for more than the price of gold. According to some media reports, these buds are as much as three times as expensive as gold by weight!
Of course, there may be some miscalculation in the source based on treating troy ounces (used for precious metals) the same as AVP ounces (used for other commodities). The important point remains that Britons are currently willing to pay more for top-shelf pot than for gold.
How long do you suppose that will last?
Mind-boggling incongruities in a market such as this often appear, almost without fail, before major downturns. Think of the peak of the cryptocurrency craze last year, or the aforementioned real estate mania in the middle of the last decade.
In retrospect, we always call these anomalies and aberrations "bubbles"—but that's invariably after many thousands of people have collectively lost hundreds of millions of dollars on their investments. Labeling them asset bubbles is useful because eventually, but inevitably, they pop.
Compare this trend to the cryptocurrency bubble. Prices surged throughout 2017 before losing more than half of their value in just a few months.
Like cryptocurrencies, there's also still great uncertainty about how legal marijuana will be regulated. For instance, a protracted legislative battle has been fought over the licensing process to become an authorized grower here in Florida. The ubiquitous lawyer John Morgan of Morgan & Morgan (& Morgan & Morgan & Morgan . . .) was also recently involved in a political squabble in Tallahassee regarding whether or not the new laws authorizing cannabis use for medical purposes permitted the patient to smoke the flower and leaves of the plant (as is "traditional") or if only clinician-recommended methods of ingestion, such as vaporizing cannabis oil, are allowed.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.