How much will the Aussie government tax cannabis?

Monday, 28 August 2017
Melbourne, Australia
By Bernd Struben

  • Are they thinking at all?
  • Colorado reports US$1.3 billion in marijuana revenue
  • Easy credit not going anywhere

Back in 1988, living in Ann Arbor, Michigan, I wrote a novella titled The Cigarette Men.

It took place 25 years into the future…in 2013. By then, according to my story, tobacco had been made illegal. And the protagonists made money hand-over-fist running cigarettes across the US border.

The Cigarette Men — never published and still gathering dust in a drawer — was meant to have a satirical edge. Everyone knew cigarettes were bad for you in 1988. But no one expected governments would be foolish enough to prohibit another highly demanded substance.

And yet here in Australia, in the very real world of 2017, that’s exactly what our pollies are up to.

More after a look at the markets.

Markets

Over the weekend, the Dow Jones Industrial Average rose 30.27 points, or 0.14%.

The S&P 500 gained 4.08 points, or 0.17%.

In Europe, the Euro Stoxx 50 index closed down 6.18 points, or 0.18%. Meanwhile, the FTSE 100 lost 0.08%, and Germany’s DAX index dropped 0.11%.

In Asian markets, Japan’s Nikkei 225 index is down 16.69 points, or 0.08%. China’s CSI 300 is up 1.52%.

In Australia, the S&P/ASX 200 is down 38.36 points, or 0.67%.

On the commodities markets, West Texas Intermediate crude oil is US$47.64 per barrel. Brent crude is US$52.58 per barrel.

Gold is trading for US$1,293.74 (AU$1,629.40) per troy ounce. Silver is US$17.15 (AU$21.60) per troy ounce.

One bitcoin is worth US$4,368.47.

The Aussie dollar is worth 79.40 US cents.

Are they thinking at all?

Cigarettes are known to cause a variety of illnesses. Just check out one of the ‘plain’ packages they come in, if you’re in doubt.

The plain packaging laws were intended to shock smokers into quitting. But that looks to all have been an…erm…smokescreen. The nanny state wants tobacco gone. And the government appears intent on taxing cigarettes out of existence.

Now, tobacco is not among my own personal vices. But I feel for those who smoke. Especially folks already struggling to make ends meet.

Last year the federal government approved a 12.5% increase in the tobacco excise tax. This comes as cigarettes in Australia are already among the most expensive in the world. Far dearer than in Indonesia, for example, where I’m told the wholesale price is as little as $1 per pack.

Moreover, the increase was approved for four consecutive years. That means by 2020 smokers can expect to shell out $40 for a pack emblazoned with images of lung tumours.

When these sky-high prices were first proposed, I thought surely, they weren’t serious. Surely, even isolated in Canberra, our officials had to know this would only open the door to a new black-market industry.

Apparently not. The excise taxes passed, and criminal elements are already reaping the rewards.

As The Australian Financial Review (AFR) reported last week, ‘Brazen illicit tobacco shops cost taxpayers $4b a year’.

Retailers and tobacco companies claim that federal and state law enforcers are letting tobacco shops backed by Middle Eastern and Asian crime gangs avoid more than $4 billion a year in excise taxes.

According to the information provided to authorities by tobacco companies and retailers, the criminal tobacco networks are using the profits to fund other activities including terrorism.

The networks, which have taken root in the western suburbs of Sydney and western and south-eastern suburbs of Melbourne, are rapidly expanding into other states and rural communities…

The Black Economy Taskforce, which has a copy of the list and is finalising recommendations to the federal government, said the “sheer scale” of the problem demands a co-ordinated national approach and has foreshadowed it will call for a “blitz”. 

Taskforce chairman Michael Andrews warns huge illicit profits are being channelled into other illegal activities, including terrorism. 

Smokers are buying illicit cigarettes for a fraction of the recommended retail price at shops and in markets…’

A few things to note here. First the $4 billion figure. That’s staggering. And it tells you this is much more about raising revenue than protecting the health of poor, innocent smokers.

Second, do you see how the illegal trade is already being linked to funding terrorism? That’s intended to shut you down should you have the audacity to suggest selling cigarettes on the sly is a victimless crime. Unless, of course, you support terrorism.

So, now that the outcome of the extreme excise taxes has become clear to the politicians holed up in Parliament House, you might expect them to backpedal. Admit they made a mistake. And perhaps reduce the tax rate to a level that won’t drive a new black-market enterprise valued in the billions of dollars.

Nope.

As any good government does, they’re doubling down. What we need is greater enforcement. More policing powers. And tougher penalties.

From the AFR on Friday, ‘Border Force urges more power to stop illegal tobacco smugglers’.

More illegal tobacco could be prevented from entering Australia if Border Force was given greater investigative powers and penalties were increased, says Australian Border Force acting commissioner Michael Outram.

Mr Outram said existing penalties were “weak” compared to other drugs such as methamphetamine.

Legislation could also be changed to give Border Force the power to tap phones and conduct covert operations, in a similar way to the Australian Federal Police (AFP), he said in an exclusive interview with AFR Weekend…

A report released on Thursday by the Australian Criminal Intelligence Commission said criminal gangs were “entrenched” in the black market for tobacco, just like methamphetamine and heroin.

“You get groups that might be focused on other types of things like firearms, but primarily the big profits on offer are from drugs and tobacco,” Mr Outram agreed.

“Over the past few years as the price of tobacco in Australia has gone up the price of tobacco in other countries hasn’t necessarily gone up so it’s created a market,” he said.

“What we’ve seen is organised crime move into that market. There’s a lot of profit on offer and that’s probably going to be even greater over the next few years as the price of tobacco continues to rise.”

Just like methamphetamine and heroine, Michael? Really?

As the US, Mexico, Canada, and numerous European nations begin to roll back the disastrous war on drugs — particularly in relation to cannabis — you have to wonder what the Australian government is thinking.

Or if they’re thinking at all.

With global trade in illegal drugs already netting the black market an estimated US$600 billion per year, why add tobacco to that list by pricing it out of the legal marketplace?

Not that the world’s biggest tobacco companies have much to complain about. Despite some gnashing of teeth over the plain packaging laws introduced in Australia — and now adopted in the UK and France, with more nations to follow — most tobacco stocks have done quite well this year.

The world’s biggest tobacco stock, Philip Morris International Inc. [NYSE:PM] is up 25.57% in 2017. That brings its market cap to US$178.3 billion. British American Tobacco PLC [NYSE:BTI], with a market cap of US$142.9 billion, is up 9.6% in that same time.

I imagine you wouldn’t complain about those kinds of gains. Though if it’s really big gains you’re after, I suggest ignoring companies selling tobacco and investigating the ones selling marijuana.

Colorado reports US$1.3 billion in marijuana revenue

In 2016, the state of Colorado earned almost US$200 million in taxes from legalised marijuana sales. And that’s just one state.

According to MarketWatch:

The state of Colorado pulled in nearly $200 million in tax revenue last year thanks to its $1.3 billion in marijuana revenue.

The Colorado Department of Revenue announced… the state’s revenue had pushed past $1 billion. Colorado legalized recreational marijuana in 2012, along with Washington state, and this was its third year of regulated sales. In its first year revenue hit $699.2 million, followed by $996.2 million the second year…

“This money is just the tip of the iceberg. Hopefully this will be a wake-up call for the 42 states that still choose to force marijuana sales into the criminal market and forego millions of dollars in tax revenue,” said Mason Tvert, the Marijuana Policy Project’s Denver-based communications director, in a statement. “The state received nearly $200 million in marijuana tax revenue, whereas just a decade ago it was receiving zero.”

Overall, U.S. marijuana sales grew 30% in 2016, according to data from Arcview Market Research. And using research from cannabis business intelligence and market research firm BDS Analytics, Arcview forecasts cannabis sales will grow at a compound rate of 25%, from $6.7 billion in 2016 to $20.2 billion by 2021.’

You don’t have to be an economist to appreciate the magnitude of a 25% compound growth rate. A rate that should take annual cannabis sales in the US alone from US$6.7 billion to over US$20 billion in five years.

And you don’t have to be a market analyst to appreciate the impact this will have on the share prices of the better marijuana companies.

Cannabics Pharmaceuticals Inc [OTCMKTS:CNBX], for example, gained 49.01% in 2017. And the stock is now up 2,134.39% over the past 12 months.

Then there’s Cara Therapeutics Inc [NASDAQ:CARA]. With a market cap of US$415.41 million, Cara is one of the bigger pot stocks. And it’s up 37.24% so far in 2017, and up 130.98% in 12 months.

Those aren’t the types of gains you’re going to get investing in big tobacco. Or in any well-established sector, for that matter. And they’re not the kinds of gains that come without risk.

But if you’re looking to put some money into stocks that could go up 1,000% or more over the next year, the brand new and booming marijuana industry should be flashing bright on your radar.

It’s been on Sam Volkering’s radar since the early days of legalisation in the US markets. And Sam is convinced what we’ve seen so far is indeed just the tip of the iceberg. As he writes, ‘The coming cannabis boom could smash anything we’ve seen before, and rank as the best opportunity to collect a retirement-sized fortune…in as little as two years.’

With Canada set to legalise the recreational use of marijuana next year, and more US states lining up to do the same, the best pot stocks should continue to soar to new highs. (Excuse the pun.)

That’s why Sam’s spent the past months scouring the markets for the best three stocks to take advantage of this booming growth. You can find all the details here.

Easy credit not going anywhere

Easy credit drives the real estate cycle. And the real estate cycle, in turn, drives the stock markets.

In another sign that this cycle has some way to go (nine more years according to Time Trader’s Phil Anderson) it looks like the crackdown on interest only mortgage loans may be short lived.

According to Business Day,

Mortgage Choice chief executive John Flavell on Thursday predicted banks’ recent tightening of credit policies and moves to charge interest-only customers a higher premium on their loans were coming to an end.

That is because the changes announced so far should allow banks to comply with the 30 per cent cap, and banks might even start to ease up on the tighter conditions in the interest-only market.’

We’ll cover more on what this means for the stock market tomorrow. And why the continued access to cheap credit comes as no surprise to Phil Anderson.

In the meantime, if you haven’t checked out Phil’s work, you can review a series of his essays for free on the Port Phillip Insider website here.

Cheers,
Bernd