Bootleggers, baptists and a new billion pound industry

A few brewers exploded after prohibition ended. The same could happen to cannabis producers when pot prohibition ends.

The biggest drinking party of all time kicked off at midnight on the fourth of December 1933, when US President Franklin D Roosevelt lifted the ban on alcohol.

After 13 years of prohibition, Americans could legally go for a drink again. And the drinks business boomed like never before, or since.

Prohibition had been a bit of a damp squib. It didn’t stop the people drinking – they drank manky bathtub gin out of secret speakeasies.

And prohibition turned the market over to gangsters. Alcohol from established breweries and distilleries disappeared; in its place came imported hooch from Canada and homemade moonshine. Dodgy characters like Al Capone, Bugs Moran and Joe Kennedy (John’s dad) got their start bootlegging liquor.

The bootleggers hated Roosevelt because the booze ban kept them in business. When he lifted it in 1933, and the booze boom started, they were blown out of the water.

The joke goes that the only ones in favour of prohibition were the bootleggers and the Baptists.

Roosevelt had given everyone a heads-up about his plans earlier that year, so that the nation’s brewers and distillers could get themselves organised.

A fellow called James Beauregard Beam, from an old family of distillers, decided the time was right to re-make his family’s fortune.

So in 1933 he hastily built a big new distillery near the rail lines in Kentucky. At 69 years old, he worked on the construction himself. And he had it ready to go in just 120 days, ready for the party.

On the fifth of December Jim Beam started churning out whiskey as fast as he could produce it. Ten years later his distillery had conquered a lot of the industry. And today Jim Beam is still one of the biggest whiskey makers in the world – it owns Jim Beam Whisky, Old Taylor, Old Crow, Booker’s, Baker’s, Knob Creek and Suntory.

It’s the same story with brewers. A couple of brewers were ready and waiting when the booze boom began on the fifth of December. They exploded in size in the following ten years. And they still dominate the industry today.

I’m talking here about Anheuser-Busch and Pabst, which own brands like Budweiser, Michelob, Pabst Blue Ribbon, and Rolling Rock. Basically the biggest beer companies on the planet.

These companies grew into giants because Americans couldn’t get enough beer in the early years after prohibition was lifted. By 1945, Americans were drinking 135% more beer per person than they were at the start of the boom in 1933. Anheuser-Busch increased production by 173% to keep up with demand.

Now, dear reader, having read my emails lately, you can perhaps guess where I’m going with this.

Another prohibition era is coming to an end. An industry is coming out of the shadows. And I can say with near-certainty that it’s going to be worth billions by this time next year.

Here’s the situation: in less than two months, the £16bn Canadian recreational marijuana market will go fully legal. A pot boom is coming.

The bootleggers are getting kicked out and legal pot factories are taking their place. Like James Beam in 1932, the pot factories are positioning themselves for a land grab.

A special situation

This is an unusual situation for investors.

A great deal of money is going to be made in the legal pot industry in the next couple of years, that’s for sure.

But investing in pot is complicated. There are two reasons for this.

The first is that legal pot is an incredibly young industry. And as it grows over the next few years, it’s going to change a lot.

Today’s big players might disappear, like Joe Kennedy’s bootlegging operation. So we need an idea of what the mature pot industry will look like five years down the line.

The second issue is government regulation. Yes, lots of governments are legalising pot. But that doesn’t mean they’re out of the picture. Governments are still playing a big role in the market in every country.

Regulations limit and control pot businesses. So a smart pot investor has to work around government rules… or be ready to capitalise the second the rules are changed.

The trouble with pot stocks…

A few years ago it wasn’t possible to invest in pot; today, there are more than fifty publicly traded pot companies.

The vast majority of these companies are based in North America. And of these, most are what’s called over the counter – or OTC – stocks.

OTC stocks are the smallest of the small. They’re not listed on regular stock exchanges, where they’re forced to disclose lots of detailed financial information.

I could write an entire issue about the pros and cons of OTC investing. But the upshot is that these companies are tiny, fast growing, hard to trade, and risky. Think Aim, but much more so.

Almost all the US pot stocks are OTC. That’s because in the US, pot is in a legal grey area. Pot is fully legal in a few US states, mostly in the west of the country. But the Federal Government still prohibits it.

In principle, federal agents could confiscate all profits from American pot companies. The question is whether Jeff Sessions’s Justice Department is going to enforce the federal laws.

Under the Obama Administration, pot producers were left alone. And that still looks like the most likely outcome for US pot companies right now.

But the uncertainty is causing problems. It makes US pot very hard to invest in. Pot companies can’t have bank accounts, let alone list on the publicly traded markets.

Which brings us, neatly, to Canada.

The £16bn Canadian pot boom

Pot legalisation is not a new story in Canada. Pot has been legal for medicinal purposes for 16 years over there. The Canadians have had time to get comfortable with it.

And now Canada’s liberal government, which is led by Justin Trudeau, wants to go the whole hog. The government has passed legislation which legalises the production, sale and consumption of pot for recreational use.

A report from the accounting firm Deloitte suggests that recreational cannabis could be worth £16bn in Canada – bigger than the combined sales of beer, wine and spirits.

Right now, that money is spent with the bootleggers. When the legislation is enacted, that money will flow to a small number of licensed, industrial-scale pot producers. My bet is that in ten years’ time, the pot boom will have created a new Anheuser-Busch.

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