Outsider Q&A 4.19.19
Outsider Club's Weekly Reader Question
"How are politics and the election going to affect stocks this time around? Any stand-out winners or losers?"
— Andy N.
JIMMY MENGEL | Managing Editor
I have a love/ hate relationship with politics...
I love to hate them.
Nobody really wins, except for the candidates. We are simply pawns in a very cynical cycle. As libertarian nominee Gary Johnson told me personally, "I'm paraphrasing George Washington, but he said that if this country ever devolves into political parties, we are done for."
That's what Outsider Club is all about. You are your own political party and you don't owe anything to anyone.
The lines have never been more stark. Everyone hates everyone else. Frankly, it sickens me.
But in terms of investing, politics mean an awful lot depending on what sectors you're following, and I follow cannabis. Politics are everything in cannabis...
I've heard it firsthand from Republican Rep. Dana Rohrabacher from California. He was on the short list for Secretary of State for President Trump, he was also one of the first major political figures to advocate for legalized marijuana.
He told me that, as a Republican, it was near impossible to make any movement on legal cannabis.
He told me that it was an inalienable right for Americans to be free to do as they wished as long as it didn't impede on others to do the same. He told me that the government should not be standing in the way of Americans' right to safe and effective medicine. He told me that throwing people in jail for "smoking a weed" simply ruined the lives of millions of Americans and wasted billions in tax money and pulled law enforcement away from actual crimes like murder, rape, and theft.
But after repeated failures, Rohrabacher didn't give up. He came up with an ingenious plan...
He tied medical marijuana to states' rights. Republicans backed states' rights in practically every other issue known to man.
"I had no votes when I tried it before. Once I introduced states' rights into the argument, I immediately had 68 Republican votes."
The Rohrabacher–Farr amendment passed in 2014, and has protected medical cannabis companies from being raided by the federal government ever since. It was the very first time that the House or the Senate voted to protect medical cannabis patients.
It was the first shot fired in the battle to legalize cannabis countrywide. Many other shots will be fired this year, and I believe 2019 will be the year that the war is officially over…
First up is the CARERS Act.
The bill would require the federal government to allow states to legalize and regulate their own medical marijuana markets. More importantly, it would allow the U.S. Department of Veterans Affairs to issue medical marijuana recommendations for its patients, which it hasn’t been able to do in the past.
The second big bill to hit Congress this year is the “Regulate Marijuana like Alcohol Act”.
To tie this all together, the bill is sponsored by Democratic Rep. Earl Blumenauer of Oregon — who took over as co-sponsor of the Rohrabacher–Farr amendment after Sam Farr retired.
The bill would remove cannabis from the federal Controlled Substances Act, which would remove the single-biggest hurdle that faces cannabis today. Right now, marijuana is still federally illegal.
Cannabis is categorized as a Schedule I substance, which means that it has “high abuse potential, no medical use, and severe safety concerns.” That means that marijuana is lumped in with dangerous drugs like heroin, LSD, and cocaine.
If H.R.420 passes, both recreational and medical cannabis companies will be free to conduct business without the fear of federal crackdowns.
This type of legislation — political by nature — is what will take marijuana investing to the next level. Cannabis is one issue that is beyond partisanship. It is a reality and we'll see the politics play out over the next year or two.
JASON SIMPKINS | Editor
Will politics or the election affect the stock market? Probably. But it's hard to predict exactly how. I can only tell you it won't be good.
As it stands now, the Democratic frontrunner is Bernie Sanders. Going out on a limb here, I don't think Wall Street would be thrilled to see him win. And they REALLY don't want to see someone like Elizabeth Warren in the mix. Joe Biden, on the other hand, probably wouldn't rock the boat too much.
Then, on the other hand, you have Trump, whose erratic behavior, aggressive trade policies, and hardline immigration stance tend to drum up their own brand of uncertainty. His latest big idea is to pack the Federal Reserve Board with unqualified sycophants. That's a near-sighted strategy that will likely doom us all in the long run. Although the standard Trump stocks (investment banks, defense contractors, and energy companies) would likely outperform.
So yes, politics and the election will almost certainly influence the stock market. But in true government fashion, they'll do more harm than good.
ADAM ENGLISH | Editor
There are a handful of sectors I think could meaningfully end up in the crosshairs. A vast majority of sectors will become more volatile around the election but will probably not see major changes in the long term.
Health care, especially insurers, stands out. Just about any candidate promises upheaval in the sector. The only situation where the status quo persists is for a split legislature with either Congress or the Senate controlled by an opposing party by a comfortable margin.
Of particular concern is a haphazard repeal of the ACA (or Obamacare, if you prefer) by Republicans without an effective replacement. The R's have had a full decade of opposition to the law and have not come up with anything palatable. What are the odds of that now, you think?
As for the D's, we're seeing a lot of half-baked ideas that socialize health care. Most of them would mean virtually eliminating either health insurers or their ability to pull in profits.
Short version, I'd steer clear. There are plenty of other sectors to invest in.
The energy sector stands out as a bad bet if the D's reclaim the White House, for pretty obvious reasons. If this happens you can expect a rapid reversal for all of the Trump Administration's changes. A Trump reelection maintains the status quo.
I wouldn't worry about this until much closer to the election though. Maybe this time next year will be the time to start reevaluating potential political catalysts to the downside in the energy sector.
One sector I'm not worried about is the defense sector. A lot of spending is locked in and is there to replace aging systems that are nearly obsolete or are heavily worn down and would need to be replaced (spending money anyways).
President Obama came into office promising to get the U.S.A. untangled from Iraq and Afghanistan. Not only did that not happen, but we saw a massive expansion of future weapon systems like drones.
I think anyone who gets into office may try to rein in Pentagon spending, but find it is very hard to change the course of such a large ship. Instead, they'll pick away at the edges.
I'm also not worried about the pot sector like I was in 2016. The new (for a second stint) AG William Barr recently said he would prefer the STATES Act, which leaves pot enforcement and laws up to the states, in a kind of muted "better this than that" fashion.
However, he certainly isn't Jeff Sessions with his old-school "lock 'em all up" Reefer Madness approach. And if President Trump cared, he'd have let Sessions off his leash.
At this point, public sentiment is heavily in favor of medical marijuana and a majority is in favor of recreational marijuana. I think this'll stay on the back-burner as a nonissue this election, though it may come up a couple times.
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