Prohibition in Reverse

Written by Jimmy Mengel
Posted February 22, 2018

The users are getting antsy…

The dealers are getting nervous...

And the authorities are scrambling to catch up …

It reads like the story of Al Capone’s bootlegging enterprise. In the 1920s, Capone took advantage of the U.S.’s ill-fated 18th Amendment to the Constitution: the prohibition of alcohol.

Prohibition was supposed to be the panacea for the crime problems in America. The theory was such: if our fine citizens weren’t exposed to the demons of drink, we’d thrive in a sober utopia of peace, love, and understanding.

Well, we all know how that worked out…

What should have been shocking to nobody, Americans still really wanted to drink booze!

"All I do is to supply a public demand," Capone said at the time. "Somebody had to throw some liquor on that thirst. Why not me?" 

Instead of complying with government mandates, people simply went to greater and more dangerous measures to get their fix. Here are just a few of the unintended consequences of Prohibition.

  • So many people were drinking industrial alcohol that the U.S. government actually ordered it to be poisoned. Some sources say that 10,000 Americans died from drinking Uncle Sam's poisoned booze.
  • Pharmacists — who were licensed to prescribe whiskey — got a whole lot of business. Medicinal alcohol sales increased by 400% from 1923 to 1931.

“Grape production in heavily Roman Catholic California increased by 700 percent during Prohibition,” writes Gregory Elder, professor of history and humanities at Moreno Valley College and a Roman Catholic priest. “Having a friend in the clergy might lead to better parties, at the very least.”

But, perhaps most notably, Prohibition gave birth to one of the most bloodthirsty crime waves in American History, as bootlegging mob bosses stained the streets with blood to defend their turf...

Today, I’m not here to talk about the bootleg booze business in Capone’s Chicago. I’m talking about the completely legal sales of recreational marijuana in California. And the tale is almost prohibition in reverse.

What once was a black market drug trade has now gone fully legal — yet it has given birth to a brand-new market.

It’s not the black market. It’s not the legal market.

It’s the gray market, and it has huge implications for legal marijuana companies all over the country…

A gray market is a split between a black and white market. While the black market is completely illegal and the white market is totally legal — the gray market works in the shadows of the two. These dispensaries may have legal operating agreements, but they may also provide products from companies that do not.

These dispensaries are providing customers with marijuana that is untested, unregulated, and — at worst — unsafe. A lot of the marijuana products sold in this market are full of illegal pesticides, fungi, and mold that are straight up dangerous for marijuana consumers.

Governor John Hickenlooper of Colorado called the gray market a “clear and present danger.”

“If we don’t stamp it out right now, it becomes acceptable. And then, all of a sudden, people are going to start getting hurt,” he noted.

And it is costing legitimate businesses a lot of money.

From Inc.

According to Erick Eschker, an economics professor at Humboldt State University, about $5.5 billion of California's $7.8 billion in pot sales is generated from unlicensed and unregulated growers, distributors, and dispensaries. (The remaining $2.3 billion in sales come from the medical market.)

That obviously cuts into the profits of businesses that do things by the books. And while many companies in the California marijuana business are doing really, really well — they could be doing much better.

But things are about to change. And when they do, U.S. marijuana stocks should see a huge boost.

Here’s what’s happening, and what it could mean for U.S. pot stocks...

The crackdown on the gray market is coming. And when it does, there are certain companies that will go straight up.

Erick Eschker predicted that about half of illegal sales will be legal sales within a year. That is also what I'm hearing from most of my marijuana industry contacts.

In fact, I just had a conversation with the CEO of a large American marijuana company that my Marijuana Manifesto readers are invested in.

He told me:

The bureaus in California are going to be cracking down. We didn't think that crackdown, the enforcement, was going to happen for years or so. They are going to be emailing, and sending out notices, to every gray market, black market, and shop and start to charge them fees associated with their ongoing operations.

People are beginning to understand the danger associated with a gray market product - the Eagle 20 (a fungicidal pesticide), the pathogens, the aflatoxins, the mold, all the other chemicals issues that may be in there, and the harm that can cause them.

We're looking to banding together with the industry here in California and starting a legally grown agency that stamps-off on the product so people can differentiate what's safe and what's not. I think the real gravitational pull is gonna be the safety, and efficacy of the product. So the messaging needs to continue to get out there, about just how unsafe that gray market product could potentially be on the consumers.

This is music to the ears of legal marijuana companies operating in the U.S. It means that they can start cashing in on the market that is rightfully theirs. Once that gray market money starts flowing, the solid businesses out there will see their market caps rise like crazy.

The CEO quoted above is the head of a large marijuana company that is my best bet to gain from this crackdown. You can find my report on the company — and the full interview with the CEO — right here.

Getting in now is like getting into booze stocks right as the government gave up. But in this case, you'll make out as the government gives in.

I wouldn't wait another minute.


Jimmy Mengel

follow basic @mengeled on Twitter

Jimmy is a managing editor for Outsider Club and the investment director of the personal finance advisory, The Crow's Nest, and cannabis stocks advisory, The Marijuana Manifesto. You may also know him as the architect behind the wildly popular finance and investing website Wealth Wire, where he's brought readers the stories behind the mainstream financial news each and every day. For more on Jimmy, check out his editor's page.

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