Experts Believe We are Experiencing a Bubble

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Has The Cannabis Bubble Burst? Experts Weigh In

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When Whoopi Goldberg and Maya Elisabeth started their cannabis company Whoopi & Maya in 2020, everything was looking up. They had the star power of an Oscar-winning actress, the experience of a veteran cannabis industry expert, and a well-designed medical brand that catered to women experiencing menstrual discomfort.

But they didn’t anticipate that the regulations, taxes, and competition from the illicit market in California would take its toll. This month, the two-state brand is closing shop. “The market was swallowed by the over 21. Suddenly you had to work in that venue,” says Rick Cusick, co-founder of the company who says that Whoopi & Maya originally and clearly marketed as a medical product. “The regulations kept changing, there was never a good place to land. We were on a solid upward path, slowly but surely to become a cash positive company, but then the mishegoss in the industry slowed that ascent.”

“Originally, it was not a friendy playing field,” says Cusick. “The regulations and the government were not a friendly playing field, and cannabis is usually a very friendly playing field.”

What’s happening to Whoopi & Maya is indicative of a trend sweeping the cannabis industry. The optimistic (some would say irrational) exuberance that has accompanied the Green Rush over the past few years has collided with the harsh reality of an oversaturated marketplace suffering the effects of high taxes, stringent regulations, competition, overvaluation, bad press, inaccessibility, and myriad of other factors that have made operating in the cannabis space a significant, sometimes fatal challenge.

Similar to the dot com boom and bust, many of the “firsts” in this industry have unfortunately paid a huge price.

Eaze, a heralded cannabis delivery service that Silicon Valley hopeful investors eyed as the “Uber of pot,” changed CEOs amid a round of layoffs cutting 36 employees. And an Eaze rep recently told Tech Crunch more layoffs are to be expected. MedMen’s self-assured co-founder and CEO Adam Bierman is stepping down, and the company’s attempt to renegotiate payment terms with vendors by using equity for those payments has raised serious concerns with investors. Pax laid off over 100 employees in the fall of last year, blaming the cuts on “premature planning” and “revenue miss.” Other companies reporting layoffs due to financial challenges include CannaCraft, Grupo Flor, and Lowell Farms.

For the first time, Leafly’s 2020 Jobs Report showed the states of California and Michigan lost 8,600 jobs in the legal cannabis industry. This is due to a regulatory “sunsetting” move from old systems of caregivers and medical companies into recreational licenses, without enough licenses to go around.

The public market plummets

Despite investor excitement around the cannabis industry, especially after Canada went nationally legal in 2020, the stock market madness of a few years ago has begun to crash and burn. The top five Canadian cannabis companies’ stock prices have gone down 40 percent since August, as investors are showing lots less confidence in the public market. Early last year, several high profile mergers failed to materialize as a result of this concern.

“Investors have ratcheted up the pressure for these companies to become profitable or at least show that they are on the way to becoming profitable. And the industry hasn’t been able to do that as quickly as they wanted,” says Bill Peters, a reporter for Investor’s Business Daily. “Because it’s a new industry and it’s tough to forecast, it’s been harder to manage investors’ expectations. Add to this the combination of overpromising and overdelivering, expanding into international markets that were too small, and more concerns about the protection companies in the U.S have regarding bankruptcy in a federally illegal market, and you have a bubble that seems to have burst or is still bursting.”

Small companies feeling the heat

And it’s not just the big public companies that are hitting the iceberg. Smaller companies across all sectors of the business—both plant-touching and nontouching—are dropping out of business.

“It’s a bloodbath,” says Jigar Patel, President of NorCal Cannabis. While his company is doing well, Patel says that he is getting more and more requests from struggling companies to “take the keys,” adding, “While we love to help everybody out, it’s also understanding how they’d fit into our platform. And what really makes sense for them.”

Jon Avidor, Executive Chairman of The Shryne Group, one of the largest cannabis brands in California, echoes the concerns of many currently in the business. “We’re certainly owed money by all the major players, and some of that’s net 30 money and some of that’s you know now 90 days outstanding.”

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Comparisons to the dot com bubble

Many see what’s happening to cannabis now as analogous to what happened in the dot com industry in 2000.

“Valuations went through the roof due to retail investors’ irrational exuberance,” wrote Ross O’Brien, founder of Bonaventure Equity, LLC, in a private, internal shareholder’s letter. “Companies were going public prematurely and without fundamental metrics like revenue and profits. And just like in 2000, investors saw the potential of the internet and the rush to invest validated that it was here to stay. This Klondike mentality, however, lead to quick hits and even quicker failures. And just like the dot.com bubble validated that the internet is not an investment cycle but actually a technological advancement that is here to stay. Investors are validating that cannabis is not going anywhere.”

It’s not all doom and gloom

While most industry analysts saw the dip coming, they did not anticipate it happening so quickly. But now that it’s here, they believe cannabis is about to enter a new, more mature phase.

Call it Cannabis 2.0.

“This is an emerging industry,” says O’Brien. “Failure is just part of the game. We shouldn’t be running around like the sky is falling because companies are failing. If anything, this is the kind of growing pains that give us confidence that the emerging businesses that are managing through this are durable, sustainable enterprises for the long term.”

Kim Kovacs, President of The Arcview Group, a leading cannabis investor organization, also sees light at the end of the tunnel. “I think the exuberance was an anomaly. A lot of investors actually felt reluctant to get in the space,” she says. “Because nobody was doing due diligence. There was no financial acumen. But people were throwing money anyway because it was that exuberance investment, and they wanted to be in the space. Those times are over.”

Kovacs says that many Arcview investors were waiting for that first wave of excitement to go through. “Now what’s happening is that if a company is not going to pass due diligence, our investors are not going to spend time on them. We’re going to tell those companies this is what they need to go do and then come back.”

This kind of tough love will separate the strong companies from the weak. “The companies that have the money and have the means to go and get there because they’ve been running leaner, or they’ve been looking at things from a profitability perspective, they’re gonna be able to step in and buy those devalued companies. So I think there’s gonna be a massive market for acquisitions. I think there’s going to be a massive market for net new companies coming in and taking market share from those that aren’t doing well.”

In the next edition of our new series “Surviving The Crash,” we’ll talk to industry experts about what your cannabis company can do to avoid taking a hit.

Real Estate Forecast for 2020

The Dallas property market is booming, and many fear that the city is in the midst of a real estate bubble. Well, we’re here to disprove this theory, as we believe the city is simply experiencing a sharp jump in economic growth.

But what is a real estate bubble exactly? It’s a temporary condition where the average home price drastically increases, while the supply sharply decreases. The causes are often external and can be attributed to speculation and foreign investment, leading to an overvaluation of homes. The bubble bursts when demand decreases while supply continues to increase, creating a vacuum and a drastic decrease in prices.

According to Business Insider, Dallas ranks within the top 10 US cities that are rapidly growing. The Texan metropolis has experienced steady job growth, a rise in average wages, low unemployment, and it’s the perfect place for entrepreneurs to start their business.

In terms of population, Dallas-Fort Worth is one of the largest urban areas and is home to approximately 7.1 million people. In 2020, the city issued a record 30,000 permits for residential construction, with a registered growth of 108%!

If we look at Texas as a whole, it’s projected to become the economic backbone of the nation. Not to mention that many Americans will be surprised to discover the state (especially the Dallas region) offers affordable homes compared to other US cities.

While developing rapidly, Dallas remains financially stable thanks to a robust economy. The city benefits from foreign property investment, and might also become a hub for some of the world’s largest retailers.

This includes Amazon; the city is currently within the top 20 finalists to host their second national headquarters. Many experts believe this would create nearly 50,000 high-income earning jobs, which would provide another economic stimulus to the local housing market.

If Dallas doesn’t make the final cut, it won’t be the end of the world. In 2020, 1000 individuals became Texans on a daily basis, demonstrating how the population is steadily on the rise.

So it’s evident that Dallas is not in the middle of a housing bubble, but rather just a period of extended prosperity. If you’re thinking about purchasing a home in Dallas, it’s an excellent investment, and you’re likely to make a profit once you decide to sell.

Academics Say the Art Market Bubble Is About to Burst—Are They Right?

A new fiscal study claims that we are in a “mania phase.”

A recent study published in the Journal of Empirical Finance from the University of Luxembourg predicts that the seemingly ever-growing art market bubble is about to burst.

Roman Kräussl, Thorsten Lehnert, and Nicolas Martelin from the Luxembourg School of Finance applied a new statistical method of detecting bubbles to over one million auction records from 1970 to 2020, focusing their research on the Impressionist and modern, post-war and contemporary, American, and Old Masters sectors of the market.

Graph showing the dip in the art market in the early 1990s and recovery after the 2008/09 crisis, based on the top 500 artists compared to the development of gold and real estate prices, as well as the Standard & Poor’s 500 stock market index.
Photo: Luxembourg School of Finance

By identifying the market conditions that led up to the collapse of two previous art market bubbles in 1990 and 2008/2009 and comparing them with the symptoms we are seeing today, the researchers concluded that the current art market is showing signs of overheating. According to the study, this would create the conditions for a “severe correction” or potential crash in the post-war and contemporary, American, and Old Masters categories.

The study defines bubbles as a dramatic escalation of trade volume at prices that exceed fundamental value, followed by sudden collapse. The authors point out that current market conditions bear several similarities to the art market bubble of 1990, leading them to believe that the current market is at, in their words, the “mania phase of its formation.”

A bird’s eye view of Art Basel.
Photo: Mitchell Zachs

Acknowledging the robust state of the global art market since the end of the financial market crisis of 2008/2009 and emphasizing the strength of the contemporary art market which has doubled in value during the recovery since, the study warns that the current level of growth is unsustainable.

However, the Belgian financier and collector Alain Servais told artnet News via e-mail that he believes the art market has already begun its downward spiral. Servais emphasized that highly publicized world auction records, such as the sale of Pablo Picasso’s Les Femmes d’Alger (Version O) (1955) at Christie’s for $179 million or Amedeo Modigliani’s Nu Couché (1917-18) for $170 million, hide the true state of the art market.

“I believe it is important to stop focusing on trophy performances to gauge the art market,” said Servais. “It is as ridiculous as judging the condition of the automobile market on the basis of Ferrari sales!”

Pablo Picasso Les Femmes d’Alger (Version ‘O’) (1955)
Photo: Christie’s

“The contemporary market particularly has unlimited supply, it is therefore exposed to oversupply and I believe that we reached this stage some months ago outside the ‘trophies’ market,” he added. “Prices and volumes reflect this.”

He also pointed out that some parts of the market are already experiencing slowdown and are in some cases, even contracting. “Studies don’t tend to focus on day sales and mid-size gallery sales, which I believe would show a market already on the way down and hit by oversupply.”

Lucien Smith Two Sides of the Same Coin (2020), sold at Sotheby’s London in February 2020 for $372,000 against an estimate of $66,000–99,000.
Image: Courtesy of Sotheby’s.

The market for some artists, he notes, has already started to slow, like that for the “Zombie Formalist kids.” But Servais contends that others will follow, particularly when taking into consideration that there can be “unlimited supplies of darlings like Kapoor, Hirst, Kiefer, McCarthy and so many others.”

Meanwhile, not everyone is convinced by the findings. Todd Levin of the Levin Art Group dismissed the findings as stating the obvious. “If you don’t know we’ve been in a bubble in certain strata of the market for a prolonged period, then you’ve been missing something,” he told the Guardian.

“The professors can give themselves a big pat on the back,” he added sarcastically.

While the experts duke it out, it’s probably best to turn our attention to the auctions, where the truth will, no doubt, soon become apparent.

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