No 2024 Interest Rate Relief for Cannabis Firms
I interrupt your regularly scheduled govt bashing, trash talking and plant cheerleading for something that really matters to cannabis businesses - the loss of tens of millions of dollars.
Many MSOs & LPs were counting on interest rate cuts to reduce their borrowing costs, reignite equity capital inflows and kickstart M&A.
Don't expect any help from the Fed this year.
Dashed hopes
In December 2023 dovish Fed statements triggered an equity market boom in anticipation of a 1.5 point rate decline in 2024. A different reality has set in; we’ll be lucky to get a 0.5 point reduction this year.
Many companies secured debt funding during the pandemic when rates were much lower. Lots of this debt is coming due in 2024. Firms will have to refinance at equal to or higher rates further crimping their profits and CapEx plans. Businesses with variable rate debt will continue to endure high borrowing costs.
Elevated rates also whack consumer incomes - and the demand for some weed brands. While vice products show resilience in tough times, certain buyer behaviors (e.g., trying new products, brand loyalty) often take a hit.
Cue the 2024 flash flood
Meaningful rate relief is unlikely to happen for 4 reasons-
1. Persistent inflation
Taming inflation, according to the Fed Chairman, is taking “longer than expected”. March’s annual consumer price inflation of 3.5% was higher than expected for the third month in a row. The belief that inflation is sticky will also negatively impact valuations.
2. Possible market correction
Both cannabis and the broader market is vulnerable to a big pullback. The S&P 500 and US Cannabis indexes are both up roughly +20% versus their October 2023 levels, the last time rates were expected to remain high. Equity investors have also become more skittish versus Q4 2023 (see VIX).
3. Govt’s fiscal mess
America’s high and rapidly growing govt debt is becoming much more expensive to service: the yield on ten-year Treasury bonds has risen to 4.7% from 3.8% at the end of December.
4. Potential bank instability
There are at least $480B of unrealized losses on the balance sheets of banks. Much of this comes from higher rates which reduce the value of govt and mortgage-backed bonds.
Some cannabis pundits will minimize the impact of these factors. Yes, proper regulatory reform will offset higher rates but only to a degree and only if you get reform.
Our industry is notorious for ignoring powerful macroeconomic forces that indubitably carry us along for the ride. Notwithstanding our sector’s growth and investability, the legal cannabis market needs to be put in perspective. Our heft and profile is quite modest when considered against the total US economy and equity markets.
Be prudent: look outside the box.
#debt #interestrates #Fed #capital