Factors Still Point to Higher Oil Prices and Sizeable Bets on Crude
There are many factors impacting why traditional energy prices and producers may have a hurricane-force tailwind heading into the holidays and next year.
A boost in demand for oil is expected as China just announced that it is lowering its quarantine requirements for visitors from outside the country. But Chinese Covid policies aren’t the only impetus pushing up oil demand – around the globe, there are supply challenges that are playing out. Oil hasn’t risen above $100 a barrel since early Summer, some traders are speculating it will rise above $200 in the coming months. Here’s why.
China
In addition to the announcement that the CPR was cutting the required quarantine period for the country (to five days from seven, with three days of home isolation), the required PCR test hurdle is being lowered as well. And airlines no longer run the risk of being suspended if the travelers they bring in that test positive is five or more.
Europe
The European Union has agreed to stop all oil imports from Russia on Dec. 5. The plan is to cap the prices at which EU nations would buy oil from Russia, that price is expected to be near $60 per barrel. Russia has reacted by increasing exports to Asia, but the price cap is expected to reduce its exports and lower total supply by up to one million barrels per day.
United States
Back in May, the U.S. took the drastic step of increasing available supply by selling oil from the U.S. Strategic Petroleum Reserve at a rate of nearly one million barrels per day starting in May. The increased supply has kept oil prices down. But the sales are unsustainable and expected to be reduced. Congress has allowed another sale of 26 million barrels that are expected to carry through to October 2023. This is a much slower pace of oil releases from the reserves. Plus, the reserves will need to be replenished.
After the Congressionally approved release, the reserve will be down to 348 million barrels, this is half the quantity compared to January of this year —the lowest since 1983. Congress has said that the reserve must stay above 252.4 million barrels, and the incoming Congress is expected to be more conservative when it comes to using these strategic assets to control prices.
Production growth overall in the U.S. has stalled after having increased through most of the year. Government data show that U.S. production dropped to 11.9 million barrels per day last week, this is tied for the lowest level in several months. Supplies of products such as diesel and heating oil in the U.S. are at multiyear lows. So there is not abundant supply should a weather-related or some other fuel-demanding crisis surface.
Oil is now trading between $92 and $93 a barrel. It had reached a high above $130 in March, shortly after the war began, and hasn’t seen the $100 a barrel level since late June.
Trading this week showed significant flows into an options contract that speculates that $200 per barrel may be in store. The most actively traded Brent crude options contract on Thursday was an option to buy Brent at $200 in March 2023. This was the most active oil contract of the day.
How significant is this bullish activity surrounding oil prices? The ratio of bullish to bearish bets in the options market is wider than at any time in recorded history, according to Bloomberg. Oil options traders are positioned more aggressively than ever before.
Take Away
Oil demand could rise soon in China as travel restrictions are lessened. Elsewhere in the world, oil demand is expected to increase as supplies remain the same or decrease. Demand remained elevated globally despite slower economies.
With supply likely to drop and demand ramping up, $200 by the third week in March is one price expectation for a record number of trades transacted at recently. More than doubling in a few months sounds unthinkable, but the massive trades were transacted by experienced institutional traders.
A Return to Gridlock in Washington Could be Healthy for Stocks
Political gridlock has historically been associated with higher stock market prices. So, while staunch supporters of either political party did not become overjoyed by the Election Day outcome, those invested in stocks may wind up better off. With President Biden (D) in the Executive branch, and at least the House of Representatives in the legislative branch holding a Republican majority, a split government is assured. This is true no matter the final outcome of the Senate races. A split government, with its accompanying gridlock, has been accompanied by positive long-term stock market performance.
A Smoother Road
The battles in Washington may take on a more heated tone with a split government, for investors, the gridlock scenario eliminates a lot of uncertainty. In the inflationary period we are in, a government with less ability to institute spending plans, and a reduced ability to change tax rates in an effort to pay for spending, is far less of a concern to market participants – less change will be enacted.
For businesses, there is more visibility to plan, budget, and implement plans to build their business. A split government should lead toward fewer dramatic changes or government intervention that bolsters one technology or product over another. With a lower risk of playing field changing legislation, tax change, or regulations, businesses are more likely to spend and invest as the risk of change is lower.
Historically, stocks have tended to do better under a divided government when a Democrat is in the White House. The average one-year S&P 500 returns have been 13% in a Republican-held Congress under a Democratic president and 14% when the Congress is split. This compares with 10% when Democrats controlled the White House and Congress.
Under the current situation, less spending on Build Back Better initiatives and a lower likelihood of passage of more plans like The Inflation Reduction Act help reduce spending and stimulus, which may allow the Federal Reserve to end its tightening cycle sooner.
The increase in Republicans could bring more attention to several stock market areas, such as biotech and pharmaceuticals. Their increased presence lowers prospects for price controls on prescription drugs. Big tech stocks could benefit from less of a threat to regulate the industry.
Some Choppiness Ahead
In 2011 the credit rating agency Standard & Poor’s downgraded the U.S. credit rating over the long gridlock battle that delayed increasing the Federal Debt ceiling. A possible downgrade, or “credit watch” category, could lead to an increase in rates, not just in U.S. government debt but all loans tied to these benchmark rates.
The enhanced power of Republicans could also slow infrastructure outlays, particularly the momentum in spending that has lifted so many alternative fuel stocks. Incentive plans and grants funded through borrowing and taxation have grown dramatically with both the executive and legislative branches under single-party control, those sectors that were expecting the pace to continue may find growth prospects slowing. Marijuana legalization on the Federal level may also be less of a priority now among lawmakers.
Stocks Post Mid-Terms Track Record
The S&P 500 has recorded a gain in each 12-month period after the mid-terms since World War Two. The markets have been clobbered with declining values since 2022 began; perhaps this is the turning point where the unfairly beaten-down sectors and companies begin to make up for lost ground.
Take Away
The election outcome wasn’t overly satisfying for either party but may lead to stronger stock market performance. Also, just getting past the mid-term elections without regard for the outcome has a stellar record of gains. If history is any indicator, a repeat of what the markets have experienced in the past, along with a slight shifting of those more positioned to take advantage of changes, should put investors in a positive mood as we approach year-end and enter 2023.
The Consequences of this Year’s Voting Should Create Opportunity for Investors
Once inconceivable in most voting districts throughout the U.S., ballots across the country this year will ask voters to decide on gambling measures, drug laws, and extra taxes based on defined demographics. While this is of interest to investors as it shows how trends are forming or continuing and can point to more potential for growth. Of the 130 ballot measures being decided upon on Tuesday, many will alter spending patterns and bolster industries.
What’s Being Decided Upon
Each year a number of states, including Maryland and Arkansas, are asking voters to decide upon legalizing recreational marijuana. Fully five states could move toward ending the use of involuntary prison labor. Nebraska and Nevada are asking voters if they should increase the minimum wage statewide. Gambling, firearms, and immigration are also the subject of state-level referendums.
A proposition in California would legalize online sports betting in that large potential market. Gaming companies, including DraftKings (DKNG) and FanDuel (DUEL) have poured nearly $160 million into the measure. It is not expected to pass, if it does, the news may cause a rally in these and other online gambling companies. Over $375 million has been spent by supporters and those against this measure.
Also being decided by California’s voters is a proposition that would raise taxes on personal incomes of $2 million or more. The revenue would be set aside to fund the state’s electric-vehicle production and help prevent wildfires. This is a very contentious measure that pit many from the same political party against each other.
In general environmental groups and companies perceived to benefit from a quicker evolving EV infrastructure support the “yes” campaign. Governor Newsom, and the California Teachers Association, a powerful state union, have joined business groups to oppose the measure, saying it would benefit a select number of large corporations as they transition to electric vehicles.
Recreational weed in Maryland? The pollsters seem to think it stands a good chance of passing. There are four other states (Arkansas, Missouri, North Dakota and South Dakota) where recreational cannabis is also on the ballot, those outcomes won’t be known until after the votes are counted.
To date, 19 states and the District of Columbia have legalized the adult recreational use of marijuana. Colorado could become the second state behind Oregon to legalize the personal use of psilocybin, the active ingredient in psychedelic mushrooms and other plant-based hallucinogens.
Massachusetts voters get to decide if they raise their income taxes by 4% if they have personal incomes of $1 million or more. This would leave the total rate for that bracket to 9%. Should this pass and bring in additional funds, they are earmarked for education and transportation.
Voters in five states will weigh whether to explicitly outlaw involuntary servitude as part of the punishment for a crime. Alabama, Louisiana, Oregon, Tennessee, and Vermont will all consider these questions on the topic; there is a growing movement to change the 13th Amendment so it no longer allows slavery as a form of criminal punishment. This could potentially benefit the industry in these states.
On immigration, Ohio voters are considering whether to ban all local governments from allowing noncitizens to vote. San Francisco and New York have passed laws allowing noncitizens to vote for local offices and ballot measures. These face legal challenges.
Elsewhere, ballot measures will ask voters whether to extend certain benefits to immigrants in the country illegally, including the ability to obtain a driver’s license in Massachusetts and pay in-state college tuition in Arizona.
Take Away
They say elections have consequences. As various states elect to adopt or deny changes in the running of their state, investors may be able to position themselves to benefit from trends, changes, and additional funds being made available.
How the U.S. and its Allies Plan to Put the Squeeze on Russian Oil Profits
Volatility in oil prices this week has been extreme, even by the standards already set this decade. The price of WTI rose nearly 5% just today. The month ahead promises to create even more volatility as Saudi Arabia just cut prices to Asia; meanwhile, the US and its allies have agreed to put a cap on Russian oil. Details on many of these influences have not yet been worked out or announced. What is known is that the price cap and other sanctions against Russia begin in one month. The commodity trading days leading to the planned December 5 start date and the weeks that follow ought to create a great deal of speculation and price movement. Here is what we do know the allies have agreed upon.
The Cap Map
Sales of Russian oil to the participating countries will be subject to a price cap. The cap pertains to the initial purchase of a load of seaborne Russian oil. The agreement settled by the US and its allies doesn’t subject any subsequent sale of crude as falling under the same cap. The cost of transporting Russian oil is not included in the calculation of the cap. However, these rules only apply once the load of oil makes land. Out at sea, the rules are different.
Trades of Russian oil that occur once the load is at sea are expected to still fall under the cap. However, if the Russia-originated oil has been refined into products such as diesel or gasoline, then it is not subject to the cap.
Restrictions and Jurisdictions
Under the expected price-cap plan, the Group of Seven and Australia are planning to restrict firms in their countries from providing insurance and other key maritime services for any Russian oil shipment unless the oil is sold below a set price. Because much of the world’s maritime services are based in G-7 countries and the European Union, the Western partners are aiming to effectively dictate the price at which Russia can sell some of its oil on global markets.
The Precise Price
The US and its allies have yet to set the price for the scheme, but they expect to define the level or range well before the December 5 implementation date. The slow pace of finalizing the plan have left some oil-market participants concerned that shipments of Russian oil at sea on December 5 could face the cap restrictions. The US Treasury Department, earlier this week, has clarified how this would be determined. The agreement rules that Russian oil shipped before December 5 would be exempt from the cap if it is unloaded at its destination by January 19.
It’s expected the price cap would not bring a crushing blow to banks, insurers, shippers, and traders that help make Russian oil available on global markets. The goal is to cut into the profits Russia earns from its oil sales, the hope by participants is to keep global markets supplied with Russian oil and keep energy prices steady.
The precise price is unknown, however a price range in the mid-60s has been discussed as the possible cap range, as it represents levels in line with where Russian oil had traded before the big run-up.
What Else?
Officials speaking for Russia have threatened to cut their oil production in retaliation for any price cap. It remains seen whether this game of each party partaking in ugly medicine for the survival of both will play out in unexpected ways.
The plan for the price cap for Russian crude will go into effect on December 5, while two separate price limits for refined Russian petroleum products will kick in on February 5.
Expect volatility in oil prices, leading up to and after the caps go into effect. At the same time, expect the unexpected as it relates to energy.
The Mid-Term Elections are Just One of the SEC’s Concerns
The mid-term elections have the potential to alter the course of the markets. It’s easy to recognize how the possible outcomes can cause changes to the overall economy, including industry sectors, fuel prices, and perhaps even national debt levels. But, one area that is less obvious could also impact investors in a big way, regulation. As election day is now days away, many regulatory changes that have been in the works are quickly coming to a head, with the expectations there may be a change in priorities, power, and philosophy. The push to get things through in the coming days may still be undermined by the U.S. system. Here’s why.
The U.S. Government at Work
Federal regulators are in scramble-mode working to finalize proposed rules before what appears will be a change in the balance of power in the legislative branch. The possibility that there may be a Republican-controlled Congress or the expected idea that the democrats will lose control over one of the branches of Congress would soften their ability to institute their aggressive agendas. As the agencies refine their proposals, they also have to be mindful that it isn’t just the new Congress that will be evaluating new regulations. The Supreme Court has recently taken a heightened interest in agencies overstepping their charter, that interest is likely to continue.
It’s easy to see how Congress whose job it is to decide where money is spent, can dampen the agenda of the Department of Education (DOE), Internal Revenue Service (IRS), Food and Drug Administration (FDA), or Gary Gensler’s plans at the Securities and Exchange Commission (SEC). But, the Supreme Court is also more than a casual observer and has shown how willing it is to make sure everyone stays in their defined lanes.
Recent SEC Initiatives
The SEC has a three-part mission that includes protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. Under Gary Gensler, it has been working overtime to impact the changing marketplaces. The initiatives are considered by some to be beyond the scope of the SEC’s lawful mission.
Gensler, who was appointed by President Biden, has been extremely active. The former Chairman of the U.S. Commodities Futures Trading Commission (CFTC) and MIT economics professor is proposing or finalizing dozens of regulations. Some are minor alterations to existing rules, but many are complete redesigns of how they are handled now. This redesign may make it past an unenthusiastic Congress, as they have more pressing priorities, but they may experience an aggressive halt from the country’s Judicial branch.
Recent Supreme Court Actions
In June of 2022, the Supreme Court decided W. Virginia v. EPA. The decision struck down an EPA regulation fighting climate change. The decision was made based on the grounds that the rule violated the “major questions doctrine.” The Court had never used that term before, but it seemed evident that the court might use the term and intent of the phrase should it be called on to review other federal agencies and commissions.
The Court has the authority and now recent precedent to unwind regulation that goes beyond the original intent of Congress when an agency was created or any subsequent legal grants of authority. The 6-3 ruling against the EPA explained the Clean Air Act, designed for new power plant emissions, did not extend to existing plants requiring them to shift to wind or solar. It’s a nod by the Court to keep bureaucracies from growing beyond the express original legal reason for being.
The ruling also is relevant in that it looked at Congress’s unwillingness to legislate and legitimize the way that the agency chose to regulate. One Justice in a concurring opinion wrote the decision was in part based on whether the agency was “intruding” in a traditional area of state law.
How it Could Impact Investors
Under the major questions doctrine, several SEC efforts may become far more difficult.
One high-profile SEC goal involves environmental initiatives. Climate change activists have supported the SEC’s proposal to require companies to increase their disclosure of anticipated climate risks. But it would be difficult for the SEC to weigh its mission against this initiative and easily demonstrate that anyone has a great impact on the other (orderly markets, investor protection, capital formation). If environmental initiatives are to be carried out, they will need to be enacted by the representatives elected to legislate on behalf of citizens.
It is easy to see how priorities focusing more on fiscal restraint rather than environmental awareness could alter the investors playing field with a power change in the Capital building.
The so-called greening of Wall Street is just one example of how the elections will impact the coming year’s winners and losers in the stock market. Consider the SEC’s proposed rules for swaps, which are financial instruments that some investors use to speculate on securities. The SEC’s suggested rule would require public disclosure within a day of these transactions to the public. The proposed rule can be considered an unprecedented intervention in this multi-trillion-dollar market. The argument is strengthened by the reality that Congress could have authorized disclosure in the 2010 Dodd-Frank Act, but did not. The Supreme Court would be expected to rule on behalf of the laws as written.
Another SEC initiative also at risk is the proposed rule on “beneficial” ownership. Such a definition is important for a host of reporting obligations. The SEC is considering expanding what counts as ownership. But questions of ownership have long been a matter of state concern. Gorsuch may have something to say about the SEC’s effort to expand the definition.
Another example is Kim Kardashian, who was ordered by the SEC to pay a fine for having touted a cryptocurrency on her Instagram account and the compensation she failed to disclose. The SEC has been in a battle with other financial overseers of the U.S. financial system to regulate and control digital currencies, which may or may not meet the definitions of a security or other language that legally created the commission.
Take Away
Regulatory agencies, including the SEC, are likely to have to contend with increased barriers with both the only branch of government that makes both laws and spends money and the branch that deciphers and enforces laws. Rather than argue if this is what should be, or if it slows down progress when wearing one’s investor hat,” investors may only want to consider what industries and what companies within those industries will be the winners and losers – then how does that fit into your overall portfolio strategy.
If you haven’t registered to receive equity research and thoughtful articles and videos from Channelchek, this is a good time to sign-up in preparation for the year-end and 2023. Click here for free registration.
Housing Is Getting Less Affordable. Governments Are Making It Worse
The average square footage in new single-family houses has been declining since 2015. House sizes tend to fall just during recessionary periods. It happened from 2008 to 2009, from 2001 to 2002, and from 1990 to 1991.
But even with strong economic-growth numbers well into 2019, it looks like demand for houses of historically large size may have finally peaked even before the 2020 recession and our current economic malaise. (Square footage in new multifamily construction has also increased.)
According to Census Bureau data, the average size of new houses in 2021 was 2,480 square feet. That’s down 7 percent from the 2015 peak of 2,687.
2015’s average, by the way, was an all-time high and represented decades of near-relentless growth in house sizes in the United States since the Second World War. Indeed, in the 48 years from 1973 to 2015, the average size of new houses increased by 62 percent from 1,660 to 2,687 square feet. At the same time, the quality of housing also increased substantially in everything from insulation, to roofing materials, to windows, and to the size and availability of garages.
Meanwhile, the size of American households during this period decreased 16 percent from 3.01 to 2.51 people.
Yet, even with that 7 percent decline in house size since 2015, the average new home in America as of 2021 was still well over 50 percent larger than they were in the 1960s. Home size isn’t exactly falling off a cliff. US homes, on a square-foot-per-person basis, remain quite large by historical standards. Since 1973, square footage per person in new houses has nearly doubled, rising from 503 square feet per person in 1973 to 988 square feet person in 2021. By this measure, new house size actually increased from 2020 to 2021.
This continued drive upward in new home size can be attributed in part to the persistence of easy money over the past decade. Even as homes continued to stay big—and thus stay comparatively expensive—it was not difficult to find buyers for them. Continually falling mortgage rates to historical lows below even 3 percent in many cases meant buyers could simply borrow more money to buy big houses.
But we may have finally hit the wall on home size. In recent months we’re finally starting to see evidence of falling home sales and falling home prices. It’s only now, with mortgage rates surging, inflation soaring, and real wages falling—and thus home price affordability falling—that there are now good reasons for builders to think “wow, maybe we need to build some smaller, less costly homes.” There are many reasons to think that they won’t, and that for-purchase homes will simply become less affordable. But it’s not the fault of the builders.
This wouldn’t be a problem in a mostly-free market in which builders could easily adjust their products to meet the market where it’s at. In a flexible and generally free market, builders would flock to build homes at a price level at which a large segment of the population could afford to buy those houses. But that’s not the sort of economy we live in. Rather, real estate and housing development are highly regulated industries at both the federal level and at the local level. Thanks to this, it is becoming more and more difficult for builders to build smaller houses at a time when millions of potential first-time home buyers would gladly snatch them up.
How Government Policy Led to a Codification of Larger, More Expensive Houses
In recent decades, local governments have continued to ratchet up mandates as to how many units can be built per acre, and what size those new houses can be. As The Washington Post reported in 2019, various government regulations and fees, such as “impact fees,” which are the same regardless of the size of the unit, “incentivize developers to build big.” The Post continues, “if zoning allows no more than two units per acre, the incentive will be to build the biggest, most expensive units possible.”
Moreover, community groups opposed to anything that sounds like “density” or “upzoning” will use the power of local governments to crush developer attempts to build more affordable housing. However, as The Post notes, at least one developer has found “where his firm has been able to encourage cities to allow smaller buildings the demand has been strong. For those building small, demand doesn’t seem to be an issue.”
Similarly, in an article last month at The New York Times, Emily Badger notes the central role of government regulations in keeping houses big and ultimately increasingly unaffordable. She writes how in recent decades,
“Land grew more expensive. But communities didn’t respond by allowing housing on smaller pieces of it. They broadly did the opposite, ratcheting up rules that ensured builders couldn’t construct smaller, more affordable homes. They required pricier materials and minimum home sizes. They wanted architectural flourishes, not flat facades. …”
It is true that in many places empty land has increased in price, but in areas where the regulatory burden is relatively low—such as Houston—builders have nonetheless responded with more building of housing such as townhouses.
In many places, however, regulations continue to push up the prices of homes.
Badger notes that in Portland, Oregon, for example, “Permits add $40,000-$50,000. Removing a fir tree 36 inches in diameter costs another $16,000 in fees.” A lack of small “starter homes” is not due to an unwillingness on the part of builders. Governments have simply made smaller home unprofitable.
“You’ve basically regulated me out of anything remotely on the affordable side,” said Justin Wood, the owner of Fish Construction NW.
In Savannah, Ga., Jerry Konter began building three-bed, two-bath, 1,350-square-foot homes in 1977 for $36,500. But he moved upmarket as costs and design mandates pushed him there.
“It’s not that I don’t want to build entry-level homes,” said Mr. Konter, the chairman of the National Association of Home Builders. “It’s that I can’t produce one that I can make a profit on and sell to that potential purchaser.”
Those familiar with how local governments zone land and set building standards will not be surprised by this. Local governments, pressured by local homeowners, will intervene to keep lot sizes large, and to pass ordinances that keep out housing that might be seen by voters as “too dense” or “too cheap-looking.”
Yet, as much as existing homeowners and city planners would love to see nothing but upper middle-class housing with three-car garages along every street, the fact is that not everyone can afford this sort of housing. But that doesn’t mean people in the middle can only afford a shack in a shanty town either — so long as governments will allow more basic housing to be built.
But there are few signs of many local governments relenting on their exclusionary housing policies, and the result has been an ossified housing policy designed to reinforce existing housing, while denying new types of housing that is perhaps more suitable to smaller households and a more stagnant economic environment.
Eventually, though, something has to give. Either governments persist indefinitely with restrictions on “undesirable” housing — which means housing costs skyrocket — or local governments finally start to allow builders to build housing more appropriate to the needs of the middle class.
If current trends continue, we may finally see real pressure to get local governments to allow more building of more affordable single-family homes, or duplexes, or townhouses. If interest rates continue to march upward, this need will become only more urgent. Moreover, as homebuilding materials continue to become more expensive thanks to 40-year highs in inflation—thanks to the Federal Reserve—there will be even more need to find ways to cut regulatory costs in other areas.
For now, the results have been spotty. But where developers are allowed to actually build for a middle-class clientele, it looks like there’s plenty of demand.
About the Author
Ryan McMaken (@ryanmcmaken) is a senior editor at the Mises Institute. Ryan has a bachelor’s degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He is the author of Breaking Away: The Case for Secession, Radical Decentralization, and Smaller Polities (forthcoming) and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. He was a housing economist for the State of Colorado.
Investments of Washington’s Powerful Pieced Together
Top federal employees in the U.S. are required to disclose their trading activities. The disclosure must be made within 30 days of executing a transaction. And annually by May 15 of the following year. Over 2500 government officials report transactions each year, often trading in companies that lobby their department for the company’s financial benefit. Where are these disclosures? The government doesn’t maintain a public database of mandatory disclosures. Fortunately, the pieces can be made available and, although a huge undertaking, can be pieced together. The Wall Street Journal did this when they performed their Capital Assets Investigation by analyzing 12,000 federal officials’ financial disclosures. Some may not find the outcome comforting.
How the Investigation Was Conducted
The lack of a central database made this investigation a huge undertaking. The Journal pulled information on about 850,000 financial assets and more than 315,000 transactions of nearly 12,000 officials at 50 federal agencies filed during the five-year period between 2016 and 2021.
The financial publisher compared this data to lobbying reports filed by companies to identify officials who invested in firms seeking treatment that would benefit the companies represented by those agencies (including immediate family members). Journal analysts went as far as cross-referencing reported stock trades with announcements of contracts and regulatory, enforcement, and legal actions.
What Were the Findings
The investigation was immense and tedious, however, it didn’t take much digging to discover transactions and situations that would make the average taxpayer to raise an eyebrow. As a sample, the Food and Drug Administration (FDA) let an official own dozens of food and drug stocks on its no-buy list – a top official at the Environmental Protection Agency (EPA) reported purchases of oil and gas stocks – a Defense Department (DoD) official bought stock in a defense company several times before the company won new business from the Pentagon.
Drilling a little deeper, the Wall Street Journal uncovered and pieced together thousands of questionable investment situations from a multitude of decision-makers all on the taxpayer payroll.
• While the U.S. government was escalating oversight and review of big tech companies, more than 1,800 federal official’s disclosed owning or trading at least one of four big tech stocks: Meta Platforms (META), Alphabet (GOOG), Apple (AAPL), and Amazon (AMZN).
• Over 60 officials at five agencies, including the Federal Trade Commission (FTC) and the Justice Department, reported trading stock in companies shortly before their departments announced enforcement actions, such as charges and settlements, against those companies.
• High-ranking public servants in the Office of the Secretary at the Department of Defense reported together owning between $1.2 million and $3.4 million of stock in aerospace and defense companies during each of the five years investigated. Some owned stock in Chinese companies during the period the U.S. was deciding if it should blacklist these companies.
• Over 200 senior EPA officials, nearly one in three, disclosed taking positions in companies that were lobbying the agency. Exposure to these companies by EPA employees and their family members totaled between $400,000 and up to $2 million in shares of oil and gas companies each year between the years investigated.
When financial conflicts clearly were at odds with rules of the various agencies, the rules were often waived for the situation. In most instances, according to the Journal, ethics officials certified that the employees had complied with the rules, which contain several exemptions that provide for situations where officials can hold stock that conflicts with their agency’s function.
The officials, many of which are household names and faces, can influence and financially impact company’s while at the same time making decisions that come to play in the day-to-day lives of citizens. These include public health and food safety, diplomatic relations, weapons systems, medical care, and regulating trade, to name a few. Even in those cases where a rule has not been explicitly violated, or has been waived, the actions violate the spirit behind rules intended to elevate or maintain public trust in government.
Official’s Transactions
There is a running joke that Speaker of the House Nancy Pelosi, or more accurately, her husband Paul Pelosi’s investment picks and timing are so good that he must use a crystal ball. Lawmakers like Pelosi have gotten much more public attention. And activities at the Federal Reserve have recently caused resignations over accusations. But most agencies fly under the radar. The investigation by the Journal is expected to result in a number of WSJ special reports. Each time exposing another area that they want to bring to the public eye.
Congress had long been criticized for not prohibiting lawmakers from working on matters in which they have a financial interest. The rules were tightened in 2012 by the Stop Trading on Congressional Knowledge (STOCK) Act, passed following a series of Journal articles on congressional trading abuses.
Investigative journalism or watchdog reporting is part of what helps reshape rules that lead to forced integrity and increased trust. American’s should feel confident that approvals, decisions, and all undertakings by those hired to serve the citizenry, put the interest of those funding their paychecks first.
Soaring Inflation Prompts Biggest Social Security Cost-Of-Living Boost Since 1981 – 6 Questions Answered
Social Security is set to boost the benefits it provides retirees by 8.7%, the biggest cost-of-living adjustment since 1981. It comes as sky-high inflation continues to eat into incomes and savings.
The changes are set to take effect in January 2023 and were announced following the release of the September 2022 consumer price index report, which showed inflation climbing more than expected during the month, by 0.4%.
The automatic adjustment will surely come as a relief to tens of millions of retirees and those who receive supplemental security income who may be struggling to afford basic necessities as inflation has accelerated throughout 2022. But an annual adjustment wasn’t always the case – and other government benefits and programs deal with inflation differently.
John Diamond, who directs the Center for Public Finance at Rice’s Baker Institute, explains the history of the Social Security cost-of-living, or COLA, increase, what other benefits are adjusted for inflation and why the government makes these changes.
1. How fast is the cost of living rising?
The latest data, for September, shows average consumer prices are up 8.2% from a year earlier. The monthly gain of 0.4% was double what economists surveyed by Reuters had expected.
More troubling, so-called core inflation – which excludes volatile food and energy prices – gained even more in September, ticking up by 0.6%. Core inflation is a measure that’s closely watched by the Federal Reserve, as it helps show how pervasive and persistent inflation has become in the economy.
2. How are Social Security benefits adjusted for inflation?
Automatic adjustments to Social Security benefits began in 1975 after President Richard Nixon signed the 1972 Social Security amendments into law.
Before 1975, Congress had to act each year to increase benefits to offset the effects of inflation. But this was an inefficient system, as politics would often be injected into a simple economic decision. Under this system, an increase in benefits could be too small or too large, or could fail to happen at all if one party blocked the change entirely.
Not to mention that with the baby boomers – those born from 1946 to 1964 – entering the labor force it was already clear that Social Security would face long-term funding issues in the future, and so putting the program on autopilot reduced the political risk faced by politicians.
Since then, benefits have climbed automatically by the average increase in consumer prices during the third quarter of a given year from the same period 12 months earlier. This is based on a version of the consumer price index meant to estimate price changes for working people and has been rising slightly faster than the overall pace of inflation.
While helpful, these inflation adjustments are backward-looking and imperfect. For example, 2022 Social Security benefits increased by 5.9% from the previous year, even though inflation throughout this year has been significantly higher – which means the higher benefits weren’t covering the higher cost of living. Thus, the 2023 increase in benefits primarily offsets what was lost over the previous year.
A white hand holds a card reading social security
Millions of retirees and other will soon see a big jump in their Social Security benefits. AP Photo/Jenny Kane
3. Are the benefits taxable?
A growing portion of Social Security benefits are taxed in the same way as ordinary income, except at different threshold with various caps and percentages. Only 8% of benefits were subject to taxation in 1984, but that’s climbed to almost 50% in recent years. That percentage will likely continue to increase as the taxable thresholds are not adjusted for inflation.
For example, if an individual filer’s income, including benefits, is below US$25,000, none of that is taxed. But up to 50% of a person’s benefits may be taxed at incomes of $25,000 to $34,000. After that, up to 85% of their benefits may be taxed.
Such a big increase in Social Security benefits likely means some people who paid no tax will now have to pay some, while others will see larger increases in their tax liability.
4. Why does the government adjust benefits for inflation?
Rapid gains of inflation, like the kind the U.S. and many other countries are currently experiencing, can have significant impacts on the finances of households and businesses.
For example, it might mean seniors cutting back on heating or food. Government policies generally try to account for this to reduce the negative impacts that rising prices can have on those with limited or fixed resources.
In addition, reducing the impacts of price changes creates a more efficient and fair allocation of resources and reduces the arbitrary outcomes that would otherwise occur.
5. What other government programs typically get a COLA?
Other government programs and benefits also increase to account for inflation.
The U.S. Department of Agriculture estimates the cost of its Thrifty Food Plan each June and adjusts Supplemental Nutrition Assistance Program or SNAP benefits – formerly known as food stamps – in October of each year. Beginning in October 2022, food stamp benefits rose by 12.5%, which helps make up for the largest increases in food prices since the 1970s.
In addition, the federal poverty level is adjusted for changes in the consumer price index annually by the Department of Health and Human Services, an adjustment that affects a number of government-provided benefits, such as housing benefits, health insurance and others, including SNAP benefits.
6. Does the tax system also adjust for inflation?
While some aspects of the tax code adjust for inflation, others do not.
For example, income tax bracket thresholds, the size of the standard deduction, alternative minimum tax parameters and estate tax provisions all increase annually for inflation. That means come tax filing season next year, U.S. tax filers will likely see big changes in all these items.
But examples of provisions that are not adjusted for inflation include the maximum value of the child tax credit and the $10,000 cap on the deduction of state and local taxes. In addition, the threshold that determines who is liable for the net investment income tax – the additional 3.8% tax on investment and passive income for taxpayers above a certain income level – doesn’t adjust, which means each year more individuals are subject to it.
This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of John W. Diamond, Director of the Center for Public Finance at the Baker Institute, Rice University.
Both Stockholders and Those in Prison May Quickly Benefit
The government process moves painfully slow. Some things that are presumed to be just, right, and even best still take years to become the law of the land. As investors, we can be perfectly correct as to the eventual outcome, but the future may not come fast enough. It is taking many years for cannabis or marijuana laws to settle where most presume the eventual outcome will be. That’s a long time to be holding a stock, hopeful but with little real legislative news to propel it higher. The day may finally be approaching for U.S. pot stocks. President Biden announced on Thursday that he is taking quick steps to review federal marijuana laws and recognize related prison sentences.
The U.S. president announced on October 6 that he is initiating an administrative review of federal marijuana scheduling, and he also said that he would be granting mass pardons for people who have committed federal cannabis possession offenses. He asked that state governors do the same for state-level convictions.
The pronouncements are both on the Whitehouse.gov website under Briefing Room and on Twitter @POTUS.
Biden has laid very low on legalization since taking office. Although he campaigned on marijuana decriminalization, rescheduling, and expungements for low-level cannabis convictions, he has not held these as a priority. Mid-term elections are a month away, and the president may be knocking things off his “To-Do” list after two years in office.
The White House estimates that about 6,500 people with federal cannabis convictions could be eligible for relief under the new order, and thousands of others whose local offenses have them incarcerated could also benefit.
The scheduling review—which would be conducted by the Justice Department and the U.S. Department of Health and Human Services (HHS)—could fundamentally reshape U.S. marijuana policy at the federal level. Advocates had been pressuring the president to use his executive authority to initiate a path forward.
It’s not clear how long the review might take, but Biden stressed that he wants the agencies to process it “expeditiously.” It’s reasonable to expect that the review could result in a recommendation to move marijuana from the strictest classification of Schedule I under the Controlled Substances Act (CSA) to a lower schedule or no schedule at all.
A White House official has reminded us that while the POTUS is asking for an expeditious review process, it’s still going to “take some time because it must be based on a careful consideration of all of the available evidence, including scientific and medical information that’s available.”
“This is meant to proceed swiftly. But, you know, this has to be a serious and considerate review of the available evidence,” they said. “So he’s not setting an artificial timeline, but he is saying this needs to be expeditious.”
Source: Whitehouse.gov (October 6, 2022)
This action is a clear about-face for the long-time politician. During his tenure in the Senate, Joe Biden served as chairman of the Judiciary Committee that helped shape drug policy during a period of intense scaremongering and increased criminalization. At the time, he was among the most prominent drug warriors serving in Congress.
Take Away
President Joe Biden has dropped what essentially amounts to a drug policy October surprise just before the midterm elections. The review comes at a time when a number of legislative efforts in both branches of Congress have failed to move forward.
While the pronouncement and order do not finalize federal laws related to banking or interstate commerce tied to cannabis products, it does signal an effort to move far more quickly. A number of publicly traded U.S. cannabis-related companies jumped after the news, including Tilray (TLRY), Schwazze (SHWZ), and Curaleaf (CURLF).
The Climate Bill Could Short-Circuit EV Tax Credits, Making Qualifying for Them Nearly Impossible
The U.S. Senate passed a far-reaching climate, energy and health care bill on Aug. 7, 2022, that invests an unprecedented US$370 billion in energy and climate programs over the next 10 years – including incentives to expand renewable energy and electric vehicles.
Rapid and widespread adoption of electric vehicles will be essential for the United States to meet its climate goals. And the new bill, which includes a host of other health and tax-related provisions, aims to encourage people to trade their gasoline-fueled cars for electrics by offering a tax credit of up to $7,500 for new electric vehicles and up to $4,000 for used electric vehicles through 2032.
But there’s a catch, and it could end up making it difficult for most EVs to qualify for the new incentive.
The bill, which needs House approval, requires that new electric vehicles meet stringent sourcing requirements for critical materials, the components of the battery, and final assembly to qualify for the tax credits. While some automakers, like Tesla and GM, have well-developed domestic supply chains, no electric vehicle manufacturer currently meets all the bill’s requirements.
This article was republished with permission from The Conversation, a news site dedicated to
sharing ideas from academic experts. It was written by and represents the
research-based opinions of James Morton Turner, Professor
of Environmental Studies, Wellesley College.
Building a Domestic EV Supply Chain
At first glance, the revised EV tax credits seem like a smart move.
Existing U.S. policy allows credits for the first 200,000 electric vehicles a manufacturer sells. Those credits helped jump-start demand for EVs. But industry leaders, including Tesla and GM, have already hit that cap, while most foreign automakers’ vehicles are still eligible. The bill would eliminate the cap for individual automakers and extend the tax credits through 2032 – for any vehicle that meets the sourcing requirements.
Right now, China dominates the global supply chain for materials and lithium-ion batteries used in electric vehicles. This is no accident. Since the early 2000s, Chinese policymakers have adopted aggressive policies that have supported advanced battery technologies, including investments in mines, materials processing and manufacturing. I discuss how China got a head start in the race toward a clean energy future in my new book, Charged: A History of Batteries and Lessons for a Clean Energy Future.
Sen. Joe Manchin, the West Virginia Democrat who stalled earlier efforts to get these measures through the sharply divided Senate, said he hopes the requirements will help scale up the U.S. domestic critical minerals supply chain.
The EV incentives would complement other U.S. policies aimed at jump-starting domestic EV manufacturing capacity. Those include $7 billion in grants to accelerate the development of the battery supply chain allocated in the Infrastructure Investment and Jobs Act of 2021 and a $3 billion expansion of the Advanced Vehicle Manufacturing Loan Program included in the current bill, formally known as the Inflation Reduction Act.
The problem is that the Inflation Reduction Act’s sourcing requirements come online so quickly, starting in 2023, and ratchet upward so rapidly, that the plan could backfire. Instead of expanding electric vehicle adoption, the policy could make almost all electric vehicles ineligible for the tax incentives.
Even Tesla’s Gigafactory Relies on China
The bill excludes incentives for any new vehicle which contains battery materials or components extracted, processed, manufactured or assembled by a “foreign entity of concern” – a category which includes China.
According to Benchmark Intelligence, a market research firm that tracks the battery industry, China currently controls 81% of global cathode manufacturing capacity, 91% of global anode capacity, and 79% of global lithium-ion battery manufacturing capacity. By comparison, the United States has 0.16% of cathode manufacturing capacity, 0.27% of anode manufacturing capacity, and 5.5% of lithium-ion battery manufacturing capacity.
Even the U.S.’s most advanced battery factories, such as Tesla’s Nevada Gigafactory, currently rely on materials processed in China. Despite Ford’s plans to expand its domestic supply chain, its most recent deals are for sourcing batteries from Chinese manufacturer CATL.
In addition to excluding materials and components sourced from China starting in 2023, the bill also requires that a minimum percentage of the materials and components in batteries be sourced domestically or from countries the U.S. has a fair trade agreement with, such as Australia and Chile. The threshold starts at 40% of the value of critical minerals in 2023 and ramps up to 80% in 2027, with similar requirements for battery components.
If a manufacturer doesn’t meet these requirements, its vehicle would be ineligible for the tax credit. Whether the Treasury Department would come up with exemptions remains to be seen.
Although EV manufacturers are already pursuing plans to develop supply chains that meet these sourcing requirements, proposals for mines and processing facilities often face challenges. Indigenous and environmental concerns have slowed a proposed lithium mine in Nevada. In some cases, key materials, such as cobalt and graphite, are not readily sourced domestically or from fair-trade allies.
Proposed recycling projects could help meet demand. Redwood Materials projects its recycling facility, currently under construction in Nevada, will supply cathode and anode materials to support one million electric vehicles per year by 2025. Despite such optimistic projections, experts anticipate that recycling can only play a small role in offsetting the demand for raw materials needed to scale up electric vehicle adoption in the coming decade.
How Much Can the Bill do to Cut Emissions?
Clean energy supporters called the bill historic. In addition to a massive investment in renewable energy and electric vehicles, it provides support for technologies such as carbon capture and storage and zero-carbon fuels, and includes a fee to curtail methane emissions, as well as some trade-offs that boost fossil fuels.
Forecasters have projected that the climate package as a whole could help put the U.S. on track to reduce greenhouse gas emissions by about 40% by 2030 compared to 2005 levels – still short of the Biden administration’s goal of a 50% reduction, but closer.
But for the U.S. to hit those goals, electric vehicles will have to replace fossil-fueled vehicles by the millions. A realistic EV tax credit that allows time for manufacturers to diversify their supply chains and makes these vehicles more affordable for all Americans will be crucial. The proposed policy risks short-circuiting EV tax credits just when they are needed most.
The DOJ’s Case Against Allowing Medical Marijuana Users from Purchasing a Gun
Is it “dangerous to trust regular marijuana users to exercise sound judgment” with firearms? The Department of Justice responded to a lawsuit asking the court to dismiss a medical marijuana lawsuit on Monday (August 7). The suit was filed by an agriculture official in Florida. The circumstances involved patients using cannabis; it claims that the federal government is unconstitutionally depriving them of their Second Amendment right to purchase and possess firearms. The DOJ asked a federal court to dismiss the lawsuit claiming it seeks to overturn policy involving medical marijuana users and their inability to own firearms.
The suit was filed by Agriculture and Consumer Services Commissioner Nikki Fried (D), who is a candidate in Florida for governor. It made a unique legal argument that a congressional spending rider prevents the use of Justice Department funds to interfere in the implementation of medical marijuana programs.
Presently, in order to buy a gun, citizens are required to fill out a federal form that explicitly asks about the use of (federally) illegal drugs. Applicants that use cannabis, which is legal for medical use in Florida, are not allowed to purchase a gun and could face up to five years in prison if they lie on the application.
This case has national implications and is of interest not just to those that benefit from medical cannabis but also to investors in medical marijuana.
Components of the Case
The suit alleges a federal rule that bars medical marijuana patients from having guns is unconstitutional.
In its motion to dismiss the case or secure a favorable judgment, the U.S. DOJ claimed that the policies being challenged by the lawsuit only apply to people who use illegal drugs, in this case, cannabis. Therefore, Second Amendment rights of law-abiding citizens are not barred.
“These laws merely prevent drug users who commit federal crimes by unlawfully possessing drugs from possessing and receiving firearms, and only for so long as they are actively engaged in that criminal activity,” the DOJ brief to dismiss claimed.
The DOJ referenced Florida’s own medical consent form accepted by Florida marijuana regulators; the DOJ noted that it warns, that marijuana “impairs judgment, cognition and physical coordination, including ‘the ability to think, judge and reason.'” The DOJ added that there was a deeply rooted practice in American law and policy of not allowing dangerous or lawbreaking individuals to possess firearms.
“A long tradition exists of viewing intoxication as a condition that renders firearms possession dangerous, and accordingly restricting the firearms rights of those who become intoxicated,” the brief said.
In the complaint, filed April 20, 2022, the plaintiffs claim the central question in the case is whether the physical and/or psychological effects of medical marijuana render users “sufficiently dangerous or violent” so that possession or use of a firearm would cause concern.
They further referenced a study that demonstrated that medical marijuana has no such effect. The plaintiffs referenced the 2013, Office of National Drug Control Policy study that concluded there was “little support for a contemporaneous, causal relationship between the use of marijuana ‘and either violent or property crime.'”
In its Monday brief, the DOJ countered that “marijuana users with firearms pose a danger comparable to, if not greater than, other groups that have historically been disarmed,” in part because cannabis remains federally illegal.
The government argued further that Nicole Fried, the state Department of Agriculture and Consumer Services commissioner who brought the lawsuit, had no standing to bring the action since she did not allege her right to possess firearms had been infringed.
The DOJ is seeking the dismissal of all claims.
The case is Fried et al. v. Garland et al., case number 4:22-cv-00164, in the U.S. District Court for the Northern District of Florida.
Take Away
It is presumed by many that marijuana for medical use and study will at some point be dropped as a schedule 1 drug. Despite a number of bills in the house and the Senate that, if passed and signed into law, would accomplish reclassification, to date, marijuana is still illegal on a federal level.
The status is complicated by the fact that 37 of the 50 states allow medical use for qualified individuals. The case filed by Florida’s Agricultural Secretary Fried attempts to still uphold second amendment rights to those approved for and using medical marijuana in Florida. The U.S. Department of Justice is opposed.
There is no indication whether a change in federal legal status would change, in the DOJ’s mind, the dangers of allowing firearm ownership to these patients.
Investors’ Interest in Taiwan Being Highlighted with House Speaker’s Trip
Chinese President Xi Jinping holds the position that Taiwan is a Chinese territory that needs to be reunited with the mainland. When U.S. House Speaker Nancy Pelosi announced an official visit to the island, an important U.S. trading partner, Beijing, threatened to possibly intercept the plane, and members of the media there suggested they had the right to even shoot it down.
Regardless of geopolitical considerations and ignoring memes suggesting how husband Paul Pelosi may have positioned his portfolio holdings, investors should pay attention to the unfolding market swings for their own portfolios.
Background
Speaker Pelosi had cancelled her plans to visit Taiwan last April as she was said to have been infected with Covid-19. She then rescheduled her trip for August. These plans were confirmed in late July, at which time President Biden said, “the military thinks it’s not a good idea right now.” There has been concern within the White House that China may go as far as to ground her travel by implementing a no-fly zone over Taiwan. This would put the two nuclear powers in direct conflict.
Taiwan is an important trading partner with the U.S. The announcement caused Taiwan technology stocks to dip, and the Taiwanese dollar and other Asian currencies are also off. While saber-rattling may be as far as mainland China takes their disapproval, the trip serves as a reminder of the significant risk that Taiwan represents for the U.S. technology sector. Most of the world’s advanced chips are made in Taiwan.
Investor Considerations
In assessing whether the dip is a buying opportunity or if this is the beginning of a need to sell and invest in domestic chip makers remains to be seen. It has certainly stirred up many semi-dormant issues between China, Taiwan, and U.S. relations. Investors should not underestimate the inherently unpredictable nature of global politics, positioning, and egos. Just as a war in Europe seemed improbable last December, this may play out differently than anticipated. One can never gauge based on the current state of relations. Analysts believe that if the U.S. and China do confront each other militarily, Taiwan would be the likely cause.
That there is genuine chatter and news reports discussing the chance of a war between China and the U.S. deserves serious attention. While the normal horrors of war first come to mind, as investors we can’t help but to contemplate all the industries this could impact.
Most of the advanced chips critical for military defense systems and corporate computing services are made in Taiwan. Taiwan represents more than 90% of the world’s most complex chip manufacturing (South Korea is at 8%). .
A large portion of this production is from Taiwan Semiconductor Manufacturing (TSM), which makes unique chips for external customers. TSM had total revenue of $57 billion last year and is the world’s largest third-party foundry, dominating the market for high-end chips. The products include the main processors inside Apple’s (AAPL) iPhones, the smartphone chips used by Qualcomm (QCOM), and computer processors for Advanced Micro Devices (AMD).
Source: Koyfin
Since the last days in July when the trip by the House Speaker seemed to be back on, shares of Taiwan Semiconductor Manufacturing have dropped 5% or more. It is expected that a military conflict over Taiwan would halt production and shipments. This would disrupt the completion of production of everything from cars, aircraft, and most anything else with onboard computing capabilities.
U.S.-Taiwan Trade Stats
• In 2020, Taiwan GDP was an estimated $635.5 billion (current market exchange rates); real GDP was up by an estimated 0.0 percent; and the population was 24 million. (Source: IMF)
• U.S. goods and services trade with Taiwan totaled an estimated $105.9 billion in 2020. Exports were $39.1 billion; imports were $66.7 billion. The U.S. goods and services trade deficit with Taiwan was $27.6 billion in 2020.
• Taiwan is currently our 9th largest goods trading partner with $90.6 billion in total (two-way) goods trade during 2020. Goods exports totaled $30.2 billion; goods imports totaled $60.4 billion. The U.S. goods trade deficit with Taiwan was $30.2 billion in 2020.
• Trade in services with Taiwan (exports and imports) totaled an estimated $15.2 billion in 2020. Services exports were $8.9 billion; services imports were $6.3 billion. The U.S. services trade surplus with Taiwan was $2.6 billion in 2020.
• According to the Department of Commerce, U.S. exports of goods and services to Taiwan supported an estimated 188,000 jobs in 2019 (latest data available) (133,000 supported by goods exports and 55,000 supported by services exports).
Take Away
The situation where the U.S. relations with Taiwan are separate from Beijing isn’t new. The expected trip has just highlighted and stirred up undefined boundaries. Washington recognizes one Chinese government based in Beijing and doesn’t officially support Taiwanese independence. Yet the U.S. also is opposed to China’s claim over Taiwan. These murky lines have been the unchallenged status quo for decades.
This trip may help to define the lines that China have drawn as Speaker Pelosi is being told that she is crossing them. At the same time, in her position (third in line from the President) she is defining where the U.S. believes those lines are.
From a pure investors’ point of view, we have our own lines, some of them are on the charts of the companies that are affected as this plays out. As with any disruption, there will be unusual price movement; this movement could allow for opportunity.
Senate Version of Marijuana Legalization Bill May be Unveiled in Coming Days
Investors in marijuana stocks may be given something to lift their spirits prior to Congress’s summer recess. There are reports that senators will finally introduce the Cannabis Administration and Opportunity Act (CAOA) bill. The House of Representatives has already introduced and passed its own version to legalize marijuana nationally. The Senate bill is expected to be somewhat more restrictive and have other small differences; both bills contain what the authors view as social justice measures.
It’s been a year since Senate Majority Leader Chuck Schumer (NY), Senate Finance Committee Chairman Ron Wyden (OR) and Sen. Cory Booker (NJ) first released a draft version of CAOA detailing proposed legislation to end federal cannabis prohibition. Senator Schumer has reported that the final bill to be voted on will be made public the last week in July.
There is a push to introduce the Senate’s bill ahead of the August recess (August 8 – September 5).
The final introduction of the CAOA has had many delays as the sponsors have worked to build in what they deem important while trying to move forward with something with bipartisan support. One expected aspect is that Senator Schumer has wanted the CAOA to specifically seek to build barriers so large alcohol and tobacco companies so they can’t easily overtake the industry.
Any change in details to the bill since it was first released last year is still not public. But it’s expected to place importance on removing cannabis from the Controlled Substances Act, impose a federal tax on marijuana sales, favor groups that have been hurt by what are seen as harsh laws, and provide a path to relief for those who have faced federal cannabis convictions.
Once the measure is introduced, its road to passage is still not straightforward. The measure would require a 60-vote threshold to pass in the Senate. While the bill is expected to have bipartisan support, the more conservative senators may be inclined to vote the bill down. Currently, there are senators from each of the major political parties that are non-committal.
Senator Schumer seems intent on bringing the bill to the floor for a vote. If it passes, the House of Representatives and the Senate would likely meet to work out differences between the
versions. If they agree on one piece of legislation, they then hope the president signs it into law.
The year-long push by Senate leadership to get the legalization bill to the floor has frustrated businesses, banks, patients, and some states that have wanted to see the reform move quickly. Without approval on the national level, states may legalize cannabis products, but entities that rely on Federal charters, such as banks and even the Post Office, put themselves at risk if they do business within any part of the industry that is unlawful on the federal level.
There are serious questions about the prospects of passing any broad legalization bill in the current congressional climate, especially given the steep Senate vote threshold. Then another looming unknown is what President Joe Biden would do if a legalization measure does ultimately arrive at his desk.
Despite supermajority support for the reform within Biden’s political party, the president has held a firm opposition to adult-use legalization. Instead, he has supported modest changes such as decriminalization, rescheduling and continuing to allow states to set their own policies.
Dr. Rahul Gupta, Director of National Drug Control Policy, sometimes called “the White House drug czar,” recently said that the Biden administration is “monitoring” states that have legalized marijuana to inform federal policy, and recognize the failures of the current prohibitionist approach.
