Ep 283 – The “Pot Com” Bust: Almost Over or Just Getting Started?

andrew zatlin southbay research

Have we seen the last of the Pot Com bust in cannabis stocks? Or should we expect to see more downside ahead?

Here to help us answer this is Andrew Zatlin of SouthBay Research, the cannabis industry’s rising leader in unconventional investment data tracking.

Learn more at http://www.southbayresearch.com 

Key Takeaways: 

  • Andrew’s background in economic forecasting and how he came to start SouthBay Research
  • An inside look at SouthBay Research and its mission to provide best-in-class macroeconomic forecasting and actionable insights
  • Andrew’s insight on cannabis stock valuations and where we currently are in the Pot Com bust
  • The vice index and why it’s important to the cannabis industry
  • Shocking similarities between alcohol, gambling, and cannabis
  • Reasons why cannabis might start looking like Kentucky’s whiskey industry
  • The types of businesses that Andrew foresees excelling in cannabis
  • When and how cannabis brands will begin to emerge
  • Andrew’s advice on how cannabis investors and entrepreneurs can best position themselves for the years ahead
Click Here to Read Full Transcript

Matthew: Hi. I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider.com. Now, here's your program.

Is the pot combust in cannabis stocks over or do we have more downside ahead? Will cannabis be left with only two huge cultivation and extraction companies similar to the whiskey industry? Here to help us answer these questions is Andrews Zatlin of South Bay Research. Andrew, welcome to CannaInsider.

Andrew: Thanks for having me, Matt. Hello, everyone.

Matthew: Give us a sense of geography. Where are you sitting right now?

Andrew: I'm in Silicon Valley, actually just North between Silicon Valley and San Francisco.

Matthew: Okay. And what is South Bay research on a high level?

Andrew: So South Bay Research actually got started a few years ago. During the recession, it was pretty evident that we had a clash between obvious feet on the street information. Everybody could see the bubble happening in the real estate market, but then you had Wall Street talking a totally different line. And what I found was that we had an opportunity to bring new information. The internet was bringing new data points, fresher data points. And I brought that to Wall Street, it was bringing main street to Wall Street. It was kind of a moneyball approach. In fact, the "Wall Street" journal has called me the money ball of economics. But it's not so much, you know, coming out with this wonderful rainman way of seeing things. It's more the way companies operate, the way Wall Street companies operate. I was able to come to them and show that they were too conventional and too mainstream in the data that they were using. The way we were measuring the economy was really just out of step with the way the economy had grown. You know, where we were buying, how we were buying, what we were buying dramatically changed and still changes. But Wall Street was using these data points and this frame of reference that was literally dated to post World War 2, and it still goes on. And so, that's the interesting thing is as always South Bay, what we're trying to do is share alternative data but not alternative data in the bizarre sense like pigeon guts and reading tea leaves, but more actionable, better data that's just not in the mainstream, defined as mainstream and conventional. And that's obviously what people wanna know, is what's really going on because the information I'm getting is either too late or out of step or somehow it's warped. It's not in step of what the real the economy is doing.

Matthew: Yeah. Yeah. And we were talking about the show, you know, kind of the corporate stodginess that exists out there and, you know, a lot of businesses just try to get, like, a slight evolutionary edge when there's so much room to make giant leap forwards if you expand the context of your thinking. And I wanna jump into that. But before we do, can you share just a little bit about your background and journey before starting South Bay Research, what you were doing?

Andrew: Oh, yeah, sure. So, I grew up very entrepreneurial and I was always fast. I'm a numbers guy, but I think numbers tell astory, which then becomes a call-to-action. I thought, originally, being an economist would be the best way to go. I'm very analytical, I see patterns, and then I would show what to do. But I was always entrepreneurial, taking that information, moving it forward. I found that being an economist tends to be more stodgy and more backroom than not. So, I ended up getting an MBA from University of California and then jumping into Silicon Valley back in the 90s, back in the heyday of the internet. Got to ride the internet for a while, made a fortune, lost a fortune, made a fortune, lost a fortune. And essentially, what I learned is that history does repeat itself. And even today we're no longer doing the hardware plays. We're not doing software and SAS, but it's the same business models emerging over, and over, and over. I mean, when you look at, for example, WeWorks [SIC]. What is WeWorks? Is this suddenly we're taking office space and subdividing it to people who can't afford to have a receptionist and other backroom infrastructure? No, that's been going on for decades, hundreds of years. There's nothing new about WeWorks, but if you rebrand it, you sell it and then you get some capital into it, it becomes bigger and better. My take as we talk about cannabis and other things is that the same business models come up because they work. But at the same time, there has to be an evolution. And what happens during those changes in those evolutions is where the money gets made. And I think it's really interesting right now, some of the transitioning that's emerging in the cannabis market.

Matthew: Now, you've kind of coined the term the pot combust. Where do you think we are with the pot stocks or the cannabis publicly traded stocks?

Andrew: You know, I think that we're not through it yet. And I think the real death nail will come when cannabis is legalized nationally in the U.S. Right now, what you had was the hot money leaving. I mean, it's just common sense. We're talking about stock prices like Tilray and others that have fallen about 50, 60% this year. And when you take a step back, you still have these out of control P to E ratios and valuations. When you have companies that are trading worth billions of dollars and they're doing maybe $10 million of sales. This is hot money. This is one-to-one with what we saw in the .com boom and bust, out-of-control valuations and just a disconnect between true demand and supply, but it's even worse. Why haven't we come down to the bottom yet? Well, partly because the number plays are few and far between and so, there's only so many places can absorb the hot money. Look, we know this is gonna be big. We know cannabis. We're in the early stages of the cannabis business, whether it's CBD or THC, early stages. And there's gonna be winners, but we just don't know which ones are gonna be winners and there are only so many players. And so, the money's gonna flow in and that's gonna lead the stock prices to go up for a time. But as we've been seeing, you know, how many apologies can companies make for not quite making their numbers? And then recently the bigger, broader macroeconomic concerns, investors are saying, "You know what? What's it gonna take for this company to really succeed" And that's before marijuana gets legalized across the room. You don't have patents on cannabis, you just don't. This isn't like a router or a switch. And so, for me, I think this is sort of like the first phase, the .com. bust. This is the .com bust where evaluations return from their lofty levels to a much more reasonable level. Again, a lot of growth.

But recognize that a lot of this initial growth we've seen over the past couple of years was, I don't wanna say novelty, but it was just spending that came from underground to above ground. It's legal now. But there's only so much spending that's gonna happen for bud consumption, for flower consumption. There's still more out there. I think the reason that we're seeing this first phase, and we're gonna wait a little bit, is we're seeing a conversion also to how people are consuming. Aand I think right now the idea that I'm smoking a joint. Okay, we've kind of saturated that market for guys who are smoking joints. But that's not where the real play is. The real play is gonna be in the derivatives, the real play is coming to be cosmetics companies that put CBD into Vicks Vapor Rub, that kind of thing where you're no longer talking about, you know, 100,000 pounds of pot, you're talking about lot higher production being demanded. And so, I think the next stage will be big business coming in, wanting to legalized. They're already here, they're just not out of the closet, so to speak. But once that happens, once big business steps in, you're gonna see that transition. So the .com bust right now it's still, you know, a lot of the growers and investors starting to realize, "Wow, so supply is kind of endless and demand is not if you're just talking about, you know, recreational marijuana, so where do we go next?" And companies like Tilray and Aurora, they don't have an answer, really. But we're still transitioning.

Matthew: Now, a lot of people listening might call cannabis a vice, other people a virtue/ But more people are looking at it more as, you know, not so much as a vice anymore, but it has medicinal qualities. You have a vice index. What is that and why is it important?

Andrew: So I started the vice index. Again, going back to my starting point of what do people really spend money on? And so, what I started with was, if you look at these conventional data points, consumer confidence, consumer sentiment, they're going out and they're talking to literally 400 people. And every month, this big data point comes out and hedge funds move trillions of dollars accordingly because 400 people said, so. I found that if you go out and you track things like gambling, cannabis consumption, you're looking at something that millions of people are indulging in every month. And so, if you can track what they're really willing to spend their money on, a vice, then you're really putting your finger on the pulse of where the real economic situation is for consumers. Are you willing to go out and spend, you know, 10, 12 bucks on a pint of beer? If so, you've got money in your pocket. If not, then well, that's interesting. If you can't even afford drinking money, that's a problem. Same with cannabis. You know, for the most part, it's a vice. It's a discretionary spend. And I found that it cuts across every demographic you could talk about, rich or black, white, Hispanic, you know, women, men, old, young, everybody smokes. And so, by tracking that, you have a legitimate way to track a broader economy.

But what happened was over time, I came to look at cannabis as this massive business opportunity. I think everyone knows it. We're not all clear, you know, big, broad brush strokes. We know that there is a lot of money being spent right now to smoke cannabis, whatever form it is. But that is just the tip of the iceberg. Remember though, this has been around for millennia and it's been around not just for recreational purposes, but also for some kind of therapeutic purposes. The problem is we haven't explored that and we haven't explored that because it's been illegal. So we don't really know what it can and can't do. I mean, you're always gonna have those crazy claims, you know, it cures brain cancer. I once spoke with Tommy Chong and this was hilarious because, you know, Tommy and I were talking and he was mentioning that he had to return to cancer and words of the great comic Chong, you know, he took, you know, oil and "I just, you know, stood right up and, you know, used it on my prostate, man." So, you know, you've got that therapeutic inclination. We don't know what it's gonna do. Tommy swears that it is curing prostate cancer. We don't know what it can and can't do. Right now, can you imagine, given how much we spend on healthcare, if you come out as a pharmaceutical company with some kind of derivative from cannabis, that does create a cure. I mean, right now my mother, 80-year-old woman, uses CBD lotion on her joints. But she's got, you know, a mild form of arthritis and she swears it works.

So you do have opportunities here, and that's where the big spend is gonna go. And it's gonna go there predominantly because it's also patentable. You do an extract, you can patent that. If you right now go out and say, "I've got the best strain of Kush," come on, give me a break. Anyone can reverse engineer that. You can't really patent that. You kind of can, but kinda can and, you know, to be honest, consumers don't care. Most wine is sold at stores like Costco and Safeway and they don't really care what brand it is. The bulk of wine comes out the door, it's middle road wine because consumers really aren't that crazy. They're not fetishized. You'll always have the fetishists. You'll always have wine stores. You'll always have cigar stores for the pure hardcore Epicurean and indulging person will have that with marijuana as well. That's not where the bulk of the business goes. And that's not where the opportunities are.

Matthew: Circling back to the vice index, what is it saying right now? Like what kind of data with alcohol and gambling and cannabis is it telling us about, you know, where we are in the market cycle?

Andrew: So, Matt, the thing about the device index is it has this wonderful leading-edge, four months in advance. So this is just, I have this 25-year-old data and it's just so strongly correlated to just general spending. And right now, that data is saying the consumer's done, that there's no more growth for the next three, four months. We're going into holiday season, so what that really means is, for the most part, everyone's already budgeted for this holiday season. But when we come to January, device index is saying, put on a seatbelt, do not expect the consumer to show up in the first quarter. And that's a problem for our economy.

Matthew: Okay. Now, you've mentioned before that the whiskey industry is largely based in Kentucky and that you think that the cannabis industry might kind of move to one or two players. Can you talk a little bit about your thesis there?

Andrew: Sure. You know, I use the alcohol prohibition repeal as a great analog for what we're seeing because time and time again, everything that we're seeing out there in the cannabis market is exactly what we saw in the alcohol market. But there are some important distinctions. At the end of the day, though, we're talking chemistry. With distilling alcohol, it's chemistry. There's no barrier to entry. It's a pure scaling situation. With cannabis, it's the same thing. Could you imagine if our tobacco farmers just started growing cannabis? Can you imagine what the price would drop to? And that's literally the future. Right now, with tobacco consumption dropping, we subsidized tobacco farmers all day long. What do you think is gonna happen when you legalize marijuana growing production? The tobacco farmers are immediately gonna start looking at this. When we talk about that kind of analog, what happens? You're talking about just economies of scale, you're talking about basic economics, you're talking about production eventually concentrates because at the end of the day, there really is no patent here. It's just pure... On one hand, if it's alcohol, it's chemistry. With cannabis, I strongly believe that the heyday of flour has come and gone and we're gonna go to distillates because the producers, they can dodge the FDA requirements that there's no fungus, there's no mites, there's none of this, none of that. The farmers today have to throw away half the crop. Well, if you just focus on doing extracts, you don't have to worry about your crop being thrown away.

For the logistics supply chain, having a liquid that's concentrated is a lot easier to deal with and it's got a longer shelf life. And then if you're obviously a producer at some level of the end product, again, the liquid's much more desirable for various reasons. One of the main things that we're gonna experience over the next couple of years, the main driving force behind the economics of cannabis, will be quality control. It's the heyday of the consumer. In the old days and even today, what you see is what you get. If I go into my dispensary, they have their versions, their strains are, you know, is this is my favorite, you know, "Is orange gorilla in?" I don't know, maybe not. Well, how about this one? And, you know, there's this too much variation. We saw this with alcohol prohibition. Bathtub gin got its name because, again, chemistry, you can make gin. It's not that hard, but the quality control part's a little bit challenging. And so, bathtub gin became cocktails because you had to flavor it because it tasted like crap.

As you go forward, what happened was once alcohol was legal again, you had companies like Seagram's, Bacardi able to come back in and sweep the market because there was this history of quality controlled production. You knew what you were getting. California state recently did a test of a bunch of products here, cannabis products, and found that most of them, not part, but most of the things being sold today is having X percent THC, Y percent CBD. Dope. And it's not small differences. It's, there is no connection between what you're told you're enjoying and what you're really enjoying. That's not allowed going forward. That simply is not gonna be allowed because the consumer now has a choice. And so, the winning companies are gonna be the ones who emerged that say, "When you buy Snoop Dogg, Snoop Dogg is gonna guarantee that this has a certain quality-controlled process and is consistent." You see that with every controlled substance, also from the pressure. Again, FDA, the tobacco has to meet certain regulations. Alcohol has to meet certain regulations and it's tested. Today, those regulations really are not enforced in the cannabis industry. And so, that's where the big opportunity is, but then you get back to who has the ability to deliver that? Who has the ability to meet the tax requirements? Every step of the way, we're going to see changes that support big business coming in. And so, I look at this industry and go, "This is a time of change type of opportunity."

Matthew: Okay. You mentioned Bacardi and Seagram's. We don't have any real brands yet in cannabis. Some are starting to get some traction, but how do you think they will merge?

Andrew: Well, couple years ago, I had pitched that I was shopping around because I think the next stage is they'll continue to be celebrity-based [Inaudible 00:18:30] Because, again, go back to the fact it's quality control. It's not just a question of how much, you know, let's go to Bacardi. And this, by the way, this was happening in era where racism was around. You had, Bacardi was for a certain social class, Seagram's was for a certain social class. But once you tackle the quality control issue, branding came in. The cost... And so, today if you go out and you buy whiskey, oftentimes, what you're buying is just, you know, you'll have someone come out and say, "Oh, we've been making this for 10 years." No, the reality is this company is nothing more than a label. They went to a distillery in Kentucky and they said, "I want a whiskey that has the following properties." And, "Okay, well, we've got that alcohol. It's been around for a few years. Here you go." It's been around for a few years, but they just created bundled into this one package. And so, you have some marketing gyrations here where it can be played to be X, Y, Z years old, but, in fact, this company's only been around for two years.

This sells. People are easily sold to. So you're can get to this area where marketing that's not gonna step in and say, "I know that you want to have a good smoke or enjoy, you know, you're recreational marijuana user. Come over here.You're gonna have a consistent level of enjoyment. And oh, by the way, your buddies will like it too." Or your buddies might be urban, they might be country, they might be rasta. You're gonna have celebrities that will step out. We saw this with perfume. Britney Spears can do a perfume. Does she know anything about perfume? No. But she's got the tab. Kim Kardashian probably will come out with something. Point being, you're gonna see, I think celebrity branding cause it's easier. You see it already with Bob Marley's family has started down this path [inaudible 00:20:27] and that's a global brand. Holy cow. You know, that's a huge opportunity. You're gonna have, I think Snoop Dogg's already moving in. You're gonna have lots of opportunity, but it's all gonna come back to once you get the quality control issue tackled, then it's branding. And you're gonna have every step in this chain segment. And each is gonna have all the golf with or do offloads. Whiskey has basically two distillers or two distillers in America that basically make most of the alcohol sweet drink. It just do. Again, because that's the inevitability of economics. You have only so many cable channels that you watch, only so many news sites that you go to. It's the same thing. After a while, economies of scale. And plus, we're human beings. We only have so much attention span. It's easier to deal with, you know, a couple of companies. There's Lyft and there's Uber, on and on and on. We're gonna probably see something like that, but from here to there, there are opportunities. I'm getting to a concentrated market. Today we're in a very fractured market and it's artificially so because state of California, you can only make and sell within California. Colorado, same thing.

Every year, I've been going up to Portland and visiting various dispensaries there, interviewing managers and finding out what works and what doesn't. And what impresses me is the amount of approach to pure business standpoint. The amount of money made by popular dispenser is incredible. I sat in one for 30 minutes and just watched non-stop traffic float in the middle of the day. And when you talk about, you know, inventory... You know, when you look at these jelly bean jars of bud and you go, "Wow, that's 10 grand worth of bud" and you've got X number of jars, there's this, you know, you got a little spoilers, but, you know, breakage, it's really, you know, the cost of operation are insignificant, There are huge barriers right now because, again, we're not national and legal. Those will go away. So right now you've got this high margin business, high turnover. I guess it's a fabulous visit to get in if you're in. And I think it's just gonna transform overnight once it goes legal. Safeway is gonna jump in. Safeway knows how to sell controlled substances. They sell alcohol and cigarettes all day long. You can even get in some Safeways, prescription medicines through the [inaudible 00:22:55] pharmacy. What makes marijuana special that it won't go to the same channel?

Matthew: So like this is giving heartburn to a lot of dispensary owners out there. They're thinking, "Oh my gosh, am I gonna go away? Do I need to evolve?" How long do you think it takes for something like that to happen where, you know, it moves kind to the biggest retailers? I mean, obviously each state's a little different.

Andrew: Overnight.

Matthew: Overnight.

Andrew: Overnight. Here's the pitch. This is exactly what's gonna happen. Let's use a Safeway as an example. Seafeway says, "Hey, state of California, there's a lot of transactions going on every day and you're taxing us. How are you taxing us? Oh, I see. So you've got some kind of special boutique way of taxing from seeds to store. That's so convoluted. You know, we've been doing this for generations. We know how to collect your tax money and we can guarantee that people aren't, you know, underage kids aren't buying this. Oh yeah, I know the dispensary's have that too. But, you know, do you wanna deal with 1,000 dispensaries or do you wanna do with one company? Let's say. It's a lot easier when you guarantee it. We can step up. We've got the security you're looking for," and on and on and on. And then they pitch it to the producers, you know, the ones who are making whatever form the cannibis takes, right? We don't know if it's gonna be liquid or whatever. They go, "Hey, you know what? I know that the dispensary or this guy over here down the street, their smoke is offering you four bucks for bud. I'm gonna offer you three bucks, but I'm gonna take 100% of your production. Okay? And I'll take next year's production." No, there's no way for a boutique dispensary to survive in an environment where the tax authorities don't wanna deal with them. The police don't wanna deal with them. The police don't like small dispensers for the same reason they don't like liquor stores. They are madness for trouble. And I'm not saying that the clientele are trouble, I'm saying these are cash businesses in a lot of ways with special canibis. There is part of extra fees. And that's not attractive. So, Safeway is a lot more manageable from... Every step of the way, dispensaries are more of a bandaid approach. I'm so sorry, a bridge approach to the ultimate destination.

You will still see some dispensers because you will still see some people who don't wanna buy the quote, you know, the Robert Mondavi job one, you will still see people who said, "You know what? I wanna buy a shot to old BenchWatch, 2009 and I'm gonna spend 150 bucks, and that's not gonna be safe. Okay, great. You're gonna exist on the margins and you're gonna do business on the margin because you have common source of your cadence. But 95% of the business is gonna be gone. That's a big, broad brush stroke. You'll have also location, location, location. If you are in Vegas, well, yeah, okay. Set up your shop inside Bellagio, you'll do great. But for the most part, you don't wanna be in logistics. If you sell Woodwork fire, what you saw in that TV shows something very simple. The money was made in originally with illegal substances on getting it from point A to point B. But once it's legal, logistical delivery, supply chain no longer really has the lion's share the money. It's random. And the big brands and the big distribution centers [inaudible [00:26:28]

Matthew: So the way you mentioned that like a Safeway might buy a whole, you know, all the production of a farmer, sounds similar to Big Tobacco. Do you think that it's gonna start to look similar to Big Tobacco?

Andrew: Oh, I guarantee no. I don't know if people know this, but Big Tobacco has obviously been circling this for almost 50 years and they have position papers stuff that they wrote back in the 70s saying, "When this goes legal, here is how we're going to enter the market." The key here is that the reason Big Tobacco hasn't been able to get in was partly legal and partly social. They go, "Ooh, marijuana bad." Once it became legal, we've know for a while that the majority of Americans don't look at marijuana as a [inaudible 00:27:15] thing anymore. Once it became legal at a state level, that's one thing. Once it becomes legal at a national level with why wouldn't you? You have a process of going to farmers, helping them grow, guaranteeing their crops. You work with big government to get the subsidies that they need. Who cares if it's corn, tobacco, or marijuana? You have the means and the capital to make a solution happen. That just means the bottom's gonna fall out for prices because once you go to scale, you know, why right now is it two or three bucks wholesale for bud? Why isn't it a dollart? It's a weed. Yeah, I know their cost of production, but guess what? When you are at scale, the cost of production's dropped rapidly. And that's what we're hearing also, by the way, with the companies like Tilray and Aurora. Wow, you know, we added a new warehouse, our prices went down. Yes. Well, you're going to have now suddenly big agricultural business come in and say, "If you do the following things, your crops won't be four times a year. Why can't they be six times a year?" Production is going to get crazy and then you've got import.

Remember, if you're talking extracts, if you're talking distalance, you don't have spoilage issues really to consider. Olivia can ship to us Japan, Siberia. This is now something that can be grown anywhere. You know, it's not necessarily dish weed, but come on, let's be honest. It doesn't have to be amazing. If you're doing distillates and you can extract the THC, it doesn't really matter. You can have higher concentrated THC strains and virgin. Ultimately, that's what we're going to see. Big Tobacco's planning on coming in, and this was revealed. This is not, you know, weird. When we closed the lawsuits with Big Tobacco. They had to share their internal memos with us, and this was literally part of the internal memo sharing, was they talked about initially they sold marijuana as a competitor and they funded a lot of the local resolutions that were anti-marijuana were funded by Big Tobacco because they said, "Oh, you can smoke tobacco, you can smoke marijuana. We got to fight marijuana." But what they eventually found was marijuana was more a gateway to smoking tobacco because people would smoke and then stand around and say, "Well, you got a cigarette?"

Matthew: Right. That's true. Yeah. Yeah. You know, when I hear you talking about this, I'm thinking, you know, if I'm in the retail in the cannabis, I might want to start to think about doing something differently, perhaps, you know, I want to be the Tiffany of cannabis or the Louis Vuitton because I have some powerful narrative like Tiffany does with the blue box where people are willing to look a lot less at the price and much more at the story.

Andrew: There are literally four places. If I had the capital, there are literally four businesses I would be looking at. What I'm describing as a total overhaul of the supply chain and also at the same time, an emergence of branding. So let's start, let's start with, okay, so I think what you're going to see is some equivalent, and we're already seeing DUI testing provides us. Colorado's police force said, "Hey, now that we're experiencing pot smokers driving, give us 10% of the tax revenue." That's a big dollar amount. Why? Well, we wanna, you know, we've got to now deal with, you know, stoners on the streets. What will emerge... Right now we don't have laws that say if you smoke this much, you need to be pulled over and ticketed. We have that with alcohol. We understand very clearly the relationship between alcohol consumption and drunk driving. We don't yet have that with cannabis. I don't think it matters. I think communities will start to say, "You know what, I need something on the books. So I need it. If you have this much THC content in your blood system, you're high [Inaudible 00:31:06] Well, how do you measure that? Well, you're going to have this new from emerging technology, how do I measure if you're high? Doesn't matter, but I got to start somewhere. So that's one of the four places I would go. Okay. Just looking at how things will become analogous to alcohol consumption. Within the world of the supply chain, the next place I would go is I would get out of dispensary business. Right now it's great because you have a [inaudible 00:31:32] almost a monopoly, there are only so many dispensaries allowed and you know what? It's you're buying and controlling access to the market for cannabis and things like that. But in the space, a large part of the reason we've been hearing deaths from [inaudible 00:31:46] not because of tobacco, because of going to China and buying basically counterfeit cannabis componentry. Basically, it's, you know, again, how do you control that testing?

So that's where I think we go next, is in the supply chain, testing is going to become more expected. So right now, if you're a dispensary, I would be looking to get out. Eventually, you'll be bought up anyway. Safeway is just gonna buy you out or regulations gonna close you down or business demand is just gonna shift. Why would I pay premium preview when I can go get some? Especially for caulking extracts and the guarantees versus the bud. But testing, I think, is going to be around forever. In California, I think there are only two testing facilities. That's not going to continue. If you are big pharma, for example, and you're going to be buying at the scale that you buy other chemicals, you need a testing facility to guarantee. So I would be looking at going into testing because that's just going to grow, and grow, and grow, so to speak. The third one is when you got high-end products, you know, "Ddo I want to invite my friends over and smoke out of a bomb that's all cheesy-looking?" No, I want my Rosewood pipe as gold indolent. Jewel is nice, but surely, we can do better. Jewel is other high-end devices, you know? I'm surprised Jewel hasn't already come up with sound, you know, "Hey, while you're smoking in place sounds for special effect and lights up." You know, I think we're going to come to a place where there's a definite need at the high-end low-end.

I think the more money isn't at the high-end for the, you know, the Gucci and the Louis Vuitton. I think it's more the big, wider equivalent disposable. You know, we have that with a buck 50, kind of e-cigarette. Sorry about, you know, have the devices. I think whoever dominates that market, you know, small-dollar. But I think Big Pen does what, 2 million? Big Pen sales a day or some ridiculous number. There's a company named Kush, which is interesting though. Kush sells supplies through dispenseries. They sell the baggies. Okay? Do you really think that when this goes big business, high-end, you know, large scale, that young brands or Coca-Cola is gonna source their packaging from Kush? Because what Kush is doing is really simple, just they buy in large volume and they parcel it out. That's all they're doing because if you're a dispensary, you can't get to China, you don't want to bother going to China to get these baggies and [inaudible 00:34:22] stuff. It's easier just to go to Kush. Eventually, I see Kush just having problems in a couple of years because, at the end of the day, they depend on dispensers. If dispensers aren't around, what happens to them? And big business doesn't need to go to the middle man, which is what Kush is.

The last and fourth one that I would love to do, and this I think is inevitable, it goes back to the origin of the stock. The origins of the stock exchange is really simple. Farmer Ted grows cotton. Farmer Ted wants to make sure that he can sell that cotton. So banker Fred, comes in and says, "Tell you what? I'll guarantee, I'll buy a per bushel and here's your price. And so, you know, no matter what happens, I guarantee this price and I'll buy this many of your bales." And that's the origin of stock exchange, guarantee pricing performance at the same time, guaranteed production and guaranteed consumption. And so, you know, I'm going to make a thousand bushels of corn. I'm now going to sell that at once or in parcels in advance to guarantee that I don't have to worry about it. You know, once I harvest the selling it and I've already got a locked-in price. So life is good. If you're here today with cannabis and you're going large scale operation production, you need the same type of thing. If you're in insurance, insurance, by the way, is the best next step as well. As we mainstream this product, insurance companies will insure your crop at what dollar point? How do I know what the value is of your crop? So you're going to have to have some kind of neutral third party. What they do today, there is a stock exchange for oranges. I'm going to insure your orange crop. I'm gonna go to someplace that says, "Oh, the value of your orange is this much. So if your production is this high, I will ensure your orange growth for this much money."

Cannabis is the same thing, it's a cash crop. You have to insure it, again. But the other advantage of ultimately some kind of derivatives options market emerging for this is again, I don't just want to ensure that I'm covered for insurance, I wanna sell my crop before I've even grown it. And that's what we're seeing. That's where the Big Tobacco analog comes in. Big Tobacco doesn't really grow. They go to individual farmers and they say, "I will buy your crop." And then they buy all this crop and they grade it and take a look at it and they do various choppings and blending so that they get a consistent quality that they're trying to get to. The same thing will happen with marijuana, is you're going to have, okay, you're a grower, you're a grower. There could be huge farms, small farms, doesn't matter. It's legal to grow. Your'e licensed to grow this stuff. But at the end of the day, you are a producer. You are producing a crop, someone else's gonna buy it from you. So now you've got to work with Big Tobacco, essentially, because they're the ones out there with the capital that can come in and say, "I'll buy it for this much." But Big Tobacco and everyone else, I'll say you still have derivatives markets, a futures market. So what's interesting is there have been a couple of attempts to create this kind of a market. And it's interesting to see where it's gone and where it hasn't gone. But I think this is the big deal because once this gets national, you'll see a Goldman Sachs or a Chicago Board come in and say, "Great, we're open for business. You can now buy and sell futures for cannabis." And there are certain rules and certain processes. So if someone's already existing with this, either in Colorado, there was a guy out there trying to do it. An example, if you were doing on a stock exchange, you had to buy a seed on the stock exchange. Let's say the cannabis market, 5,000 bucks. And that just gave you the right to come in. Now, there are certain qualifications and certifications that go with that. Meaning, it's like getting into the club, you know, you're expected to wear a tie and, you know, you pay your bill every month and, you know, on and on and on, we'll kick you out. And the quality of what you produce has to be verified and if you say it's great A and not a grade, okay, but if we find that it's grade B then [inaudible [00:38:34]. On, and on, and on.

So someone out in Colorado did this and made a few million dollars selling seeds on the cannabis exchange that he was creating, just that much money. Because everyone knows that the next stage will be once this is a cash crop, it has to have its own, you know, exchange and whoever creates that successfully, sell off the Chicago board exchange. So that's where I would go right now. I would do it in California. Forget Colorado, forget that buying board seat. That would be, in my mind, stupid because, you know, you don't have to. There are only so many producers legally right now. You just have to convinced them that they're... You get to explain to them the business of selling futures and you have to go to buyers and convince them like the dispensers and say, you know, "You want to get in on this and here's why." But again, you're talking about a semi-fractured market, but it's not that horrible. You're only talking hundreds, you're not talking tens of thousands for producers.

Matthew: This is great stuff, Andrew. You know, I brought you on because you really kind of think broadly about these things. Now, not everything's gonna happen exactly as we project them in the future, but a lot of this will probably shake out and we don't know when. But I find that it's good to start thinking early about what's possible and what's coming around the corner because, you know, the cannabis industry is no different than any industry where people, you know, we're kind of in an echo chamber. We're all kind of confirming our own biases and we're rarely looking at a much, much bigger picture. So you do that in a lot of other industries. I'm glad you could share that lens on cannabis. Well, Andrew, a few personal development questions before we close. Is there a book that's had a big impact on your life or your way of thinking that you'd like to share?

Andrew: Can I say two books?

Matthew: Sure.

Andrew: There I am again, just having to be different. One of them is "Moneyball," Michael Lewis. What a great book. I love it because it's a fun read, but also for recognizing a couple of important things. One is it's even the experts aren't always right and that there's always an opportunity for a new perspective and a fresh pair of eyes to bring another level of performance wherever you go. I found that really refreshing and it kind of supports where I go, which is I really think that I've oftentimes have a different perspective and that I'm bringing something to the table that can actually add value and help people do better for themselves. The second book, though, I love because it also opened up my eyes, but in a different way. If "Moneyball" opened up my eyes to understanding that the status quo isn't always right, there's another book and it's kind of obscured. It's called "The Great Game" and it's written by a former, a writer for the economist named Peter Hawker and it's this wonderful look at how Russia and Britain went into India and tried to conquer countries like Afghanistan. And what it showed me in my worldview is that we can get sidetracked by day-to-day issues, but behind the scenes, there's a bigger, usually a bigger thing playing out. It's just how we see it and encounter it. We don't always connect the dots. So for me, "The Great Game" was interesting because it pretty much says everything we're experiencing today, the U.S. in the Middle East, Iran assending, Russia coming in Turkey. This is a repeat of everything that's been going on for 200 years. There's the same players, the same objectives, everything one-to-one. And that's what I mean, is it's the old, you know, [inaudible 00:42:11] history doesn't repeat itself, but it does run kind of a thing. Actually, he didn't say that. But you know, the idea is when you look at business, when you look at opportunities, they may have a slightly different look and feel, but ultimately, it's coming from the same place and that sometimes you have to kind of get to the 30,000-foot level to understand why things are happening the way they are. "The Great Game," it's also like "Moneyball," it's got a lot of back and forth, spy crap, things like that. Really great book.

Matthew: I've heard of "Moneyball" but not the second one. That's excellent.

Andrew: It's obscure. I mean, hey, anything written by a guy who used to write for the economist is gonna be a little bit obscure. But this one's really interesting because, again, it's a historical look at why did India matter and why was Russia just galloping across and consuming countries until they got to basically Georgia and started to slow down? Why has Persia always mattered in this attempt to get to India and Afghanistan? You know, you start to realize that the place names that we read in today's mainstream press are the same place names that... And they called it "The Great Game." You know, Rudyard Kipling. It's the same thing going on, and on, and on, Russia trying to seize that space, you know, Western powers trying to seize that space and then the locals trying to survive as they're caught in this tug-of-war.

Matthew: Andrew, what's the most interesting thing going on in your field besides what you do day-to-day?

Andrew: In the field of economics, and I think what's happening as a revolution in data, and you could see this and you know, AI, you see this in a lot of different places, but fundamentally, a lot of people are starting to realize that there's a lot of great data out there. You know, what is Facebook? At the end of the day, Facebook is a data-harvesting machine that sells to marketing people. That's what they do. Data matters. But what matters more is asking the right questions. For the past few years in my field, the idea was as like taking Scrabble pieces, I, you know, I get all these Scrabble pieces together, throw them into a computer, by gosh, I'm going to get information out it. And that's kind of what the quant, what you hear quant funds doing. But the idea is computers can come in and pretty much we're gonna be at Skynet level of capability, you know. The reality is no. You can't just take Scrabble pieces, throw them up in the air, or have a computer sift through them and know what you're doing. We still come back to people have to ask the right questions. The machines don't know how to ask the questions. They know how to, if you define things for them, follow the rules. But actually being able to step back and say, you know, what should I be paying attention to here? That's, you know, that's hard. You know, so, for example, let's say I know that FedEx is based in a certain, you know, maybe they've got a hub and I know that, therefore, if I wanna know how FedEx is doing, there are different ways to triangulate on how their business is doing. I could look at how many trucks are moving or how many planes were moving. Or I could look at how much oil is being consumed. Or I could look at how many people are sitting down and getting a cup of coffee or are the warehouses... You know, when I was in Silicon Valley back in the heyday of the 90s, you could track whether a company was doing well or not by whether the warehouse hours were extended because if you've got overtime going on, baby, that must mean business is booming.

Different ways to get to that data, which you can't just grab the data and have it mean something. So what's happening is we're having sort of a zig to the zag. Past few years was grab data, didn't matter what the data was, our computers would figure it out. Now we're kind of swinging back in my field and saying, "Well, wait a second, actually you need to have, you can't just be a data scientist and assume that I can program a computer and it will find value." It'll find some value. But at the end of the day, you have to have the intelligence. You have to have the question people are in the background saying, "What if?

Matthew: I'm gonna ask you a Peter Teal question there, another California resident, what is one thought that most people would disagree with you on, that you hold?.

Andrew: The one thought that people would disagree with me on, I am an eternal optimist. I think that while I'm analytical and I catch gaps, I catch things that are moving up in town. What people tend to think of analysis is that it's criticism. You know, it's that old concept that when you're analyzing something, you're tearing it apart. And where I want people to shift their mindset is to say, analysis isn't that. It's looking at the way things are and imagining the way things could be, breaking down. You're looking at the cannabis market, comparing it to the alcohol repeal market and saying, "What's the same? What's different?" And so, where is it gonna go and trying to dream about where it can go and what form it's gonna take both today, tomorrow, and years in the future. I think where people would disagree with me on is when you talk about analysis is that it's inherently negative, tearing things apart. And I think that they missed that last part, which is in order to build them up. And I think they're not mistaken in a sense that most analysts aren't doers and they do just sort of point to problems or issues. And so, it's valid to come at an analyst and say, "I can only take what you're saying with a grain of salt." I want people to think differently.

Matthew: Yeah. And one thing that you're kind of pointing out is also a way a lot of businesses could die. And internet marketer, Noah Kagan's, he keeps a kill list and it's basically all the different ways that his business could just die. And that sounds depressing and scary for a lot of people, but then he goes on to mitigate those risks proactively. And what you're saying or have said in this interview may make some people in industry uncomfortable, but if they're the type of person that says, "Well, you know, where is Andrew right?" You know, "I disagree with him, but where might he be right?" And then they get ahead of it. Boy, man, you're really positioning yourself for success, so appreciate that perspective. Andrew, as we close, how can listeners connect with you, find you online and get more of your content?

Andrew: Unfortunately, my content is restricted to institutional investors. But feel free to email me at ac@southbayresearch.com.

Matthew: Great. Well, thanks so much for coming on the show and educating us, Andrew. We really appreciate it.

Andrew: Thanks, Matt. Thanks for having me on.

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