Last week, Canada became the first major economy to legalize recreational marijuana use to the excitement of Canadian youth and cannabis companies that intend to expand beyond medical marijuana products.

Despite the excitement, shares in publicly traded cannabis companies fell following the announcement. The downturn followed months of high stock prices and growth for many of Canada’s largest marijuana companies, including Canopy and Tilray.

Still, these businesses are expected to become behemoths as the public warms to the idea of legalized recreational marijuana. Market experts have told investors to keep an eye out for rising stock prices following the initial announcement.

Many are likening the so-called “green rush” to both the re-legalized fervor of the end of prohibition as well as the dot-com boom of the 1990s — and the boom’s inevitable crash. Currently, the country’s top 12 marijuana companies are worth a combined $55 billion. But, experts caution that not every cannabis company to enter the stock market will emerge successful.

This chilling point partly stems from the volatility of marijuana stocks. Tilray’s stock price rose an astounding 78 percent following an announcement that the company had permission to export cannabis to California for medical research in September.

For now, Canadians looking to get high will have to settle for dried cannabis, oils, and seeds — with the potential future of cannabis candies and marijuana drinks. No matter which way the market turns, one thing is for certain: Canada appears to have its finger on the pulse of the next generation.

Weed Bubble

Fiat Chrysler Automobiles (FCA) sold Magneti Marelli to KKR for $7.1 billion on Wednesday. The deal will combine two giant car component companies to form the seventh largest automotive parts supplier in the world, with almost 200 facilities across the globe.

The newly formed automotive parts supplier may intend to catch the high wind of the sector’s expansion into new technologies like automated driving, connected cars, and electric vehicles. But, success may not be a given in light of China’s recent slowdown and demand suppression in the European market.

KKR paid a substantial premium to buy Magneti Marelli. The $7.1 billion transaction cost KKR 16 times next year’s earnings, even though most companies limit payment to 10 times a year’s earnings. In addition, KKR’s return on invested capital may be as low as 10.7 percent by 2023. Moreover, FCA may soon be worthless.

Despite such criticism, the aggressive purchase will surely send the automotive industry into a spin. Whether or not the deal will boost the progress of high-tech automotive technology, the $7.1 billion deal is bound to cause a stir in the automotive industry.

Car Parts Supplier

Streaming giant Netflix announced on Monday October 22^nd that it is planning to take on an additional $2 billion in debt. Netflix plans to use the money for “general corporate purchases,” for the development of original programming, and for the acquisition of more licensed titles in order to fill out its library and keep competitors at bay. This latest offering is in line with Netflix’s overall business strategy, which has caused the company to rapidly spend exorbitant sums of money.

Netflix’s offering of unsecured bank bonds is only the latest instance in which the company has taken on enormous amounts of debt. In October 2017, Netflix issued $1.6 billion in notes. In addition, in April 2018, there was a subsequent offering for $1.9 billion. In all, this latest offering will put the company over $10 billion in long term debt.

Netflix’s actions has some analysts concerned as taking on more debt will increase the negative cash flow, which already totals around $3 billion. This prompted Moody’s to classify Netflix’s recent notes as “junk bonds.” That said, Moody’s expects Netflix to be able to eventually pay off the notes as they enter new markets and finish developing original content. Thus, Netflix is transitioning away from its previous model of licensed content. Many analysts feel that Netflix’s new strategy is best for the company and its investors.

However, the more skeptical analysts do not think that Netflix’s borrowing will continue indefinitely. Further, these analysts think that borrowing will lead to long-term success. These concerns are not without merit as they are grounded in Netflix’s overwhelming degree of debt and strategy to continue borrowing. This could lead to creditors becoming unwilling to participate in raising further capital if the cycle of burning through money and then borrowing does not end.

In the alternative, if Netflix wishes to remain the market leader in streaming, it may need to continue acquiring licensed titles as well as developing original content. Netflix must already contend with a considerable number of competitors in the streaming market. Further, this market is only becoming more crowded. Both Disney and AT&T have already unveiled their plans to create streaming services. These heavyweights may force Netflix to spend more as titles owned by both companies are potentially pulled from Netflix’s library, a move which Disney has already undertaken in preparation for its new service.

Netflix’s stock, which experienced a bump of 8% after the release of the company’s earnings report last week, has since retreated to its original value.

Netflix Acquires Another $2 Billion in Debt

President Donald Trump successfully negotiated the United States-Mexico-Canada Agreement (“USMCA”) on October 1, 2018. For a large segment of American workers, the deal appears to be better than its predecessor, the North American Free Trade Agreement (“NAFTA”). But, we should be clear about what these treaties are. USMCA is not a “free trade agreement.” A free trade agreement is a treaty among nation states to eliminate tariffs, quotas, subsidies, and other prohibitions on goods and services crossing borders. USMCA is not that.

There are two reasons why USMCA is not a free trade agreement. First, the agreement is about more than trade. Trade is about goods and services crossing borders. But, USMCA contains various side provisions about labor policy, intellectual property regulation, and monetary policy. While labor policy, intellectual property regulation, and monetary policy can be relevant to trade, it is misleading to call a treaty full of additional regulations a “trade agreement.”

Second, USMCA is not an agreement to make trade free. Restrictions on trade are still in place, including tariffs on automobiles and materials. The agreement is admittedly better than NAFTA, as tariffs are reworked in favor of some American industries. Yet, we must not forget what “freedom” actually means in the context of trade: no government interference in the economic activities between citizens of different states. USMCA, on the other hand, imposes terms on what should be produced, where, for how much, and under what conditions.

The beginning of wisdom is to call things by their proper name. USMCA is not a free trade agreement because it is not about trade and it is not about freedom. President Trump, to his credit, does not pretend that this is a free trade agreement that will benefit everyone. He promised a better deal for American workers and delivered on that promise.

A treaty like USMCA might be the best thing we can ask for in the context of international economic gamesmanship. However, we should be under no illusion that USMCA (or TPP, or NAFTA) was ever about free trade. A free trade agreement would be an absence of government regulation — an agreement between governmentsnot to impose tariffs or quotas. Anything short of that is a necessary compromise.

Not-So-Free Trade

Tesla investors surely have the right to cringe at any headline about Elon Musk’s tweets. After all, Musk’s erratic tweets have resulted in an SEC investigation, volatile stock prices, and a defamation suit by a Thai cave rescuer. However, Musk’s recent tweet that Tesla will offer a mid-range Model 3 may be an encouraging sign as Tesla strives for profitability.

The mid-range model will be priced at $45,000 and will have a range of 260 miles. Previously, the cheapest Model 3 was priced at $49,000. Tesla plans to eventually release a $35,000-version of the Model 3, but that version will only be available in four-to-six-months.

Why did Tesla suddenly announce a mid-range Model 3? The first reason is likely market share. Tesla can increase the market size for the Model 3 by lowering the price for the mid-range model. The second, and potentially more important, reason is that the new mid-range Model 3 could solve Tesla’s production issues.

The company has publicly struggled to reach a production goal of 5,000 Model 3s a week, partly on account of battery cell shortages at Tesla’s Gigafactory 1. Tesla’s long-range vehicles require more battery cells than the company’s short-range vehicles. As a result, Tesla can produce fewer long-range, high-cost vehicles than mid-range, low-cost vehicles like the mid-range Model 3.

So, the new mid-range Model 3 could be a creative solution to the company’s production woes. Tesla can produce more vehicles with fewer battery cells, and the company can keep the cars’ price relatively high. Tesla can thereby side-step the battery cell production issues that have bottlenecked Model 3 production.

Investors can be cautiously optimistic about the new mid-range Model 3’s ability to curb Tesla’s production failures and catalyze the company’s long-promised profitability.

Mid-Range Tesla Model 3

While performing a regular review of its lending practices, Citigroup found that some of its minority borrowers were not receiving earned discounts under a program that provides a break on mortgage rates to customers with large deposits in banks. This “break” acts as a stimulus for customers to expand their business relationships with banks by providing financial incentives. An issue arises in the application of these incentives when a specific subset of the population is strategically excluded from the incentive because the incentive is applied in a discriminatory manner to other subsets. Such practices violate fair lending laws and have had a long, historical effect on the wealth accumulation of communities of color and our economy.

Although such discounts may appear miniscule facially, this exclusivity mirrors many discriminatory practices that fair lending laws and other similar fair housing laws were created to prevent.

In 1963, the United States passed the Fair Housing Act, legislation specifically designed to protect buyers or renters of a dwelling from discrimination based upon race, color, national origin, and religion. This law was passed in the midst of the 20th century, a time of rampant housing discrimination against people of color. Banks refused home loans to many people of color and actively participated in redlining practices. Because many people of color were effectively excluded from receiving the same low mortgage rates as their white counterparts, they were unable to purchase homes and enter the growing middle class. Without these loans, people of color either lacked the sufficient funds needed for home ownership or entered highly predatory loan agreements with third-party lenders. These discriminatory practices created a heightened need for the implementation of fair lending laws to protect marginalized groups in pursuit of owning or renting a home.

Ultimately, although economic ramifications of discriminatory lending vary, these ramifications are primarily caused when people of color are discriminatorily denied a form of economic prosperity that is essential to the American dream. Home ownership within the United States has become a quick gateway to economic stability that not only secures wealth in the present but also for future generations as homeownership translates into intergenerational wealth. By denying people of color the right to homeownership, banks are effectively contributing to an ever-present wealth gap.

As our society increases in heterogeneity along racial lines, laws must be enacted that allow for punitive ramifications when such discriminatory behavior is sustained. Banks must take an active role to ensure lending and everyday business practices are conducted in an equitable manner, which would ensure economic prosperity for all despite racial or ethnic background.

Financial Incentive or Implicit Discrimination

Airbnb faces yet another restriction proposal in Washington DC, the likes of which is paralleled only by New York City and San Francisco.  The bill, which went to a preliminary vote on October 16, would bar short-term rentals on secondary homes and place a 90 day restriction on rentals of primary residences when the owner is not physically present. However, there would be no restrictions on short-term rentals if the owner is there.

The bill distinguishes between three groups of Airbnb hosts: those who own secondary homes, those who wish to rent out their home while away, and those who wish to rent out spare rooms. With regards to the latter two groups, the bill seems to recognize that home sharing is not new. The ability to rent out one’s home has existed in the context of lodging throughout American history and can even help to preserve home values because it shares the burdens of home ownership.

The bill does not exercise the same deference toward secondary home owners. This creates two questions: first, why seek such restrictive regulation in the first place; second, are there less intrusive means to achieve the same end?

Secondary home owners seek the short-term rental market over the long-term rental market because it’s more profitable and allows more flexibility. This effect is exacerbated in heavy tourist destinations, such as San Francisco, New York, and Washington D.C. In such an environment, locking yourself into a long-term commitment restricted by rent control becomes unappealing when the alternative enables you to rent your home out at market rates, enjoy substantially the same occupancy rate, and retain your ability to enjoy your secondary home. As market rates for rental apartments continue to rise faster than what is allowed under rent control, more secondary home owners will seek the short-term rental market over the long-term market. Considering Washington’s housing crisis, as a matter of public policy, Washington cannot allow secondary home owners to favor tourists over prospective long-term residents.

Airbnb points out that Washington’s stock percentage of secondary home rentals is less than one-quarter of one percent and, therefore, only has a trivial effect on the housing crisis. However, its argument inaccurately assesses the relationship as a stock rather than a flow. A study done by researchers at National Bureau of Economic Research, UCLA, and USC concluded that on a national basis “a 10% increase in Airbnb listings leads to a 0.42% increase in rents and a 0.76% increase in house prices.” These researchers also found that the effect was smaller in zip codes with larger shares of owner-occupiers, consistent with the view that secondary home renters have a more profound effect on rent and housing prices.

At the very least, the bill seeks to limit the reallocation from long-term rentals to short-term rentals without discouraging home-sharing of primary residences. Because the dichotomy stems from the asymmetric net benefits from renting short-term versus long-term, a less intrusive approach could be to levy an additional tax for secondary home owners seeking short-term rentals, effectively increasing the cost of favoring the short-term market over the alternative. A potential fallback to this preliminary framework could be the complexity of calculating the tax because the efficacy of the tax would depend on how accurately it closes the incentive gap between long-term and short-term rentals.

Short Term Rental Restrictions Why and How

When it comes to facilitating corporate social responsibility, should businesses be required to contribute to local problems or should decisions about contribution be left to industry leaders discretion? That is the question facing San Francisco voters November 6^th.

Proposition C, a measure put together by a local non-profit, would effectively double the city’s budget to combat homelessness by raising taxes from .17% to .7% on businesses that exceed $50 million in annual revenue.

Some moguls, such as Salesforce CEO Marc Benioff, support the tax. But the unsurprising reality, even in liberal San Francisco, is that most companies are against the measure. Leaders of tech giants, including Twitter, Square, Stripe, Lyft, and Dolby Labs have collectively contributed hundreds of thousands to opposition efforts.

Some business leaders, such as Sequoia’s Michael Morris,  are frustrated with Proposition C since their companies already donate millions to social programs. Preclusive to public backlash, businesses have packaged their opposition as concern for whether the new tax is adequately supported by plans to effectively manage the influx of money. Although this apprehension may appear as a desperate distraction from obvious self-interest, San Francisco’s Mayor and various other government officials join in this opposition.

While discussing social problems in market terms is problematic, it is important to analyze the credible concerns and repercussions of solutions like Proposition C. As such, implementing a business tax may be a realistic means to combating homelessness.

However, legislation that turns social responsibility into a tax could disincentivize a corporate culture of caring. Social consciousness, or at least the fear of negative public perception, has made social responsibility a fundamental part of corporate decision making. Further, with most governance models still aligned with shareholder primacy– this change is fragile.

Companies now consider a social agenda to be part of their profit maximization model. They choose initiatives and budgets according to their margins in order to boost public image and profits – all while motivating employees and investors with their purpose. But if the local community sequesters companies to fiscally force a social agenda…what is the incentive for them to fund programs themselves? Is it better to force companies to do good or to convince them that doing good is their idea?

No Taxation without Profit Maximization- The Potential for Proposition C to Disincentivize Corporate Social Responsibility

An order enacted by the Reserve Bank of India (RBI) regarding data localization went into effect on October 15, 2018. This order allows authorities to have “unfettered access” to data, giving them the power to supervise all payment data happening in India. Under the order, all payment system operators must store “full end-to-end transaction details” involving Indians in India. The foreign element of these transactions can be stored in elsewhere, if required by that foreign country. All system providers must comply with this order within six months.

U.S. credit card companies and other payment service providers are struggling to follow the order. Companies like Visa, American Express, PayPal, and Amazon have pointed to their expansive data processing and fraud detection systems, located throughout the world. The companies have argued they need more time to prepare for the localization. In fact, Visa and Mastercard have allegedly requested “an extension of the deadline and a relaxation of the rules, citing operational difficulties and security concerns.”

RBI, however, has ignored these pleas. The agency has made it clear via phone calls and letters that it would impose fines if companies missed the order’s deadline. Facebook’s WhatsApp messaging service is the only major American company that expressed its ability to comply.

The 21^st century is known to be an era of data. Almost everything we do on the Internet can be turned into data, which consequently involves some heated issues like individual privacy and national security. Europe implemented the General Data Protection Regulation (GDPR) to protect privacy rights by requiring companies to request individual’s explicit consent before processing data. Apart from this “individual consent” approach, some countries have adopted a “governmental scrutiny” approach. China’s data protection law, for example, also requires a security assessment when data gathered inside the country may be transferred outside of China. For critical information infrastructure operators (CIIOs) such as public communication and information service providers, the security assessment will be conducted by regulatory authorities. For non-CIIOs, this assessment will be conducted by companies and monitored by regulatory authorities, unless the transmission of data may harm the public interest or national security.

India’s New Data Localization Regulation Imposes Challenge on Payment Vendors

Stocks dropped significantly these past two weeks, as market indices recorded major losses. The S&P 500 is down over 5% in October and at the time of this writing recorded its 12th consecutive loss over 14 days. In addition to the imminent threat of rising interest rates and market volatility abroad, the President’s ongoing trade war with China may be a  major culprit for a lack of confidence in future market performance. However, it is unlikely that these losses will phase the President, who has often boasted about market growth during his tenure.

Despite coming a mere two weeks before mid-term elections, this recent downturn appears unlikely to sway voting results, which see Republicans retaining control of the Senate. While a shift in the House may impede some of the administration’s future plans, control of the Senate means current policies are unlikely to be overturned and may embolden the administration to maintain its current course, a proxy of the perceived confidence the American public holds in a President whose approval rating is on the rise. As a result, this current slump seems unlikely to bring an end to the economic policies of the past two years.

This is problematic, as although the cause and duration of this slump are complex and up for debate (however obvious or intuitive it might seem, timing the market is rarely that simple in reality), the dangers of the policies that many credit with its inception are all too real. Although the administration’s corporate tax cuts are at least partially responsible for the long-running stock surge preceding this slump, they could have disastrous effects. Tax cuts increased corporate profits but also increased the budget deficit, now at a six-year high, which endangers the government’s ability to respond effectively if and when a lasting downturn arrives.

Moreover, the administrations inability to curb potential increasing volatility in foreign markets threatens market health. Slowing growth in China moving into the fourth quarter, by no means improved by tariffs on trade, could have a profound effect on U.S. markets. In addition, rising geopolitical tensions, most recently in Saudi Arabia, worry investors, as a long list of power players, including J.P. Morgan CEO Jamie Dimon and BlackRock CEO Larry Fink, have pulled out of “Davos in the Desert” following the murder of Saudi journalist Jamal Khashoggi and what is perceived by some as a complacent response from the President. Even if economic sanctions do not follow, corporate boycotts, both real and symbolic, do little to inspire confidence.

Therefore, this midterm slump, however deleterious to the President’s bragging rights, is unlikely to sway policy in the near future. That being said, how this administration plans to sell a possible down market to voters two years from now when Presidential elections come around, remains to be seen.

Stock Slump Threatens Favorite Presidential Bragging Point… Albeit Too Little, Too Late