What comes after Bretton Woods II?

The world’s monetary system is breaking down

There is no longer any need for the United States to compete with one hand tied behind her back,” Richard Nixon, then America’s president, told his countrymen in August 1971. With that speech, he heralded the end of the post-war economic order, suspending the convertibility of the dollar into gold and putting up tariffs on imports. The survival of today’s order, which emerged from the chaos that followed, now also looks in doubt. In other circumstances, its demise might not have been mourned. But with each passing August day, the prospects for a happy shift from one global monetary regime to another look ever grimmer.

International trade is complicated by the fact that most countries have their own currencies, which move in idiosyncratic ways and can be held down to boost competitiveness. Governments’ efforts to manage currencies are constrained by certain trade-offs. Pegging them to an external anchor to stabilise their value means either ceding control of domestic economic policy or restricting access to foreign capital flows. Systems of monetary order, which resolve these trade-offs in one way as opposed to another, work until they do not. The context for America’s economic showdown with China is a system that worked once but no longer does.

Such things happen. The first great age of globalisation, which began in the late 19th century, was built atop the gold standard. Governments fixed the value of their currencies to gold, sacrificing some control over the domestic economy. This trade-off became untenable during the Great Depression, when governments reneged on their monetary commitments. As one after another devalued, angry trading partners put up tariffs, and the world retreated into rival currency blocs. In 1944 Allied nations had another go at crafting a monetary order at a conference in Bretton Woods, New Hampshire. Participating countries fixed their currencies to the dollar (with some room for adjustment). The buck, in turn, was pegged to gold. The truce survived a mere quarter-century. As America’s trade balance sagged and inflation rose in the 1960s and 1970s, faith in the dollar’s peg to gold waned. Drastic fiscal and monetary belt-tightening might have restored its credibility abroad, but at great cost at home. Forced to choose between the domestic interest and the survival of the global monetary system, Nixon abandoned America’s Bretton Woods commitments.

The present system, often described as Bretton Woods II, slowly emerged from the ashes of the post-war order. The dollar’s dominance did not end. Much of the world’s commerce trades in greenbacks. Changes in America’s economic policy still echo around the world. A stronger dollar depresses global trade, research suggests, while tighter American monetary policy straitens global financial conditions. Through bitter experience, emerging economies learnt that protecting themselves against these gales meant accumulating large dollar reserves, which began to pile up in the 1990s and peaked in 2014. Emerging-market dollar purchases kept the greenback overvalued and boosted the competitiveness of emerging-market exporters. America began running large, persistent current-account deficits. In other words, its excessive consumption was funded by lending from the emerging world, which invested its dollars into American assets. This flow of money—from reserve-accumulating economies, China chief among them, to America, and from American consumers back to reserve-accumulating economies—defined Bretton Woods II.

The regime never looked particularly sustainable. America could not borrow from abroad for ever, and persistent current-account deficits ate away at its export industries. In the 2000s some economists worried that investors might lose faith in the greenback, precipitating a collapse in the dollar and a global crisis. Fewer observers predicted that America might tire of its role in the system, or that damage done to American communities by deindustrialisation might make politicians across the spectrum sceptical of the gains from globalisation.

For a time, though, a benign end to Bretton Woods II seemed possible. As Europe’s economies became more integrated and China grew, the prospect of a multipolar world, in which the dollar shared reserve-currency duties with the euro and the renminbi, loomed. European and Chinese consumers would play as important a role as American ones—and global imbalances would shrink. Alas, history has had other ideas. Amid the turmoil of the past decade, investors have clung to the safety of dollar assets, reinforcing America’s monetary hegemony. Debt crises have undercut faith in the euro. Confidence in the renminbi’s inevitable rise has been dimmed by China’s slowing growth, and its diminished enthusiasm for reform. Meanwhile, the present system looks more vulnerable than ever. President Donald Trump’s spiralling trade and currency wars threaten to topple Bretton Woods II, even as attractive alternatives to the system fade.

History repeats

A minimally disruptive end to Bretton Woods II remains within the realms of possibility. Its fate might resemble that of Bretton Woods I, especially if Mr Trump loses office in 2020. Democrats are more economically nationalistic than they used to be, but still mindful of the value of global co-operation. President Bernie Sanders or Elizabeth Warren might seek a one-off depreciation of the dollar while recommitting America to a rules-based system of global trade. A recession in China could scare its leadership into offering concessions on trade that America would accept.

But the experience of the 1930s may prove a more apt guide. In the absence of a co-ordinated adjustment to exchange rates and a peaceful end to trade hostilities, the world could stumble into a cycle of competitive devaluations and tariff rises. As trading relationships unravel, countries may organise themselves into rival economic blocs. It is hard to imagine the world repeating such an ugly era of history. 

Six charts that explain the state of markets

Making sense of investors’ mood

n the autumn of 2008, strange and novel things happened in financial markets, such as the emergence of negative yields on Treasury bills. In times of fear, the safest assets are at a premium.

What was once strange is now ordinary. Negative yields are a familiar feature of European bond markets. But such is the anxiety about the world economy that they are spreading. In Germany, interest rates are negative all the way from cash to 30-year bonds (chart 1). In America yields are still positive. But the curve is inverted: interest rates on ten-year bonds are below those on three-month bills (chart 2). The last seven recessions in America have been preceded by an inverted yield curve.

Nervous investors are reaching for the safety of the dollar. The yen and Swiss franc, habitual sanctuaries, are among the few currencies that have risen against it (chart 3). The price of gold, another haven, is at a six-year high. That of copper, a barometer of global industry, is down from its recent peak (chart 4).

Faced with uncertainty, the go-to market for equity investors is America’s. It has left others in the dust (chart 5). msci’s emerging-market share index leans heavily towards “Factory Asia” (China, South Korea and Taiwan), which is in the eye of the trade-war storm. Europe’s markets lean towards banks and carmakers, which suffer in downturns.

Investors fret that the rich world is slowly becoming Japanese, with economies that are too feeble to generate inflation. Forecasts of inflation in the swaps market have fallen sharply (chart 6). A fear in 2008 was that deflation might take root. The fear remains.

How Negative Interest Rates Screw Up The Economy

Now they’re clamoring for this NIRP absurdity in the US. How will this end?

Now there is talk everywhere that the United States too will descend into negative interest rates. And there are people on Wall Street and in the media that are hyping this absurd condition where government bonds and perhaps even corporate bonds, and eventually even junk bonds have negative yields. All of that NIRP absurdity is already the case in Europe and Japan.

There is now about $17 trillion – trillion with a T – in negative yielding debt in the world, government and corporate debt combined.

This started out as a short-term emergency experiment. And now this short-term emergency experiment has become the new normal. And now more short-term emergency experiments need to be added to it, because, you know, the first batches weren’t big enough and haven’t worked, or have stopped working, or more realistically, have screwed things up so badly that nothing works anymore.

So how will this end?

The ECB rumor mill over the past two weeks hyped the possibility of a shock-and-awe stimulus package, on top of the shock-and-awe stimulus packages the ECB has already implemented, namely negative interest rates, liquidity facilities, and QE.

The entire German government bond market, even 30-year bonds have negative yields. And the German economy shrank in the last quarter. That gives Germany two out of the last four quarters where its economy shrank – despite negative interest rates from the ECB and despite the negative yields on its government bonds, and despite the negative yields among many corporate bonds.

In other words, the German economy, the fourth largest in the world, is hitting the skids despite or because of negative yields. And now the ECB wants to flex its muscles to get yields to become even more negative.

And there are folks who want to prescribe the same kind of killer application to help out the US economy – which is growing just fine.

Since the ECB’s shock-and-awe package started to appear in the rumor mill at the beginning of August, the European bank stock index – it includes banks in all EU countries, not just those that use the euro – well, since that shock-and-awe rumor appeared, the stock index for those banks has dropped 11%.

Negative interest rates are terrible for banks. They destroy the business model for banks. They make future bank collapses more likely because banks cannot build capital to absorb losses. But banks are a crucial factor in a modern economy. It’s like an electric utility. You can somehow survive without electricity, but a modern economy cannot thrive without electricity. Same thing for the role commercial banking plays.

So that 11% drop of the bank-stock index wasn’t from some bubble high, but from a hellishly low level. The index is now down 78% from the peak in 2007. And it’s back where it had first been in 1990. So that was, let’s see, nearly three decades ago.

European banks are sick, sick, sick. And with negative yields, they’re getting the exact opposite of what they need. No wonder that bank stocks reacted skittishly to the threat of more deeply negative interest rates.

In Japan, same thing. Japan used QE to bring down interest rates long before the term QE was even used. And Japan has had near-zero or below zero interest rates for 20 years. But the bank index has fallen 8% since August 1, when the renewed stimulus rumors started, and closed on Friday at a new multi-year low. And the index is down 73% from where it had been in 2006.

I didn’t even want to look at the bank index going back to Japan’s bubble years in the 1980s. Because that would have been masochism. But I did look. The TOPIX Banks Index peaked at 1,500 in 1989, and now it’s at 129. Let that sink in for a moment: It has plunged by 91% over those 30 years.

So zero-percent interest rates and worse, negative interest rates, are terrible for banks for the long term. And because they’re bad for banks, by extension, they’re also bad for the real economy that relies on banks to provide the financial infrastructure so that the economy can function.

Commercial banks need to take deposits and extend loans. That’s their primary function. This credit intermediation, as it’s called, is like a financial utility. One bank can be allowed to fail. But the banking system overall cannot be allowed to fail. That would be like the lights going out. So, there needs to be special regulations, just like there are regulations on electric utilities.

And banks need to make money with their primary business. The profit motive needs to make them aggressive on lending, and the fear of loss needs to make them prudent. Those two forces are supposed to balance each other out over time, with banks swinging too far in one direction and then too far in the other direction as part of the normal business cycle.

And this generally works, with some hiccups, as long as banks can do this profitably – meaning they make enough money and set aside enough capital during good times to be able to eat the losses during bad times without collapsing.

In this basic activity, banks make money via the difference between the interest rates they charge on loans to their customers and their cost of funding those loans. This cost of funding is mostly a function of the interest the bank pays on its deposits, on the bonds it has issued, and the like.

If interest rates go negative, the spread the bank needs in order to make a profit gets thinner. But risks get larger because prices of the assets used as collateral have been inflated by these low interest rates. At first this is OK, but over a longer period, this equation runs into serious trouble.

Negative interest rates drive banks to chase yield to make some kind of profit. So they do things that are way too risky and come with inadequate returns. For example, to get some return, banks buy Collateralized Loan Obligations backed by corporate junk-rated leveraged loans. In other words, they load up on speculative financial risks. And as this drags on, banks get more precarious and unstable.

This is not a secret. The ECB and the Bank of Japan and even the Swiss National Bank have admitted that negative interest rates weaken banks. The ECB has even been talking about a strategy to “mitigate” the destructive effects its policies have on the banks.

So that’s the issue with negative interest rates and banks. They crush banks.

In terms of the real economy, negative interest rates have an even more profoundly destructive impact: They distort or eliminate the single-most important factor in economic decision making – the pricing of risk.

Risk is priced via the cost of capital. If capital is invested in a risky enterprise, investors demand a larger return to compensate them for the risk. And the cost of capital for the risky company is higher. If capital is invested in a low-risk activity, the return for the investor and the cost of capital for the company should both be lower. And the market decides how that pans out.

But if central banks push interest rates below zero, this essential function of an economy doesn’t function anymore. Now risk cannot be priced anymore. The perfect example of this: Certain junk bonds in Europe are now trading with a negative yield. This shows that the risk-pricing system in Europe is kaput.

When risks cannot be priced correctly anymore, there are a host of consequences – all of them bad over the longer term for the real economy. It means malinvestment and bad decision making; it means overproduction and overcapacity. It means asset bubbles that load the entire financial system up with huge risks because these assets are used as collateral, and their value has been inflated by negative yields.

So you get these strange combinations – for example, of massive housing bubbles in cities like Berlin and Munich and other places, while at the same time Germany has one foot in a recession.

And as a remedy to this situation caused in part by negative interest rates, the ECB wants to do a new shock-and-awe package, on top of the ones it has already done, driving interest rates even deeper into the negative.

The longer negative interest rates persist, the more screwed up an economic system becomes. And the more deep-seated the dysfunction is, the harder it is for this economic system to emerge from this screwed-up condition without some kind of major reset.

And a major reset is of course precisely what every central bank fears the most.

How will this end? No one knows because no one has ever done this before. But we have some idea: So far, the outcomes are already bad, and now, because the outcomes are already bad, they’re wanting to drive interest rates even lower to deal with the bad outcomes that these low interest rates have already caused.

When you start thinking about it long enough, cooking up negative interest rates is like making hugely important economic decisions purposefully in the worst possible way, in order to disable the proper functioning of the economy. And when the economy stops functioning properly, these folks are surprised and then cook up even more deeply negative interest rates to solve the problem these negative interest rates have already caused.

It’s like watching some cheap slapstick farce, and you want to laugh at all this idiocy going on in Europe and Japan. But this isn’t a farce. It’s central bank policy making in all its glorious worst.

Corporate Debt Is At Risk Of A Flash Crash

The world is awash in debt.

While some countries are more indebted than others, very few are in good shape.

The entire world is roughly 225% leveraged to its economic output. Emerging markets are a bit less and advanced economies a little more.

But regardless, everyone’s “real” debt is likely much bigger, since the official totals miss a lot of unfunded liabilities and other obligations.

Debt is an asset owned by the lender. It has a price, which—like anything else—can go up or down. The main variable is the lender’s confidence in repayment, which is always uncertain.

But there are degrees of uncertainty. That’s why (perceived) riskier debt has higher interest rates than (perceived) safer debt. The way to win is to have better insight into the borrower’s ability to repay those loans.

If a lender owns debt in which his confidence is low, but you believe has value, you can probably buy it cheaply. If you’re right, you’ll make a profit—possibly a big one.

That is exactly what happens in a recession.

Investment-Grade Zombies

While it’s easy to point fingers at profligate consumers, households largely spent the last decade reducing their debt.

The bigger expansion has been in government and business. Let’s zoom in on corporate debt.

The US investment-grade bond universe is considerably more leveraged than it was ahead of the last recession:

Source: Gluskin Sheff

Compared to earnings, US bond issuers are about 50% more leveraged now than in 2007. In other words, they’ve grown debt faster than profits.

Many borrowed cash not to grow the business, but to buy back shares. It’s been, as my friend David Rosenberg calls it, a giant debt-for-equity swap.

There’s another factor, though. Today’s “investment-grade” universe contains a higher proportion of riskier companies. The lowest investment grade tier, BBB, now constitutes half of all issuers:

Source: Gluskin Sheff

All these are just one downgrade away from being high-yield “junk bonds.”

The best data I can find shows that there are roughly $3 trillion worth of BBB bonds and another roughly $1 trillion worth of lower-rated bonds that would still be called “high-yield.”

If it happens like last time, the ratings agencies will wait until their fate is already sealed before they cut ratings on these zombies. But that’s only part of the problem.

Selling Under Pressure

I expect liquidity in these below-investment-grade bonds to disappear quickly in the next financial crisis.

We got a small hint of how this will look in the December 2015 meltdown of Third Avenue Focused Credit Fund (TFCVX), which had to suspend redemptions and then spend two years liquidating its assets.

The fund managers made the right call to liquidate their holdings slowly, getting the best values they could. But that won’t work if the entire fund industry is strained at the same time.

This is a structural problem with mutual funds and ETFs. They must redeem their shares on demand, usually in cash (though some reserve the right to do it in-kind).

If enough shareholders want out at the same time, this can force them to sell fund assets on short notice.

Falling Apart Quickly

When the recession hits, we will see junk bonds—and the riskier end of corporate debt generally—go into surplus.

There will be more available for sale than investors want to buy. The solution will be prices dropping to a point that attracts buyers. I don’t know where that point is, but it’s a lot lower than now.

But there’s a problem. We talked about that $3 trillion worth of BBB bonds. Any that are downgraded by merely one grade will no longer qualify as “investment grade.”

That means that many pension funds, insurance funds, and other regulated entities by law won’t be able to hold them. They have a very short time to sell them back into the market.

Let’s say company X issues $100 million of a bond rated BBB by Moody’s or Standard & Poor’s. There is a high likelihood that some will be in regulated pension or insurance funds, and there will be forced selling at lower prices.

This will set a new price for that bond issue. Every mutual fund and ETF that holds those bonds will have to use the lower price when they mark-to-market at the end of the day.

I have seen this happen three times in my career. Yields go from fairly low to 20% or more at what seems like warp speed. If you are in one of those funds, you’re going to see your value drop precipitously.

Unless you are a professional and/or have some systematic trading signal that tells you when to trade, it’s probably best to avoid anything that looks like a high-yield mutual fund or ETF.

More money is going to be lost by more people reaching for yield in this next high-yield debacle than all the theft and fraud combined in the last 50 years.

A Once-in-a-Lifetime Opportunity

I can understand the plight of retirees who are struggling to live on today’s meager yields. Those high-yield funds have been so good for so long, it’s easy to forget how disastrous a bear market can be. But it gets worse.

Quick personal story, and I have to be vague about names here.

Some bond issues have been bought in their entirety by a small handful of high-yield bond funds. The problem is that the company that issued these bonds has defaulted on them. Not just missed a payment or two, but full default.

Their true value, if the funds tried to sell them, might be 25–30% of face if they actually traded, according to the people who told me this. But the funds still value them at the purchase price of $0.95 on the dollar.

How is it they’re still valued much higher? Because the funds haven’t tried to sell them. No transactions mean they can still be “priced” at the last trade, and since there have been no subsequent trades, there is no “mark-to-market” price.

If any of those few funds sold any of these bonds, it would set a “market price” and all would have to mark down the entire holding. So naturally, they aren’t even trying to avoid taking the hit to their NAV.

So here’s my question: How many other junk bond issues are in similar positions?

Note this isn’t just high-yield funds. Lots more “conservative” bond funds try to juice their returns by holding a small slice in high-yield. Regulations let them do this, within limits, but these funds are so huge the assets add up.

This game could fall apart very quickly. Any event that triggers redemptions could set off an avalanche.

I don’t know what that event would be, but I’m pretty sure one will happen. My own goal is to be a buyer, not a seller, whenever it occurs. For now, that means holding cash and exercising a lot of patience.

If I’m right, the payoff will be a once-in-a-generation chance to buy quality assets at pennies or dimes or quarters on the dollar. I think the next selloff in high-yield bonds is going to offer one of the great opportunities of my lifetime.

In a distressed debt market, when the tide is going out, everything goes down. Some very creditworthy bonds will sell at a fraction of the eventual return. This is what makes for such great opportunities. They only come a few times in your life.

There will be one in your near future.

The Reason China Is Winning The Battery Race

The world is becoming increasingly electrified. Not only are developing countries increasing the availability of electricity to their populations, but the electrification of existing transportation infrastructure is proceeding at a rapid pace. By 2040, over half of the cars on the roads are projected to be powered by electricity.

Batteries play a critical role in this transition, but a relatively new type of battery seems certain to dominate in both personal electronics, as well as in transportation and heavy industrial applications.

In fact, that domination is well underway.

A Brief History of Batteries

Batteries have been a part of our daily lives for a long time. The world’s first true battery was invented in 1800 by the Italian physicist Alessandro Volta. The invention represented a remarkable breakthrough, but since that time there have been only a handful of significant innovations.

The first was the lead-acid battery, which was invented in 1859. This was the first rechargeable battery, and is still the most common battery used to start internal combustion engines today.

There have been some innovative battery designs in the past two centuries, but it wasn’t until 1980 that a real game-changer was invented. That was when breakthroughs at the University of Oxford and Stanford University led to the development of the lithium-ion battery. Sony commercialized the first lithium-ion battery in 1991.

What’s so special about lithium?

In a lithium-ion battery, lithium metal migrates through the battery from one electrode to the other as a lithium ion. Lithium is one of the lightest elements, and it has the strongest electrochemical potential of any element. This enables a lithium-based battery to pack a lot of energy storage in a small, light battery. As a result, lithium-ion batteries have become the battery of choice in many consumer electronics such as laptops and cell phones.

Lithium-ion Batteries Gain Momentum

Because of the inherent advantages in lithium-ion batteries, sales have grown exponentially since the turn of the century. This has helped drive down costs consistently. Falling costs have also helped lithium-ion batteries gain a solid foothold in new applications.

According to the research organization BloombergNEF, the volume-weighted average lithium-ion battery pack price (which includes the cell and the pack) fell 85% from 2010-18, reaching an average of $176/kWh. BloombergNEF further projects that prices will fall to $94/kWh by 2024 and $62/kWh by 2030.

This declining cost curve has important implications for any company that utilizes batteries in its service, or for those that have a need to store energy (e.g., power producers). To date, most lithium-ion battery sales have been in the consumer electronics sector, but future sales will be increasingly driven by electric cars.

Most cars on the roads today still utilize a lead-acid battery and an internal combustion engine. But sales of electric vehicles — powered by lithium-ion batteries — have increased more than tenfold in the past five years. Further, more and more countries are setting future bans on cars based on internal combustion, with the expectation that electric vehicles will eventually dominate personal transportation.

This of course means far greater future demand for batteries. So much so that electric vehicle maker Tesla, in partnership with Panasonic, is investing billions of dollars to build new lithium-ion battery factories. Nevertheless, U.S. lithium-ion battery producers are falling behind in market share.

A related growth market for lithium-ion batteries is in heavy industrial applications such as lift trucks, sweepers and scrubbers, airport ground support applications, and automatic guided vehicles (AGVs). These niche applications have been historically served by lead-acid batteries and internal combustion engines, but the economics have rapidly shifted in favor of lithium-ion batteries.

However, one country has seized the momentum and established a commanding market lead over its competitors in this space. But it’s not the U.S., where much of the critical research and development that created the lithium-ion battery took place.

China in the Driver’s Seat

According to an analysis by BloombergNEF, in early 2019 there were 316 gigawatt-hours (GWh) of global lithium cell manufacturing capacity. China is home to 73% of this capacity, followed by the U.S., far behind in second place with 12% of global capacity.

Global capacity is projected to grow robustly by 2025, when BloombergNEF forecasts 1,211 GWh of global capacity. Capacity in the U.S. is projected to grow, but slower than global capacity. Thus, the U.S. share of global lithium cell manufacturing is projected to shrink.

Tesla is trying to address this problem by building its own battery factories, but for companies that supply a wide range of these types of batteries, such as California-based OneCharge, finding local suppliers has proven to be challenging. I recently spoke with OneCharge CEO Alex Pisarev, who highlighted the challenges his company has faced:

“American manufacturers would be happy to use U.S.-made lithium-ion cells,” Pisarev told me, “but this is not realistic today. So we have to continue importing them from China.”

China is taking the same path that it did previously with solar panels. While solar cells were invented by American engineer Russell Ohl, today China dominates the global solar panel market. Now China is focused on controlling the world’s production of lithium ion batteries.

Is it preferable to have the cheapest possible green technologies, even if that means surrendering manufacture to other countries? Low solar panel prices have helped drive an explosion of new solar PV growth, and that has in turn supported many U.S. jobs. But the bulk of those panels are made in China. The Trump Administration has attempted to address this by placing tariffs on imported solar panels, but these tariffs have been vigorously opposed by most of the U.S. solar industry.

China has a major advantage of cheap labor, which has allowed it to dominate many manufacturing industries. But China also has more lithium reserves and much greater lithium production than the U.S. In 2018, Chinese lithium production was 8,000 metric tons, third among all countries and nearly ten times U.S. lithium production. Chinese lithium reserves in 2018 were one million metric tons, nearly 30 times U.S. levels.

The Path Forward

The trends signal that lithium-ion batteries will increasingly displace lead-acid batteries in the transportation and heavy equipment sectors. This is a critical development in a world grappling with record carbon dioxide emissions.

But with such an advantage in both manufacturing costs and raw material availability, can the U.S. compete with China in the world market? If not, as growing numbers of lithium-ion batteries reach the end of their usable life, can the U.S. develop a competitive market for recycled lithium?

These are important questions that need to be addressed.

The transition to lithium batteries is opening up many new challenges and opportunities. But the U.S. needs an effective strategy to avoid ceding yet another clean energy manufacturing opportunity to China.

The Big Pharma Takeover Of Medical Cannabis

As evidence of cannabis’ many benefits mounts, so does the interest from the global pharmaceutical industry, known as Big Pharma. The entrance of such behemoths will radically transform the cannabis industry—once heavily stigmatized, it is now a potentially game-changing source of growth for countless companies.

Today’s infographic comes to us from CB2 Insights, and explores how and why the notorious Big Pharma are interested in the nascent cannabis industry

Who are “Big Pharma”?

The term refers to some of the largest pharmaceutical companies in the world, considered especially influential as a group. To give a sense of their sheer size, the market cap of the top 10 Big Pharma companies is $1.7 trillion—Johnson & Johnson being the largest, with a market capitalization of $374 billion.

So far, Big Pharma has watched the cannabis industry from the sidelines, deterred by regulatory concerns. What we are seeing now is the sleeping giant’s takeover slowly intensifying as more patents, partnerships, and sponsored clinical trials come to fruition.

Could Cannabis be Sold Over the Counter?

The cannabis plant has been used in medicine for 6,000 years. However, there is still considerable debate around the role it plays in healthcare today. There are currently almost 400 active and completed clinical trials worldwide surrounding cannabidiol (CBD), a type of cannabinoid that makes up 40% of the cannabis plant’s extract.

Cannabis relies on CBD’s therapeutic properties, and recent studies suggest it may be useful in combating a variety of health conditions, such as:

• Epilepsy
• Schizophrenia
• Multiple sclerosis
• Migraines
• Arthritis
• Cancer side effects

As of 2019, 33 states and the District of Columbia have legalized cannabis for medical use. Its potential for pain management has led some experts to recommend it as an alternative to addictive painkillers, with one study of 13 states showing opiate-related deaths decreasing by over 33% in the six years since medical cannabis was legalized.

As the industry evolves, data is becoming increasingly important in understanding the potential of cannabis—both as a viable medical treatment, and as a recreational product. The shift away from anecdotal evidence towards big data will inform future policies, and give rise to a new era of consumer education.

Big Pharma’s Foray into Cannabis

Further legalization of cannabis will challenge Big Pharma’s bottom line, and poach more than $4 billion from pharma sales annually. In fact, medical cannabis sales are projected to reach $5.9 billion in 2019, from an estimated 24 million patients.

Seven of Canada’s top 10 cannabis patent holders are major multinational pharmaceutical companies, a trend that is not unique to Canada.

It comes as no surprise that many pharmaceutical giants have already formed strong partnerships with cannabis companies, such as Novartis and Tilray, who will develop and distribute medical cannabis together in legal jurisdictions around the world.

Data is the Missing Link

While the body of knowledge about the many uses of cannabis continue to grow, clinical evidence is key for widespread adoption.

Products backed by data will be a defining criteria for major companies to come into the market en masse. And ultimately, Big Pharma’s entry could accelerate public understanding and confidence in cannabis as a viable option for a range of ailments, and mark the next major milestone for the industry