This VC Says: The Government Won’t Fuel Our Economy, Entrepreneurs Will

As investors in companies we constantly have to be aware of the macro environment.

If you read the headlines, you'll quickly see that most pundits have one common message: only big government can save us from a recession. The markets must be upheld by government intervention or revert back to the great recession. They shout this at all of us workers out here by trying to remove the facts from the noise. It’s a tough job to do these days, even for those of us who invest for a living. A perfect example was an article I read about how China’s stimulus somehow rescued the US from the 2008 recession. That is certainly news to me and also patently ludicrous. US exports to China are less than .5% of our GDP and according to the IMF have continued to hover around that number. 

Thus, how exactly did a country who affects less than 1% of our GDP with their imports save us with their spending? My answer would be they didn’t at all. 

In whole, what saved the economy was less convenient for elected officials who often like to think of themselves as the Wizard of Oz directing us citizens from behind the curtain. As one of my favorite economists who I used to work with, Brian Wesbury said, “we rebounded after a removal of mark to market accounting aka less government intervention, markets being allowed to stabilize, and then earnings growth as evidenced by companies investing post-crash.” Another article detailed how the Fed would save us by cutting rates or Japan and Europe showing a united front against China and spending elsewhere abroad.

The problem is that governments both foreign and domestic should not be, and are not, behind the steering wheel of the economy. They might be bumper lanes in the bowling alley, but they are not the momentum of the bowling ball.

What is the true engine of our economy... Entrepreneurship and business growth. 

I like to use the world of cannabis entrepreneurs as a microcosm into exactly why regulators often hurt industry...

I like to use the world of cannabis entrepreneurs as a microcosm into exactly why regulators often hurt industry when too involved and how/why entrepreneurs help.

Compare Illinois and Massachusetts, two states who have legalized cannabis with wildly different resulting outcomes.

• Illinois has seen $20mm sold in the first 12 days of their program, has had 48 stores opened thus far with more to come, has lines wrapped around corners due to demand, and industry leading sales numbers
• Massachusetts has been legal for four years and still has only 38 stores open. It was projected to do $1B by 2020 and last year did less than half that

The reasons for Massachusetts’s recent failures are poor regulatory structures, continual delays, expensive regulatory changes, and a badly designed rollout plan. Despite this, cannabis entrepreneurs still contributed tens of millions of dollars to both state’s economies through taxes. 

We as economists and investors to our own peril have ignored the fact that continuously low interest rates (i.e. Japan) and massive fiscal stimulus (i.e. Europe) have not and will not be our economic salvation.

Neither will whoever is the next president. For our salvation, we will have the consumer and the entrepreneur to thank.

The cannabis entrepreneur is struggling through an almost impossible market and they are STILL doing this: 

• $52 billion in sales in US cannabis
• 76% increase in cannabis jobs this year
• the legal-marijuana industry's estimated economic impact in the US was between $20 billion and $23 billion in 2017 
• Cannabis GDP is worth more than the GDP of nine states, including Delaware, Alaska, and both North and South Dakota according to Business Insider

Now we at Entourage Effect Capital are not completely bullish, we do understand we are late stage in the economic cycle. Are we going to get to 4% GDP growth? Doubtful. But will we continue plodding at 2-2.5%? I believe so. As an investor in private markets, we speak to hundreds of CEO’s a month, look at hundreds of balance sheets, and hear from those on the actual job creators on the ground. This hands-on experience shows us that consumers are continuing to consume and despite the governments best efforts a few see that free markets are what we truly need.

The reason we will continue to grow is that despite with the media says, Facebook isn’t waiting around on a federal reserve interest rate cut to roll out a new feature, Salesforce isn’t concerned about an extra .25 bp cut to make the Tableau acquisition for $15 billion, NorCal isn’t stopping its expansion into new dispensaries, and millions of small businesses are still hiring and growing despite great stock market volatility and impeachment concerns.

Will they take advantage of low rates to restructure debt? Absolutely. Will it drive their strategy? We think not. Even Mohammed El-Erian agrees it won’t be the government or monetary policy that drives the economy; it will be the seven million small business employers doing what they do every day, going to work and ignoring the Wizard of Oz manically waving his wand.  

Even Mohammed El-Erian agrees it won’t be the government or monetary policy that drives the economy; it will be the seven million small business employers doing what they do every day, going to work and ignoring the Wizard of Oz manically waving his wand.  

That is exactly why we should all remember to thank not the politicians but the men and the women actually in the arena working hard each day.

Especially those in this new green industry battling stigma, regulations, capital restraints and historical criminalization.

Codie Sanchez

www.codiesanchez.com

www.entourageeffectcapital.com

This article is presented for informational purposes only, is an opinion, and is not intended to recommend any investment, and is not an offer to sell or the solicitation of an offer to purchase an interest in any current or future investment vehicle managed or sponsored by Entourage Effect Capital, LLC or its affiliates. Any such solicitation of an offer to purchase an interest will be made by a definitive private placement memorandum or other offering document.?