Thursday, November 21, 2019

Juul of Denial aptly describes the latest example of a corporate mission being supercharged by product claims based on little or very thin evidence. Juul markets its vaping products as safe as and healthier than cigarettes. The CEO declared this product “would deliver smokers the satisfaction they want without the combustion associated with it”. Even more cynically, they produced flavored versions of their products to appeal to teenagers as if they were vaporized Kool-Aid. Mango, fruit and cucumber were available. The only flavor missing was an atomized Cherry Garcia as Juul recreated the animated cigarette television ads of the 1960’s.

While their product was being sold as a safe alternative, early empirical evidence suggests the opposite - that e-cigarettes are a gateway to smoking traditional cigarettes. The private and public capital markets freely supported this plan including investors like Fidelity Management, which proudly touts its ESG policies, funded it privately. The SEC and the FDA, each respectively, permitted Juul to raise capital and to make health claims to consumers.

There is a large national dialogue taking place in the political arena calling for increased government involvement in many aspects of daily life. Yet, this most recent example raises the serious question about what quality of service the existing government agencies currently provide. Never asked is: What are the consequences to the agencies and its employees for a job poorly done? After a crisis is obvious, no institution is better at yelling “fire” than a federal agency, but what are they doing to prevent the fires? The FDA is now issuing regular edicts about vaping as a handful of ill patients have grabbed the headlines, but why weren’t the safety claims of Juul and others put to a clear empirical test before they were allowed to be made public? Investors, ESG poseurs or not, management and regulators must question the veracity of claims, a priori, despite the potential of bad news to slow growth.

The vaping crisis also intersects another popular policy, legalized cannabis, as several of the vaping deaths seem to involve vaping of cannabis derivatives. State by state, we raised the driving age across the country and developed very sophisticated ways to measure alcohol levels in drivers in order to prevent deaths caused by drunk drivers. Yet, we are now legalizing sale and use of cannabis, an alcohol substitute, with no way to measure its use by a driver of a vehicle nor any empirical standard for unsafe levels, as we have for alcohol. Will it be just as surprising when vehicle incidents rise coincident with the lack of government planning and implementation being handled with the same lack of care as with Juul? When the inevitable automotive accidents occur with drivers behind the wheel while baked, which elected official or regulator will be held responsible in the same fashion corporate officials are correctly held responsible for their neglect?

A similar absence of linking responsibility for program failure applies to elected officials for decades has led to the underfunding crisis of municipal pension funds. The recent decline of the yield on government debt, which in turn lowers the discount rate for determining private pension liability to low single digits, has heightened the contrast with the 7+ % assumptions the underfunded municipal plans are using to try to make their plight seem less dire. Annual underfunding of benefit plans that math never supported coupled with perceptions that plans are immutable are overwhelming municipal budgets. Yet, no official is held responsible politically or personally for the crisis. CT, IL, and KY pension funds are just the tip of the iceberg that is slowly floating into the path of continued economic growth.

I’m Rob Morris and I approved this blog.

Juul of Denial