Blain’s Morning Porridge – March 25 2021: Positive Infrastructure Spending will help!
“For there is no folly of the beast of the earth which is not infinitely outdone by the madness of men….”
This morning – Global Supply Chains could be stressed by the boat jammed in the Suez Canal. The lessons from the Pandemic offer an opportunity to rethink Global Infrastructure Spending – and mop up much of the money glut currently funding financial asset inflation!
It’s the No-See-Ums that create the biggest speedbumps for markets. Earlier this week I was talking about supply-chain finance breaking down. This morning it’s a rogue gust of wind that’s set actual real global supply chains a’tingle.
When a whale gets stranded on a beach what kills it is its own weight crushing its internal organs and the lungs. When a massive container ship jams itself across the Suez Canal, after a freak wind grounded it on a sandbar, it’s not as simple as just dragging it off – were that even possible. It’s the weight of the ship bearing down on its keel and internal structure that’s the killer. What would be worse than a ship blocking the canal would be a broken ship and containers and fuel spilling out of it. It took years to remove the wrecks of the Arab-Israeli wars from the Canal.
With luck and a good wind raising the water level, they may clear the Ever Given, but don’t make assumptions. Hope – as I keep reminding readers – is seldom an effective strategy. The authorities will be hoping, but it may take some time to lighten the ship, refloat it, drag it back down the waterway to unload and inspect it. It blocked the Canal at its very narrowest bottleneck point.
The 30 odd ships that use Suez daily are stopped and queued. For those in the Canal they are stuck – as are their cargos of everything for chips to tat. It takes about double the time and twice the fuel cost to go round The Cape of Good Hope. It would be fair to assume there is going to be interruption to supply chains and that will have a knock-on effect. When the Hanjin Shipping Line went bust a few years ago it triggered all kinds of problems as ports refused to unload vessels.
Meanwhile… back on planet imagination… .
Infrastructure
Did you know the very first Eurobond was an infrastructure deal? It was issued by the Italian motorway network Autostrade in 1963. It was for $15 mm and carried a 5.5% coupon. Ah… I remember it well… All these offshore dollars finally has something to invest in.
58 years later we’ve got President Biden – surprisingly I think this is the first time I’ve mentioned him directly since Jan 20th – proposing a $3 trillion long-term package to boost the economy through infrastructure investment, cutting carbon emissions, and reducing inequality. How does that connect to the Euromarket? Well, it’s all about dollars and how to fund them.
The first priority for America will be physical infrastructure. It’s no secret the States’ roads, ports and airports, energy grid and dams, are all looking increasingly third-world rather than new-world. There is general agreement on the need for 5G broadband, support for EV charging, and housing. Trump said it. Biden says it. It’s unlikely to find agreement in the polarised US political system. It will stall. Political agreement comes at a cost. Egos need massaged, and were previously eased by “earmarking” pork-barrel projects so that senators can get their name on some bridge-t0-nowhere. That, sadly, is the way politics work.
The more social goals like building a “human-capital” economy around equality and skills are even stronger on rhetoric and low on detail, but would involve overhauling the education system, the great unsolvable of US health care, and building (dare I say it without being called a goddamn communist) social care. The prospects of agreement in the house are even lower.
The provision of national infrastructure is generally agreed to be a public good – but there are no reasons good social projects could not be financed with private money. After all, isn’t that what the S in ESG is all about? Stick a government obligor on anything and it’s much easier to fund.
And there is plenty of cash around. Much of it is currently chasing yields in any financial asset with a pulse. The result of 12 years of experimental monetary policy has been massive financial asset inflation. What if all that money could now be recovered and made to work by funding decent return infrastructure? It’s a thought worth holding.
If projects produce good, dull, boring, predictable, revenue streams, why wouldn’t an insurance firm want to match the returns an infrastructure project produces against their long-term liabilities. More predictable and less risky than trying to play stock narratives. Government payment streams are generally considered “credit” good – but they do raise issue of who is paying for them… and higher taxes are guaranteed to set right-wing blood pressure soaring.
The US and UK have been able spend an extraordinary amount of money to secure the economy against the ravages of Covid 19. Biden just dropped a modest $1.9 stimulus package into the US. Spending on furloughs alone in the UK exceeds £100 bln, with a similar amount on additional medical services. Raising money appears to been easy in crisis?
How much more should we be spending now to build for the future with similar amounts invested in creating solid infrastructure and a human capital base? Both would support stronger and more sustainable economies?
Curiously it could happen in the UK – if the Government can get its act together. We are currently blessed with the strongest left-spending Socialist government in UK political history, although it still calls itself Conservative. Couldn’t Sunak just keep the spending doors open to finance infrastructure rebuild, reform of education (especially at the tertiary level), a redefinition and relaunch of the National Health Service, and critically reform of government pensions and benefits?
All these things are possible… although the cost will cause conniptions for traditional Tory sound-money diehards. Let me talk to them and I’ll explain how the magic-money tree works.
How much more could we be using markets to finance infrastructure? The experience has been mixed. Private Finance Initiatives (PFI) to finance Infrastructure developments have not always gone well.. The collapse of Carillion in 2018 exposed how reckless government and dubious accounting on infrastructure projects failed to gel.
I will admit; I have a personal interest in rebuilding the UK.
For the past year I’ve been Working Away From Office. I say that because I’ve rented an office in our village rather than stayed at home. It’s tough in terms of not seeing colleagues and meeting clients (and a lack of decent/proper lunches), but it’s been a delight not being beholden on catching the train up to London!
The Southampton line to Waterloo had become a game of Russian roulette with 5 bullets in the barrel. The crux of the problem at SouthWest Rail was a massive disconnect between passengers furious with service, train operating companies struggling to profit from their franchises, and the railway operator, Notwork Rail being totally disconnected and unmotivated to deal with either. Everyone who knew anything about railways knows it didn’t work… There is an excellent note on the subject from Nigel Hawkins of Hardman & Co (my go-to-man on rail) on UK Railways – Where did it all go wrong.
Great news the failed railway experiment that blighted our lives (and certainly contributed to my health problems a few years ago) has been cut. What next?
We don’t know yet what replaces it. A white paper has been delayed till after local elections May. That may be a sign we’re unlikely to be happy with the new railway proposals. Everyone says they are in favour of better services and cheaper fares – in the past inevitably that meant fewer trains, higher cost tickets and lousy service. Whatever solution to the UK’s miserable train service should put passengers first and foremost.
It’s a shame Govt didn’t use lockdown to shock the blundership at Notwork Rail into action, and institute a wartime-style massive rebuild of the antique signalling systems that blight the system, or relay tracks to allow faster trains. As the economy reopens post Covid I suspect the rail system will quickly return to its normal overload making it difficult to anything but basic maintenance.
Yet, the experience of the rail leasing firms who finance and own much of the UK rolling stock demonstrates the value to investors. If government can spend billions fighting pandemics, then the benefit to the economy of similar amounts bringing the railways out of the 19th century and fit for the 22nd might be moot. A strong public transport system will clearly benefit the whole economy.
Railways as disruptive tech? Why not….
The car lobby – famously favoured by conservative governments – may now be past its peak. If predictions of autonomous cars and Ubers for everyone are true, why own a car at all? I could have a driverless Uber pick me up and drop me at the station for 25 min fast train (currently 1 hour) to Waterloo, hop on a selfdrive uber to take me to watch Scotland hammer England at Twickenham again and back. Nice… Who needs a car?
Anyway, the main reason for writing about trains this morning was to have an excuse for the photo of Mallard… the fastest ever steam engine.
Five Things to Read This Morning
FT – Markets brace for large shift from stocks to bonds in fund shake-up
Torygraph – Britain has too much debt to handle higher interest rates
FT – Brightening UK outlook sends bonds sinking most in two decades
WSJ – Hot US Economy, Fresh Supply Distruptions Pressure World’s Factories
BBerg – Tesla’s Bitcoin Adventure Promises an Even Wilder Ride
Out of time and back to the day job…
Bill Blain
Shard Capital
6 Comments
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Bill,
I love the Mallard too but could only ever play with the Sir Nigel Presley on my Hornby ..
Whilst modernising infrastructure is essential, as a modern internet clearly boosts economic competitiveness, I fear the actual economic multipliers of such spending are reall rather low and badly executed projects like HS2 may never cover their costs. So we must beware the ponzi projects and ponzi politicians promoting them as they just become a waste of our borrowed money !
Regards
Sir Nigel Gressley – and it was called Mallard because he kept ducks! I had both Mallard and the Sir Nigel on the railway I’ve just deconstructed in my attic… now knocked down so Wife can have a yoga studio.. They world is so unfair..
You are quite right about the risks of ill-thought out projects – but we should equally address human capital
Dear Bill, I much enjoy your blog. On infrastructure financing, there could be a case for some form of municipal bond market in the UK. I am not thinking of GO (general obligation) bonds, which lead to local authorities becoming huge debtors, but hypothecated Revenue bonds, linked to a local project. I remember when John Major launched Tessa accounts, which was a disguised attempt to restore cheap deposits to banks but it was dead money. Instead, the Newbury bypass ( being built at the same time) could have been funded entirely by local bonds as local people stood to gain so much. I tackled a senior politician on this who said local( tax exempt) bonds would not work because ‘The Treasury will not allow anyone financing below the gilt rate’. With the possibility of higher rates, people having saved money in the lockdown, surely local project bonds would tick all the boxes: people love sourcing food locally, so why not point to a local toll bridge bridge ( Hammersmith?) and say ‘I helped fund that repair’ or’ I helped pay for that toll bypass’ or ‘I helped fund that new rewilding scheme , (which charges an entry fee) etc etc. It could tick the E and S boxes of ESG…..
I wonder about how you would control local spending to ensure its common sense..
Maybe a role for a British Infrastructure Bank – like the one we are getting in Leeds – to play in allocating and determining where to put the money.
Railroads may still have a role in moving freight but people? Cars having individual destinations can fill a highway separated by only a few feet of pavement between them. This allows for a much more efficient use of the right of way. Yes roads can become congested but WFH may greatly reduce this. As to comfort a car is essentially a first class ticket to anywhere.
Mass transits in citys and high density connurbations will be much more efficient than cars for mass movement – i reckon. That said, I would always drive the 6 hours to Edinburgh than catch the 5 hour train because its more convenient at either end.