Trend Czar

Finding a way to pay the way

Of all the remaining presidential candidates, Barack Obama is the only one who even budgets a number for stepped up infrastructure investment. He calls for a timid $60 billion infusion. The Feds, states and cities combined spent about $140 billion on infrastructure in 2007. But a national commission report released in January states the country really needs to spend $225 billion annually on transport related projects for roads, rails, ports and airports. That doesn't include dealing with the country's aging levees (remember Katrina), crumbling dams, and questionable power grid (Tuesday's Florida blackout). Back in 2005, the American Society of Civil Engineers calculated the country had to spend $1.6 trillion to refurbish its infrastructure in the five years leading to 2010.  Any way you look at, the USA isn't spending enough and must find a way to finance, build, and pay for new and improved infrastructure or face greater congestion, more pollution and new tragedy. How soon we all conveniently forget Minneapolis. 

Facing recession, higher unemployment rates, increasing gasoline prices, lower home values and rising pricetags for food and clothes, Americans balk at the idea of new user fees, toll hikes, and more taxes.  But we continue to want to buy big cars to drive to our big new houses all the way at the suburban fringe if need be. Oh, and don't forget the flat screen TV we need to purchase for that new house.

So politicians avoid facing people with hard facts. Following the example of Chicago (Skyway tolls) and Indiana (turnpike tolls), some governors examine ways to sell toll concessions from existing jewel infrastructure assets (the New Jersey and Pennsylvania Turnpikes) in order to help balance state budgets and keep from raising taxes or cutting too many services. In the meantime, they try to put off all but absolutely necessary capital projects.

At least, some states try to figure out how to tap new billion dollar private infrastructure funds raised by various banks and investment managers to finance projects -- Florida, California, Virginia and Texas take the lead. JP Morgan, Macquarie, ING, Morgan Stanley, the Carlyle Group and Goldman Sachs among others all have funds, hunting for opportunities.  But the U.S. lags far behind the U.K, Australia, Canada and other European countries in working out concession protocols and best practices to get deals done.  Most of the infrastructure investment funds choose to focus on opportunities outside the U.S. instead of spinning their wheels here in often fruitless and costly negotiations with state officials.   

But the big bugaboo remains finding new revenue sources to pay for needed improvements.  Another federal commission looks at replacing the nation's meager gas tax (19 cents a gallon) with satellite/transponder user fee technologies which can charge drivers by the mile, adding surcharges on heavier vehicles which spew more harmful emissions and cause more road wear and tear.  Can you imagine the hysteria when people start opening monthly vehicle mileage bills and realize that roads aren't "free " anymore?

If we don't get a grip soon and find a way to pay the way, breaking that old SUV axle in some pot hole may be the least of our worries.

© Miller Ryan LLC 2008    

Slushy liquidity crunches laissez faire

So we're in the midst of this credit crisis. People are losing their homes. Financial institutions register more quarterly writedowns. Some investors lose big bucks. It's much harder for anyone to get financing on anything. And many observers fear there is more bad news to come.

Wall Street banks had created their alphabet soup of securitized vehicles and derivative products (expanding them to include mortgages and real estate), traded by incomprehensible computerized programs. Yes, there have been the recent losses, but these companies have raked in countless profits off this activity all in the name of creating liquidity for the markets, which the pr tells us facilitates entrepreneurship, the capitalist engine, growth and prosperity. While recent increases in asset values proved phantom, the transaction fees from deals made in bidding frenzies were paid out in hard cash. A few executives have lost their jobs, but nobody is giving back those big bonuses. And for the last six months and counting instead of more liquidity, we have (a lot) less in the system. Streams of capital from 2005 and 2006 have suddenly turned into gutter slush -- that cold, clammy soup which ruins patent leather shoes if the chauffeur driven limo is parked too far from curbside.

Right now, government pooh-bahs and banker elites focus on stemming the damage in the mortgage markets, and hope to sidestep other crises like mortgage bond insurer collapses. The Federal Reserve remedy relies on low interest rate morphine -- cheap money -- the elixir that helped us into the mess in the first place.  Rating agency watchdogs, who get paid by bond issuers, assure us they will be more vigilant in the future.

Once we get through this rough patch, what needs to be done to ensure this mess doesn't happen again? We know Wall Street and financial industry barons will put up firewalls against greater regulation, warning about constricting growth (certainly to their bank accounts). But doesn't some balance need to be returned to the system on the regulation side? How much will be determined by how bad things get: The worse the fallout and the longer credit markets spasm, the more political pressure for greater government oversight. This tug of war will start to play out during the election campaign, but we are a new administration and Congress away from seeing what happens.

In the meantime, watch where you step. Our winter continues.

© Miller Ryan LLC 2008 

Headlines Point in Wrong Direction

Recent headlines keep our trends barometers heading down:

"Fed lowers growth forecast": These announcements have become seemingly weekly events as Fed policymakers do the limbo -- how low can they go without saying the economy has entered a recession. Right now they don't have much room to work with -- the bar looks awfully close to the floor at their predicted 1.3% annual growth rate.

"Oil Prices Close Over $100 a Barrel": No surprise that oil prices keep edging ever higher, but the increases continue to pinch hardhit consumers, who deal with a 4.3% increase in consumer prices over the past 12 months.

"That 70's Look: Stagflation": Analysts start to worry about that CPI rise in a stagnating economy, and the need to raise interest rates to get inflation under control. While short-term the stock market lives off of rate cuts and the credit markets continue to seek relief in liquidity, the long-term impacts on economic growth and the need to increase interest rates suggest unpalatable scenarios.      

"Writedowns Continue": Every day or so another bank announces a new set of writedowns. As we have noted, subprime was a convenient whipping boy and just part of a larger problem, precipitated by laissez faire lending across the capital markets spectrum. And commercial real estate still waits its turn to take some hits.

"More Housing Defaults, Prices Sink": Wasn't it about a year ago the various realtor trade organizations were confidently predicting a housing rebound by this winter? Now recoveries have been pushed out to two and three years. Gloom has enveloped hope.

"Obama Wins": But hope for change and its possibilities keep winning in the current election campaign. The national mood may be the biggest indicator out there that trend lines haven't bottomed. Change (better times) hasn't happened yet so people transfix on hope.

© Miller Ryan LLC 2008   

Holding Strong... For Now

Two areas seem to fare better in the current housing downturn -- places that missed the boom and select premium districts in global gateways where demand remains strong. Off the radar screen neighborhoods had avoided speculation and bidding frenzies. The fact that values haven't dropped as much may not necessarily be good news -- they're just not places to which people gravitate whether in good or bad times.

Not surprisingly it's premium addresses in the handful of 24-hour global metros which not only hold value, but also even experience pricing upswings. Certain established Manhattan neighborhoods stand out as premier examples of seemingly impervious gold-plate fortresses, particularly along Fifth Avenue, Central Park West and Park Avenue. In a building I know well, recent apartments still transact at closing above original asking prices. Bidding wars continue in established coops for coveted two and three bedroom apartments -- enough dollars have flowed through from year-end Wall Street bonuses to keep demand strong among the sliver of cash buyers remaining. Some investment bankers and white shoe lawyers desperately seek extra bedrooms for growing families. Meanwhile, foreign money taking advantage of the weak dollar and looking for prime U.S. beachheads sustains Manhattan's condo buying... for now.

But the Wall Street scene continues to deteriorate as the credit crisis spreads beyond subprime. The real impact on jobs and incomes will hit during 2008. Condo developers look like they have overshot in Manhattan. There are just too many cranes and construction projects around town given the gloomy financial climate. At co-op board meetings, everyone wonders how long prices will hold up. Lesser addresses start to feel the pinch from tightening credit requirements.  This past Sunday's New York Times' real estate section crowed now is a good time to buy.

Well, expect the buyer's market to get better. Even those gold plated addresses could be tarnished -- not a crash, but a leveling off, even a slight dip. 

© Miller Ryan LLC 2008   

Fiddling like Nero

The elephant in the room that nobody wants to discuss -- especially elected leaders and presidential candidates -- is the nation's ticking debt bomb. Everyone wants Social Security, Medicare, good roads, big houses and lots of stuff to put in them.  But the U.S. is now the world's biggest debtor nation -- the national debt has doubled in the past seven years. And the housing bust has exposed many Americans to the vicissitudes of overborrowing on mortgages, car loans and credit cards. Companies, meanwhile, inexorably cut back on pension and healthcare benefits, putting more of the burden on workers. We all know that 50 million Americans have no health insurance at all.  President Bush introduces a budget that ignores the alternative minimum tax problem and pretends that the Iraq War doesn't need funding.

Back in the 1970s, my father was a member of a blue-ribbon panel selected by Congress to come up with solutions to keep Social Security solvent for future generations. Well 30 years later nothing has been done and funding Medicare is another fast approaching train wreck. Democrats talk about Universal Health Care coverage and taxing the rich, while Republicans hail cutting taxes and increasing the defense budget (America spends more on defense than all our enemies and friends combined). Everybody gives lip service to cutting earmarks, but earmarks comprise less than 1% of the federal  budget. In effect, both parties adopt the let's keep borrowing solution.

At some point, probably sooner than later, foreign investors will stop taking a chance on investing in T-bills and other instruments that float our national debt, because the country is too much in hock. Interest rates will shoot up, the dollar falls more, and our standard of living starts to tank. Social Security and Medicare programs crash and our roads stop functioning.

It's a Nero fiddles scenario... In the late 1990s we knew tech stocks couldn't keep skyrocketing, but we kept investing in them anyway. The housing market was too good to be true, but everyone kept leveraging up and paying more. Now it is increasingly obvious that something has to give -- either we pare down our entitlements (higher age eligibilities, less coverage for wealthier citizens) or spend more of what we earn to keep them at present levels (higher taxes, user fees). We can't keep borrowing to sustain the unsustainable.

(And wouldn't you think Congress has better things to do than posture before the miserable likes of Roger Clemens and his trainer.)   

© Miller Ryan LLC 2008 

 

"Broken" China

For the past several years, China has been the hot place to go for opportunity investors. All the major investment managers have lured institutional money into the emerging economic goliath. No doubt the arguments seem compelling for China continuing to grow into a dominant power over the next quarter century. Unprecedented development builds out and modernizes the country's cities and entirely new urban areas mushroom as rural populations move to industrial job sites. An evolving middle class moves into high rise apartments and shops in new shopping centers. Office buildings pop up to accommodate commercial expansion and more hotels are needed for all the offshore visitors -- business and tourist. Beijing gets a total facelift for the upcoming Olympics. The powers that be also fund massive infrastructure projects -- a highway network, the equivalent of the US interstate system, has been built in just the past decade; mass transit facilities, high speed rail lines, and state-of-the-art airports start operations.

But recent news out of China should make investors wonder whether the growth track won't hit some bumps. Last week's pre-New Year snow storm crippled the country. Several factory buildings crumpled under the weight of snow, raising questions about construction quality. The government grudgingly admits it might have made a mistake with Three Gorges Dam and resulting environmental damage. Air and water pollution creates dangerous health conditions in much of the country -- about 50% of the country's vast population does not have potable water. The U.S. Olympic team will ship in food for its athletes, fearing that high steroid levels in local meats could trigger doping failures. Marathoners worry about noxious Beijing air quality. Manufacturers manage to ship overseas everything from tainted tooth paste to unsafe cancer drugs. Who knows what the locals are ingesting and breathing. And more than 300 million Chinese are smokers. Oh, probably no surprise, the government runs the cigarette franchise. In short, it would be charitable to say the country seems to play fast and loose. You could wonder how transparent the growth numbers are and whether they are sustainable. I do.

Add on: Talking about trends -- Will Hillary win another primary?  The Obama Mo steadily builds. She pins her hopes on "firewall" Ohio and Texas primaries in early March. But if Barack wins everything between now and then, as appears increasingly likely, Mrs. Clinton may be dead in the water. Remember just before South Carolina three weeks ago, she had a 20% lead in some national polls. Don't bet on the Dem decision going all the way to the convention.

© Miller Ryan LLC 2008 

    

      

From Abroad

After a six day swing from New York through London and Paris, here are some disparate observations and takeaways:

Rail and subway links within and between major Euro capitals and their airports put major U.S. cities to shame. We continue to fall further behind in our ability to move people and goods around and between our congested metros, and that spells long-term issues for real estate markets.  Earlier this week, a French company just introduced the prototype for a train that will travel at 225 miles an hour.  America does not have tracks or dedicated rail lines to accommodate high speed trains.  Amtrak's so-called Acela Express in the Northeast corridor can run for spurts over 100 mph, but that's all. 

London congestion pricing seems to work. Traffic appears more manageable in the center city. On Monday, truckers began getting charged £200 a visit into the congestion zone, if their rigs don't meet pollution requirements. Most locals accept the schemes. And the revenues go to mass transit and road repairs.

Privatizing London rail and subways leads to fares double or triple those in U.S. cities. Roundtrip tube rides cost nearly $12, compared to $4 in New York. A one way off-peak train ticket to suburban Milton Keynes cost $20. But the convenience and connectivity keep ridership up.

With congestion pricing a coming attraction to New York and probably other U.S. cities with mass transportation alternatives, expect travel costs to increase dramatically here to pay for all the new roads and mass transit we will need in the years to come. London is a leading indicator. The Brits reluctantly accept they must pay. At some point we will too. 

Euro real estate attendees at the Urban Land Institute conference in Paris show growing apprehension over economic prospects. In a show of hands -- about half expect a mild downturn, the other 50% anticipate a deeper recession. All eyes focus on  U.S. prospects both economic and for the November election. Everybody you talk to wants to see a "change" in direction.   

London and Paris like New York are chock full of luxury retail, and no shortage of shoppers. It looked like December 23rd on the ground floor at the flagship Galeries Lafayette department store near the Paris Opera on Tuesday afternoon. Harrods in London was packed too on Saturday morning. Meanwhile, the real estate markets seem to be headed south in London --talk of values dropping 10-20%, and commercial real estate companies listed on FTSE take their lumps. 

© Miller Ryan LLC 2008 

     

All Aboard

I'm in Europe for a few days in part to examine how countries there are dealing with infrastructure solutions to keep them competitive in the future. New infrastructure can become a big loss leader. In the U.S. we can point to Boston's "Big Dig" -- its billions of dollars in cost overruns and leaking tunnels.  But the new road, tunnel and bridge system has transformed Boston's financial district and arguably helps position the city for long-term growth.

The 32-mile long English Channel tunnel (the Chunnel) is another example of huge infrastructure expense overruns and operating deficits. Completed in 1994, the Chunnel cost $21 billion to construct in a titanic engineering feat to bore the world's longest underwater tunnel.  Chunnel operators, meanwhile, continue to register large (though declining) annual deficits for freight and passenger service between England and the Continent.  Paying off debt is a huge anchor and high charges discourage some use.

Still, the Chunnel's future value to the UK and France appears considerable, especially now with introduction of high speed passenger train service from London to Paris and Brussels. The trips take two hours plus center city to center city. No more hour long cab rides to and from airports and potential weather delays in inclement Northern European climates. In fact, plane trips between the cities have dropped dramatically, and the train has become the favored form of intercity transport -- it's just faster and more convenient or in other words more efficient and counter-intuitively more 21st century. Yes, in a retro sense, railways may offer more futuristic solutions to congestion and pollution problems than continued dependency on our two most significant and transformative 20th century inventions -- cars and planes.

Now, the United States needs to get its act together and make the necessary investments in creating high speed train corridors along the East and West Coasts and within other high growth states/regions (Texas, Florida). The challenges and political impediments will be huge, not to mention the costs -- many multiples of a Chunnel or Big Dig. But can America afford to depend on clogged roads, which can make trips to the airport longer than scheduled flight times to destination cities, and on airports that can't handle increasing demand for flight slots? The country also needs freight train corridors to help relieve congestion and pollution from over-reliance on truckers. The alternative is eventually gridlocked transport and the costs to the economy will be prohibitive. If we continue to stand pat the rest of the world could literally leave us behind. 

© Miller Ryan LLC 2008