On the weekend I published a special report on the ‘Golden Age of Infrastructure’ and how you can potentially profit from this new era. If you didn’t catch it, you can do so here.
Perhaps not coincidentally, on Friday Infrastructure Australia released its second National Infrastructure Audit. The document focussed on the cost to Australia of not updating or expanding crucial infrastructure.
The aim of the audit is to promote discussion and feedback for the release of the Australia Infrastructure Plan, a 15-year national infrastructure plan to be released later this year.
The decay and neglect of our infrastructure is yet another casualty of the mining boom. I’ll explain what I mean by that in a moment. But now the mining boom is over, you should expect infrastructure investment to play catch up in the years ahead.
Along with China and Japan fighting it out with hundreds of billions of dollars of infrastructure funding for the Asian region, the next decade will indeed be the ‘Golden Age of Infrastructure’, and a number of firms should profit nicely from this trend.
The implications of the mining boom were massive for the Australian economy. It diverted infrastructure resources and capacity into the mining sector and away from the more traditional forms of infrastructure, like transport systems.
On top of that, the government boosted economic growth by running a very generous immigration policy. Consider this: the two primary contributors to real economic growth are productivity and population growth.
Generating sustainable productivity growth is difficult. It requires tough and usually unpopular structural reforms which most government’s these days seem allergic to.
It’s therefore much easier to pursue economic growth by juicing the population. According to the World Bank, since 2000 Australia’s population growth has been consistently stronger than both the US and China. It’s one of the main reasons behind our record run of uninterrupted economic growth.
Of course, strong population growth makes headline economic growth figures look good, but under the surface problems start to build.
The biggest problem is infrastructure. If you keep increasing your population but don’t invest in the infrastructure to deal with the population growth you’re going to run into problems.
This is where Australia is now. In fact, we’ve had major problems with the most basic of infrastructure — housing — for years. You can put that down to the complete failure of planning…land release restrictions, high cost of greenfields land, regulations pushing up building costs, tax policy that promotes speculation in the existing housing stock.
You name it, Australia’s done it pretty poorly. Which is why we have the most expensive housing in the world despite having more than adequate amounts of land.
You can also put the high cost of land down to a complete lack of infrastructure planning. Because the range of public transport is inadequate, it clogs the roads and incentivises people to live closer to the cities to take advantage of the main public transport hubs…pushing inner and middle ring house prices up in the process.
Infrastructure Australia understands this deficiency, which is why they’re preparing a 15 year plan for the country. Whether it will be executed properly is another question. In terms of funding, you will see a lot of ‘public-private partnerships’ develop as private capital looks for secure long term returns in a low interest rate environment.
There are a few companies that should benefit handsomely from this developing trend. Indeed, my top pick rallied strongly on Friday on the release of the infrastructure audit. It’s early days but I think there’s a long way to go.
To get my special report on the ‘Golden Age of Infrastructure’ click here.
If nothing else, the focus on where the money will flow in the coming years is a welcome break on following the same boring narratives prevalent in the market right now.
Greece and will or won’t the Fed raise interest rates are two such narratives. They were both front and centre over the weekend.
As reported by the Financial Times:
‘Greece has again threatened to default on loan repayments due to the International Monetary Fund, saying it will be unable to meet pension and wage bills in June and also reimburse €1.6bn owed to the IMF without a bailout deal with creditors.’
It did the same thing earlier this month. It only made the payment because the IMF loaned it the money!
We’ll see if this charade lending and repayment continues. The €1.6bn owed to the IMF falls due in four separate instalments from 5 June to 19 June. That’s only a few weeks away. The problem for Greece now is that its default threats are no longer as big a concern as they once were.
Because the IMF and the European Central Bank hold nearly all Greek debt, the market no longer sees a Greek default as a risk to the financial system. While it’s true that a default wouldn’t hit bank balance sheets, there are still many unknown effects and it looks as though the market is being far too sanguine about the risk of a Greek default.
Over in the US, the Fed continues to umm and argh about the timing of its first official interest rate hike in nearly a decade. Whatever they decide, it’s clear the Fed is trapped.
Holding rates at zero into the sixth year of an economic recovery is crazy. When the cycle turns down again, they will have nothing to work with except more QE…which everyone knows doesn’t work.
The Fed is trying to get out of this trap by moving to raise rates, or at least talk about raising rates. This ‘jawboning’ seems to be working. Bond yields are on the rise and the US dollar remains strong.
In Friday’s US trading session, the Australian dollar fell back below 79 cents as the US dollar strengthened. With the iron ore price set to turn back down and our economy increasingly dependent on the east coast house price bubble, prepare for the dollar to fall into the 60s against the US dollar by the end of the year.
For The Daily Reckoning