Strategic Investment Insights - June 2021 Full Commentary @?www.StrategicCAPM.com/Commentary
Key Topics: US Infrastructure Revitalization, Investing in Infrastructure: Our Forecasts of Risk and Return, Federal Debt and Fiscal Deficits Impact, Extended Global Pandemic Stimulus, Raising Taxes, Interest Rate Risk, Hauser's Law, Earnings Growth and Profit Margins, Municipal Bonds, Federal Privatization, Investor Alignment, Public-Private Partnerships/P3.
Revitalizing US strategic infrastructure should improve national economic productivity and efficiency of essential services, transportation, communication, as well as power generation and distribution. However, The pathway for infrastructure legislation is becoming increasingly difficult without bipartisan support, particularly as additional stimulus is not needed and risks boosting inflation expecations. Infrastructure should be easier, but so far its not. This Infrastructure Boondoggle needs to be downsized, accountably financed, and reprogrammed with better objective alignment for the greater good. We prescribe alternative ideas to focus the objectives of spending and finance development without incuring further debt or burdening taxpayers, including exploring privatization of America's massive underutilized and non-strategic assets to fund project development or even reduce federal debt.
- Revitalizing US strategic infrastructure should improve national economic productivity and efficiency of essential services, transportation, communication, as well as power generation and distribution. Lower operating costs and encouraging innovation, including research and development, increases potential growth and promotes prosperity.
- President Joe Biden recently outlined his massive $2.3 trillion plan, plus $400 billion in presumed “paid for” environmental tax credits. Unfortunately, the American Jobs Plan includes only about $600 billion to revitalize American infrastructure. The American Families Plan proposes another $1.8 trillion for caring infrastructure. Total ask: $4.5 trillion, before considering the next $6 trillion ask for FY2022 budget.
- There is no need for another $4.5 trillion in fiscal stimulus with the strong economic recovery toward full recovery that began in mid-2020 without any remaining output gap given US GDP of $22.1 trillion in Q1/2021 has already surpassed Q4/2019. Unemployment has plunged from 14.8% a year ago to 5.8% in May.
- Private capital is critical to financing entrepreneurial innovation, commercialization, and project development, including infrastructure needs that can bolster potential growth and lift living standards. Asset owners are well-positioned to provide needed capital. Long horizon asset owners seeking to maximize return on invested capital also tend to increase accountability and governance of project development and operational management, resulting in better asset performance with less fraud, waste or misappropriation than government spending programs or stimulus.?
- Infrastructure is often characterized as a real asset or inflation hedge, but it tends to behave like cyclical higher dividend stocks, which are more interest rate sensitive.
- We forecast about 4% infrastructure net return over the next decade with risk of ~13%. This is lower than the forecasted 8-12% return with 10-14% risk we observe in various asset allocation studies. Earnings growth will struggle to exceed 4-5% as these lower growth companies with capacity constrained investment opportunities (starting from higher P/E vs. growth) that tend to monopolize their markets already. Infrastructure return correlation of 78% versus equity also should remain higher than presumed, and as our research models suggest result in less portfolio risk diversification than many assume.
- Our debt burden has soared past 100% Debt/GDP with projected fiscal deficits exceeding $1 trillion If infrastructure need was so critical, why didn’t Congress include it in prior fiscal stimulus bills?
- More fiscal spending can extend financial imbalances and boost inflation expectations, which already jumped to 4.6% as CPI inflation accelerated to 5%, up from 0.2% a year ago. Given the various forces driving inflation, we don’t believe rising US inflation is transitory. Such debt-fueled inflation risks a new era of stagflation.
- Higher interest rates will follow inflation, further boosting fiscal deficit’s interest burden that is already unsustainable if Treasury yields rose above just 3%, as we expect.
- We should consider alternative means of financing an infrastructure plan incorporating stronger oversight to minimize misappropriation, fraud, and waste.
- The US Government can privatize vast holdings of land and property to finance development, including a lot of underutilized real estate. US Privatization should also increase available opportunities, and thus normalize currently high valuations--this might improve the outlook for future returns in infrastructure, as well. Maybe America's balance sheet holds within a marvelous opportunity in privatization of some of its massive holdings to reduce debt and also fund US infrastructure revitalization.
- ?Private-Public Partnerships are more successful achieving their objectives than government spending programs. Government should focus where it can incentivize investment from loan guarantees for qualified projects to easing regulatory and administrative hurdles.
- This Infrastructure Boondoggle needs to be downsized and reprogrammed. The American Families initiatives should be more targeted as well and flow through regular legislative order within an annual federal budget, if the initiative can even stand on its own merit--indeed, what is the rush if there is no need for further stimulus?
- Moreover, something this important and so significantly large should be a bipartisan effort supported by at least 2/3rds of the House and Senate. The current pathway for infrastructure legislation is becoming increasingly difficult without bipartisan support, particularly given both houses are very narrowly split. Thus, we expect a smaller and more targeted infrastructure plan of about $1 trillion with no need for tax increases—considering alternative financing approaches we've suggested herein.
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Strategic Insights?This publication is for general information only and is not intended to provide specific advice to any individual. Some information provided herein was obtained from third party sources deemed to be reliable. We make no representations or warranties with respect to the timeliness, accuracy, or completeness of this publication, and bear no liability for any loss arising from its use. All forward-looking information and forecasts contained in this publication, unless otherwise noted, are the opinion of this author, and future market movements may differ from expectations. Index performance or any index related data is provided for illustrative purposes only and is not indicative of the performance of any portfolio. Any performance shown herein is no guarantee of future results. Investment returns will fluctuate, and the value of holdings may be worth more or less than original cost. ? Strategic Frontier Management www.StrategicCAPM.com. 2021. All rights reserved.
