Playing the Global Infrastructure Boom
By Chris Mayer
January 2, 2009
He won a decisive victory in the presidential elections and his party picked up a bunch of seats in Congress. The American economy is in the dumps and the mood is glum. The new president puts in motion sweeping new legislation and spending plans in an attempt to fix things…
I’m talking about Franklin Delano Roosevelt in 1933. But the same thing could apply to the 44th president of the U.S. in 2009. Barack Obama plans to spend $700 billion over the next two years as part of a new plan to give a jolt to a flagging economy. It’s a kind of “new” New Deal.
His stimulus package is big — it’s more than what the U.S. has spent on Iraq in the last six years. It also rivals the Paulson bailout plan. And Obama’s stimulus just gets bigger and bigger. During the presidential campaign, it was $175 billion. Heck, by the time he takes office, we could be talking about numbers that begin with a “T.”
Where is all that money headed? It’s basically new money for public works projects to repair the nation’s crumbling infrastructure. It’s a lot of money for highways, bridges and water infrastructure projects. It will also include a fresh infusion of cash to promote alternative energy and green technology.
China has its own $586 billion new deal, too. When the world’s two largest economies plan to spend that much dough, you’ll want to know where it’s going. The short answer is infrastructure. As investors, we have a window to cash in on a sort of government-guaranteed prosperity. You don’t have to like it, but you can profit from it.
Most of it will go toward highways, railroads and airports. Already, China’s infrastructure spending has grown at a pace of 20% annually for the last 30 years. The impact on China’s economy has been transformational. For example, new highways now connect small far-flung rural towns to much larger booming cities. As a result, the economic activity between the two areas is in full bloom.
This transformation in China reminds me of the effect canals had on trade in the U.S. during the 1820s and ‘30s. The Erie Canal alone cut transportation costs by 90%, according to Tomorrow’s Gold by Marc Faber. It linked the Great Lakes grain markets to New York. Canals more closely knit the interior part of the country with the Eastern seaboard, resulting in explosive growth in trade.
How to pay for these plans is a question neither country seems all that concerned with at the moment.
There is this belief that you must stave off economic contraction at any cost. Meanwhile, the U.S. government’s fiscal position is atrocious, with a deficit closing in on $1 trillion and the federal debt approaching $10 trillion. China is in much better financial condition. But China’s stimulus plan is still a big bet. It’s about 14% of the Chinese economy. As The Wall Street Journal reports: “The central government likely will have to significantly boost its own debt sales to fund the stimulus.”
Both big expansion plans will probably end badly eventually. America’s infatuation with canals that began in the 1820s led to a canal boom that ended in tears by 1836. Canal stocks collapsed, over 1,500 banks failed, nine-tenths of Eastern factories closed and a depression began that would last to 1842. Ultimately, these plans likely lead to wasteful spending and overinvestment. In finance, as in an Argentine steakhouse, everything gets overdone.
For now, investors have a window to capture huge gains from the global infrastructure spend. As I write, the U.K. just announced a $30 billion stimulus plan — with huge chunks of money for infrastructure. Argentina quickly followed with its own big plan. The news agency AFP calls it “a massive public spending plan to pump more than $21 billion into Argentina’s infrastructure.”
This is the dominant theme — think of it as a kind of contagion. Soon every government with a slowing economy from Capetown to Moscow, from Brasilia to Bangkok, could follow suit. All of which spells a possible golden age for those that make asphalt, water pipes, wind towers and the like. It should be a nice ride for investors who get in now, especially as prices for these stocks have become so cheap.
Until next time,
Chris Mayer
