Infrastructure: the thread

I have a bridge in Oklahoma to sell you

Investor and “extreme salesman” Adam Townsend has a few thoughts on US infrastructure spending. Behold, a Twitter thread that I think is worth preserving for posterity:

Adam Townsend
@adamscrabble
1. This is going to be a fun thread, it’s gonna be about finance and U.S. infrastructure. If that’s your groove, you’re going to swing. Lets begin… Historically, infrastructure financing has been done through public authority issuance of bonds….,

2. …the interest on which is tax-exempt to the recipient. There are three problems
Lower quality revenue stream projects need an equity component or a guarantee by a creditworthy public authority or municipality. These are becoming scarcer…

3. Construction costs tend to be higher when projects are built by the government rather than the private sector. These higher construction costs offset the benefit of lower interest rates, especially in today’s low rate environment when spreads between taxable…

4. and tax-free bonds are so small
Not all projects may meet the complex eligibility rules. Public bonds need to be issued in relatively large amounts so that there is a reasonable aftermarket. The money must also be spent on the project within a certain amount of time…

5. relative to the date the bonds are issued. These restrictions limit the extent to which the drawdown of the funds can be matched to the construction schedule. In today’s especially low short-term rate environment this means the project will have to pay a negative interest rate

6. arbitrage on money it actually doesn’t need yet or get a short term construction loan and run the risk that interest rates will rise between the date that the loan is taken down and the date of the long term refinancing.

7. now.. lets talk about NEW FUNDING MECHANISMS! were talking about…Pension funds, insurers and other institutions with long-term liabilities. The long-term nature of infrastructure programs means these investments are structurally well matched to the revenue flows…

8. from the debt that finances their construction, operation and maintenance.
Recently… the Japan Government Pension Investment Fund has been in cabinet-level talks. The GPIF will purchase debt issued by American corporations to finance infrastructure projects.

9. Up to 5% of the roughly $1.14 trillion in assets controlled by the megafund can go toward overseas infrastructure projects,,, [Related: “The US and Japan have emerged as new investment destinations, making up 11% and 3%, respectively, of the total global infrastructure assets, GPIF said,” but so far this total is only a few billion dollars]
I had this discussion at cabinet level with Trumps people… lets talk about it…

10. The Trump infrastructure tax financing plan
A major private sector, revenue neutral option to help finance a significant share of the nation’s infrastructure needs. For infrastructure construction to be financeable privately, it needs a revenue stream from which to pay…

11, …operating costs, the interest and principal on the debt,and the dividends on the equity.
The difficulty with forecasting that revenue stream arises from trying to determine what the pricing, utilization rates, and operating costs will be over the decades.

12. Therefore,an equity cushion to absorb such risk is required by lenders. The size of the required equity cushion will vary with the riskiness of the project. Assuming an average leverage will be about five times equity.

13. ok, now ure bored, so its gonna get crazy fun now, cool?
Some numbers,,,
Every $200 billion in additional infrastructure expenditures creates $88billion more in wages for average Americans and increases real GDP growth by more than a percentage point.

14, Each GDP point creates 1.2 million additional jobs.
I’m gonna blow ure mind now, buckle up!

The US has infrastructure needs of about $3.6 trillion through 2020, including…

15. $1.7 trillion for roads, bridges and transit alone
Traffic delays cost the U.S. economy more than $50 billion annually
iPhones are smarter than many of our air traffic control systems

As a reward for being such a great guest, here’s a pic of me and my cat

btw, Peter Navarro who was the tzar pushing the Infrastructure plan, was moved over to Trade tzar – where he is truly
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A mot of people have asked about what Obama did with the 787 billion that was allocated for infrastructure. So, I am going to explain reality, sit back and read on. Lets begin anew…

118,000 bridges have been recorded as hazardous. This is about 30% of the American bridges yet account for only 6% of the United States population: Oklahoma, Missouri, Kansas, Nebraska and South Dakota. Iowa alone has 25,000 bridges and only 3 million citizens.

These bridges do not have an industrial use. Of our 600,000 bridges most are trafficked only by livestock and people on a scenic walk. They have nothing to do with interstate commerce, GDP growth or national public infrastructure.

There are also 19,000 structurally deficient bridges in another 35 states, these states have a combined population of 175 million and more than 600 citizens per bridge.

80% of bridges in need of serious repair are in California. They have improperly used earmarked monies for general fund expenditures. Money was allocated, it was spent elsewhere by the state (wink and nudge to the State public employee pension system. More cat pix. /End

They apparently haven’t watched Burn After Reading

I think it’s safe to dispense with the idea, being promulgated by certain parties, that US intelligence is behind the Hong Kong protests/riots. One would have to be painfully naive to rule out the possibility of the US exploiting a chaotic situation in Hong Kong for its own ends. Many elements of the US establishment have made it clear that they support the protests. But it stretches credulity to claim that the CIA is capable of orchestrating a massive, open-source protest movement in a large and sophisticated Asian city. Seriously, think about it. As the Big Lychee helpfully reminds us, this is the same agency that saw its entire network in China caught and executed over a two-year period (I posted about this total debacle here). And if the “black hand” of the US is responsible for the current ructions in Hong Kong, was it also responsible for the 2014 democracy movement and the massive 2003 protest against Basic Law Article 23? That seems highly implausible, to say the least.

A Cambridge academic weighs in:

Jeppe Mulich
@jmulich
[Thread] The idea that foreign forces, and specifically the CIA, is either behind or heavily involved in the #antiELAB protests in Hong Kong seems to endure, somehow. So here are a few thoughts on why that is silly.

The first problem with the “foreign black hands” thesis is the underlying assumption that Hongkongers are unable to organize these protests themselves. That somehow they need the guiding hand of foreigners to mobilize.

That there simply is not enough motivation to take to the streets without outsiders stirring up trouble or offering incentives to do so. This is the same logic behind every colonial administrator or crony politician in history

complaining that the only reason the ‘natives’ or the ‘masses’ are protesting their rule is due to foreign troublemakers. It is devaluing the capacity and motivation of ordinary people and, in this case, it’s orientalist to boot.

The second problem with the thesis is that it greatly overestimates the capabilities of the CIA. Don’t get me wrong. The CIA is good at some things, and a lot of those things are deeply troubling and unethical.

Those things include funneling arms and finances to established groups of insurgents or to foreign regimes; extrajudicial rendition and detention; gathering particular types of intelligence and sharing it with select allies;

killing people with drones (sometimes even the intended targets); and supporting the more kinetic divisions of the US forces during on-the-ground military operations. They’ve also had some success with ruining Castro’s cigars and funding abstract expressionist art.

But none of these things are happening or would be relevant in HK today. There is no established insurgent group for the CIA to co-opt. There are no arms being funneled in (protesters use umbrellas, hard hats, dishwashing detergent, and a few Molotovs!)

Langley wouldn’t begin to know who to talk to in this type of leaderless, highly networked movement (look at their failures during the Arab Spring). I doubt they even have enough people proficient in traditional Chinese (let alone Konglish) to keep up with LIHKG and Telegram.

So, the idea of foreign black hands driving HK protests puts too little faith in the capacity of Hongkongers and too much faith in the capacity of those foreign forces. And worse, it plays directly into Beijing’s attempt at discrediting what is in fact a bottom-up mass movement

“A constitutional outrage”

Wow, just wow. I am coughing and spluttering with indignation at this gross violation of Democracy:

Parliament will be suspended just days after MPs return to work in September – and only a few weeks before the Brexit deadline.

Boris Johnson said a Queen’s Speech would take place after the suspension, on 14 October, to outline his “very exciting agenda”.

But it means the time MPs have to pass laws to stop a no-deal Brexit on 31 October would be cut.

House of Commons Speaker John Bercow said it was a “constitutional outrage”.

The Speaker, who does not traditionally comment on political announcements, continued: “However it is dressed up, it is blindingly obvious that the purpose of [suspending Parliament] now would be to stop [MPs] debating Brexit and performing its duty in shaping a course for the country.”

In the meantime:

Leader of the House Jacob Rees-Mogg, who was at the meeting with the Queen, said the move was a “completely proper constitutional procedure.”

Jacob Rees-Mogg

Remember, folks, democracy is good… except when the people vote for bad things, like Brexit, in which case the people’s will can safely be ignored. But when the prime minister tries to implement the people’s long-thwarted will by using ruthless but entirely lawful tactics, like suspending parliament for an extra two weeks, this is “a smash and grab” on democracy and even “dictatorship,” and it must be stopped in its tracks, because democracy is good. Except of course when it isn’t.

I am reminded of Turkish PM Erdogan’s wise words: “Democracy,” he declared, “is like a tram. You ride it until you arrive at your destination, then you step off.”

By the way, wasn’t Britain supposed to leave the EU on March 29 by statute? What happened to that?

Running the numbers

Professor Balding does the math on US/China tariffs and finds that there may be somewhat less to the “trade war” than meets the eye:

Playing with some numbers here. YTD US exports to China are down 19% and imports from China are down 12%. To the horror of sky is falling people, these are borderline irrelevant numbers set against the US and global economies. Let’s have some perspective. For instance, 1/n

If US exports to China rose by an unprecedented amount of 19% rather than falling 19%, this would raise US GDP 0.1%. Just for illustration, imports and exports rising by those amounts rather than falling are equal to only 0.4% of US GDP. As a percentage of world GDP this 2/n

Amounts to 0.1% of world GDP. Put another way. This might be having a small impact on US and Chinese economies, it is irrelevant to the global economy. To put this number in perspective for China. If Chinese exports rose by 12% instead of falling by that amount you the US, 3/n

The Chinese economy would have grown by $63 billion. This would have added 0.45% to their economy. However this is a tiny number compared they reliance on credit. By comparison, China has added more $3 trillion in new credit since this time last year. In other words, 4/n

The marginal difference in trade is equal to 2% of rapidly expanding credit flows. Whatever your thoughts on the state of affairs a wee bit of reality is needed when blaming all nature of phenomenon on the not a trade war trade war. Done.

Meanwhile, in Thailand:

Thai officials glimpse a silver lining in the U.S.-China trade war as companies such as Sony Corp. move production to Southeast Asia’s second-largest economy.

At least 10 firms are in the process of relocating some production to Thailand from China, according to the National Economic & Social Development Council. More than a dozen others could potentially choose Thailand, it said in a statement.

“We may not see the impact on the economy now, but in the second half of 2019, it could become a positive factor for growth,” the agency’s Deputy Secretary-General Wichayayuth Boonchit said Monday.

Manufacturers are trying to escape US tariffs on imports from China.

The 10 firms moving some manufacturing to Thailand include Sony, Sharp Corp., Harley-Davidson Inc. and Delta Electronics Inc. Most have finalized locations near Bangkok or in the so-called Eastern Economic Corridor development zone, according to the economic and social development agency.

The coming scramble for Greenland

Now that the status of Greenland is a live political issue, I wonder if China will make its own play to acquire the world’s largest island before the US does:

It’s not just America who acknowledges the strategic importance of Greenland, either. Look no further than China, which has repeatedly attempted to gain infrastructure on the island.

In 2016, a Chinese company attempted to buy a former U.S. military base in Greenland, and the government in Denmark stepped in, vetoing the deal. At the time, Danish officials were quoted anonymously in the press, saying they had resisted the deal as a favor to its longtime American ally.

Then in 2018, a Chinese government-owned firm was announced as a likely winner for a contract to build a new airport. The 3.6 billion Danish krone (U.S. $560 million) contract would have given China major economic power over the local government, and decision makers in both Washington and Copenhagen worried it could lead to the U.S. being pushed out of Thule – or give Beijing a ready-made airport that could accommodate Chinese military planes in case of a conflict.

Eventually Copenhagen and Nuuk reached an agreement, with generous financial support from Denmark’s coffers, to pick a different contractor. But it is likely that China will continue to push for entry into Greenland, underlining its strategic importance once again.

I can only guess that the US put considerable pressure on the Danes to squash these Chinese attempts at gaining a foothold in Greenland.

More from Reuters:

The Arctic region sits at a geopolitical intersection of renewed rivalry between world powers China, Russia and the United States, and – with its melting ice cap – is a major symbol of the growing impact of climate change.

Russia has been raising its profile in the Arctic, creating or reopening six military bases shut after the Cold War ended in 1990, modernizing its Northern Fleet, including 21 new vessels and two nuclear submarines, and staging frequent naval exercises in the Arctic.

Russia also hopes that as the polar ice cap retreats, a shipping lane north of Russia will develop as an alternative route for goods from Asia to Europe.

The Trump administration last year began re-establishing the U.S. Second Fleet, responsible for the northern Atlantic, to counter a more assertive Russia. […]

China has also shown interest in Greenland after Beijing laid out its ambitions to form a “Polar Silk Road” by developing shipping lanes opened up by global warming and encouraging enterprises to build infrastructure in the Arctic.

Greenland, which plans to open a representative office in Beijing later this year to boost trade ties, has courted Chinese investors and construction firms to help expand three airports to allow direct flights from Europe and North America.

Greenland, which is three times the size of Texas, has vast mineral reserves including uranium and rare earths, as well as 50 billion barrels of still-untapped offshore oil and gas reserves, according to the article.

Can every American chip in $171 to “buy” Greenland?

I can’t claim credit for the idea, but it has been suggested that the US would not need to negotiate with Denmark over the purchase of Greenland. Instead, since the Danish constitution recognizes Greenland’s right to decide on its own independence, the US could simply bribe the people of the island to vote for independence from the Kingdom of Denmark.

The US could offer a generous subsidy of, say, a million dollars to every one of Greenland’s 56,000 inhabitants (this is roughly the population of Greenwich, CT) in exchange for Greenland’s permanently binding decision to part ways with Denmark and join the United States. Result: the US obtains more than 836,000 square miles of highly strategic Arctic territory at the low, low cost of $56 billion.

This is assuming of course that Greenland’s residents would agree to be acquired by the US for a million bucks cash per man, woman, and child. I don’t know about you, but it’s a deal I would take.

For the US, the transaction would be a no-brainer. One of the nice things about being the US in its current state of decline is that federal spending is already so nonsensically vast that a one-time payment of $56 billion barely moves the needle. For perspective, this amount is less than 1.4% of total federal spending in fiscal year 2018. Considering that the ongoing war in Afghanistan is bleeding the US of an estimated $45 billion per year, the cost of Greenland would equal about 15 months’ worth of military engagement in the country aptly described as the “graveyard of empires.”

In other words, the purchase of Greenland could be paid for by simply withdrawing from Afghanistan, or ditching some other equally worthless program within America’s sprawling, $4 trillion budget.

And considering that the US population is >327 million, the cost of Greenland would be a mere $171 per US resident, or a bit more than the price of a new pair of Apple AirPods. Get it while the getting is good.

Strategic real estate?

Why the hell would the US want to own Greenland? The semi-autonomous Danish territory is already home to the US military’s northernmost installation, Thule Air Base, which hosts a vital space monitoring system as well as a deep-water seaport and airfield. What would be the advantage in actually owning 836,300 square miles of empty, mostly ice-covered land?

I’m thinking there could be a strategic advantage, and it has something to do with this:

In 2016, a Chinese company attempted to buy a former U.S. military base in Greenland, and the government in Denmark stepped in, vetoing the deal. At the time, Danish officials were quoted anonymously in the press, saying they had resisted the deal as a favor to its longtime American ally.

Then in 2018, a Chinese government-owned firm was announced as a likely winner for a contract to build a new airport. The 3.6 billion Danish krone (U.S. $560 million) contract would have given China major economic power over the local government, and decision makers in both Washington and Copenhagen worried it could lead to the U.S. being pushed out of Thule – or give Beijing a ready-made airport that could accommodate Chinese military planes in case of a conflict.

Eventually Copenhagen and Nuuk reached an agreement, with generous financial support from Denmark’s coffers, to pick a different contractor. But it is likely that China will continue to push for entry into Greenland, underlining its strategic importance once again.

See also my previous post. If the US owned Greenland, it could put the kibosh on any attempted Chinese (or Russian) projects in the territory, no questions asked. That could throw a serious wrench in the “Arctic strategies” of America’s principal rivals in the decades ahead.

Besides, we’d have Canada surrounded.