The U.S. Treasury Secretary said something very disturbing this weekend.
It wasn't about the bank bailout though. It wasn't about how the administration decided to draw a line between bank and automaker CEOs. It wasn't about how a concrete deal for ongoing free trade (or anything else tangible or enforceable) will be reached at the G20 meeting.
It was nothing like that at all. Basically, Secretary Geithner told viewers of This Week with George Stephanopoulos about what's up next. This move will be, as far as I can see, his worst move yet. Considering Mr. Geithner's accomplishments so far, that's saying a lot. Of course, with the G20 meeting kicking off this week, the government cutting the proverbial cord from GM and Chrysler, and the unemployment numbers coming out on Friday, it's likely to get completely passed over. I bet the mainstream media will focus on President Obama's tea with the Queen or how drab the G20 meeting location is rather than something which actually matters.
But for those of us who are paying close attention now can start getting prepared. This seemingly innocent exchange tells us where we're headed:
Now, the important thing, though, is that we keep at it. You know, the big mistake governments make in recessions is they put the brakes on too early.
Stephanopoulos: Is that what happened during the depression? Is that what Franklin Roosevelt did?
Geithner: That's one thing that happened in the depression. It's happened in Japan, too. It's happened in a lot of countries in the world. They see that first glimmer of light, and the impetus to policy fades and people are putting on the brakes, and we're not going to do that.
Really? So that's what exacerbated the Great Depression.
It wasn't protectionism. It wasn't the creation of new and massive bureaucracies. It was that the government didn't do enough. That was the cause of the staggering length of the Great Depression.
Cutting the Brake Cables
Whether you agree with him or not, doesn't matter here (for long time readers of the Prosperity Dispatch , it's pretty clear where I stand). It doesn't matter what the right thing to do is either. What matters is what the government is going to do.
What they're going to do is a lot. And when they're doing a lot of what they're doing, the end result will be inflation.
This should come as no secret to anyone. We know the Fed is going to print as many dollars as it takes. Overleveraged homeowners are deep in debt. Consumers who borrowed and bought are too deep in debt. Everyone, as you would be led to believe, is overcome with debt. And the easiest, and most politically feasible solution, is to inflate all the problems away.
When inflation is rising, the value of debt and savings shrinks. As a result, savers will spend more because the purchasing power of their savings is dwindling and the value of the debt borrowers have to repay shrinks as well.
It's the perfect answer, right? Well, history has proven it is not, but that's their solution.
They even get mad when other countries don't join in the money printing party.
For instance, Chancellor Angela Merkel of Germany is taking a lot of heat for her refusal to continue to borrow, tax, and spend. (Yes, you heard right. Even socialist Germany thinks massive government bailouts and spending is not the answer)
In response, Merkel wisely stated, “This crisis did not come about because we issued too little money, but because we created economic growth with too much money and it was not sustainable growth.”
The Treasury and the Fed are working together on this one. Fed Chairman Bernanke readily admitted he's printing money. And Geithner's going to ensure the dollars keep flowing from the tap well beyond the first signs of a recovery.
They've cut the brake cables on inflation and it's not going to get stopped for a long while. When it hits, your savings will be worth less. It's a horrible situation for responsible people. But there is one thing you can do now before the inflationary storm even starts to show up on the horizon.
That is to buy stuff.
A Bridge (and Road) to Somewhere
Now, I'm not talking about tapping credit cards to buy clothes and deluxe coffee makers in the name of building debt so it can be inflated away. I'm talking about buying productive assets. Things you can build a businesses with or around. Something you can charge someone else to use.
Like an airport owner who charges planes to land and use the terminal to load and offload passengers and freight. Or, my personal favorite, buy roads and bridges. You can stick booths on them and charge people small amounts – usually pocket change – for using your road. People still drive. They willingly pay the small fee to cross over a bridge, through a tunnel, or drive on a toll road to get to where they want to go.
Owning a toll road is probably one of the greatest businesses. Roads are expensive to build, so competition isn't much of an issue. You can charges as much as you want (when it comes to privatized roads, the “maximum profit rate” is usually stipulated in the lease with the government owner). And you're customer doesn't have too many other options.
Realistically, once the road is built, you could just sit and count the cars that drive by. It would go something like this “50 cents…50 cents…50 cents…$4” (The last one was an 18-wheeler). It might not sound like much, but when millions of cars go whizzing by every month, the numbers get much more enticing.
But that's not what I like about roads right now. What I like is they are one of the best ways to hedge against inflation. As the price of everything else goes up, tolls go up too. But the real kicker is, all else being equal, the value of the road will increase and it will pay you plenty of cash along the way.
It's the same premise behind gold, silver, oil, diamonds, and other real assets used to hedge against inflation – but better.
While the price of all these hard assets will increase as more currency is issued – more currency/same amount of “stuff” – the road will pay you all the way along. You don't get any cash flow from gold coins or a barrel of oil. They're non-producing assets. A road, or other productive asset, produces cash flows and still provides a hedge against inflation.
The Easy Way In and Out
Now, there are two red flags which should jump into your head. First, if they are such great businesses, why would the government give up their monopolies?
The answer here has to do with how democratically-elected governments run. Elected officials have to keep their constituency happy. They have to do that or they will get “fired” at the next election. As a result, the incentives (keeping their jobs) are for short-term performance.
This means spending money. You take money from the small portion of the population and give it to the bigger part. Or you can keep everyone happy and just borrow from the future. Of course, that can't go on forever. As a result, one popular step for short-term infusions of cash is to sell assets. Around the world, one of the first things to go is the roads. It's the easy way out.
That's part of why we've seen so many road privatizations over the past decade (the other reason is because the private sector would help fund road construction in exchange for a part of the revenues).
The second red flag would be it's unrealistic to buy a road.
Many roads cost billions of roads dollars to build. When they are sold, the asking price is in the 10s of billions. It's impractical for any one person to buy a road, install tolls, and then sit back.
Well, that is impractical. But numerous companies have sprouted up all over the world willing to sell you a “share” of a road. They buy (or build) the road, put it into a publicly traded vehicle (normally common stock), and then let investors buy and sell whatever they think is a fair price. Of course, they pay themselves well to do it all, but in most cases it's worth the price to get into one of the greatest investments you can make during inflationary times.
A bunch of entrepreneurial bankers and Wall Street types have securitized the roads to attract more funding by providing some sort of liquidity. Here are a few examples:
One of the classic examples of a publicly traded toll road is the Jiangsu Expressway (HK:0177) . This is a Hong Kong listed toll road. It owns numerous toll highways in the Jiangsu province in China.
Major production, shipping, and research hubs in cities like Nanjing, Wuxi, and Suzhou are all in Jiangsu province. The average GDP per capita in Jiangsu is twice as high as the rest of China. As you might expect, this means more road usage. That's a very good thing when you're in the toll road business.
There are dozens more. In China you have the Zhejiang and Sichuan Expressways – both listed in Hong Kong. In Europe you have the Societe Des Autoroutes Paris, Brisa Auto Estradas, and Abertis Infraestructuras. Australia has one too. The United States has been slow to adopt the privatization process, but with so many states facing large budget shortfalls, you can bet that will change as well.
So options are limited, but that doesn't mean there aren't any. When it comes to toll roads, you just have to turn over a few more stones to find the opportunities. From there you have to look at the fundamentals like return on equity, interest payments, impact of a slowing economy, and the likelihood of debt defaults and the impact of a liquidity crunch (which can be big for toll roads which are usually privatized using large amounts of borrowing).
A Tidal Wave of Inflation
In the end, roads are just another way to survive and prosper in the coming inflationary environment.
There are plenty of other ways too. But it's tough to match the safety, consistency, cash flows, and upside potential when it comes to toll roads.
Bernanke and Geithner have their sights set on inflation. They've intentionally let the cat out of the bag. For the time being though, we're still facing deflation. Although, the government seems determined to fight deflation with everything they've got.
The current inflation/deflation situation is like the calm before a tsunami. Deflationary forces are sucking the water away from the beach. Tourists are going out further and further as the water seems to get sucked out into the ocean. Meanwhile, a few people with the patience, experience, and foresight to see what's coming next are taking precaution and getting ready.
The window of opportunity to head for higher ground is still open. It probably will be for quite a while, but by the time we see the inflationary tsunami coming our way, it will be too late. I'm not going to wait around to see if I am one of the lucky few survivors. I hope you don't either.