Regardless of where one stands in terms of their political philosophy, it is clear that government spending is having a bigger and bigger impact on the global economy as a whole. As the world still operates from the Keynesian perspective -- in which any business failure is seen as an irrational fear requiring government stimulus to restore confidence and socialize losses via price inflation/currency debasement -- it has become especially prudent, if not imperative, to see where government is directing capital. Where government and its cronies -- i.e. JP Morgan (JPM), Goldman Sachs (GS), Bank of America (BAC), Citigroup (C), etc. -- is directing capital dictates where capital flow and where corresponding speculative investment opportunities will emerge.
From that perspective, one area that looks especially promising is infrastructure investing. The Washington Post reports that according to projections by CIBC World Markets, a wholly owned subsidiary of Canadian Imperial Bank of Commerce, countries will spend about $30 trillion -- yes, trillion, with a T -- on renovating and building new infrastructure. That is a lot of money, and it is sure to move asset prices, create momentum that draws in hedge funds, and create what will likely be some lucrative opportunities for speculators.
In addition to planned government expenditures that will create a boom in infrastructure is the looming sovereign debt crisis. As I noted previously, the sovereign debt crisis will create weakness in the bond market and send capital into stocks, particularly dividend-yielding stocks and stocks with real, tangible assets -- like infrastructure stocks. And so, it is perhaps not terribly surprising that we are seeing headlines like this one, telling us that institutional investors are raising capital from pension funds to invest in infrastructure.
At this point, it begins to seem as though this will be a long, slow opportunity; I think we are still in the very early stages of the bull market, when the idea is off most people's radar, but the smart money -- in this case government and big funds -- are engaging in stealth accumulation. As this is an opportunity that could go on for decades, there are some additional trends worth noting:
1. Urbanization. Increasingly people are living in cities. According to the United Nations, 2008 marked the point at which more than half the world's population lived in cities, and by 2030 the urban population should swell to 5 billion. So, urban infrastructure is a particularly compelling opportunity.
2. Peak Oil. The idea remains unpopular, but as this chart from IndexMuni illustrates, the facts are undeniable: global crude oil production has plateaued since 2005, signaling that peak oil is in fact here. Tar sands and oil from shale remain dubious propositions given that the energy derived is unfavorably low relative to the energy involved in extracting them -- let alone the time it would take to get such operations going even if they are viable. As such, the infrastructure of the future is going to have accommodate energy systems that are not dependent upon oil.
3. Internationalization. For better or worse, power is shifting from nation-states towards supranational entities; just witness what is happening in the Eurozone, in which the solution being offered is for greater fiscal unity. I suspect this will be the "solution" that is proposed to the economic crises elsewhere as well; we've already seen calls for the IMF to manage a new world currency.
So, what are the investment options that fit into this outlook?
1. First, base metals/commodities are going to be used for all this stuff, so it is another reason to be bullish on them -- in addition to the currency debasement/inflation argument. (DBC) is an ETF that may be of interest from this perspective.
2. Copper is a big part of infrastructure, and if the end of cheap oil means a greater reliance on electricity for all energy, copper should do even better; it is one of the most conductive elements out there. The copper ETF (CPER) may be of interest in this regard. I should also note a copper mining firm I am a shareholder in, which is Nevsun Resources (NSU) -- its Bisha mine in Eritrea is one of the most memorable and noteworthy properties I've come across.
3. Of course, infrastructure opportunities go well beyond mining and base metals. Sterling Construction Company (STRL) is a US-based company focused on transportation and water infrastructure in several states in the southern portion of the US. STRL has already secured numerous long-term contracts for additional construction work in Texas, which is the kind of event that is particularly noteworthy for those who want to invest in infrastructure; it is ultimately about riding the wave of government investment and investing in companies that can get taxpayer money.
I won't be making any investments in this sector just yet, as I want to do more research -- particularly to see which companies have connections to governments, with key employees that used to have jobs within governments. A revolving door between government and private construction companies working on building infrastructure will be an especially valuable clue.
The other caveat we should be on the lookout for is some type of government reform, or perhaps even a collapse of governments. While all signs currently suggest a collapse of local governments will be replaced by bigger governments that are less localized, this is not guaranteed, and given that we are talking about trends that are set to play out over decades, it is worth being aware of signs that suggest the trend towards supranational government and centrally planned economies is being reversed.
Disclosure: I am long NSU.