THE BLOG
11/18/2014 02:46 pm ET Updated Jan 17, 2015

Patchwork Investing

There is nothing like that safety pin to replace a missing button, or piece of tape to give the rearview mirror the last fix; it may not be pretty, but it works--at least somewhat. Beyond these rather frivolous examples, our tolerance for the imperfect has seemingly reached a new high threshold. Yes, I dare to address the state of our nation's infrastructure, and for my message to be delivered clearly in this opening paragraph, please recall the last time you couldn't avoid the gigantic pothole while driving down the street, the train that never made it due to flooding of the station or "signal problems," or--a classic-- when the power was out (again) for no obvious reason.

In global comparison, the overall quality of U.S. infrastructure has fallen behind materially, ranking only 16th, behind countries such as Spain and Portugal, and even worse with respect to the current electricity and telephony framework (ranked 26 out of 144 nations). No wonder that a well-known company in the space has found basis to turn misery into amusement, with slogans such as "Can you hear me now?" and "Half-fast Internet." Even the domestically-focused American Society for Civil Engineers (ASCE) has issued a D+ for the U.S. in its latest Infrastructure Report Card.

With a large number of Americans still un- or under-employed, focused infrastructure spending could reverse the effect of approximately 900,000 jobs currently lost as a result of "chronic" underinvestment. The overall economic impact would be immense: For every dollar invested in the U.S. transportation system, our domestic economy would gain $3.54 in return. A new study concludes that federal funding of infrastructure projects, along the lines of requests set forth by the Department of Transportation (DOT), would lead to the creation of nearly 2.5 million jobs--58% more than at current funding levels--and to over $404 billion in total economic benefit.

My assessment of the topic coincides with the U.S. Federal Reserve (Fed) having scaled back its Quantitative Easing (QE) program entirely, and yet economic conditions remain subpar when compared to any other post-recession recovery. The International Monetary Fund (IMF) suggests that large-scale infrastructure investment programs could serve as the next big stimulus lever, rather than the expansion of Central Bank balance sheets, a policy measure that has not entirely produced desired results.

Funding levels to address a poor or failing infrastructure are immense, with an estimated $3.5 trillion required over the next five years in the U.S. alone. At the same time, funding costs remain at historic lows, mainly as the result of a persistent zero-interest-rate policy (ZIRP) approach led by global policymakers. Considering, in addition, that the global stock of public capital, a good proxy for infrastructure investing, has reached its lowest point in more than 30 years, there appears to be no better time to "marry" capital providers searching for premium returns with those in need of funding.

Investing in infrastructure programs does not need to be an entirely state and federal government-led effort, but given that an average of approximately $56k per capita was expended as a result of the Fed's QE economic stimulus program, it appears to be a logical conclusion. Further, it is estimated that about 60% of institutional investors have underspent their allocations to infrastructure investments, despite the fact that the global economy experiences annual shortfalls of $1 trillion per annum in this particular asset class.

It remains my conviction that the U.S. needs to continue to deploy the nation's future excess savings to soften the impact of a lasting balance-sheet recession, and that the expansion of the Fed's balance sheet will prove to be ineffective in the long run. Necessary investments in infrastructure will not only improve living conditions and overall economic competitiveness, but can be considered a productive substitute policy measure. Aside from institutional market participants, retail investors will also have the opportunity to participate in a likely forming trend, not only in search for premium returns, but also in recognition that numerous other segments in capital markets are no longer attractively valued.