An Odd Way To Play America’s Crumbling Roads

I live in the Washington, D.C., area, and the Capital Beltway — the vital road network of the region — is crumbling. “Under the surface of all but some recently restored segments,” The Washington Post reports, “fissures are spreading, cracks are widening and the once-solid roadbed that carries about a quarter-million cars a day is turning to mush.”

The 64-mile highway that rings the nation’s capital is nearing the end of its useful life. It may be too late to fix it already. Instead, it is time to rip it up and lay a brand-new roadbed from bare earth.

Besides this, road congestion is terrible and commuting times keep rising. (Fortunately, I work out of a home office. My commute is a flight of stairs.)

Of course, what’s happening here is a microcosm of what’s going on all over the U.S. The Beltway is, as the Post reports, “one roadway among the tens of thousands at the end of a long and fruitful life span.” You have undoubtedly heard by this point about the dilapidated state of American roads and bridges and the huge sums to fix them all.

And no, this isn’t a piece about investing in stocks that benefit from having to rebuild it all. Quite the opposite, actually. I don’t think the government ever makes the investments needed. For why, consider this quote from James O’Connor, author of The Fiscal Crisis of the State:

Transportation costs and hence the fiscal burden on the state are not only high but also continuously rising. It has become a standard complaint that the expansion of road transport facilities intensifies traffic congestion. The basic reason is that motor vehicle use is subsidized and thus the growth of the freeway and highway system leads to an increase in the demand for their use.

This is simple economics. You subsidize something, people use more of it. In the case of the nation’s road systems, they are the progeny of tax dollars. Few who use the roads pay the full cost of their use — especially when you consider the costs of things such as pollution or even gasoline.

So the O’Connor thesis is that the more money the state dumps into roads, the more demand rises. The result is a never-ending spiral, except that demand rises faster than the ability of the state to pay for it. Hence, you reach a crisis at some point. O’Connor’s book came out in 1973, I should note — 40 years ago. This theme is one of those that took a long time to play out.

It seems we are close to that breaking point now, though. The road is so bad in parts that just laying new asphalt won’t do it. “The underbed is rotten,” the Post writes, “so a fresh asphalt surface doesn’t last. As the surface gets rough, traffic slows and backups begin. When the surface needs more frequent repaving, traffic backs up.”

In the past, I’ve pointed my Capital & Crisis readers to invest in road building. We owned, for example, Astec Industries for little more than a year in 2008–09. Astec makes equipment needed for road building. We didn’t own it long because it didn’t take long to see that the needed investment dollars weren’t coming. Even today, you look at a five-year chart of that stock and you see it’s just been marking time and going nowhere.

So let’s forget about investing in infrastructure stocks. Doing so yields an investment thought process of an entirely different kind. It takes as its beginning that all these trends just get worse. Americans will spend more time idling away in traffic. Congestion will continue to raise the cost of transporting goods. Costs to use this network will just go up and up.

Thinking of it in this way, it signals a crisis for an old order and perhaps the birth of something new.

The old order — namely corporate giants — benefitted tremendously from subsidized roads. What is Wal-Mart without the ability to send its cheap, China-imported crap across the country’s subsidized road networks? In fact, just about any business that depends on this infrastructure as part of a competitive cost advantage will find tougher competition than those that don’t.

The latter group would include locally sourced production that saves money on transportation costs. This is part of what’s contributing to the revival of American manufacturing and hurts China’s export model. Being near your market will be more important in the 21st century.

In the 20th century, the dominant trend of Corporate America was to get bigger. It was, as historian Robert Sobel described it, “the age of giant corporations.” Scale and size were winning combinations.

In the 21st century, I think the winning formula will be a very different mix. States are broke and the infrastructure, not just the roads, disintegrates. Local businesses that serve their local markets more efficiently than the big guys will be where you’ll want to put your money. This is a theme that I’ll revisit in a future letter.


Chris Mayer

Original article posted on Daily Resource Hunter

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Chris Mayer

Chris Mayer learned the art of valuing companies the hard way — clocking a decade as a corporate banker while also earning his MBA. He never lost money on a single deal. In 2004, he founded Capital & Crisis, making his one-of-a-kind research available to the general public. His second letter, Mayer’s Special...

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