US infrastructure

Naked Capitalism has a post today that echoes something I have recently been reading about. The background is that Joe Lieberman now wants to regulate the commodities futures markets so as to exclude pension and index funds (NYT article to this effect). Yadda yadda yadda. This is the typical Washington crap and it's impossible to know what, if anything, might come of it. Note, for the record, that the entire problem has been created by the original regulation that forces people into a sort of black market and creates the opportunity for really serious profits for those who operate that market. But I digress. Anyhow, that regulatory uncertainty alone, coupled with very real questions about whether or not these funds have contributed to a bubble in commodity prices, may make some folks re-think their commitment to a passive commodities index. However, the thinking that led them to investigate that index to begin with -- its purported inflation hedging and diversification properties, the perceived long-term imbalance of supply and demand for the underlying assets -- is still going to be around. Deprived of commodities as an outlet, NC suggests that the same thesis might express itself via infrastructure investments.

Now before the wealth-holding class howls that they've just been done a dirty by being deprived of inflation protection, there is an asset class that, unlike commodities, supports productive investment. and provides inflation protection, namely, infrastructure investments. The cash flow from infrastructure projects (toll roads, airports) goes up over time, as do the payouts, so they have fairly secure cash flow that increases over time. Although there is some debate about how to view them, they seem closest to an inflation-indexed bond (although any investor would need to study the ability of the enterprise to increase charges versus the drivers of operating expenses).

I think this is an interesting possibility, and infrastructure is one of the few places you can imagine being early relatively early to the alternative assets party. There's no doubt that the US is in desperate need of it. There's no doubt about its inflation hedging potential (even better than commodities futures, because you actually own something real). And there's no doubt that the returns shouldn't be terribly correlated with the stock market over the long-term. There is, however, a very real question about the political risk of this type of investment.