Smart. Strategic. Unfiltered.
Tyler Durden suggests that crude oil prices will fall in the second half of 2016:
Tracking last year’s pump-and-dump of hope perfectly.
As demand is set to tumble…
Source: Oil Crashes To $41 Handle After Surprise Inventory Build, Production Rise | Zero Hedge
The recent peak in crude prices coincides with the bottom for the US oil rig count (discussed Monday).
Double-decker TGV leaving the Gare de Lyon of Paris. Source: Alno
Geoffrey Clifton, University of Sydney
The CLARA private consortium claims a high speed rail network between Sydney and Melbourne could be paid for at no cost to the government through a technique known as value capture. What is still not clear is whether there will be enough value created by the project to capture in order to pay for the project.
Value capture is well established techniques used by governments to offset some of the costs of new transport infrastructure, for instance the taxes paid on apartments built near a new train station help to offset the cost of the transport investment. The taxes paid by warehouses or factories built near new freeways are another good example of value capture.
CLARA’s proposal is that the high speed rail can be paid for by purchasing land cheaply in regional New South Wales and Victoria then developing a string of new towns alongside the High Speed Railway. The sale of land would fund the High Speed Railway’s construction and the new residents would provide patronage for the railway.
This form of development was once common place with the suburban railways of London and the urban railways of Tokyo and Hong Kong being the most famous examples. However, this sort of value capture by private investors is much rarer today and unprecedented on this scale.
The first stage proposal involves a A$13 billion link from Melbourne to the Greater Shepparton region of Northern Victoria, the full link to Sydney with a branch to Canberra would cost many times this much. The CLARA consortium is claiming the exact figure as commercial in confidence, but a cost of around $200 billion has been suggested in the media.
CLARA haven’t released the full business case for the network but value of the project can be assessed by its benefits and whether or not the project will capture them.
High speed rail creates benefits for two types of travellers, longer distance commuters and intercity travellers. Previous proposals for high speed rail have floundered in Australia because the benefits to intercity travellers have just not been enough to justify the costs of developing and running it.
Australian cities are just too far apart for a high speed rail to be competitive on travel time and fares with aviation. Perhaps this will change over the 40 years that it will take to build the network but there is no evidence that this is happening at the moment.
Unlike previous plans, CLARA is emphasising the potential of the longer distance commuter market (e.g. Canberra or Goulburn to Sydney). There is a developing market for commuting by High Speed Rail in the UK amongst other countries.
There is no doubt that high speed rail would be faster over these sorts of distances than the alternatives (ordinary rail, coaches, private car) although it might be a challenge to schedule high speed intercity services alongside slower commuter services and building dedicated high speed rail lines into the Central Business Districts of Sydney and Melbourne will be very expensive. These travellers will gain benefits from a faster service and also from being able to purchase houses in more affordable regional areas.
Land prices are a capitalisation of the benefits that accrue to people who use that land. In the case of residential land, it reflects the benefits to be had in terms of access to schools, jobs, recreation facilities, etc.
Improved transport services reduce the time it takes to get to existing jobs and activities plus makes it possible to travel to additional jobs and activities within a reasonable time and, finally, encourages new jobs and activities to be created through the process of economies of scale and agglomeration.
Some of these benefits accrue to the travellers, others to the owners of the businesses who can hire from a bigger pool of potential employees and service a bigger pool of customers. Because of these benefits travellers and businesses bid up the price of land in places near the improved transport services thus sharing the benefits with the land owners (and with governments in the form of the taxes paid on income, property transactions and developments). It is this increase in land that CLARA hopes to tap into to fund the new high speed rail.
This project will only be successful if the new rail service generates enough benefits and this will only happen if people really will be prepared to pay higher fares for high speed rail or prefer lower fares on traditional train services from cities closer in (i.e. Wollongong). If not, will governments have to ban development in other cities to force people to move to CLARA’s townships in order to support the developers of the HSR?
Value capture is a rediscovered form of financing major projects that could prove an innovative source of funds but it does not remove the need for a project’s benefits to exceed its costs.
Geoffrey Clifton, Lecturer in Transport and Logistics Management, University of Sydney
This article was originally published on The Conversation. Read the original article.
Hat tip to Macrobusiness.
June US Light Vehicle Sales came in at a disappointing seasonally adjusted annual rate of 16.689 million vehicles. Light vehicle sales, an important barometer of consumer confidence, have been trending lower since November 2015. Further falls would be cause for concern.
Want to know the real cause of low GDP growth? Look no further than Private Investment.
Private Investment ran with peaks around 10 percent of GDP and troughs around 4 percent throughout the 1960s, 70s and most of the 80s. Since then Private Investment has declined to the point that the latest peak is close to 4 percent.
It is highly unlikely that the US will be able to sustain GDP growth if the rate of investment continues to decline. GDP growth is a factor of population growth and productivity growth. Productivity growth is not primarily caused by people working harder but by working more efficiently, with better tools and equipment. Using an earthmover rather than a wheelbarrow and shovel for example. Falling investment means fewer new tools and efficiencies.
The second graph plots the annual increase in private debt against GDP. You would think that this figure would fall — in line with falling rates of investment. Quite the opposite. Private debt growth is rising. While annual debt growth is nowhere near the red flag of 5 percent of GDP, if it crosses above the rate of private investment — as in 2006 to 2009 — I would consider that a harbinger of another crash.
In a blistering attack on decades of common government practice, Australian Competition and Consumer Commission chairman Rod Sims said the sale of ports and electricity infrastructure and the opening of vocational education to private companies had caused him and the public to lose faith in privatisation and deregulation.
“I’ve been a very strong advocate of privatisation for probably 30 years; I believe it enhances economic efficiency,” Mr Sims told the Melbourne Economic Forum on Tuesday. “I’m now almost at the point of opposing privatisation because it’s been done to boost proceeds, it’s been done to boost asset sales and I think it’s severely damaging our economy.”
Mr Sims said privatising ports, including Port Botany and Port Kembla in NSW, which were privatised together, and the Port of Melbourne, which came with conditions restricting competition from other ports, were examples where monopolies had been created without suitable regulation to control how much they could then charge users……
Deregulating the electricity market and selling poles and wires in Queensland and NSW, meanwhile, had seen power prices almost double there over five years, he said.
I have also been a strong advocate of privatising state assets, but Rod Sims raises some important concerns that need to be addressed.
There is a strong trend in capitalist economies away from free enterprise and towards privatised “monopolies”. Investors place a great deal of emphasis when evaluating stocks on a company’s “economic moat” or competitive advantage. Both of which imply the ability to restrict competition. While this may maximize revenue for the individual economic unit, it is harmful for the economy as a whole.
Which brings me back to Mr Sims’ point. Higher prices paid for infrastructure services destroy the competitiveness of the economy as a whole, with profound implications for exports and productivity.
Source: Privatisation has damaged the economy, says ACCC chief
Alex White, Head of Country Analysis at The Economist Intelligence Unit: “We see an EEA- deal as highly likely…..we are reasonably optimistic about the breakup.”
On secular stagnation: “I don’t see growth picking up until you either redistribute income downwards — which is politically quite difficult and slow — or developed countries which are credible borrowers engage in massive infrastructure spending — which would be a great idea but politically difficult — so I’m afraid secular stagnation is going to last several more years.”
On BREXIT: “I’m not to optimistic that the Euro will be around in 10 years…BREXIT could speed up the process if England does well.”
On future crises: “It’s always the same thing: a huge switch from New York to Washington (in American terms) where policy begins to dominate the whole process…because the solutions to the problems are political solutions, not really economic or financial solutions…”
Highly relevant in today’s political climate.
Turn the sound off if bad language offends you 😉
From Clancy Yeates:
Australia’s banks face the threat of higher funding costs, after Standard & Poor’s downgraded the big four’s credit rating outlook to “negative”, a direct result of its action on the government’s top-notch rating.
….the banks’ credit ratings are automatically raised by two notches because S&P assumes they would receive government support in times of financial stress. Action on the government’s rating therefore tends to flow directly into the banks’ ratings.
“The negative outlooks on these banks reflect our view that the ratings benefit from government support and that we would expect to downgrade these entities if we lower the long-term local currency sovereign credit rating on Australia,” Standard & Poor’s said.
While the warning does not reflect changes in the banks’ financial performance, analysts say that if it leads to a downgrade in the actual credit rating of banks, it could push up bank funding costs all the same.
….”While Australian banks enjoy relatively high credit ratings and are deemed to be in the top quartile of global capital requirements, the frequent use of offshore wholesale funding markets is likely to result in higher funding costs.”
The big four raise about 30 per cent of their funding by issuing bonds in wholesale funding markets, so the cost of this debt can have a significant influence on the sector…..
To avoid moral hazard, with banks taking unnecessary risk at the taxpayer’s expense — a case of heads I win, tails you lose — Treasury and the RBA should commit themselves to the Swedish example. Banks that require rescue should forfeit control of their assets by issue of a controlling equity stake to the government. That would significantly curtail management and shareholders’ willingness to take unnecessary risks. And create a strong incentive to increase capital buffers. Not just to comply with APRA rules, but to make their businesses as bullet-proof as possible. Conservatively-run banks would be a major asset to the economy.
What APRA needs to focus on is instilling the right culture in banks. Rather than management focused on incentives to grow the business, there should be more emphasis on protecting the business and ensuring its long-term survival.
Source: Major banks’ credit rating outlook cut to ‘negative’
