Focus on Commodities — Not Empty Promises

Written by Jason Simpkins
Posted April 2, 2021

Historians say people in the Dark Ages gazed at the decaying works of the fallen Roman empire (roads, aqueducts, colosseums) and were disheartened.

How could citizens of the past have enjoyed such wonders while people of the present make due without them?

How did society backtrack?

I think that's how a lot of Americans feel. 

I know I do. 

It's hard to read about things like the construction of the Hoover Dam, our national network of highways, and the Tennessee Valley Authority and not wonder how we've failed so miserably at maintaining (much less expanding) our country's most vital economic arteries. 

Or as the question is often phrased: Why doesn't America build things anymore?

It's a feeling made worse by the sense that the rest of the world has passed us by.

High-speed rail in Asia, modern airports and mass transit in Europe, faster internet speeds in the Pacific Rim... Affordable housing, smart grids, clean energy investments made seemingly everywhere but here.

Well, one reason is that the investment simply hasn't been made. As a share of the overall economy, U.S. infrastructure spending is right now lower than it has been at any time since 1956.

Of course, that won't be the case much longer, if Joe Biden has his way. 

On Wednesday the president unveiled a sweeping $2 trillion infrastructure plan that would address many of these deficiencies. 

Here's what's included:

  • $115 billion for the most dilapidated roads and bridges, targeting 20,000 miles of road and 10,000 bridges. 
  • $174 billion on electric vehicle development, including a network of 500,000 EV charging stations, a fleet of electric buses, and tax incentives and rebates for electric cars.
  • $85 billion to modernize transit systems and $80 billion for a growing backlog of Amtrak repairs.
  • $213 billion to build, preserve, and retrofit more than 2 million affordable homes and commercial buildings. 
  • $40 billion to improve public housing.
  • $111 billion would go toward clean drinking water, including replacement of all lead pipes and service lines.
  • $100 billion for constructing or modernizing public schools.
  • $12 billion for community college infrastructure.
  • $100 billion to build high-speed broadband networks.
  • $16 million to plug oil and gas wells and reclaim abandoned mines.
  • $400 billion to improve access to quality, affordable home- or community-based care for the elderly and disabled.
  • $300 billion in the plan would be invested in manufacturing, including support for domestic production of technologies and critical goods.
  • $50 billion toward semiconductor manufacturing and research.
  • $180 billion toward clean energy R&D and climate change research. 

That's... quite a list. 

And it sounds great, sure. It always does. 

The problem is that it's easy to lay out vast sums of money and attribute them to popular projects. 

Few people are going to argue against elder care, replacing lead pipes, faster internet speeds, clean drinking water, and better schools.

But the devil, as always, is in the details. 

Exactly which corporations/agencies are going to be involved in these projects?

Are they going to be contracted in good faith, or used to reward donors?

Are we really to believe that they'll come in under budget and not over?

And that brings up another point.

The Biden adminitration says all of this spending (which comes on the back of trillions of dollars in deficit-jarring handouts to combat the coronavirus) will be paid for by a modest rise in the corporate taxes.

The general corporate tax rate would go from 21% back up to 28% (the level it was prior to Donald Trump's 2017 cut). And a rule that allows U.S. companies to pay no taxes on the first 10% of repatriated overseas earnings would be eliminated, along with tax loopholes for intellectual property and offshoring jobs.

These measures alone would pay for our $2 trillion infrastructure investment in just 15 years, according to White House projections.

Again, that sounds good. 

But is it true?

Probably not when huge companies like Amazon, GE, Apple, and Google usually find ways to avoid paying taxes altogether.

Consider that in a 2017 report, the Institute on Taxation and Economic Policy (ITEP) found that between 2008 and 2015, 100 companies in total did not pay income taxes in at least one year. 

With a combined pretax income of $336 billion in that period, the 35% statutory income tax rate would have dictated a $118 billion in taxes be paid to the government. 

And yet the tax breaks these companies were able to exploit allowed them to earn a negative effective tax rate — meaning they earned more in their after-tax income than in their pretax income, often due to tax rebates from the U.S. Treasury.

And that was before the 2017 Trump tax cuts, which made tax avoidance even easier.

After that happened, the ITEP published an updated report on corporate taxes in December 2019 and found 379 companies paid an average tax rate of 11% for the tax year.

But we expect that these same corporations are going to faithfully pay 28%?

OK.

Look, I'm not trying to be overly cynical here. America's infrastructure should be improved. And corporations should pay more in taxes.

But not everything is as it should be. 

I just want you to remember that as the media whip themselves into a frenzy over infrastructure week. 

It's also worth remembering when you see headlines in other financial publications promising to tell you what companies and stocks will profit from this infrastructure spending. 

Remember, this bill hasn't even become a law yet. And there's no telling where the money will ultimately end up. 

This is the American government, after all. That's going to be a gray area, I promise you. 

But if you're looking for a real way to profit, my advice is to focus on resources — copper, iron, oil, etc.

Prices for these raw materials were already surging prior to the grand infrastructure rollout. And their producers will rake in the profits regardless of what companies win government contracts to do the actual work. 

Fight on,

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Jason Simpkins

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Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of Wall Street's Proving Ground, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page. 

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