According to the IRS, the interest rate subsidy provided via the Build America Bond structure is considered a “tax refund” and is subject to the IRS’ right of offset or counterclaim.  One of the really troubling aspects of this is that the locality could owe the IRS for programs totally unrelated to the bond issuance yet the bond payments will be garnered.

“Conceivably, if the federal government believes that an issuer is in violation of an environmental regulation or any other federal disallowance or repayment, the IRS will also withhold the subsidy.” – Moody’s Credit Watch – May 31, 2010

In addition, the IRS has indicated that it plans to review ALL of the Build America Bonds that have been issued to date to see if they had been priced properly at issuance.  In question is the BABs had been issued with a premium greater than the “de minimus” amount allowed by law.  Issuing the BABs with a greater premium would increase the interest rate payed making them more attractive to investors, but also increasing the amount of subsidy provided by the federal government.  Should the IRS determine that a BAB was indeed issued with an out-sized premium, they will disallow ALL interest rate subsidies for that bond.  That could have a very significant negative impact on localities if they are forced to continue to pay bondholders 100% of the interest promised, but not be able to receive the 35% subsidy they had planned on.  At that point, they would either default on the bonds or reallocated funds away from other programs.

All in all, I believe it would be wise for investors and localities alike to be very cautious of Build America Bonds going forward.  For the localities, you may end up paying more out of pocket than you expected.  For the investors, BABs may carry a greater than normal risk of default if the locality runs afoul of the IRS.

“The big drop in China’s holdings meant that it lost the top spot in terms of foreign ownership of U.S. Treasuries, dropping to second place behind Japan”

Chin ahas long been the largest holder of US Treasuries.  They are (were) our go-to group when we (the US) needed to raise some cash.  If the demand for our Treasuries from China drops off, that could lead to the US paying higher interest rates and a double dip recession for our economy.

It now appears that they are in fact reducing their holdings.  In fact, China has been reducing its exposure to US Treasuries for some time now.  While they are not out in the market selling them (that we know), they are trending towards purchasing shorter  duration notes.  This gives them a quicker “out” when the time comes.

When will that time be?  Well, that’s the $64,000 question.  If they were to dump their holdings onto the market at once, they would devalue the holdings they are trying to sell and do more harm to themselves than they care to.  If they become gradual sellers, they would damage the US economy and potentially we would not be able to buy as many Chinese made goods – again hurting their economy.

What China is doing is making every effort to create a burgeoning middle class that can replace the US as the consumer of their manufactured goods.  With 2 billion people to work with, that shouldn’t take too long to replace the 300 million or so US consumers.  Once that middle class is in place, China has much more freedom in their financial policy because they are not as tied to the US consumer.

This is one that will definitely take some time to play out, but it will play out and it will have dramatic consequences for our economy.

One trend that emerged out of their research was that in randomly created networks there emerge major “hubs” that shrink the relationships between nodes and enable fewer degrees of separation.  In any given network, you can remove many of the less influential nodes and the network continues to operate well.  If you remove one of the hubs, the network begins to break down.

What I found especially interesting about this is that the hubs occur in multiple, randomly created networks.  It doesn’t matter if the network is microscopic (cellular), operated by viruses (pandemics), or man made (power grid).  The hub and spoke structure ends up being the absolute most efficient way to distribute information.  Now if we jump to the real estate world, will the same hub and spoke structure emerge in supply chain strategies?  Does the world only need a few key, hub warehousing cities and then a vast network of spokes?  What are the qualities that will help a location emerge as a supply chain hub?  Are their locations we consider hubs today that are evolving out of “hub” status?  

And consider the East Coast port situation.  There are a number of ports trying to emerge as the “hub” of the east coast. What are the qualities that will make a Jacksonville emerge over a Charleston?  How vast is the networked web of nodes and how many hubs are needed?

Science, math and nature have told us that hub and spoke is the most efficient way to set up networks.  How effective has the US been at following their lead when we set up our supply chains?  Thoughts?  Anyone care to share a good example of a hub and spoke supply chain that they think works particularly well?

While helpful, the early indications are that shippers are continuing to pursue other alternatives to both the Panama and Suez canals.  We’ll have to wait and see whether these cost savings offset the higher fees and whether shippers continue to structure routes to avoid any fees at all.

Shipping analysts are saying that the days of “mega” U.S. seaports may be behind us, as more marginal ocean cargo gateways capture share.

I think that announcing the death of the US “mega” seaport may not only be premature, but dead wrong.  Certainly, there will be changes in the shipping patterns to the US.  We see this every day through service changes, new partnerships and slot sharing agreements.  However, I believe what you are seeing is not a shift away from “mega” ports, but a shift towards new “mega” ports.  

Let’s be clear, the US doesn’t have too many “mega” ports to begin with.  Basically, it’s LA and Long Beach right now.  The trend that Moreland Advisors is seeing, and the trend that our clients our seeing is a shift away from the West Coast ports to East Coast ports.  Some recent analysis indicates that up to 25% of the business that currently calls on the West Coast will transfer to the East Coast in the next 8-10 years.  The enlarged Panama Canal, new Suez services, as well as the improved capacities and intermodal capabilities have helped to drive this paradigm shift.  Also, don’t forget that 75% of the US population lives on the Eastern side of the US.  It’s pretty basic, if you have the option, put the goods as close to the people as possible.

Our contention is not that the “mega” port is dying, but that it is moving.  We expect to see 1, maybe 2, East Coast hubs emerge from the fray.  Economically, it just makes sense to use bigger ships and call on fewer ports.  Why pay multiple port and harbor pilot fees, and incur the additional time delays, if you don’t have to?  This becomes especially critical when you consider that many of the US ports are tidally constrained and shippers are facing the prospect of steaming to a new port only to have to wait until high tide to unload (or low tide to get under bridges).  We are in an era where efficiencies and cost cutting is critical and we believe that benefits the new hub, or “mega” ports, not the smaller niche ports.

http://www.volvooceanrace.tv/page/NewsDetail/0,,12573~1591823,00.html

Good stuff.

In an economy where we hear on a daily basis about hundreds of billions, or even trillion’s, of dollars being handed out by the government, it is easy to be lulled into thinking that a $1 billion dredging project is small.  This is still a huge undertaking for the Corps of Engineers and these funds won’t come without a significant struggle.  However, a 50′ channel depth seems to be the magic number and if you have it you have a significant competitive advantage.  When the big ships come there will only be a few mega-ports on the east coast that these ships will call on.  Jacksonville’s ability to obtain these funds will go a long way in helping to determine whether it can become one of these “winners”.

I can appreciate the POLA/POLB position and their desire to clean up the environment.  However, I continue to question whether an additional fee is the wisest move in this economic environment.  I wouldn’t want to give a current customer any reason to take their business somewhere else.

For more information on the project, please see the Portcheck.org website.