Best Photos of the Year HERE

The snow fell hard and steady yesterday morning.

Our street was populated with a handful of early risers sweeping off a few inches of wet powder from their idling cars.

Fortunately, I worked from home, so I wasn’t among those fighting the morning arctic bite, stressing out over whether or not the roads would be an ice skating rink.

Of course, it really wasn’t all that bad.  After all, it wasn’t long ago that the city of Baltimore stood vulnerable to nearly four feet of the white stuff, leaving most daily commuters outside of the city trapped indoors.

As for me, I was merely two blocks from the light rail station. And even with a knee-high blanket of snow, the trains were running smoothly. They were a bit more crowded than usual, but that’s really been a solid trend over the past five or six years anyway.

Truth is, in most major cities throughout the nation, ridership on public transportation has risen steadily.

I suspect much of this started back when oil crossed $140 a gallon and the high cost of 87 octane forced a lot of folks to re-examine the financial benefits of public transportation. But even after oil prices plummeted and the price of gasoline fell back within an affordable range, quite a few commuters chose to continue their daily commutes in the comfort of a warm train or bus, reading the newspaper or kicking back while letting someone else deal with morning rush hour.

My friends, I don’t think this is just some random event. In fact, I believe we will continue to see this as a long-running trend going forward. And the result could mean an opportunity for all of us to make a nice bit of cash along the way.

More Than Half the Population

Last week, the Public Interest Research Group (PIRG) released a new report highlighting this transition away from the car and toward public transportation in 100 of the nation’s largest cities.

According to the report, from 2006 to 2011, the average number of miles driven per U.S. resident fell in nearly 75 percent of the nation’s largest urbanized areas, while most urbanized areas saw increases in public transportation use and bicycle commuting. As well, researchers found that the share of households owning a car has actually decreased.

While not everyone lives in urban areas, it’s important to note that the cities cited in this report are home to more than half of the U.S. population. And folks in the cities below are providing excellent indicators for investors looking to profit from the transportation sector.

Take a look at the map PIRG highlighted in its report.  It details the decline in vehicle miles traveled from 2006 to 2011.

The Numbers

Some of the key findings in PIRG’s report are actually quite surprising, even for a guy like me, who thoroughly enjoys the benefits of public transportation. These include the following:

• The proportion of workers commuting by private vehicle – either alone or in a carpool – declined in 99 out of 100 of the largest urbanized areas in the United States between 2000 and 2011.

• The proportion of residents working from home has increased in 100 out of the 100 largest urbanized areas since 2000.

• The proportion of household without cars increased in 84 out of the 100 largest urbanized areas from 2006 to 2011.

• The proportion of households with two cars or more decreased in 86 out of the 100 largest urbanized areas.

While this data is intriguing, it does beg one question: why the change?

Researchers give a number of reasons for this, three of which are worth mentioning here. And bear with me, because there is a point to all of this…

1. After decades of increase, the number of vehicles per licensed driver has declined by four percent since 2006, suggesting that Americans may have reached a limit on the number of vehicles for which they have a need. I discussed this a few years ago after we started noting some very significant growth in the car sharing industry.

2. After peaking in 1992, the percent of driving-age Americans holding licenses has stagnated and then declined. By 2011, 86 percent of driving-age Americans held licenses. This is the lowest percentage in thirty years.

3. Americans may also be hitting their limit on the amount of time they’re willing to spend in their cars each day. And unless travel speeds increase – which they haven’t since the 1990s – they may be hitting their limit on the number of miles they’re willing to drive each day.

Another interesting finding shows that the share of Americans in the labor force has dropped from a peak of 67.3 percent in 2000 to 63.2 percent – the lowest level since 1978.

Whatever the reason, I don’t expect to see these trends peter out anytime soon. So we’re certainly interested in the companies behind the integration of mass transportation.

“Most men seem to live according to sense rather than reason.” 

                                                                                    – Thomas Aquinas

Although the U.S. stock market continues to hit new nominal highs on a nearly daily basis, the U.S. economy bumps along at a lackluster pace. This disconnect has been achieved by a massive Fed experiment in monetary stimulation. Through the combination of seemingly endless maintenance of zero interest rates and the injection of some $1trillion a year of synthetic money into fixed-income markets, the Fed is hoping that the boom it is creating on Wall Street will lead to a boom on Main Street. In reality, this a very dangerous economic gamble of enormously high stakes.  As we have seen in the recent past, financial bubbles can leave catastrophe in their wake.

However, there are many in the financial establishment who disagree with the professor, including, most interestingly, Professor Karl Case, the co-creator of the famous Case-Shiller Home Price Index. Most markets either believe that current share prices are fully justified by corporate metrics or they believe the Fed has expertise, and the ability, to prevent an ugly sell-off if things turn out badly. This debate has become the defining conversation as we head into the end of the year.

However, those who believe that QE will produce positive results to compensate for the risks are finding their position to be increasingly difficult to defend. At the International Monetary Fund’s November annual conference in Washington, Mr. David Wilcox, reputed to be one of the Fed’s most important economic advisors, offered insight into some problems facing QE. In essence, he maintained that the Fed’s QE-3 program is producing only very limited results in terms of U.S. economic growth. At the same time, he seemed to hint that unlimited QE could create serious financial market distortions.

Many market observers, including myself, think that the Fed’s open-ended QE program has been a massively expensive failure. As a result, market watchers have become increasingly eager for the program to be wound down, and many do not understand the Fed’s reluctance to taper its monthly bond purchases.

Although many of the more open-minded members of the Fed’s Open Market Committee may have lost faith in the ability of QE to deliver tangible gains in the real economy, they have also shown some concern that a diminishing of QE could trigger stock and bond market turmoil. There can be little doubt that such an outcome could usher in a new round of recession. In other words the “good” that the Fed sees in QE may merely be the prevention of a potentially worse reality.

A majority of investors have seemed to convince themselves that QE has become an unneeded crutch that the Fed will be more than happy to abandon by the end of next year. Many believe that such an outcome will place limited downward pressure on stocks, bonds and real estate. These views are Pollyannish in the extreme. The recent sell-off in the bond market should attest to that. On the other hand, some investors, including some aggressive hedge funds, seem to be operating under the belief that QE will not be ended any time soon, if ever. They have even borrowed massively to invest on booming financial markets that stand already at record highs. Today, total New York Stock Exchange margin debt stands at $412 billion, an all-time record.

The disagreements of the investing public are of little weight in comparison to the opinions of the FOMC members themselves (such is the world we have created). The key point for 2014 is how many voting members of the new Yellen-led FOMC will follow her down the Keynesian cul-de-sac. Should a majority of the FOMC feel forced, in the national interest, to vote against an expansion of the Bernanke-era stimulus policies (which we believe Ms. Yellen is sure to propose), financial markets could be in for a severe shock.

Those who wish to continue equity investing in face of this risk might be well-advised to ensure they have adequate hedging policies in place. Investors in both equities and bonds must question how the Fed can coax a market into a continued boom in a manner disconnected from economic reality.

John Browne is a Senior Economic Consultant to Euro Pacific Capital. Opinions expressed are those of the writer, and may or may not reflect those held by Euro Pacific Capital, or its CEO, Peter Schiff.

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 3.0 Unported License. Please feel free to repost with proper attribution and all links included.