Guest Post: Jim Blaze=> Railway Age=> Is Intermodal Rail Stalling?

OK boys and girls.  Here's an article guaranteed to send chills down the spines of Railroad Management in North America.  Why?  Because, as a commodity, Coal made so much profit for Railroads that it easily paid for Infrastructure and Maintenance on the railroads.  But when coal traffic dried up like a deciduous leaf in the fall, the Big 7 Railroads in North America decided to make Intermodal Traffic their next Cash Cow.

Now, I consider this a bold, but risky move, as railroading in North America got lazy hauling bulk commodities that were shipped in quantities too large for trucks, but where there weren't competitive water routes via rivers lakes and oceans.  However railroads have long ceded the truly fast freight to truckers who compete against each other to provide timely service and to airplanes for overnight shipping, when the time constraint for an item was truly critical.  And when Power Companies found out that they could economically choose natural (methane) gas AND Combustion Gas Turbines with Waste Heat Boilers and Steam Turbines to replace Coal (Wood or even Oil) Fired Steam Turbine plants they jumped at the chance, leaving and even stranding assets.  I'm not sure the railroads have the desire, let alone the will to really compete with truckers with  intermodal and piggy-back service.

Intermodal is also risky because of the dynamics of railroading, where long trains create nearly intolerable conditions.  In the articulated, permanently coupled, double-stacked container "well" cars, the axle loading is 125 tons.  That's higher than the axle loading on loaded coal hoppers and loaded coal hopper trains aren't routinely run at 60-70 MPH.  This alone is a recipe to rapidly wear out and destroy the track that trains are run on.  Add to this the possibility of string line derailments, where when trains are operated around sharp curves at low speeds, the pulling force is able to derail cars because the force is applied in a straight line, when the cars are following tracks that curve away from that force vector.

This strategy was tried before by the Northeastern Anthracite railroads, when home heating in New York, New Jersey, Northeastern Pennsylvania and New England  changed fuels from Anthracite hard coal to Fuel oil after World War II.  Smaller railroads in Eastern Pennsylvania banded together with smaller railroads or railroads from Chicago that didn't directly reach the New York/North Jersey Ports to ship Piggy Back trailers of goods into Chicago's expansive distribution center.  It wasn't a bad plan, but it didn't give the railroads enough capital  to adequately maintain their infrastructure.  The entire railroad system in the Northeast, with its short distance hauls slowly succumbed to truck competitions

So now rail traffic in general, as well as intermodal traffic is contracting, with lower volumes as compared to last year for 41 weeks as on the week of October 14, 2019.  Lower volumes of traffic, means lower volumes at regional warehouses, which means sales in retail stores are slowing.  Back up the Supply Chain, less goods are being made or imported, which eventually means fewer shifts are being worked to make these goods, which means less workers have disposable income to purchase goods, which affects sales volume.  This is how a recession gets started.

Now whether or not an economic slow down is caused by Inflation (Price increases that eat away at disposable income and eventually savings), fewer containers means less trains and even smaller profits for the railroads.
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• September 05, 2019
 
• Class I, Freight, Intermodal

Is Intermodal Rail Stalling?

Written by Jim Blaze, Contributing Editor

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Shutterstock

Intermodal rail—a transportation mode choice that was to take trucks off the road—is slowing down. Where is it heading? Over several decades, the premise was that railroad intermodal trailer on flat cars (TOFC) and containers mostly on double-stacked well cars (COFC) would grow in volume and therefore reduce highway truck congestion. 

This is not a financial analysis to help determine whether to buy or sell railroad stock.  This is about the evolving role of rail intermodal service in a market that is dominated by trucks, whose share of volume dwarfs rail.

Data courtesy of IANA and TTX, from materials presented in August 2019.

Yes, rail intermodal has grown, and at a pace mostly above the growth rate of the nation’s gross domestic product. But the commercial message sent by the railroads has largely focused upon the financial earnings and the success of railroad company yield management using their so-called Precision Scheduled Railroading (PSR) business model.

As one example, CSX  proudly states that “CSX has more pricing power [now] … particularly in intermodal truck-rail business …” according to Wall Street Journal business editor Paul Page (October 2018). However, on a volume and market share basis, changes in CSX’s origin-destination intermodal services have resulted in weakness in CSX’s second-quarter intermodal volume.  The company reported a 10% drop year-over-year in intermodal volume. CSX also reported an 11% drop in intermodal revenue for the quarter.

Beyond this one eastern railroad, mid-August 2019 U.S. rail total carload and intermodal volumes were down 3.5% year-to-date to 16.6 million units. Of that, U.S. carloads fell 3.2% to 8.1 million, while U.S. intermodal units dropped 3.7% to 8.5 million.

Not everyone is negative about rail intermodal.  In the eastern states, Norfolk Southern executives remain optimistic. They stated in mid-July that Norfolk Southern’s rail intermodal could see demand grow in certain service lanes during the second half of this year. “We’ve got the most powerful intermodal franchise in the East, which is married to the consumption part of the U.S. economy, and the economy continues to move in the direction of the consumer. The consumer-related economic indicators are still relatively strong. We’ve got a diverse merchandise franchise, which offers many opportunities for growth in the second half of the year,” NS Chief Marketing Officer Alan Shaw said during his company’s second quarter earnings call on July 24.

The NS logic is that some of the railroad’s intermodal customers (channel partners) support that second-half intermodal market outlook.

Financially, as Wall Street Journal reporter Lauren Silva Laughlin wrote on August 23, PSR execution so far has been good for shareholders of North America’s freight railroads, including CN, Canadian Pacific, CSX, Kansas City Southern, NS and Union Pacific.

Yet, here is the market share and growth “rub”: Financials aside, unit volume is not growing at the rate once expected in intermodal trailers/containers. The U.S. rail freight sector remains at about 10% or less of total surface freight by mode by shipper payments billed vs. trucking and other freight modes.

Data courtesy of IANA and TTX, from materials presented in August 2019.

The rail industry position is that rail pricing and rail freight dependability have improved greatly since the passage of the 1980 Staggers Act (which partially deregulated the U.S. railroad industry). There is no question of that improvement based upon the statistical evidence. But as the old saying goes, “What have you done lately?”

The Association of American Railroads is correct that “intermodal rail has benefited rail customers with competitive rates and unmatched efficiency of scale.” True, average rail rates have fallen 46% since 1981, allowing most rail shippers to move nearly twice as much freight for the same price paid more than 30 years ago. However, recently, railroad rates have been increasing. Some rates are increasing much faster than nominal inflation.

Meanwhile, the hope of diverting millions of trucks annually from the congested eastern interstates and primary U.S. highways isn’t quite playing out as once expected. Why? In large part because the average distance that most of the trucks moving between markets in the eastern states are in the 250- to 500-mile range—and are not ripe for rail conversion.

No American railroad has achieved a sustainable high-margin profit intermodal service over such short distances. Moreover, the PSR model with its long trains doesn’t match that geographic opportunity. Further, the railroads still lack a rapid load-on/load-off railcar platform to capture the dominant roadway traffic we call semi-trailers. Flats, tankers and similar big rig semis just don’t fit onto the very-low-cost-per-operated-mile double-stacked well railcars.

Statistically, the movement of trailers on rail flat cars is a disappearing market segment. A recent conference sponsored by the Intermodal Association of North America (IANA) and TTX Company gave the industry an interesting profile of where intermodal is this year. The patterns they revealed were these:

Trailer on Flat Car Continues to Decline as a Rail Intermodal Service:

• Four of the past 11 years back to 2009 saw declines in TOFC volume.
• Two of those years saw volume drops of more than 20%.
• Only two years provided a relatively high 10% to 11% increase in year-over-year growth.
• The period 2011 to 2015 witnessed a low 1.6% to 2.9% increase, spaced between 5.3%t and 9.7% declines.
• What used to be ~3 million TOFC units more than a decade ago is now trending to ~ 1.2 million annually.

No one disputes this trailer pattern. Yet most of the traffic units out on the highways remain the semis. Rail management doesn’t have a mechanical engineering solution to grab this market. Does anyone dispute this? In contrast, stackable containers are the dominant domestic intermodal service.

The cost per mile to move a 53-footer on a stack container car is about 40% to just 60% per mile moved of a similar trailer or container chassis moved on the road. That’s the internal railroading business cost—not the price charged.

The railroads have been clearly documenting in their periodic investor reports that they are using pricing leverage to increase their intermodal margin. They are getting greater earnings before interest, tax, depreciation and amortization (EBITDA) by not growing volume under the PSR model. Instead, they are increasing their prices against trucking prices in strategic lanes.

What Happened to the Railroads’ Plan to Grow by Taking Domestic Share? 

• Domestic rail container units used to grow at a respectable 9.6% to as much as 14.7% year-over-year pace between 2009 and 2013.
• After 2013, this growth rate dropped to about a 4.5% average.
• 2017 was up by only 2.7% over 2016.
• So far in 2019, the rate is down about 6%.

Because of the huge trucking base share, rail intermodal must gain at a near-double-digit pace to take highway share.

International Intermodal Container Movement Patterns Are a Bit Different:

International intermodal units have been growing year-over-year at a more stable range of about 4.5% to nearly 7% year-over-year until the trade dispute started. Now it’s dropped to a mere 1.4% pace to-date in 2019.

The future is at best unclear. This railroader’s interpretation is that, based upon the current evidence, far less intermodal highway to railway shifting will occur than was formerly expected unless something in the railroad intermodal business model changes. Or truck capacity drops.

Driver shortages for trucking will likely continue. This will include shortages of drivers in the short-haul lanes and the drayage markets. Railroads don’t have a solution to combat either the short-haul or the drayage shortages.

The following are credited with interesting facts and observations. However, they might disagree with some of my data interpretation:

• Melissa Peralta, Senior Economist, TTX Company.
• Peter Wolf and John Woodcock as recent IANA speakers.
• Technical observations shared by experts like Larry Gross and FTR’s Eric Starks.

Independent railway economist, Railway Age Contributing Editor and Freightwaves author Jim Blaze has been in the railroad industry for well over 40 years. Trained in logistics, he served seven years with the Illinois DOT as a Chicago long-range freight planner and almost two years with the USRA technical staff in Washington, D.C. Jim then spent 21 years with Conrail in cross-functional strategic roles from branch line economics to mergers, IT, logistics, and corporate change. He followed this with 20 years of international consulting at rail engineering firm Zeta-Tech Associated. Jim is a Magna cum Laude Graduate of St Anselm’s College with a master’s degree from the University of Chicago. Married with six children, he lives outside of Philadelphia. “This column reflects my continued passion for the future of railroading as a competitive industry,” says Jim. “Only by occasionally challenging our institutions can we probe for better quality and performance. My opinions are my own, independent of Railway Age and Freightwaves. As always, contrary business opinions are welcome.”

Categories: Class I, Freight, IntermodalTags: Freightwaves, IANA, Intermodal Association of North America, Opinion, TTX

The Beginning of the End of the Collector Car Bubble?

Collector cars are a hobby that's dangerous to your wallet.  The market is notoriously fickle.  The target consumer audience members are the wealthy, retirees and baby boomers with disposable income.  Some are re-living their youth, some are buying exotics and the fools among them (us - I readily include myself) are buying in the vain hope that their asset will appreciate.

As signs of a sinking economy continue, has the collector car bubble just "popped?"  I ask because of two Unicorn Cars of very distinct taste recently sold or are selling for what was 1/2 of their asking price on E-bay just a year ago.

The First Car was sold on Bring A Trailer.  It was a 1992 Consulier GTP C4, a special Carbon Fiber chassis  ("tub"), with an American Built Drive Train (Chrysler Turbo III/A-568 Transaxle - that's a dual overhead cam, pent roof, 4 valve per cylinder combustion chamber, Chrysler 2.2L Turbo Charged Sequential Multi-Port Fuel Injected 4 cylinder with the best shifting 5-speed Transaxle Chrysler designed for their late 1980s-Early 1990s Turbo Cars - the Dodge Spirit R/T or Daytona R/T drivetrain, and a Quaife anti-spin Differential), American designed and built Super Car, with Aluminum Suspension and cross members.  These drive trains in either the Spirit R/T sedan or Daytona R/T coupe WERE QUICK ENOUGH TO BEAT UP ON MUSTANGS AND CAMAROS!  By the way, this was a 1 of 2 car that had the Spirit R/T Drive Train. The rest had the 8-Valve Single Overhead Cam Turbo 2 Engines with the A-555 Transaxle.  While quick, they can't keep up with this car.

The Car, while not considered aesthetically pretty by many, weighed about 2/3rds what the Spirit R/T or Daytona R/T weighed, so acceleration was unbelievably quick.  Quick enough where Warren Mosler's first creation was banned from SCCA Class Racing!  I consider this car to be the ultimate track weapon!  When I last saw it for sale on E-bay last year, the asking price was $100,000.00, but this week it sold for $53,500 plus fees, only 53.5% of its last E-bay listing.


The Second Car is currently being sold on E-bay (classified sale ad) is a 1937 Chrysler Airflow Coupe C-17.  There were only about 200 of these luxury coupes ever built in 1937, the last year of Airflow Production.  And while I like the Earlier 1934 and 35 Chrysler Airflow Coupes better (with the waterfall grill) and the 1934 and 35 DeSoto Airflow Coupes my favorite of the Airflows (with the shorter hood and the waterfall grille enclosing the inline 6 instead of the inline 8 used by the Chrysler), it's still a significant car for a collector.  As there were only 200 coupes made in the 1937 model year, this too is a unicorn, with few peers.  The last time I looked at this one on E-bay, the minimum bid was at $100,000.00.  It was appraised at $115,000, yet recently listed at $59,500 or best offer, at just 51.7% of its appraised value, despite being listed in #2 condition:  Excellent, Well Maintained Condition, Showing Minimal wear.

So what we have are two disparate collector cars, unicorns because of the rarity of each of these cars on the market. They are both in very nice condition, yet they only sold for 53.5 and 51,.7% of their previous "market values."  So the question is Is this the Beginning of the End of the Collector Car Bubble or were they just dramatically overpriced (the definition of a "bubble" before?

Guest Post: Larry Kotlokoff via John Mauldin Why the FDIC Won’t Work and Will Cause HyperInflation

I’m a big fan of John Mauldin, a plain spoken Texas Investment Banker, whose (free!) weekly newsletter, Thoughts From The Frontline, is in every Saturday Mornings E-Mail.  Mauldin specializes in making Economic Theory understandable; especially for an Economic Contrarian like me.

Don’t Get me wrong:  I’m not an Economic Contrarian because I want to be.  As a follower of Christ, and someone that’s received Economic Counsel through Christian Financial Concepts (now Crown Financial Ministeries), I just don’t necessarily buy what’s being sold as “good advice" about how we handle our money.  The advice I received (e.g. Don't Ever Completely Pay Off Your Mortgage, etc.) from local Financial Counselors at Banks, Tax Accountants or Investment Banks tended to be contrary to traditional and Biblical concepts that I got from my Budget Coach.

One of the big promises of the Federal Reserve Act and the 1933 Banking Act (2 entirely different things) that both tried to limit economic Panics by introducing "Deposit Insurance."  The idea was that when (1 or more) banks in a small area failed, the "contagion" of bank failure panics, where all depositors of any bank would suddenly try to get their assets, instead of risking their loss due to insufficient bank funds, would be limited to that area alone.

If, however, the panic was regional or national, from a bank with a nationwide footprint, the panic contagion will occur in multiple places at the same time, quite probably into different bank brands as well.  And since most of the major banks now cover multiple or most states, it's VERY LIKELY that the next panic/bank run would be national.  The only way to give their deposited money back to people is to print lots of it.

The US Economy in total could accept a relatively few Deposit Insurance Reimbursements as compared to our Gross Domestic Product without risking much inflation.  However in a viral contagion of Bank Failures, Hyperinflation is likely to occur.  Even large depositors would get back their deposit, valued only in pennies on the dollar, as the government would have to print a significant amount of money as compared to the GDP, significantly devaluing the dollar and causing rapid or hyper inflation.  So if the money you get back causes the typical items you need to buy to go up in price 2 - 10 times their previous price, any replacement money wouldn't last.  Any "insurance" paid by the government would cause inflation (prices going up). So if we are to EVER use Deposit Insurance, we'd better Pray that it's on a small scale, or we all will get hurt.

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The Big Con: Reassessing the “Great” Recession and its “Fix” By Laurence Kotlikoff Everyone knows what caused the Great Recession (GR). Bad banks issued bad mortgages. Bad bankers overleveraged. Bad shadow banks evaded regulators. Bad rating companies overrated securities. Bad regulators fell asleep at the wheel. Bad households drove up house prices. Bad derivatives expanded. Bad traders overtraded. In sum, bad banks full of bad bankers did bad things. Some degree of bad banking is a given. But this time was different. Virtually all outstanding mortgages were subprimes, and virtually all subprimes were no-doc, liar, NINJA, or other forms of fraudulent loans. Bank leverage reached record levels. Massively bribed rating companies gave triple-A ratings to securities that were triple-F. Regulators were totally outgunned, outnumbered, and out of touch. House prices soared forming an incredible bubble. Derivatives became “weapons of mass destruction.” Trading grew exponentially. And well-greased politicians looked the other way. The Financial Crisis Inquiry Commission (FCIC) summed it all up in two words: “pervasive permissiveness.” There’s just one problem with this narrative. It doesn’t fit the facts. Worse, it diverts attention from the real problem. The real problem wasn’t bad actors misusing a good banking system. It was mostly good actors using a bad banking system—a banking system built to fail. Structural failures have structural causes. The Hindenburg had a short circuit. The Challenger had faulty O-rings. The Titanic had unsealed bulkheads. The I-35W Mississippi River Bridge had inadequate gusset plates. Our banking system had and has leverage and opacity. Thanks to these structural problems, the banking system failed colossally. Then it was bailed out and rebuilt to original spec. Consequently, it will collapse again. Leverage and opacity are the O-rings of the banking system. They can cause it to collapse overnight. Recall It’s a Wonderful Life—the Christmas movie featuring honest banker George Bailey. The movie starts with a run on George’s bank sparked by a rumor that there’s a run on George’s bank. Everyone runs because George’s bank is opaque and leveraged (in debt), meaning no one knows whether George’s bank has enough assets to cover what it owes. Like all banks, George’s bank has borrowed money, which it’s promised to repay come hell or high water. If the bank misses repayment by even one dollar, it’s game over and the bank fails. The bank’s riskiest liabilities are demand deposits, which can be withdrawn on demand. This is why checking accounts are called demand deposits. But as George tells the panicked crowd assembled in his bank’s lobby, he’s lent out most of what he took in. If everyone is patient, they’ll get their money back with interest in due course. But if they all want it back immediately, the bank will fail... and so will Bedford Falls, the town whose economy depends on George’s bank. Thus, the movie presents two equilibria (two places the economy can land). The first is everyone panics, the bank fails, and Bedford Falls’ economy falls apart. The second is no one panics, the bank survives, and the local economy continues to thrive. Fortunately, George, played by Jimmy Stewart, is a good talker. His plea to the crowd narrowly averts the bad equilibrium. This lets the movie continue for another hour until, yet again, George’s bank confronts a financial panic but is again saved, this time thanks to a Christmas Eve miracle—a rich buddy of George’s who wires him a large deposit just as the bank regulator is about to shutter the doors. In the Great Depression, one third of US banks went under in precisely the manner depicted in the movie. They experienced runs by depositors for their money. But in 1933, President Roosevelt established FDIC insurance to convince depositors their money was insured by Uncle Sam. Had everyone called Roosevelt’s bluff and continued to run anyway, Uncle Sam would have had to print tons of money to “insure” the deposits... leading to hyperinflation, leading to everyone running to retrieve and spend their money before prices went out the roof. So, government deposit insurance also introduces multiple equilibria. Everyone believes that no one will run due to deposit insurance is one equilibrium. And everyone believes everyone will run despite deposit insurance is another—a very bad one. So far, in our country, the former equilibrium has held the day. In countries like Argentina, the second applies. No one there puts any trust whatsoever in government deposit insurance. The Great Recession, which saw the collapse of 27 major financial companies worldwide, didn’t feature people running on banks. (The fabricated promise of FDIC insurance, at least in terms of insuring the real value of one’s deposits, worked its magic.) Instead, the Great Recession featured banks running on banks. The banks ran on the banks because of rumors—some true, some fabricated—that other banks were running on banks. In 2008, financial panic here at home took down, in succession, Countrywide Financial, Bear Stearns, Fannie Mae, Freddie Mac, Merrill Lynch, Lehman Brothers, AIG, and Washington Mutual. The collapse of these massive and in many cases venerable financial companies (banks for short), whether via shotgun weddings, nationalizations, or bankruptcy, spelled economic disaster on Main Street along with financial disaster on Wall Street. The reason is that Wall Street’s bank runs triggered Main Street’s firing runs. Firing runs reference firing someone else’s customers (i.e., your workers) for fear others are firing your customers (i.e., their workers). If you’re an employer on September 15, 2008, the day Lehman died, and everyone is screaming “Great Depression,” you don’t wait months to see what’s going on. You start to fire to reduce your biggest debt—your need to make payroll at the end of the month. The firing runs expanded as one financial goliath after another crashed. They exacerbated the bank runs, which exacerbated the firing runs, which exacerbated the bank runs, all of which produced a vicious downward economic spiral that culminated in the swift loss of 9 million jobs. The Usual Suspects Given all we’ve been told about the causes of the Great Recession, the notion that pure financial panic, cultivated by opacity and leverage, tanked the economy is hard to swallow. So, let’s round up the usual suspects and make sure we can rule them out. Subprimes: Subprime mortgages are the bête noire of the Great Recession (GR). But their losses were far too small to produce a recession, let alone a great one. Indeed, during the GR, the subprime foreclosure rate peaked at 15%. Since at most 14% of outstanding mortgages during the GR were subprime, at most 2.1% (0.15 x 0.14) of all mortgages during the GR represented foreclosed subprimes. This is simply not big enough to matter to our massive economy. The Housing Price Bubble: Between 2003 and 2007, real housing prices (home prices adjusted for inflation) rose at a 2 percentage-point faster annual clip than did real GDP. But this is hardly evidence of a bubble. One can construct economic models in which the stock of housing grows together with the economy and the real price of housing stays fixed. And one can construct models in which the stock of housing stays fixed and the real price of housing grows together with the economy. Given the increasing urbanization of our country, the fixed supply of central city land, and the remarkable foreign demand for US housing, an irrational bubble isn’t needed to explain the pre-GR real housing price rise. Ratings Shopping: The FCIC’s report states that failures of the Big Three rating agencies were “key enablers of the financial meltdown.” But economists have now studied tens of thousands of complex mortgage-backed securities and found that the number and values of the securities that may have been misrated could, at most, have impacted less than 1% of the US bond market. Again, this is trivially small.  Bank Leverage: A stable fable related to the run-up to the GR is that banks dramatically increased their leverage. Not so. Fed data show bank leverage falling from 1988 through 2008. Equity rose from 6% of bank assets in Q1 1988 to 10% in Q1 2008. Leverage was also not particularly high in either Bear Stearns or Lehman. Indeed, according to Christopher Cox, former chair of the Securities and Exchange Commission, Bear Stearns was well capitalized when it failed, with a capital ratio over 13% and a debt-equity ratio of just 6 to 1, not the 33-to-1 figure bandied about at the time. As Chairman Cox stated, The fate of Bear Stearns was the result of a lack of confidence, not a lack of capital. … [At] all times until its agreement to be acquired by JPMorgan Chase … the firm had a capital cushion well above what is required to meet supervisory standards. In the event, Bear Stearns’ actual capital ratio didn’t matter. Multiple equilibrium mattered. Creditors past and prospective came to believe, based on innocent and guilty rumors, that other creditors were pulling the plug. They did likewise. Lehman was also well capitalized prior to its demise. Its capital (equity) was 11% of its assets when creditors pulled the plug. An 11% capital ratio is very close to the current banking system’s figure, according to the Fed’s recent stress tests. Hence, today’s banking system is no safer than was Lehman Brothers on the day it was driven out of business. Mortgage Debt: Another “smoking gun” is the pre-GR run-up of mortgage debt, which roughly doubled between 2002 and 2007. But the increase in borrowing to purchase homes wasn’t associated with a rise in household consumption relative to GDP. Instead, Americans borrowed to invest. And although the ratio of mortgage debt to household net wealth rose, the rise was minor. So, too, was the rise in debt payments relative to personal income. Derivatives: The reigning narrative—that derivatives were overrated, complex securities sold to naïve investors—also doesn’t jibe with the facts. Economists have studied thousands of residential mortgage-backed securities that were issued between 2007 and 2013 and rated AAA. Three-quarters of these securities experienced essentially zero losses through 2013. Most striking, AAA-rated residential mortgage-backed securities outperformed the universe of AAA-rated securities. No Skin in the Game: Economists have also now examined the pre-GR executive compensation contracts of 95 banks. The stock and option compensation in these contracts exceeded wages by a factor of eight. The authors of one study write, Banks with higher option (and bonus) compensation … for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.  Jimmy Cayne, Bear Stearns’ CEO, is an example. He lost $1 billion. Dick Fuld, Lehman’s CEO, lost some $80 million. In short, these and other big-bank bankers had plenty of skin in the game. Regulatory Capture: The main job of bank regulators is overseeing bank leverage. Since bank leverage was not historically high and indeed fell in the run-up to the GR, regulators did their job. What they couldn’t do is prevent our unstable economy from switching equilibria. Democratization of Finance: Some claim that politicians forced Fanny Mae and Freddie Mac, the big government-sponsored mortgage entities, to permit too much risky lending to the poor. But for this to be a major cause of the GR, losses from subprime mortgage foreclosures would have had to be much larger. Fed Interest Rate Policy: In the 1990s, the expected real 30-year mortgage rate averaged 7.91%. It averaged 6.27% between January 2000 and December 2007. This decline is too small to matter. Furthermore, the Fed doesn’t directly control long-term nominal, let alone real mortgage rates. As for 5/1-year adjustable-rate mortgages, their real rate averaged 5–6% in the two years preceding the GR. Real rates of this magnitude are not low. Unsafe at Any Speed Bank runs, as indicated, are midwifed by opacity. Opacity permits misinformation to spread and be spread. Bear Stearns was among the first to be picked off by short sellers because it was viewed as particularly opaque. According to business writer William Cohan, no one on the Street or inside the bank, knew what it actually owed or owned, let alone the true value of those liabilities and assets. The fact that Bear’s stock was valued at $60 per share one week before it was sold for $2 per share says that its valuation was a matter of pure conjecture. Apparently, before it didn’t, the market thought Bear’s assets were worth something because everyone else thought its assets were worth something. Such self-fulfilling prophecies are the stuff of multiple equilibria. Lehman’s CEO, Richard Fuld, certainly lays the blame for the GR on multiple equilibria. As he publicly stated, “what happened to Lehman Brothers could have happened to any financial institution.” The facts support his view. Bankers didn’t destroy the banking system. The banking system destroyed the banking system. It operated in the dark, and it operated with leverage. That, plus rumors of rampant malfeasance, brought Wall Street’s house of cards tumbling down. The takeaway is that banking can’t be fixed with cosmetic reforms, such as the US Dodd-Frank Act or the UK’s Vickers Commission Report. What’s needed is a system with zero leverage and full, government-supervised disclosure. Why zero leverage and fulldisclosure? The answer is simple. You can’t be a little bit pregnant. Any degree of leverage and opacity invites bank runs, which produces firing runs, which produces bank runs, which moves the economy from a good to a bad equilibrium. Are we and our children stuck living with an economy that can instantly fall apart? The answer, which I provided in my 2010 book, Jimmy Stewart Is Dead, is absolutely not. The book lays out a very simple means, called Limited Purpose Banking (LPB), to fix banking for good. LPB would transform all financial corporations into 100% equity-financed mutual fund holding companies subject to full and real-time disclosure, done by private firms working exclusively for the government. In considering LPB, it’s important to note that not a single equity-financed mutual fund failed during the Great Recession. Yes, the Reserve Primary money market fund failed, but it and other money market funds were leveraged because they promised to back their deposits to the buck. Limited Purpose Banking has been endorsed by a Who’s Who of former top policymakers and economists. The list includes senior statesmen like George Shultz, Nobel laureates in economics, former chairs of the President’s Council of Economic Advisers, and some of the top names in finance. There is no reason to run our financial system and economy on a knife’s edge. It’s happening for one reason, and one reason only: It works for Wall Street, which pays our politicians to keep the current leveraged, opaque banking system in place. Wall Street, as we saw in stark relief in 2008, takes the upside and forces taxpayers to bail it out when things go south. If and when this will change is anyone’s guess. In the meantime, we each need to realize that the next collapse of our banking system, the stock market, and the economy can happen at any time.  Looking for Solutions John here again. Larry Kotlikoff and I have had several late-night discussions on the ideas you just read. I think we agree (and you probably do, too) that the banking system isn’t sustainable as presently structured. It has too many twisted incentives, is too cozy with governments and central banks, and is much too leveraged. And of those problems, leverage is by far the most serious. Larry and I aren’t the only ones who see this. Even some former central bankers like Mervyn King and Bill White recognize the threat and have offered similar solutions. There are ways we could have a rational, viable banking system that doesn’t expose everyone to these periodic meltdowns. They don’t happen often, but even one such crisis is too many when the damage takes generations to repair. This banking system wouldn’t look like the one we have today. You might not be able to deposit your cash and have 100% of it back on demand. Or, if that’s a feature you want, you might have to pay for it with lower interest rates. But the bottom line is the same, whether via Larry’s “Limited Purpose Banking” or something else. Risky, overleveraged banks are an economic problem we really need to solve. I’m glad Larry and others are trying to find solutions.

First it was St. Louis, Now it’s Chicago. The Port of Savannah is out to conquer North American shipping. Will all (Rail)roads eventually lead to (the Port of) Savannah?

A few short weeks ago, just before Memorial Day, I announced in this blog post, that the port of Savannah had made an agreement with The St. Louis Regional Freightway and the Port of Savannah are forging a partnership to create a new connection between the St. Louis, Mo., region and what aims to be “the largest single-terminal container facility in the western hemisphere.”  At the end of the blog, I asked, "Now let's see which Marketing Hub Savannah targets next...?"  Today, we know that answer; Chicagoland.

First it was St. Louis, Now it’s Chicago. The Port of Savannah is out to conquer North American shipping. Here’s the latest News Brief from Trains Magazine.  

So now, I must ask a question:  Will all (Rail)roads eventually lead to (the Port of) Savannah?

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Cargo imported through Savannah will now get 3-day rail service to Chicago,officials say

September 16, 2019

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A view of the ship-to-rail operations at Savannah, Ga.

Georgia Ports Authority, Stephen B. Morton

SAVANNAH, Ga. — Rail is a key component in expansion of the Port of

Savannah, with new fast service to Chicago and development of new

infrastructure.

Griff Lynch, executive director of the Georgia Ports Authority, introduced

three-day CSX Transportation and Norfolk Southern service between the port

and Chicago while addressing an audience of 1,400 at Thursday’s Savannah

State of the Port meeting

Calling the service a “game changer” in the port’s growth, Lynch says,

“We’re now moving containers from ship to departing rail in only 24 hours —

two-and-a-half times faster than our previous schedule — which makes

Savannah competitive on time and lower on cost compared to traditional

cargo routings.”

As a result of increasing rail demand, the Port of Savannah is in the midst

of a $220-million expansion of its rail facilities, says Will McKnight, the

ports authority's board chairman.

Phase I of the ports authority’s Mason Mega Rail terminal is slated for

completion in the spring of 2020, with Phase II done the following fall.

The expansion will double the port’s rail lift capacity to 1 million

containers per year, officials say.

“The Mason Mega Rail Terminal will be the largest on-dock rail facility at

any port in North America,” McKnight says. “It will allow the Authority to

shift more of its cargo mix from truck to rail, so that we can grow our

overall volumes without congestion at our truck gates.”

Savannah has gambled on massive infrastructure projects targeted at

securing larger container ships now able to pass through the Panama Canal

following the canal’s expansion three years ago.

The effort to date apparently has been successful as the Georgia Ports

Authority reports record volumes in containers, total tonnage, and freight

moved by rail.

Twenty-foot equivalent container traffic was up 7% at the end of the fiscal

year in June to 4.5 million.

“The market has clearly chosen the Port of Savannah as the Southeastern hub

for containerized trade,” says Lynch. “To fulfill the growing

responsibility placed on our deepwater terminals, we have developed a plan

to double our capacity.”

Current capacity is 5.5 million TEUs; plans call for a capacity of 11

million.

Besides rail, port officials say other expansion projects include more

cranes, revamped dock space to accommodate more large ships, and a new

terminal at Hutchinson Island.

The U.S. Army Corps of Engineers is in the final stages of deepening the

Savannah harbor, officials say.

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Full disclosure:  My parents met, married and had my 1st little sister and me in Savannah.  Mama attended and graduated from Savannah Business College, and worked fro the I. C. Helmy Furniture Company in Savannah.  Daddy, 8 years her senior worked a Chemist at the Southern Cotton Seed Oil Company, which would become Wesson Oil and then Hunt-Wesson Foods.  We left when I was 4 years old for a different job opportunity for my Dad in another city.  I have a fondness for the city, which I'm sure has dramatically changed in the 54 years since I lived there.  It's history, with Azalea flower filled squares ,the Cotton Exchange and River Street make it a place worth visiting.  However this is not the reason for today's blog post.

A few short weeks ago, just before Memorial Day, I announced in this blog post, that the port of Savannah had made an agreement with The St. Louis Regional Freightway and the Port of Savannah are forging a partnership to create a new connection between the St. Louis, Mo., region and what aims to be “the largest single-terminal container facility in the western hemisphere.”  At the end of the blog, I asked, "Now let's see which Marketing Hub Savannah targets next...?"  Today, we know that answer:  It's Chicagoland.

Chicago is a HUGE Marketing Center and point where the railroads exchange traffic from West to East and vice-versa.  However, it's such a spaghetti bowl of rail lines, crossing each other "at grade" that the US Department of Transportation, the state of Illinois, the railroads and the local municipalities decided to spend BIG MONEY (approximately $4.6 Billion of which $1.6 has already been spent) on multiple projects to try and unravel the knotted ball of yarn that has becomes Chicago's railroads.  The project is called CREATE and it's designed to "unclog Chicago" by building Railroad fly-overs  (where one railroad crosses another with an overhead bridge) and with railroad overpasses and under passes vehicle crossings, eliminating crossing the railroads "at grade" that stop vehicle and other train traffic.

To see how large Chicagoland is from a marketing perspective, one only has to go as far as slide #8 in the CREATE program overview linked above.  The total TEU Lifts in Chicago were 15.4 Million units in 2014 exceeding the sum of both the twin ports of LA and Long Beach.  But, per slide in Also note Although the report is dated August 2019, the data on slide #8 is dated 2014, before the Panama-Max Lane of the Panama Canal opened.  The port of Savannah was listed as having 3.35 Million TEU Lifts, but it actually had 4.5 million lifts in the fiscal year having just ended in June, 2019 has increased increased its TEU lifts by 1.15 Million. And the port of Savannah, has just entered a partnership with St. Louis Regional Freightway for 1 month.  I wonder what next year will bring for the Port of Savannah, especially with 1 full year of the St. Louis Freightway Partnership and with 10 months of 3-day service from the port to Chicagoland in the books.

Slide #6 states that 26% of Intermodal freight lifts from the twin ports of LA/Long Beach touch Chicago and Chicago has 15.4 Million TEU Lifts.  But how many of the intermodal units would move from the twin ports of LA/Long Beach to Savannah, a port that is closer, has fewer and lower geographic obstacles to  overcome and requires a shorter time to travel from the port to the distribution hub?  These intermodal trains from LA/Long Beach, San Francisco and Oakland are most likely to be affected by the new Pana-Max lane of the Panama Canal.   

Only time will tell just how successful the Port of Savannah is by shipping Container Ships directly from Southeast Asia to the closest large eastern US Port.  While some intermodal rail traffic will continue to be exchanged in Chicagoland, a percentage of it will be diminished by the Port of Savannah.  We need only to look to seeing track capacity from Savannah being expanded on the Norfolk Southern, CSX or even the Genessee & Wyoming's Georgia Central by the addition of sidings, double tracking or adding Centralized Traffic Control to lines out of Savannah to see if Savannah is making the impact they hope to be making.