Download Can America Get Back on the Tracks?

Citizens Investment Services
Can America Get
Back on the Tracks?
Trains aren’t a good fit for Americans. We figured out long
ago that railroad travel was expensive and inefficient for
our needs. Railway might be good for other developed
countries, but not for us. We’ve built a successful
transportation system around highways and airlines; trains
haven’t been necessary for almost 70 years.
crossing distances of less than several hundred miles. Their
persistent popularity has kept them at the top of
innovation, creating faster and more efficient services. The
opposite is true for Amtrak, which has been forced to cut
costs and routes numerous times over the past 40 years and
has had little money to invest in high-speed rail.
The only catch is that after decades of decline and
government dependence, railway travel has actually been
making a persistent comeback. But is there really any way
(or any good reason) for America to go back in time and
make passenger trains useful for our transportation
systems once again?
Given the situation, it should be no surprise that Amtrak’s
annual losses (including depreciation of assets) have been
exceeding $1 billion in recent years, with potentially
billions more required for repair projects to major lines. All
this money is ultimately paid by taxpayers, polarizing
many people against the continued subsidization of
commuter trains.
Back Then
In the 19th century, rail transport was one of the
preeminent industries of America. It provided an easy way
to safely transport goods and people long distances in a
relatively short amount of time. Railroads allowed people
to develop cities in the center of the country and turned the
East Coast into an industrial powerhouse.
However, the 1950s and 1960s saw the rise of both the
Interstate Highway System and the commercial airline. Car
travel allowed Americans to get exactly where they wanted
to go on their own schedule, and commercial flights were
able to cover distances in a fraction of the time it took a
train. With the exception of municipal subway lines,
railways were deemed suitable only for massive freight
loads. Railroad companies quickly sold off their costly
passenger lines to the government, who consolidated them
under Amtrak.
The failure of a developed country’s passenger train system
was unique to the United States. In most developed
nations, trains retained their role as the de facto means of
The Light at the End of the Tunnel
Despite all this negative information, Amtrak’s long-term
future is probably the brightest it’s ever been. Amtrak
ridership has been on the rise, increasing for 11 of the past
12 years. In 2014, it posted its lowest operating deficit in
over a decade.
Why the improvement? Right now there are a number of
things working in Amtrak’s favor. If they persist, it could
lead to a major resurgence of rail over the next two
decades.
Rail has become integral in some areas – Trains are
successful when used for distances that exceed what local
mass transit/taxis cover, yet are short enough that flying
would be a needless hassle. Amtrak has seen its greatest
ridership between metro areas in its densely populated
Northeast Corridor in New England. Amtrak has targeted
this area (where it actually has operating surpluses) to
receive high-speed rail and the majority of its service
improvements. If Amtrak can continue its success in the
area, it may be able to implement these developments in
other parts of the country.
Car ownership has become a hassle for some – There is a
growing migration of people (particularly young people) to
downtown areas and city centers. To avoid congested
driving, they may avoid car ownership and rely on mass
transit to get from place to place. If this trend progresses,
these people will need some option for traveling to adjacent
cities or states.
Trains are safe and comfortable – Amtrak is often cited as
the most comfortable way to travel. Though rail travel takes
longer than flying, train services and accommodations are
much better than the increasingly cramped conditions of
airplanes. It is also considerably easier to sleep or work on a
train if your travel time happens to be significant.
Compared to cars, trains are drastically safer for riders,
other vehicles and pedestrians.
Roads aren’t getting cheaper – Though
many people disapprove of the subsidies
provided to Amtrak, the reality is that
both automobile and air travel are
both highly subsidized by the
government. As we’ve become
more dependent on cars for
travel, an increasing amount of
road maintenance has been
needed. As a result, the
Interstate Highway Trust
reached the brink of insolvency
mid-2014 and will require an
additional $15 billion annually from
taxpayers to continue its construction
and maintenance plans. When combined
with state, county and municipal road building
projects, it is easy to see how railways may become popular
in the interest of fiscal conservatism.
Energy efficiency – Trains have a high level of energy
efficiency—and not just because they carry several
passengers at once. Trains can move weight about three
times more efficiently than automobiles and, like hybrid
cars, can be designed to recapture energy lost when
braking. As energy costs climb, this could make rail travel
significantly cheaper than other travel options.
The technology is well tested – If America decides to
improve and expand its rail service, it won’t (initially) have
to spend much money developing new systems. Europe,
Japan and China already have highly sophisticated rail
systems built on technology that is getting cheaper and
could be implemented here.
Curbing Expectations
There are a lot of good reasons rail travel could have a
bright future in America, but it still faces serious obstacles.
The single biggest issue is that America has been built for
cars. We’ve made it very easy to drive around and between
our cities and, as a result, have encouraged more car
ownership. Predictably, this has meant more cars on the
road and a stronger need for cities to cater to drivers, which
further encourages driving.
This isn’t to say that one system is necessarily better than
another, but it does show how transportation choices are
influenced by the options presented to people. Right now,
many people have no alternative to the car; in most of the
country, it is impossible to live without one. The question is
how America should interpret the growing use of trains by
the people who have the option to use them. If trains failed
in the past, should we (or could we) try to change
that now?
If trains become popular again in the
United States, it won’t happen
overnight and it will come at a high
initial cost to all levels of
government. Rail travel requires a
strong network of local
transportation (buses, subways,
taxis etc.). Taking a train into a city
is useless if you don’t have an
affordable way to get around when
you arrive. National, state and local
governments must all commit to rail
for it to be successful—an increasingly
difficult prospect in a world of polarized
politics and limited budgets.
So will America get back onto tracks? No one can be
certain. Chances are good we’ll continue using whatever
option is most convenient for us. As cities and downtown
areas attract more and more people, trains may become that
convenient option. But, no matter what changes we make
or vehicle we use, our transportation system will always be
a uniquely American accomplishment.
10/1/14 – 12/31/14
U.S. Large Cap
(Dow Jones Industrial Average)
17,823.07
(4.58%)
U.S. Mid/Small
(Russell 2000)
1,204.70
(9.35%)
Foreign Large
(MSCI EAFE Index Fund)
60.84
(-5.12%)
Bond Market
(Barclays Aggregate Bond Fund)
110.12
(0.93%)
Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
October
 After supplying more than $1.5T of asset relief to the market, the Federal Reserve Open Market Committee
votes to end its current quantitative easing program, QE3.
 Iconic carmaker Ferrari announces that it will be spun off from parent company Fiat Chrysler.
 Brazil narrowly re-elects socialist president Dilma Rousseff to another term. Rousseff promises to
simultaneously support business growth while narrowing wealth inequality.
November
 After months of pressure on its central bank and falling revenue from dropping oil prices, Russia is forced to
discontinue its currency pegging and allow the ruble to “float” on the market.
 The U.S. Commerce Department reports that the national homeownership rate dropped to 64.4 percent during
the third quarter—the lowest level in 20 years.
 China links its Hong Kong and Shanghai stock markets, opening Shanghai equities to foreign investors for the
first time in history.
December
 The U.S. government sells its remaining shares of Ally Financial Inc., officially ending its last significant position
from the 2008 Troubled Asset Relief Program (TARP). Overall, the government made a small profit of $15.3B
from the $426.4B bailout it provided to sinking companies like Ally, Citigroup, General Motors and AIG.
 A Q3 report shows that the ratio of household debt to disposable income in Canada has risen to a record 162.6
percent. The growth of the debt, which includes mortgages, raises concerns that Canada’s housing market is
being increasingly overvalued.
 The U.S. Consumer Sentiment Index makes a massive jump to 93.6 in December, up from 88.8 in November.
This is the highest level the index has reported since January 2007.
 After 18 months and more than $7B in defaults on unsecured debt, Detroit exits its historic $18B municipal
bankruptcy.
Chinese Economy Now
Largest in the World (in PPP)
For decades, the U.S. has had the largest economy in the
estimates, not PPP estimates. Most tend to regard nominal
world, and by a wide margin. Though other countries, such GDP as the more important measurement, because it better
as China and India, have had much more rapid growth in
states the position of the country in a global economy.
recent years, the U.S. GDP still dwarfs that of any other
However, the reason the PPP estimate is so significant is that
country. In fact, it’s almost double China’s, at least in terms the time that China will become the largest economy by any
of nominal GDP. However, the International Monetary Fund measure is not so far off.
(IMF) recently reported that China is the world’s largest
This isn’t to say that China’s economy is similar to the U.S.
economy in one regard: purchasing power parity (PPP).
economy—far from it. The U.S. still has much more
First, some background: When comparing the size of
purchasing power globally, even if it has less inside its own
economies, normally each country’s GDP is converted to
borders. While China may be able to purchase more
U.S. dollars using current market exchanges rates to create domestic goods, like cars, missiles or soldiers, than the U.S.,
an easy means of comparison. A
the U.S. has greater access to foreign
country’s GDP expressed in U.S.
goods due to the strength of the dollar.
dollars using this method is called its
China also has a much larger population
nominal GDP. It is in this regard that
than the U.S. This means that while the
the U.S. still towers over every other
country’s economy is large, its per capita
country. The U.S. nominal GDP is
GDP is drastically lower than the U.S.
roughly twice the size of China’s
Additionally, China is still mostly a
economy using this method and
communist state, and many of the
multiple times the size of every
companies are state-run with limited
other country.
access to foreign investment. However,
that is changing as China has been
But economists have pointed out that
becoming more public. Just last
nominal GDP doesn’t give us the
November, China’s Shanghai stock
whole picture. The same goods or
exchange linked up with the Hong Kong
services in one country don’t cost the
exchange to become open to foreign
same in another, even taking into
investors. It’s too soon to tell how well
account market exchange rates. This is
the exchange will do, but the long-term
especially true in underdeveloped
implications are significant.
countries, where goods and services
are often much cheaper. Tourists
Does this mean Americans need to start
often recognize this concept intuitively when going to a
converting their dollars to Yuan and learning Mandarin? No.
restaurant or market in a less developed country than their But it does mean that the global economy, as always, is
own and noticing their money goes much further.
changing in big ways. If things continue in the direction they
Purchasing power parity applies this concept on a much
are heading, America will soon lose its tenure as the world’s
larger scale. One country may have less money (nominal
economic leader—in size, at least—and China will step in to
GDP) than another, but the amount of goods and services
take its place.
that money could buy within that country (PPP) is
effectively the same.
In terms of PPP, the IMF reports that China currently
outputs $17.6 trillion in goods and services annually, while
the U.S. outputs $17.4 trillion. This may come as a surprise
for many who had heard that China’s economy won’t
become the world’s largest until 2020 or later. That’s still
true, as those estimates are based off nominal GDP
Employment in 2014
The U.S. economy made some significant improvements in 2014, which are made all the more impressive by the
lackluster growth (or decline) seen in other countries. The stock market did particularly well, continuing its five-year
bull run. However, for the majority of Americans, the most important part of an improving economy is a growing
job market.
So how did employment do this year? Overall, things
went pretty well. The economy continued to post job
growth each month and the unemployment rate
steadily declined.
Unfortunately, the percentage of Americans working
or seeking work (participation rate) remains much
lower than its pre-recession levels. This is attributed to
an increased number of retirees and discouraged
workers (those that have given up looking for work).
However, as job growth continues, the number of
discouraged workers should continue to drop.
George Vranes
[email protected]
(262) 363-6571
http://www.citizenbank.com
301 N Rochester
Mukwonago, WI 53149
This significant slack in the labor force has given a
market advantage to employers, allowing them to
lower wage growth and use part-time positions to
meet their employment needs. Wages have
outpaced inflation by only a few tenths of a percent
since the recession, while “involuntary
underemployment”—workers limited to part-time
work due to the economy—remains elevated,
though improving.
Though there are still improvements to be made, it’s
clear the U.S. job market has made great strides in the
last couple years. Things seem very positive right
now, with experts in both the public and private
sectors predicting further improvements for the labor
market in 2015. As we progress, it is hoped that the
remaining performance gaps can be shrunk even
faster than before.
Securities offered through LPL Financial, member FINRA/SIPC. Insurance products offered through LPL
Financial or its licensed affiliates. The investment products sold through LPL Financial are not insured by
Citizens Bank of Mukwonago and deposits are not FDIC insured. These products are not obligations of the
Citizens Bank of Mukwonago and are not endorsed, recommended or guaranteed by Citizens Bank of
Mukwonago or any government agency. The opinions expressed in this material do not necessarily reflect
the views of LPL Financial.
This article was written by Advicent Solutions, an entity unrelated to Citizens Investment Services. The information contained
in this article is not intended to be tax, investment, or legal advice, and it may not be relied on for the purpose of avoiding
any tax penalties. Citizens Investment Services does not provide tax or legal advice. You are encouraged to consult with your