The Limerick of Finance for 10/18/15

China likes California's train deal
Early bid shows competitive zeal
State must still raise more cash
So the project won't crash
Major money will make the plan real

The Haiku of Finance for 10/07/15

Venture governance
Crowdsource public policy
Fix the Golden State

Innovate Your State Moves Beyond Six Californias Plan

Famed venture capitalist Tim Draper wants more innovation in government. He created Innovate Your State and its Fix California Challenge to bring Silicon Valley's innovative spirit into the Golden State's messed up system. We have no time to waste. California ranks poorly on Forbes' list of the best states for business. Better governance will be good for business.

The venture capital community worries about more than just California's business climate. Tim Draper's plan for Six Californias did not qualify for the state ballot. The proto-state of Silicon Valley would have been the wealthiest and most educated of the six states. That plan reminds me of Tom Perkins' remarks at the Commonwealth Club about the rich getting one vote per dollar of wealth. Wealthy VCs would not mind if Silicon Valley became one giant gated community. I would not mind it so much myself if it meant new states in Southern California had to pay full market price for their water.

The Tim Draper philosophy of "venture governance" crowdsourced from highly motivated citizens allows good ideas to get traction. Like every new venture, opportunity also brings risk. Ideas like allowing constituents to simulate votes on Congressional or Legislative bills will probably force more real-time accountability between elections. It also risks annulling the electoral process if lawmakers start slavishly following the popular will instead of voting their conscience or brokering compromises. Too much innovation brings the kind of direct democracy the Founders wanted to avoid by designing a republic.

I don't see how digitizing democracy will bypass special interests. Well-funded lobbies can still run compelling social media campaigns, and those campaigns can decisively influence crowdsourced projects. The Founders warned about "factions" in the Federalist Papers. Placing governance into the hands of a wise elite whose wealth insulated them from outside pressure was the Founders' solution to factionalism. Lobbies targeting single issues make representative governance more difficult.

Devolving governance into crowdsourcing works best if it improves the machinery of government, like speeding the passage of bills or making regulatory compliance easier. The good news in venture governance is that bad policies can be undone when they lose public support. Markets work that way.

Van Halen And Genius In The Music Business

I went to a Van Halen concert for the first time in my life last night when they played the Concord Pavilion on their Tokyo Dome Live in Concert 2015 tour.  They put on a loud, tight show with plenty of flair from all of the players.  I got to relive the 1980s because most of the setlist for this tour was from their earlier albums.  Everyone should have careers they enjoy, and if you follow your bliss then financial rewards will follow you.  Concert fun and business success often go hand in hand.

Ignore all of the sniping from this 2015 tour's critics.  There were no rough lead vocals or pre-recorded backing vocals.  Diamond Dave stretched a bit for the high notes he can't reach anymore in his older years but his phrasing and timing were clear enough.  Wolf was in front of his mic, singing and playing in time, and he flawlessly led off the famous bass chords from "Runnin' With The Devil."   Alex's drum solo sounded like Miami Sound Machine gave him some inspiration.  Dave does not have the vocal range of Sammy Hagar or even Gary Cherone, but his stage presence is one of the intangibles that make Van Halen special to fans.  Dave twirls a mic stand like nobody's business and his dancing punctuates Eddie's guitar licks.  These guys put on a professional show.

Some Diamond Dave quotes were instant classics.  Asking the audience "How 'bout that women's soccer team?" was the perfect break during his harmonica intro to "Ice Cream Man."  I wouldn't have used a Bill Cosby joke, but I'm not Dave.  I don't know what "Fifty shades of Dave" means, or whether there's an America Town in China, or whether his description of a long-ago Mexican girlfriend was accurate.  Knowing why would take the fun away.  Whatever tension exists between Dave and Eddie was not visible at all on stage.  Eddie played along with Dave's verbal gags like a classic straight player to an improvisational comic.

Other professionals were obviously hard at work on the business end of this tour.  The merchandising tent was full and people lined up to spend $20 or more for a $5 T-shirt.  The band's 2012 tour grossed over $54M from ticket sales but I couldn't find a figure for merchandise sales.  The tour revenue averaged over $1M per show that year.  Guitar Player breaks down the album sales from the band's eras under two very different lead singers.  Dave sold more records for the band but Sammy's net worth is much higher, probably due to all of his Cabo Wabo business ventures.  No one seems to be tracking Gary's earnings from Van Halen III; his only album with the band went gold, the lowest US certification of any album in Van Halen's discography.

The blurry photo above is the band on stage.  Trust me, it's them.  If the spirit moves you, well, you move.  I was moving along to the beat the whole night, raising my fist with the "hey hey hey" chorus of "Ain't Talkin' 'Bout Love" and everything.  Other people could have jumped around the aisle during "Dance The Night Away" but the seats on either side of me were empty.  I have high standards, and I'm not jumping around a Van Halen concert even though most of the people in attendance did that at some point in their lives.  Oh BTW, I only date drug-free intellectual babes.

The first Van Halen item I ever purchased wasn't even their music.  I bought a replica of the poster above during junior high school in 1988 because it just looked so freaking cool.  I think the poster was designed for their appearance at the 1983 US Festival.  I recall seeing a recording of the US Festival once.  One thing from the recording still rings clear as a bell in my memory.  The chords that became the riff for "Top of the World" on 1991's For Unlawful Carnal Knowledge were audible during the closing chorus for "Dance the Night Away" in that 1983 show.  Eddie played those "Top of the World" riffs during the closing of "Jump" in last night's Concord concert.  He obviously loves the way it sounds and I wonder if he regrets not performing any songs from the Sammy era live while touring with Dave.  I still have that 1983 poster rolled up in my closet.  I feel on top of the world whenever I look at it because it's just so darn patriotic.  It is still freaking cool after all these years and I'll hang it up when I'm ready.

Van Halen's body of work remains compelling after four decades because its principal artists are true virtuosos.  Wolf is still growing musically but he's coming along fine by all indications.  He is making his dad very proud.  Dave, Alex, and especially Eddie have always been excellent performers.  Some people are just gifted, and wasting natural talent is a crime against nature.  Whenever something in business bugs me to the point of exasperation, I think about songs like "Dance the Night Away," "Panama," "Jump," "Dreams," and "Top of the World" to remember that chaos gives birth to a dancing star (paraphrasing Friedrich Nietzsche).  I am supposed to be a financial virtuoso.  Whatever chaos Dave and Eddie use to create their most memorable songs is something I can tap into myself.  It is simply impossible to be sad or angry when you're standing on top of the world, dreaming of jumping all the way to Panama so you can dance the night away.  Great music makes you want to do just that every time you hear it.

Van Halen takes forever to put out new music now that their founding members are all age 60 or over.  I could not shake the suspicion that this tour for their only live album with Dave could be their swan song.  I am very grateful to have seen them just this once if this turns out to be the first and last time I can witness their creative genius in person.  The mark of genius is to make a difficult task look easy.  Dave and Eddie make rock music look so easy that every amateur in the audience imagined themselves in the music right along with them.  The gross revenue from my one concert ticket won't make the band much richer but it should be enough for each Van Halen member to buy a sandwich if they're so inclined.  Have lunch on me, guys.  You earned it.

The Haiku of Finance for 03/06/15

Cal jobless rate down
Back to pre-crisis job days
Wonder who dropped out

Alfidi Capital Witnesses Intersolar Opening Ceremony 2014

Alrighty, here comes my first impression of Intersolar North America 2014.  I normally roll up my observations of the entire conference in one long blog post, but this year I'm giving the opening ceremony its own special treatment.  Politicians were the stars of this particular show.

The Governor of the Golden State spoke about his ancestral acreage filled with wildlife.  It had nothing to do with solar energy.  In fact, nothing he said had anything to do with much of anything at all.  He seemed to lose his train of thought in places, but recovered when he realized he didn't have much to say.  He could have addressed the State of California's energy policy, which has a detailed clean energy implementation plan.  He could have mentioned the important partnerships working for California's Clean Energy Future.  He could have mentioned Go Solar California's roots in the previous Governor's Million Solar Roofs program.  I did not hear any details of these success stories.  Career politicians have a knack for connecting with people who feel rather than think.  This gentlemen excels at his chosen career.  He is indeed a man for our times.

The Mayor of The City was a study in contrasts.  He was distinctly proud of his effort to extend the PACE financing of GreenFinanceSF to residential developments.  He briefly mentioned a tax exclusion for clean technology companies, which I believe is the Clean Technology Payroll Expense Tax Exclusion for businesses in the San Francisco Green Business Program.  The man's background as a city planner is a huge plus.  He knows how public policy makes life better.

Some state senator from the Empire State got up and spewed pure ignorance.  It was painful to watch but the morons in the crowd, presumably locals, loved the performance.  He stumbled over prepared text and made several factual errors.  Citing specious claims of drowned polar bears did not help his case for induced climate change.  He failed to articulate the full name of the National Oceanic and Atmospheric Administration (NOAA), and then laughed it off to the audience's delight.  His selective use of annual temperature data would have been more credible had he mentioned it in the context of NOAA's NCDC US Climate Extremes Index (CEI) and the periodic adjustments NOAA has made to its data.  This Telegraph UK article is exemplary of news media efforts to question NOAA's constant data adjustments.  I am dismayed to think the US government's scientific data is as unreliable as its economic data.  This state senator's only positive contribution to the climate change debate was his mention of Harvard University's "Climate Extremes" report, funded by the CIA.  Keep that connection in mind; it will come in handy later.

The CALSEIA official was a class act after the state senator's jackass act.  She had data to back up her ideas.  Environment America's "Shining Cities" report from April 2014 is a good foundation for solar energy development's role in urban renewal.  She mentioned CPUC's net energy metering (NEM) program and noted that CPUC has adopted very favorable treatment of solar installations; this blog post from Renewable Energy World has a good summary of CPUC's decision crediting solar production.

I want to touch on a point related to my blog article from earlier today about climate change as a stalking horse for a new green religion.  Recall my note above about the CIA's interest in funding climate change research that justifies continued national security planning.  Religious fervor motivates behavior.  If waving a monotheistic standard is an insufficient motivator for power projection, then another supernatural justification must take its place.  A growing body of strategic thinking now supports American intervention for humanitarian and environmental reasons.  Americans like to think of themselves as the world's generous saviors.  Deploying to save the children and the rainforests is a much easier sales pitch to urban elites than deploying to preserve access to mineral resources.

I'll conclude by saying that I am not disappointed at all to hear career politicians play emotional themes or mangle facts.  The ones who talk that way are not really in charge and they probably know it.  They like their careers because they love the limelight.  The rare politicians who talk sensibly know who benefits from good public policy: voters maybe, businesses probably, deep state elites certainly.  I am totally in favor of cultural programming that employs innovative memes to direct public enthusiasm for elite management of civilization.  I am totally on board with ruling class direction of public policy.  I totally understand the role public leaders play in propagating pre-approved themes.  It's a fun game to watch and even more fun to play.  

Alfidi Capital Checks Out Mineta Transportation Institute National Policy Summit 2014

I attended the Mineta National Policy Summit for 2014 at the Commonwealth Club a few days ago.  More policymakers should follow the Mineta Transportation Institute's work on funding transit infrastructure.  Lobbying organizations for the transportation industry certainly pay attention, and that's why lobbyists' legislative agendas are enacted into federal appropriations.  I never turn down a free breakfast and the Mineta people paid for enough banana nut bread and coffee cake to incentivize my attendance.

The head of DOT's Federal Transit Administration spoke on federal policy and the status of the Highway Trust Fund.  I've read plenty of commentary about the Fund's stresses from lapses in funding, and the transportation sector is very willing to accept higher fuel taxes.  Trucking operators know the federal highway system's disrepair better than anyone.  The FTA adapted its MAP-21 program to incorporate the New Start / Small Start Capital Grant Investment Program.  Making a long story short means there's federal money available for municipalities to upgrade transit infrastructure.  My only concern about such spending is that the federal government should not fund transit projects that do not connect to national infrastructure.  I can understand a new light rail line that connects an urban core to a major airport, because that airport connects to the rest of the US.  I do not agree with federal funding for a local line from one end of a waterfront to another, or to a ballpark.  That's an issue for local voters to decide.  There's too much room for local boondoggles and politicking in those projects that is impenetrable to federal review.  She mentioned that the Grow America Act is supposed to fix a long backlog of infrastructure and workforce development projects.  It's good to know that this Administration is getting serious about fixing the failing grades in the ASCE Report Card for America's Infrastructure.

Mineta analysts published the results of their MTI Project 1328 survey linking tax options to transit funding.  Americans are more likely to cough up dough for safety and maintenance than for global warming.  The climate change alternative religion IMHO hasn't convinced everyone just yet.  The Mineta panelists noted that Americans' views of transportation funding have remained consistent throughout changing economic cycles, which is no surprise for a topic typically off the low-information voter's radar.  I support the Obama Administration's proposed repeal of the ban on interstate tolling, because travelers who use our national infrastructure should pay for it as they go in addition to paying fuel taxes.  The panelists mentioned the recent APTA 2014 International Practicum on Innovative Transit Funding & Financing in Montreal, where experts presented case studies on how transit enhances property values.  That is the kind of data-driven analysis that urban planners need when municipal finance offices assemble bond issues for projects.

The various presenters made good points that lead me to ponder some untouched issues.  The sharing economy is just taking off and it will eliminate demand for parking garages and lots at airports and other nodes.  Those lots will become excess infrastructure we don't have to repair or expand.  I predict major public policy moves in favor of infill development of unused parking lots.  There is still unresolved tension between car advocates who think reduced metering increases retail commerce and transit advocates who think smart metering (changing fares by hour, congestion, and vehicle emission standards) enhances commerce.  Let's put the data from each side up for comparison, for crying out loud.  I would also like to see transit advocates address the GAO's reviews of DOT's recent results.  The GAO-14-628R report from May 2014 found that DOT's documentation and internal controls for TIGER grants were inadequate.  It is very disturbing to think that billions of dollars in grant money have been wasted on unneeded projects for expedient reasons.  I have already revealed my bias against federal funding of transportation projects that have only local impacts.  Such projects contribute to overbuilt suburbs and unsustainable communities.  The last thing the federal government needs in an innovative transportation funding program is a repeat of the DOE's politically connected solar loan program debacle.  The US still needs a National Infrastructure Reinvestment Bank to help vet these projects, because more transparency and review from the financial markets will help reduce the influence of political cronyism in infrastructure funding.

I attended the Mineta summit in 2013.  Compare my analysis at that link from last year to the article you're reading now.  The question I posed last year about whether California can sustain muni bond issuance in a difficult economic environment may soon find its answer in the markets.  I have recently noted the exit fees bond fund investors will likely face before the bond market collapses.  Muni bond fund investors will not escape their positions in advance of a bond market crisis.  Infrastructure awaiting funding will have to wait even longer while the bond market returns to historically normal conditions.  I think both the DOT and Mineta analysts should plan for transportation funding mechanisms that will survive a prolonged hyperinflationary depression.  Maybe user fees and gas taxes will have to adjust by the hour to keep up with inflation in a crisis.  I'll look for their solutions at next year's summit.  

SF Prop A and California Prop 41 Tax Defeasance Through Muni Bonds

San Francisco Voters passed Proposition A this week, calling for a $400B muni bond issue to fund seismic retrofits of first responders' facilities in the City.  California voters passed Proposition 41, diverting bond proceeds raised for CalVet home and farm loans to low-income housing for homeless veterans.  San Francisco voters will eventually pay higher property taxes to pay off the principal and interest of these bonds.  Taxpayers are also investors.  They can effectively get their money back through a form of defeasance.

A San Francisco property owner can theoretically buy a sufficient amount of city and state muni bonds whose interest payments will offset their property tax increases.  They would have to buy whatever new general obligation issues are specifically intended to fund these most recent ballot measures.  If enough San Franciscans do it, their increased property taxes transform into tax-free income.

Here's an illustration of how this would theoretically work.  The San Francisco June 2014 Voter Information Pamphlet and Sample Ballot described the fiscal impact of Prop. A.  The City Controller estimated that Prop. A's fiscal impact is an average tax rate of $9.61 per $100,000 of assessed value through 2040.  Offsetting this with a purchase of San Francisco muni bonds means buying enough of them to pay at least that much in annual interest.  The California Voter Information Guide for Prop. 41 has a similar analysis but does not reveal the property tax rate impact for assessed property.  Darn, that's no help.  California's bonds carry the lowest rating in the nation because this state can't get its act together.

I logged into the brokerage where I maintain my portfolio and searched their bond inventory.  The California GO bond inventory revealed coupons of 4.25%-5.25% for maturities out to 2029, which is the target maturity implied by Prop. 41's analysis.  The San Francisco GO coupons for all maturities past 2014 ranged from 4.00%-5.00%.  Buying one SF GO 4% bond of $5000 face value will pay $200 in interest per year, more than enough to offset a Prop. A tax assessment on $100,000 worth of property.  I'll assume the same holds true for the state's Prop. 41 assessment; buying one $5000 California GO bond should be sufficient.  The bottom line is that San Francisco real property owners can elect to set aside the liquid equivalent of 10% of their real property's value (i.e., two $5K muni bonds for each $100K) as a defeasance for the taxes to fund these bond issues.  That's what I would do if I owned real property in this town, but I don't tell anyone else what to do with their own money.  I would of course receive much more from interest than I would pay in taxes, so muni bond defeasance of property taxes sure looks like a transfer of wealth from City taxpayers to bond holders.

I won't debate the political merits of either measure except to say that I voted against them.  I generally oppose issuing new government debt unless it is earmarked for spending on capital goods in the "public commons" that enhance economic activity.  I suppose I can live with Prop. A because it supports The City's long term capital improvement plan, but City Hall needs to cut other things first IMHO before planning bond issues.  I also won't recap my hyperinflation warning, which would make any bond purchase worthless.  Hyperinflation would rapidly eliminate property tax burdens anyway so defeasance would be a waste of effort.

Full disclosure:  None of this analysis constitutes financial advice; go see a registered financial advisor for that service.  I do not own any muni bonds at this time.  I do not own real property with assessable value in San Francisco.  

The Haiku of Finance for 03/21/14

State success index
Small states live within their means
California fail

Success Metrics In South Carolina And California

I attended the San Francisco Republican Party's annual Lincoln / Reagan Dinner last night.  Governor Nikki Haley of South Carolina spoke about her efforts to improve conditions in her state.  It's appropriate to compare that state to California so we can figure out what we're doing wrong.

The Tax Foundation's 2014 State Business Tax Climate Index shows that South Carolina is #37 and California is #48.  That's a notable difference and it's embarrassing to see California near the bottom.  The top states are those that do without one of several major taxes.  That means even California's Proposition 13 limits on property taxes can't make up for high taxes in other areas.  Tax burden isn't everything in measuring a state's economic health.  Governing's 2013 analysis revealed that the above tax index had little relation to levels of wages or employment.

If taxes don't tell the whole story on a state's competitiveness then we need broader measures.  The Mercatus Center's "Freedom In The 50 States" index ranks South Carolina 15th and California 49th.  Gee, that's a huge difference in personal and economic freedom.  The Cost of Government Center's assessment of each state's contribution to an individual's regulatory burden shows that Californians have to work 20 days longer than South Carolinians each year to be free of regulations.  The invisible tax of regulation matters as much as the formal tax burden.

The US Chamber of Commerce Foundation's Enterprising States project ranks states across a number of economic measures.  California beats South Carolina in Performance and Talent Pipeline, but loses to that smaller state in the other four broad categories.  My state's ranking in the Talent Pipeline sub-categories reveal that we're eating our seed corn.  The state does well in high school AP but poorly in college affordability and degree output.  I expect our most talented high school students to exit California for cheaper colleges elsewhere.  Blame our state's teachers' unions for this likelihood.

One very important measure of a state's ability to manage its affairs is its credit rating for general obligation bonds.  Pew Charitable Trusts tracks the US states' S&P credit ratings in a handy infographic.  South Carolina has been consistently high at AAA or AA+ for over a decade.  California is at the absolute bottom of all of the states.  It is shameful to see developing nations with higher sovereign credit ratings than the US's most populous state.  Compare our state's debt burden to the poor results we obtain in the rankings above to see the extent of our dysfunction.  If our tax burden according to the Tax Foundation is so high, we should have no difficulty repaying our state's debt and earning a higher credit rating.  The persistently high tax burden and low credit rating indicate uncontrolled state spending that is not moving the needle up in the other indexes' very important success metrics.

In fairness to alternative views, Good Jobs First's "Grading Places" 2013 report objects to the findings of the Tax Foundation and other business climate indexes.  I don't think any single index will ever perfectly describe a state's KPIs but we have to start somewhere.  Some states have unique natural resources that confer windfall advantages, like North Dakota's shale boom.  California has abundant natural resources, so we should be experiencing perennial financial windfalls instead of persistent budget deficits.  Our state's problems stem from its people.  California has become home to too many dingbats, bums, and morons.  We elect leaders in Sacramento who reflect those degraded tendencies.  The US federal system of government allows the states to be laboratories for policy innovations.  California's lab experiments need a reset at the ballot box.  

Climate Change Demographics Should Place Income First

I usually like the Climate One series of talks at the Commonwealth Club but today's talk on "Green Latinos" fell short.  Climate change shouldn't be the concern of one ethnic group because it affects everyone.  Replace "Latinos" with any other interest group and the effects remain the same.  Honing the message matters, and some demographics may respond more enthusiastically to culturally-specific images.  The single most important demographic factor impacted by climate change is probably income level.

Take a look at the social justice messaging from groups like 350.org and the Greenlining Institute to see their strident attitudes.  Justice is a worthy goal but limiting the dialogue to race is far from Dr. Martin Luther King's message of inclusiveness.  A race-specific approach will turn off the broad middle where political coalitions win converts for action.  Contrast the radicals' approach with Fuel Freedom's common sense emphasis on the economics of free market choices that benefit everyone.

Low-income citizens live closer to pollutant sources than high-income people.  A constituency for environmental stewardship should thus exist among low-income people of all races.  That constituency should be more than just an activist base where politicians win votes.  It should be a target market for entrepreneurial solutions.  California's green transport fleet incentives are the right regulatory reform for high-traffic areas.  The unintended side effects will include pricing self-employed truckers out of port service and chassis fleet markets if they cannot afford upgrades to meet the state mandates.  This means high-polluting truckers will still find business servicing other areas, likely the same high-traffic intermodal sites near freeways and railyards where low-income people live.  This is where entrepreneurial innovation solves the rest of this problem.  Somewhere between Google X and the X-PRIZE's reward for energy and environmental innovation is a solution to pollution.

Politicians and policy analysts consider the California ARB's cap and trade revenues to be a windfall for funding all sorts of green projects.  That should raise red flags with anyone concerned about accountability.  I'd like the state to avoid the problems the US DOE experienced with its loans and grants to troubled green enterprises like Solyndra.  Cap and trade revenue can be a decent source of subsidies for low-income Californians who want upgrades to more efficient home appliances.  I'll trot out my favorite pet project for the poor once again - the public option bank - as a conduit for such subsidies.  Paying a subsidy to owner-operator truckers for engine upgrades should be contingent upon income ceilings and an account at a public bank.  Energy rebates to low-income households should run through a similar public bank channel.

Climate change is not an ethnic issue.  It's an income issue, especially for the parts of our population who can't afford to mitigate its effects.  Energy efficiency reduces utility bills and raises personal income, but the poor among us will need some help with the initial capital outlay for more efficient technologies.  The California PUC should ask me about my public option bank plan if it's serious about helping the poor escape from pollution.  

Business Opportunities In California Water Problems

I recently wrote a Third Eye OSINT study of potential water supply impacts on global stability.  California is not immune from water supply problems.  The state Department of Water Resources (DWR) reports that California is currently experiencing one of the worst droughts in its recorded history.  Every problem presents opportunities for business solutions.  Studying policy trends will point the way to opportunities.

The state government has made the California Water Action Plan an interagency effort.  The undated draft makes it clear that water supplies are stressed and California must manage demand more carefully.  The plan states that over seven million Californians live in a floodplain, and later states that large amounts of floodplains and other natural habitats have been lost in modern history.  The connection is obvious to me.  Development in floodplains puts humans and habitats in danger.  IMHO the state government is in dire need of a UN Agenda 21 smart development plan that will prohibit further residential development in floodplains and gradually unbuild legacy development.

The Bay Delta Conservation Plan is a comprehensive attempt to preserve an ecosystem that sustains California's agricultural might.  Without this plan, I believe there will not be enough water available in Northern California to support both agriculture and the need for eventual oil and gas drilling in the Monterey Shale Formation.  Southern California developers and residential property owners are probably going to be very disappointed that their fantasies of comfortable life in the desert can longer be sustained by intrastate water transfers.  Metering and rationing mean the California golden age of lush front lawns and leisurely car washes is closing for good.

Note that California's credit ratings are still in the basement.  California voters won't tolerate any more bond issues for much of anything, including needed infrastructure.  The Governor's plan to build huge tunnels through the Delta gets more expensive every time someone turns over a rock.  This means that privately funded infrastructure has a golden opportunity to capture revenue from future projects derived from managed hydrology.  There is simply no constituency outside of inland SoCal for further incarnations of intrastate projects on the scale of the long-proposed Peripheral Canal.

It's really funny to hear SoCal politicians talk up the fairness of charging ratepayers for new water development.  Any further infrastructure development that diverts freshwater to SoCal will move the saltwater gradient so far inland as to make much of California's agribusiness nonviable.  It makes zero economic sense to invest in infrastructure projects that benefit agriculturally poor land at the expense of agriculturally rich land.  SoCal ratepayers would eventually face a death spiral of higher water rates to sustain more expensive crops, while those crops are gradually priced out of world markets.  Adding water infrastructure in Kern County will be wasteful investment as more farms in that region become untenable and cease operations.

I see the following business opportunities based on this emerging regulatory framework.

Hydroelectric development.  Any policy planning guidance that calls for more groundwater storage and flood control inevitably means more dams on rivers.  More dams mean more hydroelectric installations and electric transmission lines.  This opens investment opportunities in undeveloped real estate that could serve as rights of way for transmission lines.  HydroWorld notes that the California drought is reducing the amount of hydropower available from larger dams, forcing more reliance on other energy sources.  Always remember the water-energy-food security nexus.  I think the potential for smaller-scale hydroelectric installations deserves study.

Water utilities.  I have never been impressed with the financial performance of US publicly traded water stocks.  I may have to reconsider this stance, at least for companies that serve the California market.

Disruptive water technologies.  Cleantech entrepreneurs can make a difference with new solutions in water delivery, recycling, and decontamination.  SoCal's soil and climate may not be suited for water-intensive agriculture.  This is one reason why drip irrigation will address a much larger market than flood systems.  Oh BTW, water rationing implies that flooded crops like rice will play less of a role in California's economy.  GMO crops may have a future if more independent research helps paranoid people get over their hysteria.

Smart metering.  This one's a no-brainer.  Any unmetered residential parts of California - aside from those suburbs that will eventually become uninhabitable and marked for deconstruction - will soon be metered.  Any vendor of smart meters for water delivery can expect large orders from California utilities.

Desalination.  Making fresh water from seawater along the California coast has long been a policy pipe dream.  The state DWR has a desalination plan for grants and small experiments.  Desalination plants on a scale to meet SoCal's needs will require a huge investment.  The opportunity exists for visionaries with deep pockets and giant visions.  The market for water in SoCal is huge and water from the Delta won't supply its needs forever.  Use your imagination.  If you build it, they will come.

I foresee more regulatory control and microeconomic changes in the future, regardless of whether the private sector steps up to the water opportunity.  Here are my predictions for California.  New residential developments will minimize or prohibit front lawns and private swimming pools.  Existing homeowners will remove lawns and replace them with local native plants or drip irrigation gardens.  Some suburbs will cease to exist and be unbuilt, either because their municipalities are bankrupt (Bell, Stockton, Vallejo) or because they are environmentally untenable.  Many golf courses, especially in SoCal, will cease operations.  Those courses occupy space that will be more valuable as farmland or watersheds.  I don't like making bad investments.  Much of suburban California is malinvestment that will come undone in prolonged periods of water austerity.

One thing will not change in California's future hydrology cycles.  I will find a way to make money from the state economy's transition to more strictly controlled water use.  That is why Alfidi Capital exists.  Water and money both seek the path of least resistance.  

Alfidi Capital Attends Cleantech Open Western Region Innovation Showcase 2013

I can't get enough cleantech action.  My participation in the Cleantech Open as a mentor enabled me to attend last week's Western Region Innovation Showcase for 2013.  I am very impressed with one of the startups that participated in CTO this year:  RePower Capital, a matching service connecting institutional investors with commercial-scale renewable energy projects.  The other startups at the showcase addressed energy management, environmental remediation, manufacturing, and other sectors.  It's good to know that CTO has now found a permanent home at Xerox's PARC.

Notable local officials were out in force to tout California's business appeal.  The mayor of Fremont mentioned the city's foreign trade zone and expedited permitting.  Think Silicon Valley and the Fremont Chamber of Commerce have more details for those of you considering setting up shop.  Other cities in California have jumped on the innovation bandwagon ever since San Francisco proclaimed itself the "Innovation Capital of the World" and Fremont's FAST Innovation district strategy is the latest one I've seen.

Nancy Pfund from DBL Investors gave the morning keynote.  Her portfolio includes Pandora and Tesla Motors, so she knows what she's talking about.  She believes Tesla's success disproves the myth that payback on a cleantech investment takes forever.  Her experience indicates that cleantech investments can hedge other investments that have regulatory difficulties (I'm thinking hydrocarbon energy and petrochemical manufacturing).  Check out Bloomberg New Energy Finance to see continuing investment flows in the cleantech sector.  The WilderHill Clean Energy Index (ECO) is the benchmark that Nancy and other cleantech investors use when figuring whether their portfolios are outperforming other broad market indexes.  Nancy noted that Elon Musk proves that superstar cleantech executives can become pop culture icons.  One other resource she mentioned was PWC's Money Tree report on VC investing, which I'm sure is very useful to startups that want to find the most active VC funds seeking deals.

The policy panel was next, featuring more politically savvy Californians.  They noted that the California Public Utilities Commission's renewable portfolio standards (RPS) created a market for renewables, and that cap-and-trade regimes will fund development fulfilling the RPS.  Policy change has a very long incubation time and policymakers need the business community's input.  I'm pretty sure the organized labor community won't want to hear that but IMHO that's what it takes to make California more competitive.  They noted that municipalities have a role in developing infrastructure that makes an area an attractive place to work.  I immediately thought about plans to extend BART's reach to San Jose but freight rail links are also important.
I see two major areas for improvement based on what the policy folks had to say about wanting engagement from investors and entrepreneurs.  First, the cleantech sector is probably underrepresented among the lobbying efforts in Washington DC and Sacramento.  The Apollo Alliance, which helped write the ARRA stimulus/recovery/pork barrel package, has morphed into the BlueGreen Alliance and has Washington's attention.  OpenSecrets is a good place to find out whether the cleantech sector is making a level of campaign contributions that will get politicians interested.  Second, local governments and chambers of commerce can do a lot more to promote startup incubators and accelerators.  I linked to the Fremont Chamber of Commerce above but I don't know whether their representatives attended.  I suspect that some Bay Area chambers of commerce aren't aware that incubators exist and need corporate sponsors.

I couldn't stay for the afternoon program because I had another commitment in San Francisco.  My work isn't done after mentoring CTO startups.  I'm going to put startup accelerators on the radar of the San Francisco Chamber of Commerce.  There's enough corporate representation in that chamber to interest a startup seeking funding, and there's enough tech in CTO participants to interest corporate venture investors.

Full disclosure:  No position in any companies mentioned at this time.

Alfidi Capital Pays Attention to Mexico and Silicon Valley

We often hear about the special relationship between the US and Great Britain.  It's cemented by language, culture, common law, and a long absence of conflict.  There may be some other special relationships out there that some of us have ignored.  I found out about another special relationship last week when government and business entities from the US and Mexico met in Silicon Valley to promote bilateral trade.

The City of San Jose's Office of Economic Development let us know just how lucrative the trade relationship is for California.  Mexico's GDP is growing this year and it's California's largest export market.  That's a whole lot of refried beans, pardner.  I didn't know that the federal government of Mexico had a trade promotion organization named ProMexico.  The Mexican Consulate in San Francisco informed us that ProMexico is their equivalent of the US Commercial Service.  They said the US is Mexico's #1 FDI source, and I tried to confirm this in OECD's Statistics with no luck.  "Made in Mexico" products have the highest percentage of US content of any domestically sourced products in the world; in other words, Mexicans put more US subcomponents into their goods than any other country.  The country has not done well in developing lower-tier suppliers and must rely on a high percentage of US-made components.  The regional breakdown of Mexico's economy is important.  Northern Mexico has generally higher purchasing power and more industrialization than southern Mexico.  This is clearly a good opportunity for US suppliers to continue to target maquiladoras in northern Mexico.

The Consulate said that US retirees in Mexico are mostly an untapped market for US-branded services.  Yeah, I'm pretty sure the makers of medical alert devices and motorized scooters are salivating at the chance to sell down there.  I also learned that Mexican startups rise seed-round money in the US because there's very little to find in Mexico.  It's hard for startups to qualify for business loans from Mexican banks because their interest rates are high.  It sounds like Mexican startups take CustDev seriously if they seek early adopters in the US to obtain market data.

The US Commercial Service introduced their Silicon Valley Export Assistance Center, which I didn't know existed.  See, I learn stuff too.  US companies doing business in Mexico can easily launch into other Latin American countries.  The Commercial Service can customize trade missions for a single company due to their extensive contacts in-country, starting with their Mexico country page.

Please note that the SBA also connects with the Silicon Valley Export Assistance Center.  Our government really does work well when the business sector is the client.  Uncle Sam protects intellectual property rights at StopFakes, safeguards critical technologies at the Bureau of Industry and Security (BIS), sponsors emerging markets through the US Trade and Development Agency, and finances trade at the Ex-Im Bank.  Our taxes pay for these services and they're pretty effective, so businesses would be crazy not to leverage them to the max.  Check out the SBA's export loan programs and OPIC's investment services (like their Expanding Horizons workshops).

The San Jose Silicon Valley Chamber of Commerce presented the local region's perspective.  I don't come down often enough from San Francisco to use their services but I'm intrigued by their program for reintegrating military veterans into civilian life.  The Joint Venture Index of Silicon Valley tracks this region's economic health and sponsors public-private solutions.  I recall that San Francisco once had a public-private partnership called the Private Industry Council but it was merged into a City office during Gavin Newsom's administration.  The Silicon Valley Leadership Group assembles the region's leading employers to speak in one voice on public policy.  I didn't quite see the direct connections to trade with Mexico but the region certainly has the right policy players in place.  I also learned that "embeddedness quotient" describes employee happiness.  Who knew?  I didn't.

Mexico and the US have a lot going on.  That's pretty special.

Citadel Exploration (COIL) Keeps It In The Family

I'm checking out Citadel Exploration (COIL) right here in California.  The founding family behind this operation has been drilling for as long as oil has been drilled in the Golden State.  I am somewhat concerned about the philosophy of "find oil where it's already been found."  That has long been an industry truism but today it is executed with geological and mathematical precision.

Citadel has active exploration projects at Rancho Grande and Project Indian.  My concern with Rancho Grande is the company's stated plan to eventually truck the oil to regional refineries, which I interpret to mean there is no pipeline network serving the area.  I'd like to see how much the cost of truck transportation adds to each BOE, or if the company would consider building out a pipeline connection.  My concern with Project Indian is the oil's heavy API gravity.  Heavy oil is more costly to refine than light sweet, so this may eliminate the 10% price premium to WTI that California refineries are supposedly willing to pay for California production.

The company admits to going concern doubts in its 10-K dated August 13, 2013.  I noticed that executive compensation makes up a significant part of their operating expenses and has been increasing since 2012.  They had $307K cash on hand as of June 30 and a burn rate of approximately $100K/month.  The good news is that they have successfully raised cash and wiped out notes payable in early 2013.

This is a young company with an old history.  I want to hear more details on well results and logistics.  The stock has traded below a buck since July but if oil is in this family's blood, they may strike pay dirt once again.  That's why I'm going to keep watching this company's results.

Full disclosure:  No position in COIL at this time.  

Matchbox Twenty, Goo Goo Dolls, and Kate Earl in Concord for Summer 2013

Live music is an opportunity to wonder at mass behavior.  Some artists fade away after a single hit and others have careers for decades.  The handful of bands that have survived in American pop culture since the mid-90s captured the zeitgeist of the dot-com bubble's promise of endless prosperity.  Matchbox Twenty and the Goo Goo Dolls are among that small number.  I got to hear them live on July 23 at the Sleep Train Pavilion in Concord during their 2013 Summer Tour.

The Pavilion itself is impressive.  It's a Frank Gehry creation that looks like someone chopped an edge off a Borg Collective cube and propped it up in the hill country of Contra Costa County.  I don't quite get the business logic behind Sleep Train's sponsorship, unless people in the Bay Area really need new mattresses more than once a decade.  Bay Area denizens break down into tribes of intellectuals and laborers.  I normally hang out with intellectuals but I can deal with the masses when I'm out in public.  Longtime concert goers mark their tribal affiliations with T-shirts from previous tours.  Lots of these folks must love the big name tour circuit.

The opening act was Kate Earl, a very strong performer with radio-friendly tracks like "One Woman Army" and "All I Want."  Kate will easily be a star because she has talent and the crowd felt it when she connected with them.  I was particularly impressed when she hit several progressively higher notes to demonstrate her vocal range, and her voice was stable at each octave.  It also helps that her looks and emotive ability translate well to video.  Check out her video for "Melody."  She's a natural performer and boldly displays sensuality.

Even top acts aren't above using base comic relief.  After Kate Earl's set, some random performer in a bear costume got up on stage and gesticulated to the old Disney standard "Bare Necessities."  I guess that was to please the kids in the crowd, or perhaps to fulfill a union contract that stipulates some minimum amount of time the roadies must be on stage.  Even roadies have unions these days, and the International Alliance of Theatrical Stage Employees (IATSE) helps ensure that the ticket prices you pay at live performance venues remain as high as possible to pad their fat pockets.

The Goo Goo Dolls had tons of energy in their set, plus tons of touring musicians who aren't part of their regular lineup.  The one thing I've never fully understood about touring performers is their desire to supplement their official lineup with extra musicians who didn't record the songs in a studio.  I have a pet theory that I would like a music industry insider to either confirm or debunk.  I think studio recordings are now so overly processed, engineered, and dubbed that the only way to achieve a comparably rich sound while live is to add more live musicians.  I don't care much either way.  The Goo Goo Dolls sounded great with their extra backups.

John Rzeznik was a crowd favorite.  I suspect he'll go down in music history as a game-changing singer and songwriter.  His lyrics are poetic and his vocals have so many alternating layers that the band's oldest hits never tire out.  Their newer songs often share similar rhythms with their older standards but it's not like you're listening to the same song twice.  The only thing the Goo Goo Dolls need to do to remain successful is to stop their bassist Robby Takac from singing lead.  His bass playing is fine, but the dude just can't sing.  His raspy voice contrasted with John's melody displays an obvious talent gap.  It is no coincidence that the band achieved its commercial success when John took the lead vocal role from Robby after their first two albums. It is also no coincidence that none of the album songs where Robby sings lead have ever been released as singles.  Even the audience noticed the difference in vocal quality; they were polite and sedate when Robby sang but enthusiastic when John regained control of the stage.  This observation won't sit well with hardcore GGD fans but someone has to tell the truth.  Just play, Robby, and let John sing.

Matchbox Twenty went last and played the longest set.  Here's another of my pet theories.  I suspect that music industry tradition reserves the last and longest set for the band that has sold the most retail music.  That used to be measured in CD sales but now MP3 downloads are probably the leading metric.  The RIAA keeps statistics on shipments of music packages.  The IFPI has worldwide data.  I don't subscribe to either service so I don't get full access to their data histories by artist.  The closest I can come in open sources is to compare the unofficial Matchbox Twenty discography with the comparable Goo Goo Dolls discography.  Argh, the GGD page doesn't have total sales figures per album.  Shucks.  Billboard is no help either; it has article histories but no sales data.

I'm getting off track here, but I just can't help thinking about business topics even at a rock concert.  Matchbox Twenty simply rocked.  Their old standards from the mid-'90s pleased the youngsters in the crowd.  The two hot chicks in front of me just couldn't stop shaking their shapely bee-hinds during "3AM" and "Real World."  I had to stand for most of Matchbox Twenty's set because so many yahoos were standing up in front of me, including one tubby guy who insisted on waving his arms in some bizarre Tai Chi poses.  That's rock 'n roll for ya, where even no-talent slobs think they can be stars.

The prominent use of video effects as part of both headliners' stage acts is a sea change from road shows of yesteryear.  My very first live rock concert was Tesla in Sacramento on New Year's Eve 1992.  The hued lights would blink in time with the rhythm section and the bright lights would cue the audience to go nuts at the musical "bridge" points in each song, much like an "Applause" sign in a TV recording studio.  The last big name rock concert I attended was when The Cranberries played San Francisco's Warfield in 2002 as their popularity was just about to wane.  It really does take me a decade to get around to a show.  Anyway, the Cranberries had plenty of flashy lighting but no big video monitors to tell the audience what they should be feeling.  The video cues in the Goo Goo Dolls' "Come to Me" included supertitles of the lyrics so we could all sing along to one of their new releases.  Matchbox Twenty launched their set with a video of some Vaudevillian actor introducing them, and introduced "3AM" with a video of a clock radio hitting that time.  Video added a dimension to these groups' artistry that I never expected to see live.  Watch a YouTube video of some old '80s hair metal band and you'll see that lighting and video cues used to be as subtle as sledgehammers; now they're as sharp as scalpels.

Many of the younger folks in attendance couldn't have been past elementary school age when these two bands were in their heyday during the dot-com bubble.  Most of them weren't even born when INXS released "Don't Change," but they rocked out to it anyway when Matchbox Twenty covered it during their encore.  Those teens and twentysomethings now have a memory of an old song made new again.

Pop music's pervasiveness allows us to time-stamp our lives.  I'm in Generation X, the first generation to transition its listening preferences from FM radio to CDs to MP3s and finally web streaming.  The time-stamps of each of the hits that night are as readily visible for me now as when they were first imprinted . . .

- Goo Goo Dolls' "Name" in 1995 . . . meeting my platoon for the first time at Yongsan Garrison, Republic of Korea.
- Matchbox Twenty's "Push" and "3AM" in 1997 . . . driving back country Texas roads around Fort Hood after major exercises, going past the boundaries of the maps the base gave me.
- Goo Goo Dolls' "Iris" in 1998 . . . browsing the old German shops made new for tourists outside of Warner Barracks in Bamberg, and regretting that the remake City of Angels wasn't nearly as good as Wim Wenders' original Wings of Desire.
- Goo Goo Dolls' "Black Balloon" in 1999 . . . watching Air Force pilots throw plastic furniture from the Officers' Club patio at Osan Air Base, Republic of Korea, with a very attractive female Air Force lieutenant who might have done anything I'd asked her to do (if only I had thought to ask).
- Matchbox Twenty's "Real World" in 1999 . . . at my promotion to Captain on the fourth floor of the Zone night club in Songtan, Republic of Korea, surrounded by my fellow soldiers and Korean bar girls with Anglicized stage names.
- Goo Goo Dolls' "Here is Gone" in 2002 . . . commuting to MBA classes in San Francisco where most of my classmates held me in contempt for my military background, and wondering how badly my pending recall to active duty would hurt my civilian career (as it turned out, almost terminally).
- Matchbox Twenty's "Unwell" in 2003 . . . risking my rank and paycheck to fight every illegal order I received from corrupt and incompetent military superiors, all while wondering why I was still bothering with the Army.
- Goo Goo Dolls' "Before It's Too Late" in 2007 . . . rebuilding an Army unit and its training regimen from the inside out at Fort Bragg, North Carolina, in the same barracks where I was told as a cadet in 1994 that I did not deserve to be a soldier.
- Goo Goo Dolls' "Notbroken" in 2010 . . . returning from war in Iraq, not broken at all.
- Matchbox Twenty's "She's So Mean" in 2013 . . . when my Army rank, personal net worth, and business reputation are higher than I ever imagined they would be in my darkest days.

I marked a new time-stamp at this concert with Kate Earl's "All I Want."  All I wanted was to see awesome performers live.  Popular music will never really change.  Frank Sinatra was the first pop crooner to make young women swoon and Elvis Presley was the first to make their boyfriends jealous.  The Beatles made pop music go transnational, with or without Tavistock's help.  Heavy rhythms recall our tribal origins as hunter gatherers.  Those rhythms can still bind us as temporary tribes, under the stars in outdoor pavilions.  

Shale Gas Fracking or Coal Gasification

America has long been rich in hydrocarbon energy.  That's great for Joe Six Pack and his fellow energy hogs who forget to turn off a light when they leave a room.  The country's remaining reserves of coal and natural gas are still plentiful but are more expensive to extract than ever.  Choosing between gas and coal is not easy.

The US Potential Gas Committee has published estimates of natural gas reserves for decades using rigorous peer-reviewed methods.  The Committee estimated that the US's recoverable gas reserves stood at 2.38 Tcf at the end of 2012 with no caveat for expected production timelines or market prices.  The New York Times's "Drilling Down" series exposed the hype some shale gas enthusiasts had pushed on the public.  Large US gas reserves are not necessarily cheap or easy to obtain.

Shale gas may be cheaper and cleaner to burn than coal but that does not mean its extraction is without cost. Methane is still a greenhouse gas and its uncontrolled escape exposes the atmosphere to global warming.  That's why monitoring orphan gas leakage from wells and pipelines is important for the energy sector.

I will go out on a limb to suggest that the risk of groundwater contamination from fracking is overblown.  The GAO-12-732 found no evidence of aquifer contamination from fracking.  Oil companies already know how to purge contaminated water from a well by plugging it at the bottom and creating air pressure that sucks contaminants out of a compromised bore hole.  The scene in the documentary film Gasland of a water faucet lighting on fire displayed the results of biogenic methane gas unrelated to oil and gas exploration.

Fracking's impact on surface topology also appears to be negligible.  A fracking well's surface footprint is 5-7 acres for each well pad, but horizontal drilling means several wells can fit on a single well pad to save space.  Surface traffic into rural areas will increase as trucks bring in large amounts of water to sustain fracking, but refer again to that GAO-12-732 study above which was inconclusive on the impact of surface disturbance.  The GAO's 2013 High Risk Report concluded that the management of oil and gas royalties from production on federal lands needs improvement because of uncertainty over monitoring and revenue collection.  It all comes down to money, folks.  Uncle Sam will ignore fracking's potentially unknown impact on surface degradation if it gets a more accurate account of the enormous revenue it generates.

Trucking in all that water means someone else doesn't get to use it.  The "water wars" of the Western states have always been pretty intense between environmentalists and farmers.  Introducing fracking wells' need for water may end those wars unexpectedly because energy companies are rich enough to outbid other parties.

Fracking may have some common cause with the geothermal energy sector.  Injecting water into deep wells does induce seismic activity.  LBL's Earth Sciences Division has studied induced seismicity for years in the context of energy exploration.  It would be great if the geothermal sector could partner with the oil and gas sector by sharing data on deep well injection because they could probably learn from each other.  Both sectors should also peruse the USGS Earthquake Hazards Program data to see where their drilling is likely to raise their costs if they get hit with lawsuits from earthquake victims.

If you don't like the headaches involved with shale gas, you won't like the coal sector either.  The current Administration seems determined to make life difficult for the coal sector with increased regulatory attention.  Goal gasification in situ may provide a favorable solution.  The heat transfer to the surface generates electricity and the carbon byproduct stays locked in the Earth's crust away from the atmosphere.  DOE's support for the FutureGen coal plant conversion project shows that the Administration is willing to back a demonstrated carbon capture technology for the coal sector.  One big potential drawback to coal gasification is the uncertain means of turning off the thermal reaction underground.  I recently had a conversation with a former energy company executive who mentioned some underground coal mine fires in Pennsylvania that have burned for decades and then migrated to consume other deposits.  He had the same concern about extracting methane hydrates from Arctic tundra and the frozen ocean floor.  Taking out too much at once may cause an unpredictable reaction.

California is set to play a big role in satisfying America's future energy needs.  The Monterey Shale Formation may be the biggest oil-bearing formation in the US.  Getting energy out will be hard because of its complex geology.  I predict it's going to happen anyway.  Ignore the political noise and focus on the money.  America is going to build clean coal plants, lay the Keystone-Xcel pipeline, and frack California's shale.  The energy companies that line up first will be minting money for years.  

Mineta Transportation Institute Holds Forth on Transportation Funding in 2013

The Mineta Transportation Institute held its annual policy summit last week at the Commonwealth Club.  I have a background in both transportation and finance so I couldn't miss a chance to connect the two over a free breakfast.  I got there so early I actually walked in right behind former Secretary Norman Mineta himself.  I didn't speak with him because I'm just another commoner and there's no way he can do me any favors unless I write a big check to his institute.  I'd rather hear what his invited policy wonks have to say, free of charge.

The first agenda item was an address from USDOT's acting General Counsel Kathryn B. Thomson.  She briefly mentioned ARRA's $48B commitment to critical infrastructure but I'm concerned about whether it's being used effectively.  She also mentioned a couple of programs that I think should be excellent candidates for consolidation into a national infrastructure bank.  The first is the TIFIA program of loans and other credit instruments specifically for surface transportation.  The other is the TIGER grant program for multiple transportation modes.  If USDOT's approach to favoring public-private partnerships is correct, then an infrastructure bank that issues bonds linked to these programs is the way to go.  I do see a potential hurdle in that federal highway improvements are funded by the Highway Trust Fund's revenue from the federal gasoline tax.  Moving all federal infrastructure projects into a national infrastructure bank's inventory means revising the enabling legislation for every federal tax on transportation modes.

Ms. Thomson made us aware that federal gas taxes can no longer be the single funding source for our transportation needs.  Hybrid cars use little gas and pure EVs use none, but their battery packs make them heavier than gasoline-powered cars.  That's simple physics, folks, because the energy storage capacity of liquid hydrocarbons is denser than that of lead-acid or lithium-ion batteries.  Heavy hybrids and EVs will wear out our roads faster.  Here's my idea.  Instead of a knee-jerk funding commitment to every meter of highway in the federal inventory, why not "red-line" those segments that are seldom used?  Cities like Detroit and Stockton will have to downsize and unwind much of their development, allowing USDOT planners to declare some roads too costly to maintain.  This is why ARRA's blanket approach to funding unmet "needs" has given me pause for some time.  A planner may mark a road for the "need" column even if it leads into an urban area that deserves to be torn up and unbuilt.

The Q&A for Ms. Thomson was revealing.  The USDOT favors California's high-speed rail program.  IMHO federal planners are blind to that program's cost overruns, unneeded stops in rural towns, and pork payoffs.  My ideal high-speed rail system for the Golden State would link no more than six cities:  Sacramento, Oakland, San Francisco, San Jose, Los Angeles, and maybe San Diego.  Anything more adds transit delays and costs.  Nobody asked me to contribute, so of course we're getting a more expensive system than we need.  Federal matching funds for high-speed rail make it too easy for state planners to add unneeded segments.  Smart leaders in Ohio, Wisconsin, and Florida have turned down federal matching funds for high-speed rail since 2010.  This unfortunately makes it easier for California to gorge at the federal trough instead of scaling down its own high-speed rail plans.

One comment gave me hope that there is room for disruption in the transportation sector.  Positive Train Control (PTC) is an expensive mandate but the railroad industry is making progress to meet the 2015 deadline specified in the Rail Safety Improvement Act of 2008.  The thousands of wireless devices and monitoring systems needed for PTC represent a great opportunity for entrepreneurs.

The next panel had experts from several different entities.  I think they could have benefited from having a member of the National Research Council's Transportation Research Board (TRB) on the panel.  I've been receiving the TRB's emails for years ever since I expressed an interest in joining the board.  TRB puts out tons of white papers that should inform both the private developers who build near transportation infrastructure and the public policy planners who take development into account.  The panel believed that public infrastructure and private development attract each other but they did little to enlighten us on the nuts and bolts of project finance.  They spent little time addressing how projects could be funded but gave detailed coverage to MTI's latest study on how tax options can be sold to the public.  Come on, folks, even USDOT just admitted there's more to transportation finance than gas tax increases.

It's time for me to go out on a limb, as I am wont to do.  A public that lacks understanding of how its transportation priorities are determined will eventually get as riled up over transit tax increases as Brazil's current protesters.  Fare increases set off the Brazil protests but they have a long list of other grievances.  The American public needs to see benefits that impact them personally and emotionally if they're going to buy into a sales pitch.  Only developers will be convinced by a transportation project's ROI, although that's important to demonstrate.  That MTI survey shows that the gax tax appeal rests on resolving users' pain points.

The panel noted that the MAP-21 legislation will not be sufficient to fully fund the nation's needs for public transit.  The full commitment for a public transit system that meets the nation's needs is a one-time cost of $70B.  Even this doesn't account for pay-as-you-go funding of long-term sustainment.  The panel acknowledged that federal funding will shift to favor those state projects that can demonstrate self-funding, which to me implies user fees.  Some combination of a state gas tax, usage fees, general fund revenue, sales taxes, vehicle registration fees, naming rights, development fees, tolling, and other public/private hybrid solutions are inevitable in California.  This combined funding mechanism needs to be in place far in advance of any further work on high-speed rail.  Private investment committed too early to a public project, as the panel noted, will discount the project's completion too heavily and make it nonviable if future private funding is unavailable.

I did not hear one single comment during this entire forum on inland water transportation or port infrastructure.  California has two of America's busiest ports - Oakland and Long Beach - and many ports in the country need regular dredging to remove buildups of silt that degrade their deepwater shipping channels.  Port cargo throughput ability will be a serious national security enabler in the event of any major mobilization.   NDTA keeps me updated on the lack of progress addressing this potential bottleneck at critical ports.  America's inland waterways need serious upgrades to their locks and dams so barge traffic that supports the petrochemical and agricultural sectors can proceed unimpeded.  The members of the American Waterways Operators know just how much they depend on the US Army Corps of Engineers to keep their traffic flowing.  If you don't believe me, review the USDA's Agricultural Marketing Service data on barge rates for agricultural transportation.  Take a guess at how much higher those rates would be if inland waterways are degraded or congested for lack of infrastructure repair.

I should not have been surprised that the panelists did not answer the question I submitted on transportation finance.  I wanted to know whether California agencies could sustain municipal bond issuance in the face of either rising interest rates or high inflation.  I can't blame them for not wanting to touch that in light of their revelations above about the difficulty of attracting long-term finance (from bonds that fund initial capital outlays) without mechanisms for sustaining annual finance in place (from user fees and other sources).  Today's ZIRP environment is ideal for raising muni bond proceeds and states will never get a break like this again in my lifetime.  Rising real interest rates will soon make the cost of new capital projects astronomically high.  My ideal answer to my own question would rely on state agencies issuing inflation-indexed munis.  They could get really creative and issue equity in publicly financed corporations modeled after Fannie Mae and Freddie Mac, provided the State of California does not provide unlimited guarantees for those corporations' liabilities.

California needs more than just money to complete its transportation dreams.  It needs creative leadership.  Gov. Brown, give me a call.  I'll be happy to put your state agencies on sound financial footing if you pay me for my genius.

Adventure at the UC System-Wide Technology Transfer Forum 2013

A few months ago I received an invitation out of the blue to attend the University of California's annual System-Wide Technology Transfer Forum.  They must have heard through the grapevine about my extraordinary business acumen and remarkable insights.  I do have to live up to my reputation, so of course I accepted.  The forum took place today down in Millbrae and I was suitably impressed.

I commiserated with some fellow investors over breakfast about the state of the economy.  A few of us had read David Stockman's recent NYT op-ed piece arguing for the inevitability of economic annihilation in America.  I admitted I had no idea what the future held for the economy and that I was content to tread water in my own portfolio until things shake out.  My regular readers know that my coverage of natural resource stocks anticipates a hyperinflationary scenario friendly to hard assets, but that doesn't preclude Stockman's deflationary asset crash from happening first.  Anyway, we were all attending out of optimism that commercializing technology out of the UC's labs is the antidote to whatever malaise and stagflation afflict America.

The Forum's opening remarks taught me a fun new term:  the "Valley of Death."  I heard about "Crossing the Chasm" years ago so I figured the Valley of Death is where failed startups go if they can't cross that chasm.  There are ways across the chasm that avoid the valley, and the UC Forum showcased some good research ideas that could attract funding.  The winners of the UC's system-wide proof of concept program got to showcase their technological developments here after thorough peer review.

The morning's motivational keynote came from Nathan Harding, the CEO of Ekso Bionics, who got his own professional head start in UC Berkeley's laboratory system before jumping to the private sector.  His company's story was a template for everything that should go right with partnerships between universities and entrepreneurs.  U.C. Berkeley's Office of Technology Licensing helped write Ekso's business plan.  Their robotic powered exoskeletons had obvious military applications, but the defense community wasn't interested until Ekso brought in a market-specific leader with a defense background as a temporary executive.  Presto, he got them funding from Lockheed Martin.  That's how it's done, folks, and you won't learn that in business school.  They got funding from leading rehabilitation centers (the opposite of how new devices are usually introduced) by allowing sponsoring hospitals to use the Ekso devices in their own capital raising campaigns.  That's another win-win you won't read about in textbooks.

Here's the ultimate winning play.  The Ekso team demonstrated their robotic powered legs on a volunteer patient who had lost the use of his own legs in an automobile accident.  While they were strapping him into the robot harness and powering it up, he briefly fell over and the team had to do a retake.  They didn't break their stride, complain, or ask for a bailout.  They had obviously rehearsed contingencies like this and calmly proceeded to reset, reboot, and get back on their feet.  That's exactly what that patient did, folks.  In front of hundreds of executives and scientists, he got out of his wheelchair and walked across the conference room on powered legs.  The lesson for America is obvious.  It doesn't matter whether you fall into David Stockman's camp of disillusioned Reaganites or Paul Krugman's passel of needy liberals.  When you fall down, run through your playbook of backup plans and GET BACK UP.  Americans used to know how to do this, before bailouts and entitlements.  We need entrepreneurs to get us back into the habit.

I picked out the breakout sessions I wanted to attend from what looked like a biotech-heavy lineup.  I'm neither a scientist nor a doctor, so I wondered whether these subjects were going to be over my head.  I checked out a presentation on microfabricated ceramic blade arrays from folks associated with the UC Davis Engineering Translational Technology Center (ETTC).  That's a fancy way of saying ceramics can make sharper, longer-lasting edges than metal alloys.  I get the emphasis on a razor blade that holds its integrity for ten shaves before degrading.  Human skin can be course and tough, and I usually change disposable blades after seven shaves (i.e., once a week).  Going head to head with this blade against Gillette,  Schick, and others means figuring out whether consumers will change their shaving habits to a ten-day calendar that optimizes the product's demonstrated value.  I think a ceramic blade is more readily adaptable to industrial fabrication apps that integrate microfluidics, like cutting silicon wafers.

The next presentation got me really excited.  I figured I couldn't go wrong hearing about "self-healing multiphase polymers for coating applications" because it gave me a mental image of the old movie The Blob.  I had to see if these mad scientists had made a real blob that could re-form on its own, and fortunately their creation was benign.  They designed a synthetic material that can regenerate itself after experiencing damage.  The video of this stuff maintaining its integrity under load after re-forming was impressive.  This stuff combines two of the hottest trends in engineering today:  biomimicry and additive manufacturing.  The material mimics nature's use of multiphase, composite designs and is assembled layer by layer to conform to the expected temperature of its environment.  UC Irvine is behind this stuff 100% with support from their Office of Technology Alliances.  I was intrigued by the potential applications in rail transportation as a buffer between the metal rail and concrete trackbed.  I was further intrigued by the possibility that this material can be tailored to tolerate the temperature and pressure extremes of any known environmental window.  I am convinced that the oil and gas sector needs to know about this development so they can evaluate whether this self-sealing polymer is viable in the extreme environmental conditions experienced on drilling rigs and subsea infrastructure.  There are many more ways to use this stuff than in aerospace anti-corrosion coatings.  Gentlemen, you know where to reach me.

The lunchtime panel showcased the entrepreneurship programs of several UC campuses.  UCSF's Entrepreneurship Center is looking to move beyond the school's biotech focus.  Startup UCLA is focused more on educating students and reconnecting alumni than incubating live businesses (hey, whatever works).  UC Davis' entrepreneurship center sounds like it has a hard-core schedule of workshops, angel events, and prep sessions for business plan competitions.  UCSD's von Liebig Center funds innovative projects all over SoCal.  It's hard to believe California is hostile to business with all of this academic interest in fostering entrepreneurship.  Take heed, Sacramento.  Ambitious dreamers will create jobs if you get the tax and regulatory environment right.  The panelists had plenty of wisdom on how to get the job done.  They were big fans of their centers' collaborative efforts with each other and their campus laboratories.  Gift campaign pitches to donors now include requests for underwriting the commercialization of UC technology.  The entrepreneur centers want investors to get involved; their doors are open, so go visit and get on their email lists.  The culture of entrepreneurship on campus was more important than the the quality of any specific technology.

The afternoon briefings I attended touched on material science, another blind spot for me but I wanted to see what was on display.  One guy from UCSD talked about a nanostructured coating for solar thermal arrays.  I couldn't miss this one, as I've long been convinced that whatever bet California makes on a solar future should favor solar thermal (a.k.a. CSP) over PV panels.  Go back and read my blog archives for more info.  His observation that CSP allowed for energy capture from both solar radiation and visible light meant that solar thermal installations would benefit from the heat capture abilities of an enhanced coating.  His solution was a silicon-oxide spectral selective coating with embedded Si-Ge nanoparticles.  His research indicated the coating would resist oxidation and see less degradation over time.  There's no shortage of silicon for his solution, but I wonder about the availability of Germanium for his nanoparticles.  The vast majority of Ge is found in China, so that country's potential lock on supply is a cause for concern.  I want CSP to work but it has to be cost effective, so making Si-Ge viable means knowing the cost per Watt of a coated CSP cell and comparing it to the cost of a typical Bi-Sb-Te coating compound.

The briefing on broadband full duplex radios kind of threw me for a loop.  I'm unfamiliar with the commercial limitations of radio broadcast technology using half-duplex hardware.  I can see the military applications of deploying full duplex mobile base stations to isolated outposts in combat.  The mystery for me lies in convincing civilian base stations of the efficiency to be gained from improved base stations when the path of least resistance in telecommunications is to pursue advances in streaming and data compression.  The best test market for full duplex base stations may be isolated regions like sub-Saharan Africa where nomads, adventurers, and resource prospectors have no access to existing broadcast towers.

A briefing on a lithium-sulfur battery cell was intriguing but I think they've got a tough road to commercialization.  Li-Ion battery makers already have a lock on much of the hybrid car market so Li/S will need more than just a serious cost advantage or capacity enhancement.  New car models must be engineered to account for the likely difference in weight and volume of an Li/S battery.  Sulfur is an abundant material but research on the safety and degradation problems unique to Li/S batteries needs attention.

The final panel on crowdfunding was right up my alley.  I'm starting to see the same thought leaders from the same portals at more of these panels, which means a handful of committed innovators are going to write the rules for the entire movement.  Direct equity investing still isn't available because the SEC is waiting for FINRA to certify the first crop of ready portals.  Those portals that want to raise equity capital are limited to collecting login data from self-reporting accredited investors and segregating their platform interfaces so bona fide angel investors can contact startups directly.  I learned that medical device trials may offer product  iterations that lend themselves to reward-based crowdfunding; hey, donate a couple hundred bucks and get a free thingy.  I wonder if that would work for cosmeceuticals too.  The panelists were adamant that crowdfunders run their own social media campaigns rather than outsource them; that aligns with the adage that a startup CEO must give the traditional roadshow pitch, no exceptions.  The ideal time frame for a project-only crowdfund pitch is accepted as 40 days, give or take ten days; this phenomenon is maturing so quickly that metrics like that are now validated from widespread use.  BTW, crowdfunding isn't just for little startups anymore.  Large organizations can crowdfund a high-profile project they want to showcase because a well-crafted social media campaign can raise any organization's "digital footprint."  Philanthropic funds are attracted to crowdfunding projects that are already supported by well-defined communities.  Caution is warranted when crowdfunding a project that isn't fully IP-protected, because it will be exposed to scrutiny before it's mature.  See, this isn't just greasy kid's stuff anymore.

Good times lie ahead somewhere and they won't come about through monetary stimulus, fiscal profligacy, Wall Street legerdemain, or populist agitation.  They will come when entrepreneurs team up with inventors and bring forth disruptive new solutions, just as they always have in American history.  Some of those solutions were right there at the UC's Forum.  See you next year.