Cities Get Incentives for Working With PE, Carlyle COO Says

New York City headquarters. Coverage of the Bloomberg Invest Conference on Bloomberg Radio is brought to you by s e I. This is the big week, the week when we're finally going to hear some of these details about President Trump's infrastructure spending plan and to break down exactly what we can expect and what potential opportunities there are for private investors.

Glenn young Ken is here to make it all makes sense for me anyway, President and Chief operating Officer of the Carlisle Group, and he joins us here in our Bloomberg headquarters. Glenn, let's start with good morning, good morning, thank you for joining me. Let's start with the idea of this two hundred billion dollars of federal money and eight hundred billion dollars of private money that comes in

because these private investors are promised incentives. What are these incentives? Yeah, I actually think, um, the incentives are going to be more for the jurisdictions that take on new projects. So how's this really going to work? Um, First, the government's incentives are going to be are going to be put in place so that cities and states could actually earn a bonus if they take on public private partnerships for

critical assets. So, for example, if you're the mayor of a city and you have an airport, and you have big plans for that airport, and you actually put it into a public private partnership process and bring in private capital to fund the expansion of that airport, and oh, by the way, most likely receive a payment up front. Um, the government will in fact provide an incremental incentive on

top of that for the city. The city then has the capital that they liberated from that airport plus incremental capital from the government to invest in new things. All right, back up, when you say they get this extra incentive, they get this extra bonus. That money is coming from somewhere. Where does that come from? Does that mean higher tolls.

Does that mean higher taxes federally? Well, first of all, the two hundred billion was in the president's plan that they submitted two weeks ago, which was a ten year a ten year a budget frame plus a ten year forecast. And it's over the ten year period the two billion um and they actually hope to liberate more than eight

hundred billion. They hope to actually attract a billion trillion I'm sorry, they hope to attract a trillion into this and so, which I actually think they will because the asset base that the private sector has a chance to invest in is already existing. Very interesting fact, just in the airports alone in the United States today, which are up and running commercial entities, right They get landing fees, they have passenger traffic, they have restaurants and shopping in them.

There's there's an estimate that that's already a half a trillion of value that exists in just airports in the United States today. Okay, so I love the idea of liberating cash. By the way that my mind is going wild, but I'm trying to understand, uh, this idea of attracting when trillion dollars in investment capital. It seems like private equity firms in particular, which are despot for opportunities in

this overvalued market, at least ind of some. I'm surprised that there haven't already been more investments made in infrastructure. And if they're not, are there structural reasons as to why not? For example, whether it's certain interests or whether it's certain obstacles that are just physical. You can't construct a new airport when there's one that needs to operate, right at least that's It's a great question, and I think there's two primary um factors to make sure we

look at first. Outside of the United States, this concept has flourished so in Europe, in Canada, and particularly in Australia. The concept of bringing private investors into infrastructure and have them almost recapitalize that infrastructure in a partnership with the

government has flourished for years and years and years. It hasn't happened here because there's been a hesitancy to actually take on what is something new, because there's been this expectation that the government is just gonna pay for it. We'll don't worry, We're just gonna pay for it. And the reality today is we can't afford to pay for

it any longer. There are critical infrastructure needs that the government can pay for, but it can't pay for the two trillion dollar gap that exists today in our infrastructure requirements. And so it is the need to actually uncover this new technique for this country. And it's not perfectly new, because we've done a few already that in fact will will gain some momentum and actually begin to start filling that gap. So, Carlisle overseas about a hundred and sixty

two billion dollars of assets. How much money do you expect Carlyle to invest should this plan come to fruition in infrastructure. That's that's that's a very nice direct question, and so I'm going to dodge it a little bit. I imagine that you would find a way. But we in fact, we in fact have funds and are raising funds, and so in energy and infrastructure today we manage across

equity and debt capital about twenty eight billion dollars. Infrastructure needs extend from energy infrastructure to airports, to toll roads, to telecom infrastructure, and so the depth of this market is big. It's big, and so what I think what we're gonna end up seeing, however, is a few key critical projects out front that blaze a trail. Airports. Airports particularly because they're commercial entities that are up and running

there and as a result, people understand them. They've been done in other countries, um, and that to me is a decision that a mayor can make and the f a A can make and they don't really need government intervention from the from Washington to do this. And that's the great part about A Reports today. This is a

fascinating conversation. I could speak with you all morning because it really highlights a lot of interesting angles such as if you do have airports that are successful at pairing partner private and public money, then what does this lead to next? But unfortunately have to leave their Glenn at Calfkin, thank you so much for joining us at President and

chief operating Officer at the Carlyle Group. It's private equity firm that oversees a hundred and sixty two billion dollars in Washington, d C. We are broadcasting alive from the Bloomberg Invest Conference at Bloomberg's New York City headquarters. Coverage of the Bloomberg Invest Conference on Bloomberg Radio is brought to you by s EI And of course no investing conference or conversation would be complete unless we addressed the big elephant in the room, which is passive investing and

the shift that's been going on. Moody's put out our report earlier. This you're saying the passive investing will overtake active management by twenty twenty four in the US. From more perspective on this, I want to bring in Christie Mitchem. She is chief executive officer of Will's Fargo Asset Management, which has four hundred and eighty billion dollars of assets under management and is based in San Francisco, which has much better weather than there is in New York City.

Yet today and yet here she is and she joins us here in New York. Christie, thank you so much. UM. You know, we hear so much about this accelerating shift to passive management, particularly with respect to equities. Uh is now any different? I mean, it's time with such low volatility,

won't this just absolutely accelerate? You know? I think today is different, and I think one of the things that investors may be missing that really sits below overall low volatility levels is a real c shift in the marketplace, and that's a change in the para wise correlation between stocks. You know, we saw that correlation actually hit a low in January of this year after hitting a high back in two thousand twelves. Hold on sec let's just back up.

In other words, the correlation between stocks, all stocks moving in tandem broke down earlier this year reach the lowest point ever. It reached the lowest points since two thousand eight in the Lehman bankruptcy. So a really big shift um and one of the things that's really characterized the big market rally that we've seen since the global financial crisis has been strong correlations that's changing and that presents

real opportunities for active managers. Let me just give you a playbook from from what we're seeing in terms of our own stable of managers. Since the beginning of the year, seventy of our active managers are outperforming their respective benchmarks. And just to put that in perspective, they're outperforming by a lot. On average asset weighted outperforming respective benchmarks by over seventy five basis points. Is that including fees or

not including that is after fees, that is after fees. Okay, and this is the biggest out performance in a while that you've seen. Absolutely, I mean, two thousand thirteen to two thousand sixteen really difficult years for active managers. The number of active managers out performing in the large caps ace in two thousand sixteen, that's the lowest number since n So if investors are looking for a place to put money, I think that place today is active managers.

And active managers also performed better in a downturn, so it's a great way to pick up excess return today but also put a little insurance cushion inside your portfolio. Okay, So you said that seventy of Wells Fargo asset managements active fund management have been outperforming their perspective benchmarks. Have they seen inflows? Have they seen flows follow that performance?

Or is is marketing still a really big issue. I still think we're a little bit late to see I mean we're a little bit early to seeing flows, you know where I think people are still really focusing on this sort of you know, um phenomena in terms of a trend towards passive investing. And that's why I think this is really an important story and a potentially important inflection point for asset management. So is there a particular

equity market where you're seeing correlations breakdown even more than others? Well, I think, you know, across the board we're seeing correlations breakdown, but I think where it's particularly impactful is in the sectors where it's been difficult to outperform, and that is US large large cap and oh, by the way, that's a big part of the investors portfolio in the U

S so UM. Just to sort of back up, the correlations were tightly moving together just simply because of the central banks and the fact that the Federal Reserve was basically driving all of the risk on sentiment. Now, however, it's unclear what's really driving it. And as we talk about with Dave Wilson or Bloomberg Soocks editor and calumnist, uh here uh you know, every day, you know you

have big losers and big winners. How long can we continue with this type of activity and this type of dispersion before something macro kind of gets in the way and drives us all, especially with all the noise that we're hearing on the geopolitical side. Listen, I do think there is tons of noise on the geo political side. Obviously, if we just look to tomorrow, there's a lot going on. We've got Comely, we've got the ECB, we've got UK elections.

I mean, there's a ton of focus on. But at the end of the day, stock market valuations and performance comes down to, you know, how our corporate earnings performing. And we've really seen, you know, really strong growth. So we look at top line growth, we're looking at numbers in the six to seven percent range um bottom line growth, you know, similar numbers, so, you know, really outstanding growth both in the top line and the bottom line compared

to last year. And I think that's what's supporting the valuations that we see in the marketplace today. So a couple of years ago, there was a lot of fear among investors about rising rates and about a big sell off in markets. And at that time, liquid alternatives and other types of unconstrained funds were the rage. People piled into these things, saying, please protect me in a downturn. Not anymore? Are these things were going to be popular again? Oh?

I think so. I mean, you know, I think everything has its space in the marketplace, and it has its time, and I think, you know, those products in particular, did not perform well in a market that was really doing, um, you know, quite well. Um. So I think we'll continue to see people put rainy day strategies in their portfolio portfolios, and I think that's a good thing to do. So. Um. With respect to Wells Fargo asset management, what area in asset management, uh do you see as having the biggest

opportunity for potential expansion? Well, I think the biggest opportunity is undeniably multi asset class solutions. I think as investors, individual investors continue to get more sophisticated about what they want and what they need, we're going to see a world drive towards customization. You're not gonna want the market portfolio. You're gonna want a portfolio that that actually matches your specific needs, desires, and obviously liabilities, and that's going to

be a big shift. I think the undeniably the biggest opportunity is multiasset class solutions and personalized investment. So what will a computer be giving me that? I think it's highly likely that a computer will be part of that solution, absolutely, and that's not a bad thing. Actually, you know, what I think, you know, robo advisory, and you know, as

we call it, is actually highly enabling, right. It allows us to take the kind of insights and strategies that have typically been only accessible to the largest institution to the world and put them in the hands of individual investors.

And that's an incredibly important and valuable shift. Do you think that there's any area of the market that's going to continue to shrink and will eventually become obsolete with respect to active asset management, Well, then I think we're going to continue to face pressures in the large cap marketplace as it relates to active management. I think we do see opportunities or at least in more readily available opportunities and less efficient spaces, so that small cap stocks,

mid cap stocks, international stocks, emerging markets. So you know, I'm not saying it's we're not going to have to fight the good fight in large cap I think we are, and I think we'll be able to generate alpha more easily in other spaces. But I still think it has a real place in the portfolio. Christie Mitchum, thank you so much for joining us to really a question to speak with you. Christie Mitchum is chief executive officer of

Wells Fargo Asset Management UH in San Francisco. It overseas four hundred and eighty billion dollars in assets and is on the forefront of this transition, this changing investment landscape that we have talked so much about. One of the things that is being talked about is the revolution that is going on in consumer lending, in particular the way that people UH investors are mining big data to get a better sense of what the potential for defaults and

delinquencies could be. To get more of a sense of just where this is in the mortgage market in particular, I want to bring Emmanuel Shireff. He is executive vice president and a portfolio manager at PIMCO, which is based in Newport Beach. Emmanuel, thank you so much for joining us. So you know, we hear a lot about the ability for online lenders to mind big data and understand people's Facebook feeds and whatever else and credit scores to get a an accurate sense of whether they will default. What

do you look at? What do you think is the most important online data indicator that is a deciding factor for whether somebody will make good on their bills? So thank you for having me. First of all, at PIMCO, we have been doing machine learn in big data for a very long time in the mortgage and real estate space. UM.

I've been heavily involved in that. And UH We've built out a fairly significant infrastructure that allows us to gather information on local real estate markets, UM on all the mortgage performance, on consumer credits, on local demographics and economics and and and all of that, and we use that in order to build up our mortgage lending models and

our mortgage performance models. UM. With with kind of Internet related big data, UH, it's worth being a little bit skeptical of some of the claims that are that are

being put out there. UM. Whenever we analyze data, we spend a lot of time cleaning data, understanding the provenance of of where it comes from, how it was collected, adjusting for potential biases and other related issues that may arise with the data in order to try and extract correct UM signals from it and adjust for whatever biases may exist. And and so with a lot of online data, the collection methods are a little bit uncertain and subject

to change at any time. So, for example, if you there there's a idea of vendors out there that have sprung up over the last few years selling you know, Twitter sentiments, location data, you know Facebook feed information and all of that, and the populations can change very rapidly,

the methods of collection can change all the time. There's not a whole lot of history for most of these things, so it's difficult to calibrate what exactly all this information means for future mortgage performance, especially for signals that have only been around post crisis, that you have never even observed in in a high stress situation. So, um, this is fascinating. The amount of time and attention focusing on exactly where the data is from, how it's been collected,

and it's track record of potential biases. I'm wondering, do you have a track record with respect to how accurate pimco's model is in predicting tolinquencies in the mortgage debt mark. Well, when you're working with long term data that has existed for some time, it's possible to back test it, to build a variety of models surrounding it. Um with with bigger data, it's much more challenging to do that, and you have to kind of depend on whether or not

you've um correctly made those those adjustments. And whenever a high stress period occurs, such as it is now, you start seeing things potentially breaking down or you're forced to high stress period of time like now now as a high stress period of time, it's it's becoming a little bit more stressful. Please explain, um, So, as I think you mentioned, some of the online lenders are seeing a

little bit of increases in the faults and delinquencies. So it's never been unexpected and unpleasant surprises in the prospers of the world and the lending clubs of the world, and there has been a certain wave of cynicism over some of these models correct exactly. So, so I think now they're seeing a little bit of um, maybe not stressed in the world, but stressed to their models that they have to make adjustments for. But are you seeing

stressed to the underlying US mortgage market. Uh, We're still very constructive on the mortgage market, on the housing market overall. But do we do we want to talk more about big data machine learning? All right? Well, I mean with big data and machine learning, what are the signs that you look for, uh, to sort of lead up to a potential deterioration of the market. UM. So we track UM a lot of information on the local demographics and economics.

We track affordability ratios, UM, we track UM. The consumer performance overall always tracked credit scores and so on. But a lot of this is built into a variety of nested models that rely on each other and build upon each other to build a complete picture of the consumer and projected mortgage performance. So in some cases the signals interact in ways that with machine learning you don't always entirely understand why a signal is showing what is showing?

So how much work is done after you get you know, you put something into your model and it spits out you know six, and you look at the six and then what do you do with it? You know? I mean do do people basically do portfolio managers take the input from the models and just going directly put it out there or is there analysis and a discussion about what to do with that? The models with with any model that we use is UM. The model is just an additional tool in our toolbox that is given to

the portfolio manager and the trader. So the models allow us to synthesize a huge amount of information UM in order to help us make a better investment decision more quickly. UM. But it's not making an investing decision by itself. And maybe that's part of the issue that some of the consumer lenders you mentioned are are facing. UM, that the models are effectively making decisions by themselves without additional human

input or review. Do you think that social media is a viable tool to understand somebody's ability to pay their debts? I don't know. I haven't spent a lot of time looking into social media effects because on on debt repayment and some of some of them would say that, but it might also be UM might also be completely unpredicted depending on what it is that people post fascinating. I honestly this is this is an important area and it's one that an increasing number of investors are turning to UM.

And just real quick, how many people do you have at PIMCO who are focusing on maintain these databases? Depending on the sector we have UM, I don't actually know how many we have in total at PIMCO. We have many dozens of people working on these things, and UH, depending on depending on the sector, there's more fewer Emmanuel Sharreff,

Thank you so much for joining. Emmanuel Sharreff is executive vice president and portfolio manager at PIMCO, which is based in Newport Beach, and we are broadcasting live from the Bloomberg invest Conference at Bloomberg Bloomberg's New York City headquarters. We had some breaking news this morning. President Donald Trump tweeted I will be nominating Christopher A. Ray, a man of impeccable credentials, to be the new Director of the FBI.

Details to follow. We are not going to wait for him to give us some details before getting some of our own from Larry Liebert, national Security Team editor for Bloomberg in Washington, d C. Larry, what do we know about Christopher Ray, the nominee for the new director of the FBI. Well, he's quite well known. He's a white color defense attorney now, but he served at the Justice Department for a number of years, including prosecuting the infamous

in Ron uh financial scandal. UH. The initial response UH, including from some critics of President Trump, has been that he's a good, solid choice, although he didn't have specific experience as some previous FBI directors heading the agency. So UM. All in all, considered a respectable, solid choice. But uh,

there'll be confirmation here he is. Well, he'll be asked a lot of tough questions, including whether um, he was promised independence by President Trump or whether President Trump asked him for loyalty as uh the fired FBI director Comey apparently alleges, Yeah, this is this is important. The other thing that I find interesting is the timing of President Trump's announcement this day before fired FBI Director James Comey is set to testify in front of Congress about his

discussions with President Trump. Uh, what is the significance of this? I mean, is it just a coincidence? Has this been a word in the works for a long time, or is this a move to perhaps um pull attention away from the hearings and towards the future. Well, there's no pulling attention away for these theories where are fair enough dramatic. But I think you're right. The the President's message is returning the page. That's all history. We have chosen a

new uh appropriate FBI chief that we're nominating. Let's get on with it. And that's certainly the best, politically speaking, the best message he could send. Uh. You know, there's been a lot of talk about whether he'll be able to resist tweeting all day long tomorrow Comey's testifying, But in terms of using his Twitter handle this morning, he

sent an effective message show going into tomorrow's hearing. Right, Um, Larry, and before we get to getting a sense of what the big issues are tomorrow, I really want to touch on Attorney General Sessions because there are reports that he offered to resign after getting some pressure from President Trump based on his decision to accuse himself from the Russia inquiry.

Do you think that this is realistic the color that you're getting from people in Washington, d C. Do they really expect that Attorney General sessions proposal might be accepted and is a realistic possibility? Well, the sets are reporters Chris Stroman and others get is that, Uh, President Trump tended to lash out at those around him when he

feels they haven't come through. In this case, Uh, he's never forgiven, reportedly Attorney General Sessions for recusing himself and which led to a whole series of events, including naming a former FBI Chief of Special Prosecutor And with that kind of festering um that Attorney General Sessions said, if you'd like me to resign, I will. But I think the sense was it was more a message to the president, if I don't have your faith, I'll go, rather than

a resignation we should expect in the near future. Okay, So people don't think it's realistic. They think it's more sort of a an ultimatum. Look, you have you have, you have carte launch here. Do you want me to go? Right? Exactly? And of course you never know this. This president has proven, uh if if nothing else, that he's done predictable, that he goes his own way, uh, and that he has

been frustrated. He attacked the Justice Department for the revised UH travel ban that he signed uh in a tweet. And that's unprecedented. So we're always ready for surprising. All right, Larry, now to turn to the center stage event tomorrow, James Comey heading to Capitol Hill. What are the main issues

that he's going to be talking about. What are the main things that people want to hear, Well, they really want to hear what he and Donald Trump discussed, As has been reported, did the President repeatedly ask him for loyalty, uh, which he apparently sidestepped. Did the president ask him, can't you let this go? After? Uh? General Flynn was fired as National Security Advisor? Uh? And did he feel that

that was a clear effort in interference? Uh? And the question is, will well we hear from people familiar with UH with Comey who changed to speak? His mind is that he will recount those discussions, but he'll leave it to others to decide whether it was obstruction of justice or otherwise deeply inappropriate. Larry, does it matter? Does it matter what he says? Because let's say he says, uh, you know, anything, everything, but that it was obstruction of justice,

and then it's clear that congressmen feel like it is. UM, then what Well, that's always the question because practically speaking, you know, prosecute a president but uh. And peachment is not on anybody's lips really at this point. But that would keep alive not only the investigation of Russian interference, but whether those close to the present were involved and

whether there's any effort to suppress that information. So it's it's a key moment, and I should add that right now send an intelligence committee is hearing from Dan Coates, the Director of National Intelligence, and others suppressing them on their conversations with UH with President Trump, and so there's

quite a build up to tomorrow's Comy testimony. Larry, your head must be spinning concertainly, Larry Liebert, thank you so much for distilling all of the activities that are going on in Washington, d C right now what we can inspect or expect for tomorrow. Larry Leebert is National Security Team editor for Bloomberg News and he is UH there in the heat of the action in Washington, d C. Thanks for listening to the Bloomberg p m L podcast.

Can subscribe and listen to interviews at Apple Podcasts, SoundCloud, or whatever podcast platform you prefer. I'm pim Fox. I'm on Twitter at pim Fox. I'm on Twitter at Lisa Abramo wits one. Before the podcast, you can always catch us worldwide on Bluebirg Radio.