Infrastructure is Useful But Doesn't Change Economy, Dwane Says

Alian's Global Investors. Also he in addition to talking with all of the asset managers around the world for Alians, he also manages one point five billion euros in in several funds. Neil, I am so glad you could join us. I want to start with the idea that we're hearing about all of this political warfare going on in the United States, We're hearing about Brexit, We're hearing about what's going on the French elections. At what point do you

care when it comes to managing money. Well, firstly, thank you for the invitation to be here. I think when one's managing clients money, one has to invest rather than what I would call trade. If you try to respond to every headline or every tweet, I think you would simply destroy the alpha that your clients are are going to receive. But that's that's an important point. So what's an investment and what's a trade? What's an investment you like? And what's a trade that my people are going into.

That's that's not sustainable for you? Okay, well, well, just for me, investing is like a rolling three of you. I'm genuinely trying to get the benefits of companies that are compounding their returns and generating the investments. So a trade, I like his energy. We think from the risks in the Middle East through to the low oil price that there's a supply demand imbalance which we think will work

to energy grinding higher from here. Therefore, because of the risks in the of the geopolitics, I like the big UK or US high dividend stocks yielding seven percent you're getting paid to run with them. I think that's a that's a trade, but also an investment on a two to three year horizon. Whereas something I'm may be more concerned about is the growth in China last year was phenomenal.

They went back to the old school fiscal stimulus. Unlike President Trump, who may spend a trillion dollars on infrastructure over ten years, we estimate they spent a trillion dollars last year on their infrastructure. So commodities have boomed. We think that's a misalignment of the recognition of the underlying strength of the economy. It's also a misalignment of how

much stimulus Trump may deliver. The US consumes four percent of global copper, China consumes seventy so even if Trump really gets stuck in over the next ten years, it's not going to matter to global copper demand. So we think maybe the miners have traveled too far, and therefore we would trade out of them. If you, if you own them, trade out of the miners right now and wait for another entry point. I would say the cycle

hasn't finished. China's China's um. You know, rebalancing is going to change, and until you see serious infrastructure spending in countries like India and Indonesia, we don't see the underlying demand for for some of these classic commodities. Right. But do you said you were your energy sector that did you did you were bullish on the energy sector. Why why that's like disconnect energy versus commodities. Well, because everyone needs you, particularly given the success in in China, and

also everyone owns a car. The Americans have all traded up to larger cars rather than smaller cars. So the underlying demand for energy is still going to be there. It's very resilient. About ninety eight million barons of Alliday. You know, Neil, as you said, President Trump is expecting to spend about a trillion dollars on infrastructure in the US over the next ten years. There is so much focus on fiscal stimulus and infrastructure spending. How do you

as an investor get in on that. Well, the first thing I would say is infrastructure spending takes a very very long time. Um So even if as we discover with the the the baron like Obama stimulus in two thousand and eight. He spent a trillion dollars, but most of it went to the States and they put it in their health in their pension funds. So in the

end there weren't many roads or railways built. So we think it's a very long term, long tail investment, and it works better in emerging markets than in developed markets. We think the payback in developed markets is very slow. Can you imagine if you built a faster road to JFK, you'd have to shut the roads to JFK first to build the new road. So the disruption in developed markets of infrastructure is quite high, Whereas if you don't have a road in Vietnam and you build a road, you

immediately get the efficiencies of the spending. So we think infrastructure is useful, but it's it doesn't step change the growth rate of the underlying economy. But is there a way that you can invest in companies that will benefit from the spending programs by investing in those you know, infrastructure plans somehow or is that sort of too esoteric? Well, I think at the company level, I think the markets have already run on the basis that the trillion dollars

is about to be spent. So we think that that you know that the expectations in the markets are way ahead of where the actual spending is going to come from. So I would say from a strategic long term institutional client investor, accessing the stable cash flows of many of the rose rails or ports that you can do inside infrastructure debt type structures makes a lot of sense as a way of generating a stable but relatively high yield six or seven percent return, but it's not. I think

we underestimate because America or the UK are built. We underestimate how disruptive big infrastructure projects are, and the fact that it takes a long time before you earn the returns right well now and also very interesting, a long time before you get to realize the political glory for having done so. Thank you very much, sir, and Neil Dwayne is a global strategist for Alliance Global Investors are here to help us get a little smarter when it

comes to the automobile industry. Is John Lippert. Here's our automotive reporter for Bloomberg News. He joins us from our Chicago bureau and you can follow him on Twitter at John M. Lippert with two piece. All right, John with two piece. Let's get some business out of the way. In terms of the January report for automobile sales, I was just racking them up here, some better, some worse. But you're over your results. No one is is defying

any major trends. Correct. Well, that's right. There'll there'll be some softening of the overall market, but not not anything like a disaster. So so what we're saying is we're looking at a seventeen point three million annual i's selling where and that will be down from seventeen point nine a year ago. So all the auto companies are saying, Look, if there's gonna be cooling off, that's a cooling off

we can live with. Yeah, And we got actually some results from ALI Financial yesterday that seems to suggest that even though there is sort of a plateau ng in the auto industry, at least with respect to auto loans, that the that the credit quality isn't deteriorating as quickly as some had feared. Well that's right, and UM, and now we're all trying to figure out sort of you know, the Trump you know, UM enthusiasm, just how deep root

it is. So UM December was an absolute blowout for UM for the auto industry eighteen point four million, and so now and a lot of that was just sort of a year end um uh closeouts. But but but now, I mean there is going to be some softening and so among the many factors are gonna be looking at. But yes, and centives are creeping up. Yes, inventories are

creeping up, but none of its disasters. And as you say, you know the credit quality that we're all you know, sub prime loans, I mean, they're creeping up, but they're not soaring at least so far. And then you know, in terms of just January, you know, um uh Toto is down, FIA, Christier down, but then Honda's up five point nine, Nissands up six. So it is a little bit of a mixed bag. But but so far that

you know, the markets holding up pretty well. Which companies stand to benefit the most from some of the trade policies, at least from what we can glean from them from President Trump's administration. Well, just taking the border tax UM and these are all sort of crude measures because we're we're all trying to figure out what the border tax, you know, in what form it will actually emerge on the Congress. But if you just take the question of UM, what companies have what percent of um U s sales

that they're importing, there are some clearer differences. So um of forward UM only imports ford, you know, of what they sell UH in the United States is built in the United States, and and some companies like you know, Masda's you know, just to take one example, has zero. So obviously the you know four and four it is actually saying, we think we can live with this, you know, with the border tax as we understand it so far. And and then the import companies like Masda are saying this,

this is a terrible idea. And and sort of in the middle of there, there's Toyota. I mean, Toyota is coming out pretty strong, and he's saying, even the American made camera that has the most US content in any car, actually, uh that the border tax will drive the cost of that car up by a thousand hours. And and they're saying that, Uh, Toyota is saying, um, you know, consumers are just not going to accept that, and that that

will hurt sales and hurt employment. So there's gonna be there's gonna be a big fight about what exact actually all this is going to mean as as it goes through the Congress. Can you give us a perspective about Ford and the relationship that may have been forged between Mark Fields, the chief executive, and the members of the Trump administration. Well, I mean Ford, I mean, as as I say, Ford is saying more than any of the other automakers that we can live with this border tax.

There there vocal about saying um um um. We Ford need relief from the the fuel economy and the mission start that's at Barack Obama put in place, and um Donald Trump has said he's going to do all that. So that you know one thing about the border tax, um um. And we can argue if it's going to increase the price of cars and our people gonna um accept that. But there's no question from from Berkley's analyst

Brian Johnson. And another is that the border tax will on the margin, creating the center to put more factories in the United States as opposed to also were in NAPTA. So um um. Mark Fields is saying that that the overall business climate that they think will evolve under President Trump is something that's going to be good for Ford. I mean, they're they're they're pretty aggressive and saying that.

John Leppert, thank you so much for joining us automated writer for Bloomberg talking about auto sales and what effect the border tax may have on auto companies. Now we're going to get a chance to look at what the trade policies might look like and how an investor really deals with that. I want to bring in Scott Clement's chief investment strategist at Brown Brothers Harriman's private wealth management, and Scott, you know, we've talked a lot about some

of the policies. We haven't really solidified anything as of yet. It's unclear what could get through Congress, what the actual proposals will be. Scott, Are you advising clients to change their allocations at this point based on what we know? No, we haven't changed any allocations, partially because we're very long term investors, partially because there's no real clarity on what

policies are likely to unfold. There's certainly been a lot of suggestions, a lot of threats steven Um, but at this stage, until we see something more concrete unfold, it's very difficult to analyze and respond to it in a responsible way. Well, Scott, given that context, let's say this continues, Let's say that this is part and parcel for daily operation of the government. What would you be counseling people

to do? Um Well. Within the equity market, we remain positioned as we always have in pretty long equities for the time being, we welcome the resurgence in corporate warnings. That's the fuel for the equity market. We're watching with great interest the rise in interest rates, and I think at some point over the course of this year, as the labor market continues to improve, and we got some good data from a DP just this morning, interest rates

will continue to rise. That will give investors in fixed income a chance to go back into the intermediate even longer into the yield curve. We're not there yet, but that tradeoff of risk in return is beginning to get a little bit more appealing. Let me just mention that a DP numbers were two two thousand, the estimate was for a hundred and sixty thousand. Well, but Scott, so what's the level at which you would say that that

you would recommend investors get back into fixed income. You know, it's more of a process, Lisa than it is an event. That The algorithm that we're using is as long as you can earn a rate of return in traditional fixed income that is higher than inflation. If you're talking about taxable bonds higher than whatever fees you pay for a muni bond fund or whatever, then the risk trade off becomes a lot more interesting. You know, there's another moving

part there. Sorry, I was just gonna say so. In other words, with a ten year treasury yield heading north of two point five, we're getting there. We're getting here. It's heading that way very quickly, very quickly. The other interesting moving part to watch is that there have been hints as part of the Trump tax proposals and also the health tax proposals, that would limit the deductibility of municipal income, which for higher tax bracket clients, would have

an implication for the appeal of those assets. And again, it's one of those many things on which there are no details yet, So we're playing it safe and waiting watching seeing how this unfolds, because that could certainly change the relative appeal of tax all wands versus municipal bonds, even for investors in a higher income tax brackets. Do you think that money outside the United States will flow into the US in the form of investments or in terms of maybe just any buying up debt. I think

we're seeing that already. Uh. You know, if you think about the the central banks worldwide, the United States of America is the only one it's actively trying to raise interest rates. That has implications for currency strength, That has implications for return on fixed incomes. So yes, I expect the flows of funds into the United States to continue. Scott, At what point will yields rise so high in the US that it will endanger the stock rally? I think

we're a long way from that. The risk out there is that the labor market improves so rapidly that wages begin to accelerate rapidly. We're not there yet. This is not a forecast. It's a risk, and the FED feels like they have to accelerate their own response to that. If the FED, for example, were to raise interest rates four or five times this year instead of the three that the market is expecting, that that would spook the

equity market. That would send the signal that maybe the Fed's a little bit more worried about inflation, which hasn't been a concern for a decade now. Uh, then the market is I don't expect that to unfold, but it's

certainly a risk that we're keeping an eye on. Talking about the FED, we're going to hear from them today at the end of their two day meeting, and I'm wondering how much you're looking for guidance with respect to what process they'll follow to unwind their four point five trillion dollar balance sheet, or if they'll start to do that in the near future. I think if it is the right word, because I don't think they have any intent of doing so. There's nothing that requires them to

do so. I think the FED would rather restore more normal monetary policy through the old fashioned tool of raising the FED funds rate interest rates and leave the balance sheet where it is at, as you said, roughly four and a half trillion dollars. There's something very important that happened in two thousand and eight. The FED for the first time has the ability to pay interest on bank reserves. Hell at the FED. That's a tool they did not

have beforehand. So if they are concerned that commercial bank lending might become inflationary, they have the ability to raise interest rates on reserve and therefore restrain some of that lending. It's a tool they've never used, but it's a tool that would enable them to leave the balance sheet to four and a half trillion dollars without having to actively wind it back down. Tell us more about tax reform in addition to your comments about income earned from municipal bonds.

Tell us more about tax reform and some implications. One of the other things pen that we're watching very closely, and again it's part of the Trump proposal, part of the House proposal. The details are are sketchy still, but one of the proposals would limit the ability of corporations to deduct interest on corporate debt issuance. That might have the implication of lowering the desirability for rations to issue debt.

It might restrain the supply of corporate debt, and anytime the supply is restrained, that has implications for for the ability of investors to earn a better rate of return on corporate debt. So we're watching. There's a lot of moving parts that that we're watching very closely. Corporate tax reform, on which there's been no progress whatsoever, does have a real ability to affect the equity market for the better, particularly repatriation tax, lowering the corporate statutory rate. These would

all be very beneficial for the equity market. Thanks very much for joining us. Scott Clemmens is the chief investment strategist at Brown Brothers Harriman's private wealth management division. Giving us a look into what or what you should not be doing. Maybe just do nothing for a while. A change at the Supreme Court, that's its future. And here to help us understand what might happen is Kimberly Robinson Supreme Court Reward for Bloomberg b n A. Kimberly, thank

you for being with us. Tell us. Who is the Supreme Court nominee? Neil Gorsich, Well Neil Gorfis is a long time federal Hellic Court judge who sits on the tenth Circuit. He sits at Denver. He's pretty young, at forty nine years old. He could make a big impact um for a very long time to come. Um. You know when cent uh, when the Senate is going to consider his nomination. UM, they're going to be able to check off a lot of the qualifications that we typically

think of with modern day justices. You know, he has an Ivy League pedigree. He worked for the prestigious law firm, he had did a s in the d O J and he even clerked on the Supreme Court. UM, so he's he's got kind of the traditional um qualifications that you would mean. He has also a pretty strong conservative background. UM. Which should get him support UM from Senate Republicans. But he also something that UH Senate Democrats might like as well.

And UM that's that he's pushed back on the deference that courts give to administrative agencies. That's something that could look attractive to Senate Democrats UM in the Donald Trump era. Well, Kimberly, we've already heard from some Democratic representatives saying that they're going to vote against him. What measures could they take to do that or is his nomination all but guaranteed at this point. I do think that UH judge is likely to get nominated, but there are some tools that

Senate Democrats could use. UM. Although Senate Denemocrats did get rid of the silibuster for lower court nominees, they kept it in place for the Supreme Court and so they still could use the silibuster, and indeed, some Democrats have said that they planned to do that. The danger in that is that Republicans could UH go nuclear themselves, as it's called, and eliminate the filer buster UM for Supreme Court nominees UM, something that really hasn't been thought of,

UM in in the history of these confirmation hearings. First for Supreme Court justices. I wonder if you could just speak a little bit about Utah Senator or In Hatch and his role UM. You know, I I don't really know a lot about what his role will be UM in this confirmation process. Sorry, I can't really speak to that. Can you then give us a little bit of an

idea of what's next for Neil Gorsage. Well, what will be next is that he'll need to fill up some paperwork that's been tripping out some of uh Donald Trump's other nominees. But uh, pretty it is pretty straightforward for judges. Uh, it's paperwork that he's already done to be confirmed. And then we'll go through, uh likely in a couple of months, some confirmation hearings where we're likely to hear questions about

abortion and immigration, um and the lid is freedom. Well, Kimberly, how much is the controversy over Neil Gorsich uh specific to him and his views? And how much is residual anger by the Democrats that Merritt Garland, Obama's nominee was not confirmed. Well, I do think there's still a lot of UM Democrats who are really smarting over the fact that, you know, Senate Republicans didn't give President nominee uh even

a hearing. UH. And so I do think that there's some initial sense that Senate Democrats might try to block this nomination as sort of a payback. UM. But if Senate Democrats are playing the long game, they'll need to consider that the election looks pretty tough for Senate Democrats. There are a lot of Democrats who are going to be going up in elections in states that Trump won, and so UM, it may be that the Senate Democrats

may be in the minority for a while. UM. And you know, risking a filibuster and risking that that silibuster could be eliminated could be something that puts some a Democrats kind of on the back burner when it comes to, at least in the near future. UM. Supreme Court nominees. Now, the Supreme Court, of course, rules on a variety of topics. Is there any understanding as to where Judge Gorsuch would reside UH in business cases or in cases involving regulation

and the government. Well, there has been some indication in those areas. UM. As far as business regulation, UM, we've seen that, you know, he's pretty hostile to the idea of using class actions of the way to get redressed from businesses. UM. And actually he wrote a two thousand and five article that seems to indicate that UM, he's hostible to using the the courts out of the way of getting civil rights litigation UM through as well. UM. But on other issues, you know, we're not as clear.

Judge cors which hasn't had a chance to rule on abortion, something that has been hugely important UM in this UH, in this selection, UM, we do have some hints on how he might rule, but UM, we don't know for sure. I thank you. Asked also about how he might um interact with agencies and regulation, and that would be really

a change UM there on the Supreme Court. There has been some indication from some of the justices that they want to change the way that courts look at these regulations, that they want to give a harsher look to them and have a bigger role for the courts. UM. And Neil Gorser's would join what is now a minority UM and could turn that into a majority. Kimberly Robinson's Supreme Court reporter for Bloomberg b n A, speaking with us from Arlington, Virginia, thank you so much for speaking with us,

and uh. The nominee Neil Gorci has not expressed his opinions on the hot button legal issues like abortion and same sex marriage. There's a lot of questions about what the Democrats will be able to oppose. Thanks for listening to the Bloomberg pen L podcast. You can subscribe and listen to interviews at iTunes, SoundCloud, or whatever podcast platform you prefer. I'm Pim Fox. I'm out there on Twitter at pim Fox. I'm out there on Twitter at Lisa Abramo.

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