Math Doesn't Add Up on Trump's Infrastructure Plan, Sen Says

Uh And Connor Sen, portfolio manager for New River Investments in Atlanta, and a Bloomberg View columnist, pointed out that such incredible spending would require five hundred and seventy thousand additional construction workers. I want to bring in Connor. Now, Connor, I thought your column was fascinating and it raised the question can we find five hundred and seventy thousand new

construction workers in this currently tight labor market. Probably not five million thousand that you'd want to hire, so you can always find people off the five lines. I've never worked on construction before, but if you paid me enough,

I suppose I could give it a shot. For preparing for a career in construction exactly So, it's it's not the kind of thing that you're likely to be able to ramp up in a you know, in the short term open long term, you could get there, but it's not the kind of thing that could happen you're one

or two. So companies and investors that are looking to reap the rewards of this infrastructure spending plan should perhaps wait a while to celebrate, exactly So, if you're a company, if you're a construction firm, perhaps you could do a limited amount of production at a in In that way you can keep your costom line. But if you're really trying to ramp up to get the lion share of something like this, you probably have to pay way more

than you get back from the government. So the reason why I found this column so intra staying was because a lot of people say, you know, they questioned the idea of this infrastructure plan based on budget issues that can the US pay for it? Is there the ability to do it without raising taxes or increasing the deficit substantially?

You're saying from a fundamental perspective, it cannot be implemented, at least not in the near term, is this being priced in anywhere in markets that are currently bidding up the you know, infrastructure and the and the industrial stocks

and bonds. Well, one of the questions that investors have right now is what exactly is being pricedman, because you have you do have underlying strong economic fundamental you seeing you know, about a year ago, that's when the industrial and energy cycle was botted me out, that started to recover, and then in that sector inventories which have been drawn down or then being built up to have this kind of lagged demand from just how much industrial demand has fallen,

and so that is being pricedon's markets. And then on the policy side, we just don't know yet because it's only been a few months what exactly of people pising in Is it you know, the views on policy, or is it just this underlying economic situation. Connor, you mentioned that there is an economic cycle that we all try to pay attention to, and the last one that we saw big growth for construction employment was between You also

write that we are later in this economic cycle. What takes place later typically what happens sort of in the cycles that early on after a session you have reduced production and there's a lot of slack resources in the economy, they can be put back to work. And so after the set cut interest rates and there's potentially ciscal stimulus, you have conditions that are right for strong early cycle growth.

And so we didn't see that in housing coming out of the huge housing bubble, but we did see that in the end of the sector and just sort of a dead cat bounce and manufacturing, and so we saw that growth early on and then sort of in the middle of the cycle, like you said two thousand thirteen, two fifteen, you had apartment growth, you did have some energy growth, and at that point, I said, was still

very easy on the monetary side. What tends to happen later in the cycle is as resource flat diminishes, cost go up, the stead starts becoming more aggressive on hiking interest rates, and that's when you tend to get into problems with overproduction and tighter money. So Connor, at this point in the cycle, can we get a sort of ramp up in construction workers, especially at a time when

immigration is being constrained, Yeah, exactly. So the only way to really make this work over the near term would be a big change for more immigration. And it seems like at least on below end for immigration or going the other direction. And so the question is just I think our two choices are either more production at much higher prices or kind of constrained production at lower prices,

and either situation is really great. So Connor, given your role as a portfolio manager at New River Investments, have you started to back away from certain securities that have gotten bit up in anticipation of this infrastructure spending. But I mean, going back to your original point where people are trying to understand what actually is being priced into the market. Do you think that the market has gone too far with pricing in too much? That seems implausible

at this point, and specifically, where are you looking? I do, because our viue is that if we do get more production, it's going to be at sort of prices and profit margins that are not very compelling for companies. And so our view is that there isn't that much resource black left in economy, especially with immigration policy being where it is, so it's just not going to be a great environment for companies and profit margins. It might be a great

environment for workers and wages. Thence the question is what's the best way to take advantage of that. So for that making, the answer is more real estate or kind of just to discussion our consumer spending, but not kind of business fixed investment and and things that are potentially will suffer on the profit Martin side as as interest rates go up and labor gets more expensive. So which companies do you think are overbid at this point? I

think anything related to infrastructure in general. Um, you know, you sort of see what's happened to prices over the past year. A company like United Rentals, which is very highly lettered and sort of at the bottom of the industrial cycle. Early last year the stock went down to I think forty five dollars to share. Today it's more

like a hundred hundred thirty d and thirty five. I think it's just one of these things where it's a combination of more optimism on policy and then sort of more momentum traders who would just look at charts and prices see how much it's gone up, and they're trying to ride that trend. But it's just tough to see how this is going to work out profitably for companies

with the next two or three years. Would it make more sense to build more homes rather than spend time arguing over roads, buildings, tunnels and repairing the highways, because that's not something you just may wave a magic wand and it happens. Yeah, I think you want to try to do both. The issue is just it's a lot easier to sort of get the house and stuff done

in a reasonable way. Infrastructure is notoriously slow, with memory review and policymakers and architects and planners and just there's so many different touch points and potential pain points as resources get tight, and so there's just no way to throw a lot of money at it and get good, good value in the short term, no value in the short term. Well, in that case, I guess maybe people

will take some profits on on those positions. Just finally, to to connor, you know, we keep hearing that infrastructure spending will then lead to higher and more sustained economic growth. Is there any evidence to support that. There's there's sort of hazy long term fundamental growth. It just it's sort of like whether you have just better policy or or more younger hard to measure, given how the economic cycles

more bobble than that sort of production increase. One more thing I wanted to point out is something that other people aren't talking about, is that, let's say we found these five thousand construction workers and maybe a million more support staff, what happens after ten years, because then you have a million and a half workers that immediately get run out of work and create this technical assessment right away. The back end of this is also problematic. Thanks very much.

Connor Sen is a Bloomberg View columnist and portfolio manager for New River Investments. They're based in Atlanta, and to learn more about what he is doing with other people's money and his own, I want to bring in David Coudla. He is the founder and the chief executive of and he's also the chief investment strategist. I beg your pardon of mainstay Capital Management helps to manage more than two billion dollars of customer assets. David, thank you very much

for being with us. Good morning, him, Good morning. You've got a lot of hats to where they're I'm curious if you can tell me whether you're selling anything into this rally. Well, what we have been selling going back into the fourth quarter is our interest rate sensitive bond positions. We've been largely void of interest rate sensitive bond That's probably the most important warning I can give to investors, although once I can interest rate sensitive bonds in other words,

bonds invests the vast majority. Well, is it is it just treasuries? Is it an investment grade bonds? Are you also including in that high old bonds emerging markets? Good? Good question and an important distinction. We we've still been in high old bonds emerging market debt, and as Pimp said, floating rate income we think is a is a great

opportunity in a rising interest rate environment. Our concern is with yes, specifically treasuries and high grade corporates, those very safe investments for credit risk and default risk, but our interest rate sensitive and actually uh, you know, face negative returns looking at the time of horizon since last year you might be considering over several months and going forward. We just we've we've had uh caution there and continue to have that caution with fiscal policy, tax policy, and

monetary policy all pointing towards even higher rates. So, David, people have been talking about a bond market sell off for years, and people have been expecting inflation to pick up. Now the FED is expected, I believe now the chance of a March FED rate hike is nine or something looking at FED funds future, but the yield curve is flattening.

In other words, people are expecting growth too slow. What gives you confidence that growth and inflation are going to pick up enough to justify a really truly significant bond sell off this time around? Great question, And there have been so many people that have been forecasting the rising rates, have been shorting bonds going back five years. The difference now is the feed is finally raising rates, and you know, we we ended Keewey started raising rates a little over

a year ago, raised in December. We think we'll get at least two rate hikes this year, so we know the short end of the curve is going up. We couple that with President Trump being elected and as I spoke of the reflationary those three things, reflationary policies for the economy, and we're seeing better economic data, so you know, we've we've got a recently, I want to use the word strong economy. Economy that's doing okay, and we think

it's going to continue to do well. It's still expanding, and monetary both monetary and fiscal policy pointing towards higher rates. That is a change, you know, largely from what we had over the past let's say four years until until six or seven months ago. So you're not taking any of these signals about how wonderful everything is compared to let's say July of two thousand one, or compare it to two thousand seven. You don't buy that there's a

little bit of irrational exuberance out there. I think there's certainly a little bit when we see the DAL rise. For I tell you the sp up six and a half percent. So if you're telling me that we are in March and it's up six and a half more than six and a half per sent what kind of risk are you taking on if you want an extra four for the rest of the year. That's right there.

There is there, there's some exuberants. I mean, I think it's I think it's even fair to say that maybe we're starting to approach that u fork stage in the stock market cycle. But we don't see what we don't see. We don't see a recession on the horizon. Remember a year ago, all the analysts, all the market pundits calling talking about recession here or around the globe, talking about inflation here around the globe. That's that's gone. We're now

looking at inflation on the rise. We're looking at uh still you know, growth and emic growth, but still growth that we expect to improve at least some and so that's good for stocks. You know, we're positive on stocks and that environment. But look him and Lesta, a correction of of ten or even we can get that at any time. David, what have the call has been like

from your clients? What are the biggest concerns at this point? Uh. The the interesting thing is is, you know, we have always in an environment like this, we have those clients that are excited, I want to get more aggressive. We have clients who are concerned with how far the markets come and want to get more conservative. What's interesting is is, uh, and we were talking about this just this week, is

how that tends to fall down party lines. Those people that may have voted for Trump believe in Trump, what he's going to do for the economy, believe this continues and gets even better. Uh. Those that have been cautious and have concerns about Trump have only become more cautious. Is the market has gone higher. So it's very interesting how politics and political persuasion has entered into Investor Sentiment Individual Investor Sentiment. David Coola, thank you so much for

joining us. Always a pleasure. David coula chief executive officer and chief investment strategist of Mainstay Capital Management with about two billion dollars under management. All right, we want to get smarter about one particular company right now, which is Roche Holdings. Uh, the a d R as the American Depository receipts are trading higher by more than six and a half percent right now here to tell us? Why? Is Max Neeson here is our Gadfly columnist. He covers biotech, pharmaceuticals,

and healthcare. He can be followed on Twitter at Max Neeson Max Neeson. So tell us what is up with this new breast cancer drug and Roche Holdings. So this was a really closely watched trial for the company. The drugs called Projetta, and the company was sessing whether this drug added on to its existing drug hercepting helped more women survive or made it less likely that their breast

cancer would come back. Um, so this was a really difficult trial for them to have success in because hercepting works really really well already, and you kind of see that reflected in the share price boost. This is a really big company to move six percent or seven percent market cap move like fourteen billion, so really good news for the company. Well, so could you walk us through first of all, what this drug, how much it helps extend people's lives or you know, just whether it improves

their quality of life, extends their life. Uh, and also how much more it would cost for the patient I'm talking about, so that that's always the question with cancer drugs. Often you see where even really expensive cancer drugs cannot only a couple of months. But the really good news here is when combined with surgery and and her sept in um, women actually have a really good chance of

surviving in the long run. We don't know the precise benefit that this adds on top of her sceptin but um, the fact that the trial succeeded suggests that it's really significant. So it's something like already, um, you know, four out of five women see a really good result and this could even add on top of that. And is this late stage breast cancer or is this throughout the differ

front stages. This is early stage when you when you catch it pretty early, you kind of have really good results, but I believe the drug is being tested in later stages as well. What kind of market are we talking about, It depends on who you ask, but I've seen a peak sales estimate of about five point five billion, and that that's really significant for Roche, which is seeing its three biggest drugs of asking her up in and I'll starting to see biosimilar competition over the next few years.

Those stories are expected to sell twenty billion this year. So having something that kind of props up one of those franchises adds some more sales is really significant for the company. Okay, biosimilar that's generic. Basically you're you're going to have some of these really lucrative drugs become eligible for generic rip offs that can then take away profits corrected a sort of lower cost margins. That's sort of the idea, right, Yeah, So it's it's slightly trickier with

these drugs. It's it's like a bit more complicated of a process to get a biosimilar proper regular generic, So the sales drop off is likely to be slower, but just the sales still are going to drop pretty significantly in the next five years. So that brings me back to the price. Do we have a sense of how much this could cost this new drug that they that

they passed the test. It'll probably add some you know, an additional maybe ten dollars to the monthly list priced cost of treating a patient, although we don't know for sure until we see the actual combo on the market. And the other thing that makes us an advantage that when you have a BYR solar similar competitor, Roach can offer this too drug package, perhaps at a discount, so it might also protect sales of their older drug I

which you know, the boo boost for the company. Can you give me up an up to date version of what's going on at Valiant Pharmaceuticals and what Joe Papa is up to, because I mean the stock is up about three and a quarter percent today, but I mean this is a fourteen dollar stock that well, it wasn't always a fourteen dollar stock, and a lot of people are feeling the pain. I mean as of a couple

of days ago, it was something like an eighteen dollar stocks. Yeah, it's had a pretty rough couple of days go back, a couple of go back just a year or so in March and we're talking and you know, at least that it's been it's been pretty incredible. Um, what's happened? More recently? They reported fourth quarter earnings and it was the same sort of kind of grim news that that we've come to be used to for Valiant. Uh, some of like a five million dollar loss. Um, what was

this thing about SALEX, SALEX Pharmaceuticals. It was some report that was not really accurate. Yeah, So someone I think took a look at the ten k so an sec investigation really to SALEX and kind of you know, pumped out a tweet. Maybe, but this is something that the

company's is already disclosed and is close to settling. They've already said some cash side But but I think it does highlight, you know, beyond the fact that the results were disappointing, the debt still looms in an increasingly terrifying way, that the company is the subject that beyond SALEX fairly digging array of lawsuits and investigations that might eat into its pretty minimal pile of cash. That's it, just a

monumental pile of debt, monumental pile of investigations. I mean, you know, Max Deeson Love talking to you as always. He's a Gadfly columnist covering biotech, pharma, and healthcare of Bloomberg News. You can find gad Flight columns on the terminal at NI gad Fly or on the Bloomberg website. President Trump has pledged to cut the e p a's budget.

Environmental Protection Agency's budget by twenty five percent. That is part of President Trump's overall budget for the US, and we're gonna dig a little bit into what this might mean for specific programs within the e p A. I want to bring in Rob Barnett, senior energy policy analyst with Bloomberg Intelligence. Rob which areas of the e p

A are likely to get cut most under President Trump's proposal. Well, I would keep in mind that it's just a proposal at this point, but we certainly expect that whether the budget truly gets cut or not, which is ultimately a matter for Congress to decide, that the Environmental Protection Agency is going to do a whole lot less rulemaking under President Trump than it did under former President Barack Obama. So this includes everything from greenhouse gas regulations UH to

potentially even conventional pollutant regulations. So we expect a big slowdown in terms of agency process under the leadership of Scott Pruitt. Whether or not we have these budget cuts or not rob the the e p A is an eight billion dollar budget agency. It has fifteen thousand employees. Who is a Scott Pruitt give us an idea of his backers and his background. Well, he's the former Attorney general from Oklahoma, and he has had a pretty anti

e p A stance from his prior perch. He's one of these attorney generals that sued the e p A numerous times under former President Barack Obama to try to block regulations. And so we see a very fundamental shift from how President Barack Obama viewed the e p A versus how we expected to be viewed under President Trump and Scott Pruett. Their goal is to really slow put

the brakes on anything related to greenhouse gases. So the first and foremost that means they're going to try to tackle this regulation called the Clean Power Plan and actually take it off the books. Now that process could take a few years, but instead of taking the staff for the agency and having them craft new regulations, they're probably going to use the staff to actually kind of put the brakes on, putts on existing regulations, and try and walk them back a little bit. So it's a really

different type of agency and their Donald Trump. So given that, Rob, are we already starting to see a lot of departures from the e p A of long standing members of the agency, potentially even career employees leaving. You know, there have there are always departures of professional staff when you have a new administration come in. By and large, the rank and file of e p A probably isn't going to be necessarily departing just because you've got a new administration.

You know, these these career staff folks work typically through republic him and democratic administrations. The nature of their work changes though, So while we won't expect as much rulemaking related to greenhouse gases, there probably will still be enforcement of most standard e p A protection So things like mercury ozone, sulfur, those things aren't going away no matter who's in the White House. And then going back to the budget you were saying you started the conversation, Rob

saying that these are just proposals. How much political will is there in Congress to pass the budget as is with respect to the cut in the e PAS budget. I think there is very little likelihood that Congress will simply take up President Trump's proposal and pass it as it is. That's just not how Congress works. While I wouldn't expect Congress to pass a budget that gives a big boost and spending to e p A, something like a cut like that like President Trump has proposed is

very unlikely. There will be defenders of the e p A in Congress who will seek to assure that the agency isn't dismantled under President Trump. And there will probably even be some Republican members of Congress who would not want to see the agency completely undone. So very low chance of this kind of cut on this order of magnitude occurring. Robbie. Also, we're talking about Scott Pruitt and how he was not really for the e p A

before he became head of the agency. How much autonomy does he have with respect to rolling back some of the mandates that the e p A took on under President Obama. Former President Obama. Well, you know, he has a shared vision with President Trump in terms of the kind of changes that they want to make to the agency. So there's no surprise eyes that Scott Pruett and President Trump want to roll back regulations. They campaigned on that,

so they're going to try to achieve it. The problem is, in some sense for them, is that there's a lot of process to doing that. Just because you became the president and just because he had a new head of ep A doesn't mean you get a blank check, very very strong procedural steps that Scott Prue it's going to have to take to achieve his goals. In every step

along the way, there will be legal challenges. So no matter what he hopes to achieve, he's gonna essentially need confirmation of rolling back rules from the d C. Circuit Court of Appeals or potentially even the Supreme Court. All of these things will be heavily heavily litigated, So nothing is don't expect any quick win, all right, Well we won't, but we're going to expect you to keep us up to date. Rob Barnet at senior energy policy analyst, Bloomberg Intelligence.

Thanks for listening to the Bloomberg pien 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. It's one before the podcast. You can always catch us worldwide on Bloomberg Radio