Understanding Infrastructure, Building Innovation

getting those railroad tunnels under the Hudson River. So these tunnels that are there and a hundred years old tumble in on me one day while I'm commuting. But there's a lot more to it than that, and a lot of folks think this is an opportunity for America to get smart with their infrastructure. Andre Brumfield, Cities and Urban design leader for Gensler, joins us. Andre, thanks so much for joining us here. Again, people think about infrastructure, and

I think bridges and tunnels and roads. How should we be thinking about infrastructure in this country? We're about to go on a pretty big spending spree. Well, good morning. The first, thanks for having me on. Second, I think to at least address your question I think this is an opportunity to think much bigger uh than than uh you know, tunnels, uh and some of the obvious things

that we see day to day. But if you look back at history, you think about the aspirations of Lenny Johnson's Great Society Programs in the nineteen sixties, you know, or some of the successful elements of President rooseveltsd Deal

program as related to pw A profit projects. I think this is our opportunity for the Infrastructure Bill to, you know, think about how we can actually have a lasting impact on a number of things that have been neglected over the last twenty, maybe even thirty years as it relates

to roadways, public transportation. You know. Hopefully, I think we look back in another ten or fifteen years, you know, we will know that this was not only money well spent, the money well invested, but this could be a turning point of how we actually start to reposition a number of our cities. You Know. The problem is, I think a lot of people would agree that we need to do something about the infrastructure in the US, and would

have no problem paying for it as well. If they trusted the government to spend the money well Isn't that a big concern. Doesn't the federal government waste a ton of money? Isn't there even in America a lot of corruption? Well, I think this is where you know, and I know that the Biden administration will be open to this, which is you know, really about transparency and it really comes from you know, not only at the federal level, but

also at the state in the local level. I think when you talk about and you think about transparency through this process and how the money is invested and where it's invested, you know, I think the more that people are aware and the more that people have a say in this, or more that people actually understand how the moneys are being spent, you know that you trust will

get stronger over time. So you know, I think for me, this is not about criticizing at least you know, um, how the money is going to necessarily be spent, uh, in terms of you know, distrust with the government. It's really more about you know, how it to we actually be creative and making sure that you know, this infrastructure bill is really touching you know, the places in our urban and our suburban environments, even our rural environments where

it needs to be touching. You know, I just read the book on Robert Moses, the guy who effectively built modern New York City, and it's just we're amazing the long ranging impact that guy had about a lot of good but a lot of bad. Um. I'm thinking about the highways that cut apart neighborhoods all across New York City and kind of read, you know, kind of redistricted, if you will, neighborhoods that have been around forever. Going forward, You've got to feel like mass transportation needs to be

more ingrained or integrated into our infrastructures. That's something you think has support. I think that's something that's critical. And you know you can't drop Robert Moses into power broker here in this short interview. I mean that's going to take them exactly. Have you read the book, oh, I mean, you know, that's one of the few books and if you haven't read it, for those are listening, it's it's a must read. But you have to allocate a lot of time because it is a very big book and

very long. It took me the entire summer on the beach, right and you almost have to jump around depending on what your sweet spot is it relates to urban planning and the built environment. But I think you know, UM, we you know, to answer the second part of your question,

UH related to infrastructure and public transportation. If we think about where we've been and where we currently are with COVID UH and public transportation of how people do get around what we can't do is slide back into or go deeper into an auto dominated society or at least how we actually moved throughout our cities. UM. If anything that we've learned, at least in the last two or three weeks with some of the latest reports coming back on where we are in terms of climate change and UM,

how that's impacting our built environment. UH, in our world as a whole, we have to think about public transportation. And if you look at um, you know this is also not about rails. If you look at some of the great investment I think that the city of Cleveland, for instance, has done over the past uh seven eight years, are really expanding and implementing your blessed blessed rapid transit

systems throughout their city. And this is about how not only get people moving to different parts of the city, but how you actually get people who are underserved in you know, um underserved neighborhoods to employment centers without having to necessarily get in their car and sometimes people don't have public transfer a car to get to the places

of employment. This is about connecting I think, you know, UM different employment centers, you know, through blessed rap or transit, through other investment that's needed, uh and public transportation as

a whole. So I think there's anything that this bill will do will start to not only address that in terms of you know, getting beyond just you know, repairing of streets and bridges, you know, but how do we actually think about manstering expectation of where we actually need to kind of double down and invest because it's a long run. It's a long term investment that I know the next generation will benefit from, even though we can't fully realize it now. All right, Andre, thank you so

much for joining us. We really appreciate it. Andre Brumfeld, Cities and Urban Design leader firm name is Gensler. Talking about the you know, fiscal stimulus coming down, We're looking at some infrastructure bill winding its way through Congress. UH, many many billions of dollars UH need to spend it. Invested wisely is the operative word here. We're gonna more coming up. This is Bloomberg. Now, the Conference Boards Leading

Economic Index rose zero point nine percent in July. UM. The estimate was for a gain of zero point seven per cent. So looks good. I guess let's bring in Adam on ozol Drum. He's the director of Economic Research and a global Research Chair at the Conference Board. UM, what do we take from these numbers? Out of on? Good morning, good to be here. UM, the l EI has been rising pretty strongly over the last several months,

in fact since last year. So all of that really points to UH, strong growth, a robust growth environment for the economy in the US, at least for the second half of the year. I don't give us that what really drives this index that a lot of investors really focused on one of the key drivers. Sure, the US Leading Economic Index has ten components. Uh. These are all leading indicators that have proven to help to anticipate major

business cycle recessions. So they turned down ahead of the recession, and you know, putting them all together in this index is giving us a clearer view of you know, where the risks lie in the economy. UM, and whether a recession peak turning point is approaching or not. So they are objectives UM measures UM. And in this case, you know,

all ten components rose in July UM. And these types of readings have been pretty common over the last few months, so it is pointing to a pretty robust business cycle expansion unfolding, although we get um other indicators like well, housing starts is said to be a leading indicator, and it was bad. The consumer um UH Confidence Index from the University of Michigan was also quite rough. Um. Are you starting to see things fray a little bit? Sure?

And and there are indicators of housing and consumer expectations as part of the leading index as well. UM. And that's one of the advantages of looking at the summary measure like the leading index, because you're not really looking at just one area, but overall how the economy of the business cycle is doing. UM. So while the underlying trend in the leading indicators is still positive and pointing to you know, a good growth environment, there are some

areas of risk that might kind of raise their heads. UM. So uh, you know, we're watching sort of how the pandemic is evolving very closely. Uh. The economics or environment is still you know, highly dependent on you know, how what happens with the delta variant and whether people are being you know, comfortable to uh go back to business as usual in a way and go back to you know, um using those in person services, especially as as we've

been predicting. Uh so UM, you know, if the pandemic takes uh downturn negative turn affects confidence, UM, there there would you some more negative impact. That's something to watch out for as a as a risk in the economy. And then the other area might be uh that um, there is rising concern about inflation and whether that might uh you know, uh leads central banks to become more concerned and start to raise policy rates. And uh there could be of course direct effects on the economy through

mortgage rates and other types of economic activity. Talk to us about the labor market AUTUMNT we had another job's claims number that came in, uh, you know, below foreigner thousand, a little bit better than expected. How does that figure into your index? Yeah, Again, the labor markets is an important part of the leading indicators. UM. The UH initial claims for unemployment is one of the components UM, and in fact, it has been a very important component throughout

the pandemic recession then the recovery. UM. And you know, now we're starting to see initial claims coming back to more normal levels that we used to seeing during expansions. Uh. And maybe you know, further gains uh from unemployment claims is going to be limited. UM. So I don't know. UM. You know, the the the levels in claims that we were seeing before, we're unusually low. Um. And you know during expansions they tend to be around that uh to

fifty two three fifty range. UM. And you know, I'm not sure that I would expect uh, the claims to you know, drive the leading indicators as much in the future as it has uh throughout this recovery. All right, Otoman, thank you so much for joining us. We must appreciate getting your thoughts on these important economic data points. Automan also Drum he is a director of Economic Research and Global Research Chair at the conference board, joining us on

the phone, and we appreciate getting that. So again, the leading economic indicator for the month of May came in a little bit better than expected here and uh so in the crucial variable will be this delta of virus and when will it peak and when can we get to the other side of that. So a lot of folks are paying attention to that, as they should, as well as to the vaccination rates which are doing a

little bit better. Well, we are twelve years into this bull marketed investors are thinking about areas that may represent some value in a market that has some stretched valuations. That is a challenge increasingly for investors. Brian macaulay joins US now. He's a portfolio manager at Hennessey Focus Funds based in Arlington, Virginia. Has some thoughts here. So Brian, again, twelve years into this bull market, the markets doubled off of those March lows. What's an investor to do here

with fresh money? Great? Yeah, I think that's really the question of the day. And um, you know, we we always approach investing with a long term mindset, so we're trying to buy businesses for the next five and ten years, and so in today's environment, it is difficult to find

attractive investments with that type of time horizon. You know, we've seen really tremendous price performance out of the technology sector over the last several years, understandably so to some extent um, but in our view, a lot of those companies require really aggressive growth assumptions to justify their current valuations, and so we scan across the market and look for

other opportunities. You know, we're finding opportunities and i'd say more mundane businesses that are not technology companies but do have an important element of innovation to what they're doing. And so for us, we're finding opportunities and companies like CarMax and Allegiance Travel and r H that hasnique stories

restoration formally known as restoration hardware. Let me uh, let me start with car Max because I think it's fascinating love the car business industry, and I wonder why would you go with the retailer and not with a manufacturer. I look at you know, um price earnings ratios on companies like Ford and Volkswagen, and we're only talking about five or six, not that it's ever been you know,

not that they've ever had really high valuations. But if you believe in the auto industry, why not the manufacturers? Well it's a it's a reasonable question, you know, our our approaches, what do we think this business is going to be worth in five years? What do we think it's gonna be worth in ten years. And that's a very difficult question for us. For the automakers, you know, they generally have relatively low returns on capital and returns

on equity, so not naturally great businesses. In contrast, the company like car actually does have a unique value proposition and it does have very strong returns on capital and equity, and so that means to us it's a good business that should create a lot of value over the long term.

So we think they're going to be able to compound their earnings that a mid teens ready for the next five, maybe even ten years, and from today's starting price evaluation of about twenty times earnings, um, you know, we think we're gonna end up with a you know, a mid teens type rate of return for annum in the stock over those long time horizons as well. Yeah, brilliant. You know,

it's interesting, CarMax. We had news today that Toyota is going to cut its production in September pretty significantly by here, so some supply issues. There's just no cars out there for the retailers to sell. My guess is you think that's just a short term blip into what is a

better longer term story. Yes, it's certainly been a wild ride for the auto industry and you know, used car UH sellers such as CarMax over the last year plus, you know, the shortage of new vehicles, driven to some large extent by supply chain issues and semiconductor shortages, has meant that the used car market has become the release valve. And what we've seen more recently is that used car pricing is up nearly according to most recent Mannheim measures.

And UH, you know, we've got supply shortages and in use cars because there's just so much demand for vehicles today and so um. You know, Fortunately for a company like CarMax that's able to source vehicles directly from UH customers through trade ins and you know, they'll buy their your car from you, even if you don't buy a car from them. They they've had a proprietary source of supply for these used vehicles and safe to some large extent, been able to better match their supply with the demand

they're seeing. And that's translated in really good results for them. But yes, this is a transitory issue that should check out over the next several quarters. I have a two thousand and two thou twenty cars sitting downstairs in the garage. Both are going for used more than I paid for them. So it's pretty crazy to look at these prices. What about our Age Restoration Hardware Why the furniture High end furniture retailer, Well r H is again a little bit

like CarMax. It's it's got a very different business model and a fairly state industry. Um. They are opening design galleries which are really large, impressive showcases for there assortment of products, and it is um both the direct economic opportunity for them. They could double their sales and nearly triple their profits when they close an old, small, small

based store and open a large design gallery. Um. But it's also elevating the brand, and our H is striving to become kind of unprecedented luxury brand in the home furnishing space and here to four that's not been something that has been done. And so our H is trying to elevate themselves to luxury status, which would come with

luxury margins and luxury turns on equity and capital. And they've done very well so far on that path, highest margins in the industry by nearly two times and They've got a lot more room to go opening up these design droleries across the country. We think they can more than double their U S stores through this process, and then they've got a global opportunity beyond. Brian McAuley from Hennessy Focus Fun thanks for joining us. This is Bloomberg.

I promised you a story on private equity offering high net worth individuals riskier loans obviously, UM, you know, with more risk you expect more reward. Olivia, i'man wrote the story with Heather Pearlberg and Olivia what are we talking about here? How risky and what kind of returns? Yeah? For sure, you know, thank you for having me on the thing. With private credit UM, and that's where these investments are in there within the private credit market, loans

to middle market companies. UM. It's extremely opaque market. A lot of the loans are not subject to ratings by credit graders, and before the pandemic, there was a lot of concern about how the asset class would hold up in a downturn. At the same time, these the market is really a liquid Lenders typically hold these loans for the maturity of the loan, and they don't really trade on the secondary market, so you can't an investor can't pull their money out in a pinch like with the

soccer bond um. But that being said, some of these annualized or turns are surpassing eight per cent, so that looks pretty attractive. When um, you're looking at what deals are globally right now Olivia, how much how far do you think these pe firms are looking to go out

on the risk curve? I mean when you're talking about some of these leverage loans, you can get some leverage on a net that the IBATA of four or five six times, which you know can be really challenging if you if you go into an economic downturn like we experienced, how much risk do you think they will take? It's a very good point. There's actually a recent report that just came out that leverage levels within the private credit

market have remained relatively stable through the pandemic. But you are still talking, like you said, around four to five times. And when you're looking at the upper middle market, UM, where the loans are surpassing one billion dollars, we've heard of deals that are getting done with eight times of leverage, So there there is risk there right now, the default level in middle market companies has dropped to a three

year low. That's data from advisory firm Lincoln International and so so, so the risk has abated right now, but that's also been bolstered by all the ciscal and monetary policy that's been flooded into the economy right now. So there's always going to be risk with these loans. And obviously the more debt that you tap on and and the more leverage, the riskier they're going to be. And it would, I mean, it would strike me that you know, if it was a more risk free scenario or a

better return scenario, institutions would be getting this. If they're shopping it around to you know, individuals, as sophisticated as they may be, that's got to be a concern. Well, so it's interesting. So actually these are products that traditionally have only gone to institutions, So institutional investors have been the primary investor within private credit endowment funds, pension funds. Now private equity is trying to do as they're trying

to tack this new pool of investors. Previously, retail wasn't allowed into these funds, partly because of the risk and now they're lowering the bar and offering it for high

net worth individuals. I guess you could say. The one concern or critique is is that some firms allocate the retail investors money to the same funds that the institutions that access to, so they're they're receiving investments and returns from the same portfolios, whereas others have wrapped up the funds specifically charging retail only UM and the portfolio portfolio excuse me, obviously looks different. So the concern there is, you know, why, why is the retail client getting a

portfolio that the institutions aren't UM. But that's not for every fund and they and they really do vary instructure. Hey, Olivia, thank you so much for joining us. We really appreciate getting your thoughts on this story. Oliver Raymond, private credit reporter for Bloomberg News and a pay in State rad There's a lot of Penn State people we've had on the show the past a couple of days all over the place. Uh, So we appreciate getting Olivia's report. Again.

Private equity firms want rich investors to embrace Penn State grad We've had in this program by the way. Yeah, I mean they're Adam ont Drum. Also, I think it's a pen You've got his PhD at the Penn State. I wrote a lot of twitch and checks to Penn State, so I have invested interest, not for him or Olivia. Yeah, no, exactly. So we're all set. Thanks for listening to the Bloomberg Markets podcast. You can subscribe and listen to interviews with

Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller. I'm on Twitter at Matt Miller V three pen on Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast. You can always catch us worldwide at Bloomberg Radio