Bloomberg Audio Studios, Podcasts, Radio News. Hello and welcome to another episode of The Odd Laws podcast. I'm Joe Wisenthal and I'm Tracy Alloway. Tracy, I saw an interesting headline this morning, just one good point. I saw a million interesting headlines, but one that sort of caught my mind, sort of market moving, is that there was this comment
from Jensen Wong. He was at a conference, the CEES conference, and he was talking about how in the future, I guess their chips are getting more efficient as chips send to do that they may not need as much intense cooling infrastructure or cooling equipment for future data centers. And a bunch of those like cooling names like train technology. They're like really getting clobbered because we know those have been like some of the big winners from the AI boom.
I can hear all the private equity shops that bought each back outfit streaming from over here. No, it is a really interesting headline, right because you think about this as a technology space. AI is technology, but it has this huge infrastructure aspect attached to it. Infrastructure investors, from what I understand, you know, historically have tended to like relatively stable returns. Right, You invest in it because you
expect this to be a pretty reliable business. But because you have infrastructure that is now tied to tech, it seems like there's a pretty big risk that like every year, every two years or maybe even months now, there's going to be some huge tech upgrade that just changes the equation entirely.
This is a good point, Like I think, like the first time years and years ago I started hearing about infrastructure investing is like, oh, we bought a toll road, right, we bought an airport, and airports by and large they don't get disrupted very much, or a toll roads, like the basic business of some of these things has remained stable.
But yeah, to your point, especially now that there's such a link with tech, they's just like the sort of volatility of what's going to win out or what's needed seems highly uncertain.
Yeah.
And of course the other obvious thing going on at the moment is everyone's talking about AI valuations. Is the build out getting ahead of itself? And are all these companies actually going to be able to generate enough cash flow that backs up all this investment spend?
You know the other thing too, and It's something that we've observed, which is if you go back to infrastructure investing is not a new thing by any stretch, but you go back to the twenty tens, and so much of the money that was made then is sort of like financial engineering, financial opportunities who had dry powder at a time when everyone is broke and so forth. And one of the themes that's recurring over and over again these days is just like to make money, it feels
like you really have to get your hands dirty. Physical things of all sorts, and physical things have just been in our face constantly since COVID, and then it's accelerated because of there's so much public money pouring into this, so governments around the world really opening up the tabs. And then over the weekend we're recording this January sixth, by the way, obviously the Maduro News and so then
there's all of this stuff. It was like, oh, who's going to rebuild all of that oil infrastructure if that oil is ever going to profitably be tabbed? Like this is just sort of the physical world is sort of like the story of our time.
Are people talking about public private partnerships? Yet I feel like this is another cyclical thing that just pops up every once in a while. I'm going to do let's bring in our guests, and while we do that, I'm going to do a news trend search to see where we are in the public private partnership cycle.
Yes, let's bring our guests. Well, we really do have the perfect guest, lots of experience in this realm. We're going to be speaking with Tyler Rosenligd. He's a portfolio manager globalisted Infrastructure and natural resource equities at Cohen and Steers. So we're going to talk about all this stuff. Tyler, thank you so much for coming on Outla, Thanks for having me.
I'm real excited.
What's your job? What do you do? Why are we talking to you? What's going and Steers, Let's let's get that out of the Yeah.
So, Conan Steers were a long only asset manager. We primarily invest in real assets and alternative income strategies. So we're you know, managing mutual funds and ETFs, active ETFs and separate accounts for institutional investors. Focused on a couple niche things, primarily real assets strategies here and now. So that's things like listed ruts, which were really well known for commodities. And then where I help is our global
listed infrastructure and our natural resource equity strategies. So these are long only strategies. Investing across in infrastructure, it's you know we call the cute subsectors, so that's communications, things like cell towers, data centers, and satellites. Utilities, so this is electric, gas, water, renewables, transportation, the toll roads that you talked about, toll roads, airports, marine ports, and freight rails. And then e energy is misstream pipelines and so forth.
So we try to look at everything and give investors exposure to what is really a dynamic and exciting place.
So how busy have you been over the past year or two.
It's been very busy. I Mean, my joke used to be that I invent and all the old economy stuff. Now it's like the new economy stuff, and it's the
stuff that people are really excited about. And I'd say we've seen a lot of these trends kind of coming for a long time, and we've talked about them for probably a decade, but they've really only surfaced kind of to the front page of Bloomberg every morning in the last eighteen months, and I think that's really exciting, and we've been really busy because there's lots of new opportunities.
We see investment cases in traditional utilities, tons of new alternatives, nuclear, renewables, pipelines, lots of new businesses, capital formation, great opportunities.
And what's the balance of power actually like between investors and the companies that need investment at the moment, because I imagine it could go either way right now, Like the energy needs for data centers are absolutely massive, so it needs tons and tons of capital. But at the same time, a lot of investors, as we've been discussing, have been very, very eager to identify opportunities and get their foot in the door.
Yeah. I mean in the world that I live in, which is the sort of hard asset economy, i'd say having capital is very important. But we're now at a place in the cycle where the investment needs are so big that it's creating pretty big challenges for companies. And take the utility sector as an example. Eighteen months ago, if you said, hey, utility capex is going to accelerate and earnings growth is going to accelerate, every utility investor would say that's great. We've gone to such a level
now that it's actually really nuanced answer. You know, there is so much capital required in utility investment today that it's really causing affordability problems and some utilities we think are really going to struggle because elections are being one
about utility bills. Other utilities. On the other hand, actually you invite data centers into your service territory and it lowers bills, and so today, I actually think from an active management perspective, the dispersion in terms of outcomes and investment opportunities is as wide as it's ever been. So that's a really good thing for us as investors, and
I think it's not going to end. You know, we think these are structural, secular trends that are here for a while, and we don't think that is a fad. From an infrastructure investment perspective, we.
Just real quickly, data center's lowering bills. Headlines like that don't go viral. What's that all about.
Yeah, it's very nuanced. So if you think about the utility business model, you know, very simplistically, the utility invests in its rate base. So let's say their rate base is ten billion dollars. They're allowed a return on equity, maybe it's ten percent. They aren't a billion dollars. This is very simple math. Isn't how it exactly works. But then they charge their cost to customers, and that's their revenue requirement what we as bill payers pay. You double
your rate base. If you don't increase your customers, you could actually double your costs. And that's a lot of what's happening here in New York City and Washington, DC and other places. There are some utilities that are long generation or they're long power. So just think about that very simplistically. You've got a utility, it's got a rate base, and inside that rate base, every rate payer is paying for power that's not actually being used. Bring a data
center into that service territory. The data center itself might consume that power, and you, as the ratepayer, are not actually going to be burdened by that cost in your monthly bill. And so for us, we think it's really important. You've got to understand the regulation, who the commissioners are, what their power systems are, like their generation and so forth. And there are examples of data centers being really good
for both the utility and the customer. But that's again, it's very nuanced, and it really depends on where you are and sort of what your asset base looks like.
I talk a little bit more about that because we've done episodes on the political risks involved with the data center build out, and this seems to be something that is really gaining traction, especially as we go into the midterms and we see politicians sort of, you know, laying down their positions on this particular issue. But how feasible is it that you could get a data center that could actually in some way improve the electricity market in
a particular state or location. And then I imagine that you have to have a lot of room, right to have a data center, you have to have water access and things like that. It can't be good ever.
Oh definitely, we're not saying it's going everywhere. I mean, i'd go the opos and say it's really actually bad in a lot of places, and then it's really good in some places. And so it really depends on all the things that you just laid out, which is, do you have the generation, do you have the water, do you have everything else? What you're seeing now in utilities is data center tariffs that are being kind of negotiated
and going through the utility regulation process today. And we've seen some examples in Wisconsin, for instance, where effectively the data center has zero impact on the local rate pair. The hyperscaler in Wisconsin has agreed to guarantee a return on a rate base for the capex that the utility is spending. It's not going to impact the rate payers there at all, and so it's kind of done off
of the back of the utility customer. There's other places though, where they're still working through those utility contracts or we'll see, but hey, you could have big stranded asset risk. Utility is going to spend a couple of billion dollars. They're going to make sure that the data center has power and electricity. Maybe the data center leaves five years from now and then everybody's gonna be stuck with a stranded assets.
So no, definitively take a step back. You know, we think the world needs more energy, we think the world needs more power. It's gonna service data centers, it's going to service industrial customers, residential customers, sort of everything, evs, you name it. But that's gonna come with the tension of rising bills, and that's going to be a challenge for some places and an opportunity for others.
I'm curious. We'll get into all all these details and stuff, but I'm actually I'm very curious about how you work and how you figure this stuff out. I have to imagine, for as long as you've been working on this, there must be new things every day, because, as Tracy mentioned, we've it's gone from this sort of like a lot of staid, stable operations to high tech and there's so much uncertainty. How do you work, Like, how do you
learn about things? Do you have a team of analysts that talk to us about like the process for wrapping your heads around so much novelty? Yeah?
So you know, we've got a great team on our infrastructure team. There's four portfolio managers and sort of we kind of break the world up by geography. We have one PM in London and who helps us with our European infrastructure investments, and then three here in New York with varying expertise, and then we have seven analysts and they're sort of our boots on the ground. I mean.
Conan Steers was founded as a real estate investor back in nineteen eighty six, and our perspective was be on the ground, be walking properties, be touring assets, because you can find unique insights if you do that sort of thing.
So we want to have this big team that is sector specialists, that really understands the utilities, the regulation behind it, what's going on in local politics, going in touring assets, talking to local professionals, and trying to find kind of where we can see unique insights and where hey, the regulation is getting a lot better, or there's this unique contract that we think is going to be really beneficial to this small local utility, or hey, what's going on
in New Jersey, what's going on in Virginia? In New York City, how's that going to affect things as well? And so I think it's important to have this team do really detailed fundamental work. And for us as investors, I'm our CIO would characterize us as thematically informed relative value investors. So let's find good themes that are underappreciated and underpriced and then find the best investment opportunities to
take advantage of those. And if you do that, we think you can generate really good investment results.
My favorite form of self side research remains the analyst going on field trips. So now I'm imagining everyone's staring at a data center in New Jersey or something. I know you're not self side, but speaking of that, though, how do deals actually land on your desk? And I say that realizing that I'm talking as if someone's like mailing out offer letters to you and it's actually landing on your desk. How do deals or potential opportunities get to your screen?
So we're public markets investors, so we're just trying to find listed securities and figure out which ones we think our best position for the next one year, three or five years. And so we're constantly invested. So as we raise capital via open un neutual funds or through our active ETFs, through through separate accounts, it kind of comes in and then we have our core strategy that's invested at all times. And for us, it's about being positioned in a way that we think will do a lot
better than the benchmarks that we're measured against. And so for us, it's sort of your traditional equity research function where we are constantly trying to make sure that we are leading edge in terms of what's happening in markets and identify, Hey, we think that this thing is going to happen to the North Dakota utility as they invite a local data center customer there. That's underappreciated by the market.
And so it's the fundamental boots on the ground stuff that everybody does, and we just think that we've got some unique processes and unique ways to tap it.
At what point did it sort of dawn on you or dawn on the market, et cetera that a lot of companies that we had long associated with being sort of classically cyclical companies can be t secular winners. Now I'm thinking of like a Caterpillar, we should just sort of imagine buy and large. Here's a company whose fortunes rise and fall with GDP. Right, the economy is growing, well, they're probably going to have a lot of people are gonna be buying equipment to break ground. You get a recession,
people buy less of it. And then something changed and you look at a chart of like a Caterpillar is like, Okay, this is no longer a cyclical company. When did this start to like take hold or sort of dawn on people? Something was changing.
Yeah, So I'd start with, so I have kind of the dual function where I oversee help oversee our infrastructure strategies and our natural resource equity strategies. And I'd say on that side of the house, so that's investing in things like the entire energy value chain, the metals and
mining value chain, the ag value chain. You've seen a lot more of like the Caterpillar type transitions that you just alluded to, which is, hey, this hyper cyclical business that suddenly is being valued like it's not a cyclical So I'd start with things always have cycles, and so it might be perceived as not cyclical now, but maybe it will become cyclical again in the future. But our view would be, hey, these cycles are actually higher and
deeper and lasting a lot longer. And one of the big drivers has been a lot of the natural resources world has been a capital starve for a while, and in that process, many sectors and industries have consolidated quite a bit, and so the expertise has really accrued to just a couple players. And if you think about that and you say, hey, one of the things that we believe about natural resources is that we've exited what we talked about as the era of abundance, and we've entered
the air of scarcity. We just don't have enough of all the stuff that we need for the economy to grow.
And the companies that actually facilitate ending that scarcity, there's just not as many of them, because again, there's been massive consolidation in these sectors that we think will be persistent, will allow them to earn above average returns, have a lot more predictable growth for a long time, and then we'll reassess in the future and maybe the competition will be invited back and they're going to go back in
the other way. But we think it's really early in a lot of these trends, and the sort of secular growth and the reduction in volatility of that growth is very different now than it was ten years ago.
So I take the point about consolidation and that you're working on, you know, pretty long timelines. But how do you guard against, you know, the possibility that, as with everything infrastructure related and energy related, certainly it seems like we always end up with overcapacity at some point in the cycle. How do you avoid that?
Can't avoid it? Okay, that will happen, right like on the commodity cycle. The cure for low prices, low prices, the cure for high prices, high prices. The same thing on the infrastructure side. Although infrastructure, again it's generally assets that are monopolistic, either by regulation or by competitive dynamic. You know, you think about the US freight rails. You can't really build a new one, and so the competition there is going to come from new technologies like autonomous
trucks and other things. You think about, things like airports, even utilities. I mean, these are local monopolies. So in infrastructure that sort of over build, I mean it would happen on the power side, and it will happen at some point, like what would happened with shale pipelines in North America. Right in twenty ten, we thought oil production was going to go up a lot. We built a lot of pipelines by twenty fifteen, twenty sixteen, and oil
price has declined. We didn't need all those pipelines in the short term. Cause a lot of turmoil. And so to answer your question directly, you can't avoid it, but we as investors, our job is to try to sidestep it. Understand when's the market getting too excessive in terms of its expectations.
Tell us about right now January twenty twenty six, within the realm of say US energy and US energy infrastructure. We all know the headlines, and we've done a million episodes on them. There's so much demand for electricity, all right, I get that point. But talk to us specifically about what are we seeing right now? What is the math that you see out there? And maybe to frame it, like, how would this conversation be different even in say January twenty twenty four, January twenty twenty five.
Perfect, So let's actually let's not start with the US. Let's start with the okay, because I think it's let's start as big as we go and then we can drill down a lot of people. For the last like six years, when they talked about global energy demand, we think they did it the wrong way that they focused on the supply side, where they said, hey, the government has these targets or we have this sort of goal
to have global warming be xyz. This is what the supply would have to look like to satisfy that world. And we said, you know, why don't we start with demand? You know, what do we think global energy demand is going to be in the next two decades. Then let's figure out how we're going to supply it. So global energy demand, it's a pretty easy model. It's kind of three factors, you know. The first thing that you care about is global population growth. All l sql more people,
more energy is consumed. Not talking oil or cool it's energy and aggregate. The second thing that you think about is the global economy. Bigger economy, all lseql more energy consumption. The third one is pretty tricky, and that's the energy intensity of economic growth. That is, hey, how good are we at converting an energy input into a unit of economic output. So what we did a couple of years ago is we said, hey, let's try to predict those
things in the very long run. The first thing is, hey, population growth, we think it's decelerating, but it's still positive. So in twenty forty there's going to be a lot more people in the world than there were in twenty twenty four. Economic growth, we think it's going to slow but still be pretty positive. Maybe it used to be three percent, now it's two point seven. That means more
energy demand. And then we said, hey, let's assume we get a lot more energy efficient, We're going to be a lot better at consuming and converting energy into economic growth. And that's a comfortable assumption, you know, two years ago, because government policy was mandating it, consumer preferences were mandating it,
and also technologies were getting better. When you put those three things together, what you saw was global energy demand rising from about one hundred and seventy eight thousand tarawad hours, which is you know, big number, but one hundred and seventy eight thousand to two hundred and twenty twenty forty. That's a big increase in global energy demand. And again that assumes a big increase in energy efficiency. So then peel back one layer. How does renewables fit into this, Well,
we also want to reduce coal consumption. So if you think about this, hey, we're going from one eighty to two twenty. We want to reduce the amount of coal we consume. Renewables we need to add sixty thousand tarot wet hours or fifty five thousand tariowot hours of supply. It's a huge number. That's basically recreating the entire global crude oil industry that's been around for one hundred years
in the next sixteen. So what's changed in the last twelve months that global energy demand assumption for twenty forty has risen. Our confidence that we're getting less energy intense has gone down because a lot of this economic growth is very energy intensive, and so we've been in this energy addition world, this need to produce really more of everything, and it's only becoming more of an issue and a challenge and an opportunity for the energy industry.
Actually reminds me. I wanted to ask you, can you talk about the decarbonization initiatives from some of the hyperscalers themselves and how you're judging Yeah, yeah, yeah.
So there's sort of like three competing factors when you're thinking about energy. So so one is you want the energy system to be stable, You want to be clean, and you want more of it. I think five years ago it was clean, stable more in that order, we want clean energy, we want it to be stable, and we want to have more. Today it's it's kind of flipped, right,
we need more. It has to be stable, and then we do want it to be clean, but we can't necessarily sacrifice the clean for the more and the stable part of it. And so I think everybody is well intentioned and doing the right things, which is, Hey, let's try to transition the dirtiest stuff away, move from coal into natural gas hyper scalers who have a lot of cash. Let's try to reindustrialize the nuclear economy. Let's continue to make investments in SMRs and existing reactors, turning them on.
Let's try to get more geothermal and other things in the Hey, let's get more of it. Let's make sure it's stable, let's make it as clean as possible. And then once we've kind of gotten there on the build out, we can start to shut down the stuff we don't want and really just rely on the stuff that we do want. But again, the three factors have changed, and I think that that's really shifted market perceptions on what the energy industry should look like.
Have they acknowledged that they've changed or is this just a quiet they've changed but we're not getting they're certainly not putting press releases about it. But you know, how is it just you.
Know, I think change. I think it's it's actually a little bit more acknowledged than people would say out loud, Like I get yelled at sometimes when I talk about specific stocks. But there's a UK based major energy company that you know went one way and then they've very publicly gone the other way. Yeah, and I think you know that's that's normal when you see sort of market conditions shift like.
This random question the year twenty forty, are we still going to be using coal in this country.
In our model? Our model is global, so this country versus the world. Let's just focus on the world. World. We have coal supply or sort of coal generation cut in half by twenty forty. I think that's ambitious. I would hope that it was zero, but the sort of energy pragmatists would say, hey, around the world coal will be relied upon for a really long time. It will be a much lower percentage of energy markets, and we
think it will sort of decline over time. But again, the idea of zero coal around the world by twenty forty, I think is highly unlikely.
Since we're talking about energy on a global scale. Talk to us about what you're seeing or expecting out of China, because this is the other source of a million headlines nowadays, or at least a million headlines with very very large numbers in them about what China is doing in terms of building out its energy capacity. Yeah.
I think part of it is you think about the global geopolitics and you say, like, well, why are some places more aggressively pursuing alternatives versus traditional and why did Europe do as much renewables as they did, And a lot of that has to do with taking advantage of
what you're endowed with or not. So Here in North America we have plentiful natural gas and crude oil, and our need to invest in renewables from a cost perspective is different than Europe, where they are an importer, and so the way to sort of convert from being an importer to self sufficient is to harness what you've got. If you've got a lot of wind and you've got a lot of sun, you're going to want to overinvest there.
I think China depends on the world for energy supply and they're trying to reduce that and I want to be more independent. They're going all in on nuclear, They're investing massive amounts in their nuclear economy, cold generation as well, kind of everything, and I think just an effort to be more self sufficient. But that's not China specific, right, that's kind of like every country right now is doing
a similar thing. And trying to be a little bit more self sufficient in a post COVID, post Russia Ukraine, rising geopolitical tension sort of world.
I think I'm very skeptical that we're going to have a nuclear renaissance in the US. Like, I know, there's tons of headlines and I'm sure there's a few of those places that are going to get restarted. I am not an expert, so it's it's just my gut. Is am I off the mark? Were we looking on that?
So?
I think it really depends on what you mean by a nuclear renaissance.
So give us a time frame, get.
Like, okay, here's my I don't even why am I making predictions. I don't know anything about this stuff, but like I would be surprised if I'm on polymarket or something. I would imagine that there's not what's that plant in Georgia that came online, the vogal, the vulgal plant, Like, I don't think there's going to be another Vocal in the next twenty years.
I disagree. I'll kind of talk you through why, But let me let me tell you about what the nuclear renaissance. And again I'm talking kind of global as opposed to just us, but we can definitely talk about US two. So take another step. I like to take a lot of step backs.
As you can tell, we're going to talk about the galaxy.
Go no data centers in space in this conversation, I promise no.
Actually that.
Yeah, okay, So why why are we talking about nuclear? Right? It's pretty simple, break the world into traditional and alternative. Good thing about traditional, so things like natural gas and coal is it's reliable twenty four to seven three sixty five energy. Unfortunately, it has the emissions profile we don't like. Alternatives let's just call it wind and solar has the
emissions profile we want, but it's intermittent and variable. If you're a data center CEO, you're feeling pretty good about your business today, you kind of wake up with night sweats about the power going out. Right, you cannot lose power. You have a very expensive metal shell that's cooling servers and providing electricity and energy, which means, hey, I can't take the intermittency. I've got to use the baseload. Nuclear is sort of the one resource that can kind of
serve both masters. It is twenty four to seven three sixty five low, variable cost, very high capacity factor and it's also pretty clean, and so that's kind of why we're talking about nuclear. There was an episode of maybe a couple months ago where you said, hey, nuclear batteries.
Yeah, I was about to ask you the same question.
Well, go, I think I mean it's all about energy storage. Yeah. The whole thing is like, hey, how do I store energy to use it when I want it? Like coal is effectively an energy battery, natural gas is an energy battery. There's just no batteries for wind and solar that are viable today. But I'd love to solve that problem. That would help in a lot of ways.
But back to the nuclear can hold solar energy in your hand?
Can't? I wish you could and me, well, one day you will, but but we think it's going to take quite a while to do that. But okay, so the nuclear renaissance, we've been shutting down nuclear generation capacity around the world for the last two decades.
So step one is including in famously sunny Germany everywhere.
So step one is like, let's just not shut it down. We think we're in like the seventh inning of that ball game, Like we're not shutting it down.
Yea, it's something yeah.
So so phase two is like, well, can we turn on any of the stuff that we recently turned off? You know, we're in like the fifth inning of that game. I think that sort of is going from a slow bleed to hey flat and then slow growth. So the next couple of years are about hey turning on three mile Islan in other places, Phase three, which would be I think we're in the second and third inning and
we're going to start to see some acceleration. Here would be the sort of brown field inside the fence nuclear facility build out. Hey, you worry about nimby issues, site supply, security safety. I think that's been talked about here as well. We do think that that's going to start to pick up, but that's like a twenty thirty two to twenty thirty five in service and then we talk about SMRs and thorium and other opportunities. I think that'll happen, but it's
like twenty thirty five to twenty forty. So that's still a renaissance to me. Were we're taking something that we were sort of allowing to slowly melt and we're sort of refreezing it and then we're building it. And that's that's okay, just yes or no.
By the year twenty forty in the United States, will we see you.
Guys are going to start a polymarket contract.
Yeah, it will.
We get another vote, so ill I've got this like internal bet, so I have to say yes. But there is a caveat no utility will do it themselves. Yeah, there is I'd say zero chance that a utility will say, hey, we're willing to do a greenfield new nuclear facility with no cost overrun risk. But I think the cost over run risk will get covered by the government. So we're
starting to see some of this stuff. We're seeing it across the natural resources economy right where the US government is taking direct equity stakes and they're having a more directly interventionist approach to all of critical minerals and resources. So what would I do if I was sort of the energies are I would say, Hey, I'm the US government. I'm going to backstop guarantee cost over run risk for ten nuclear generation facilities across the US. I'm going to
make sure they get built. I'm going to sort of shoulder the excess cost burden, and then maybe at the end of this, I'm just going to sell it to the highest bidder. So let's just make up the numbers. Maybe it costs one hundred billion dollars for the US government to do that. Maybe those ten facilities get sold for fifty billion dollars and the taxpayer has taken a fifty billion dollar loss. But here we've got ten new
generators providing sort of cheap and clean energy. Maybe they can sell it for one hundred and fifty and actually sort of help the deficit situation. But so get to answer a question. I think it's going to happen, But I mean one of my key messages, it's not going to happen alone. Like these supply chains are not going to come about because of market forces. You're not seeing a reaction in copper production, you're not seeing a reaction
in uranium mining, You're not seeing a reaction. Nuclear generation without direct government sort of intervention has a little bit of a negative connotation, but direct government catalyst, you know. And but I think that that's going to happen, and we're starting to see it.
This reminds me. I did pull up the chart of the number of times public and private partnerships are being mentioned in news stories, and yeah, spiking into late twenty twenty four and twenty five. So we're back. But okay, talk to us a little bit more. Why doesn't the market it like signal work for something like uranium or you mentioned copper as well.
Yeah, I think honestly, these are sort of markets that have been sort of forgotten by investors, and companies are still being penalized for increasing capex and increasing supply.
So it's kind of the shale story, the shale stories.
So you look at sort of at the end of last year, some of the major mining companies talked about their twenty twenty six capex. Most of them sort of cut capex expectations or at least relative to consensus came in below. That's weird, right, Copper prices all time highs, Goal prices all time highs. Shouldn't the miners be increasing their capac and inviting that supply response we talked about earlier. The investors just revolt, They say.
No, Mas, we want the discipline.
You've destroyed so much value, and they did, right, Shale destroyed a lot of value twenty ten to twenty twenty, and so it's not going to happen naturally. And maybe that's okay because you know, these these management teams, I mean, they should continue to be held to the discipline. But we do need the supply, and so that's why I think that the government is going to try to get it moving. And we've seen examples of that, right, you saw some rare earth stuff last year, lithium stuff last year.
Obviously the big nuclear backstop of contracts and so forth that was announced in the A lot of it is not well defined, but we're going to start to get some more definition behind this stuff.
You can't blame the shareholders. I mean, it must be so sick you have these prices shooting through the moon. It's like, why not just take the cash?
You know, I mean as a long term oriented as a shareholder, as a shareholder, you know, I think, listen at these prices. Returns on a lot of projects actually look pretty good, but you worry about administration changes and you worry about the supply response. And honestly, these companies did really poorly for a long time, and so the spreadsheet math might say, hey, you start drilling again, but the sort of history would say no, no, the returns need to be way better to justify that, and I think
it's a rational response by the investor base. But I think step one is, like people need to start looking at the again, the old economy stuff again, but it's the new economy stuff. People need to be looking at natural resources stocks, they need to be looking at infrastructure stocks. They need to be feeling good about them providing capital to these companies, and then you will get that supply response. But again it's early in.
The cycle on the topic of natural resources and maybe investor reluctance. We're recording this on January sixth, and the big news in the markets is, of course, what happened over the weekend in Venezuela. I'm sure that's not your particular area of expertise, but you know, as an infrastructure investor, when you look at a place like Venezuela, where we hear they need billions of dollars of capital, yeah, to get the oil industry up and running, what do you think about that situation?
Yeah, So let me just talk about it strictly from like an investor perspective or how you would sort of think about that. Being an infrastructure investor, we care a lot about one risk that very few people spend a lot of time on So if you're to say, hey, Tyler, you talked about the data center CEO staying up a knife for losing power. What keeps you up at night? For us, it's regulatory risk. Right, you're investing in airports and utilities and things like that that are governed by
a regulator. We worry about surprise, and you get regulatory surprise here. Right. You look at what happens with utilities in Illinois, you look at what's happening with FURK and as they sort of change things. So we spend a lot of time on I.
Don't know anything about utilities in Illinois.
Well, like, hey, the utilities spend some CAPEX and they said, hey, we want a high return, we want to get that in our rate base, and the regulator just says no, you know, And so we talk about our boots on the ground investing. It's trying to make sure that we understand those very difficult things to figure out before everybody
else does. So take it to Venezuela, Like if I was to make a large foreign direct investment there from an infrastructure and resources perspective, I would really really want to understand the legal constructs surrounding that and that's really challenging in the midst of regime change, and so I'm very hopeful, like I think everybody would say, hey, we're hopeful that things get resolved quickly and then you sort
of figure it all out very fast. But it's going to take a while, I think before you actually start to see some investments because you, as an infrastructure investor, that risk of expropriation nationalization is very high, and so you don't want to go and suddenly see your assets stranded there. So maybe that answers your question, But again, a lot of it is about understanding regulation and law and what's happening in politics and so forth.
Well, I'm mostly curious. I mean, we had President Trump is obviously very excited about the opportunities to rebuild that infrastructure and for American companies to come in and be part of that. But Oil West Texas it said fifty seven dollars a barrel, setting aside the obvious highly uncertain regulatory environment of Venezuela. Don't know what like pencils out
at fifty seven. I'm curious. You know, you mentioned pipelines like during the twenty tens or sort of you know, there's a lot of anti pipeline politics, and I assume that the current administration is much more you know, green light for pipelines. But who wants to build new pipelines at these prices?
Yeah, so I'll use my favorite acronym, but I've got to give credit to Paul Sankie at Sankey Research because he's the one that coined it. But so a decade ago, we had a Nimbi world, which is like not in my backyard. That world transitioned to a bananas world. Bananas has built absolutely nothing anywhere near anything, right, So the bananas world existed from like twenty eighteen to twenty twenty four. And when I say banana's world, that's about the ability
to build infrastructure. Okay, not any other bananas out there.
Right.
That does feel like it's changing a little bit in that, Hey, there's starting to be a little bit more sort of certainty and sort of based in DC desire to build stuff. And so you're starting to see a little bit of pipeline construction activity heating back up. We went from a world where, hey, we're never going to build another pipeline in North America. I think that's changing. It's going to be a get a lot more pragmatic than it was in twenty ten to twenty fifteen. But you're starting to
see this sort of willingness to make these investments. But again it comes because the sort of.
Did a math out, like what pipeline is economical at current price?
It's all a function of what the customers wi want to pay, right and if you've got natural gas prices in the high threes, and if you've got sort of wide or oil differentials and other things like a lot of the pipeline activity that we're seeing today is natural gas pipelines feeding the data centers their willingness to pay us pretty high. And so that's really where we're It's not an oil pipeline world today. It's a it's a natural gas pipeline world.
We go from we have no bananas to yes, we have no bananas.
I love that, Please enjoy it.
Please enjoy my nineteen twenties cultural references.
Going back to US energy and electricity, again, every headline or everyone person is like, you know, we have the chips, we have the CEA Energy is the bottle deck. You hear that over and over again, and I think Jensen long said that again today and that CS energy is the bottom night. Except we all know this, right, So in my mind it's like, oh, it's all priced in.
But like, as an investor, what parts of this energy story to you still feel underappreciated or where are there's still opportunities in a story where there's like literally anyone is aware of this fact the electricity constraints.
Yeah, So i'd start with we agree electricity is constrained, the demand is going to keep rising. I would note it's not just data centers. Like, we spent a lot of time thinking about US energy markets, and they went from zero growth in terms of electricity demand from twentousy and seven to twenty twenty. They've been growing like one and one and a half percent recently, we think it's going to go to two and a half percent per year.
Doesn't seem like a big number, but going from zero percent to two and a half percent and a big industrial system is a huge one. Only about half of it is data centers. There's lots of electricity demand coming from evs and from the industrial system and so forth. But where do we see the opportunity I'd start with
certain utilities. So utilities today actually trade at a lower multiple than they did a few years ago, and growth rates are a little bit higher than they used to be, So that's like a little bit of an odd thing to see. However, what we think is, hey, the average utility is going to see some challenges from affordability issues and from regulation, but the best utilities are not trading at a lot higher multiple than the average utility, and
their growth rate differential is way better. So to put some numbers around it, eight years ago, you had to pay an eleven percent premium to get one percent better growth. So the average utility group was going to grow six best in class utility was going to grow seven. You had to pay an eleven percent higher multiple for that trade. Today, the fastest growing utilities only trade six percent more expensive,
so actually cheaper relative to the average. They're going to grow two percent more so instead of six and a half, it's going to be eight and a half. That's pretty right. You're paying lower absolut multiples.
Theory.
I think people are worried about regulation. I think people are worried about rising interest rates, They're worried about affordability, and what you're going to see is the pack will separate over the next three years. So it's rational that sort of the world has compressed in the way that it has from a utility perspective. But I think over time, those that are able to execute will really be rewarded.
Outside that, I mean the picks and shovels types of companies to the data center and reindustrialization build out, we still see a lot of opportunity and multiples are up, but they're becoming more predictable. Their growth rates are accelerating. It's more structural in nature.
Who are some of those companies. Yeah, I measured Caterpillar, but that's like.
Yeah, I mean the engineering and construction companies that are helped building the large scale infrastructure and so forth would definitely fall in that bucket. Yet we look at some of the companies that are like aluminum smelters and so forth. Again, these are highly consolidated industries relative to where they were a couple decades ago. And so this is like it's
the gold rush. Who made all the money and the gold rush it was the Levi's and the picks and shovels companies, And I kind of think that's where we are. You might get the best, like absolute returns and some of the direct ways to play this, but they might come with a lot more volatility, and we think the sort of at least risk adjusted returns are more in the picks and shovels.
Speaking of volatility very quickly, one of the interesting things that happened last year in data center world was we had that big outage at the CME, which was the result of an outage at one particular data center that was run by an operator called I want to say, cyrus one. Yeah, yeah, you know, you talked about the CEO staying up late at night worrying about exactly this scenario. But do you, as an investor in the infrastructure have
to worry about operational risk as well? And then how do you actually assess that?
Yeah, we do. I mean, let's use pipelines as like the best example. Right, if you own a company that owns oil pipelines and they have an oil spill, like that is a big problem. So so we get a lot of questions on hey, how do you think about
ESG and integrate ESG and so forth. And one of the key things that we do is we think about the incentives and we think about how these companies are doing maintaining their assets, and what their local shareholder relationships are like, and what the integrity of what they own and operate are because yeah, with infrastructure, operational risks have
major asset impairment risks with them. And so again for us, it's this big team around the world trying to do what we can to talk to not the CEO, but the plant managers and the sort of next rung down and ask one CEO what he thinks about the assets of another company and are they maintaining them well, and try to get some insights there, because yeah, it's a key risk, something that that we worry about.
So we're kind of in a post banana world in the sense that from the DC perspective, you know, I think the administration clearly has a much more liberal attitude towards approving various things. On the other hand, and we've talked about this recently on the show quite a bit, the local backlash, particularly to data center Suddenly people are really anxious about that. We see these town hall meetings
going viral and there's misinformation of out there. Something when you think about like the utilities that are the rapidly growing ones, the ones for whom there's perhaps an opportunity because they don't trade at a premium that is consistent with their growth potential. Do you worry about that aspect and do much time thinking about like, yes, on paper, we know there's tons of plans to build more here, et cetera, But will it actually happen given the realities of local politics.
Yeah, I mean i'd start with there's been a lot of data center backlash and is it appropriate or not? I mean there are some utilities whose bills went up fifteen percent last year. Yeah, So and you think about a data center company that doesn't create any jobs in the local market. I mean there's construction jobs, but then once the data center's running, it's just kind of like a big empty shell with some refrigeration and some power, and you're not really doing a lot for the local economy.
So you're sort of local residential customer who's paying fifteen percent more and it's not seeing any sort of economic benefit to the local area from that. That is inviting a re ale response from the regulator to say, hey, we actually it's not in our best interest to do this, And so we spend a lot of time on who is on the utility commissions. Are they elected or they appointed? Because because that can matter what has been the bill pressure.
I take it the elected ones are more sensitive towards.
All LSEQL unelected commission. You're saying, hey, they want to stay elected, and so are they're going to do things that are more beneficial to the local electorate than someone that's government appointed or governor appointed, who would maybe do something that's Hey, I know the bills might go up a little bit, but but we actually want to invite this. I mean, just to put the magnitude of the opportunity. So there's a utility in the Midwest. It's been around
for about one hundred years. It currently has a system that's about eleven gigawatts, So one gigawott is about a million people. It's like the city of Denver. So this Midwest utility eleven gigawatts took them one hundred years to get there. They currently have data center demand to build fifteen gigawots. Think about that, right one hundred years ago?
The quest today and I want to looked as up. What utility can I.
Get yelled at?
By fine, we'll look at up, We'll look at it.
We'll get up separately.
Well, use data powered AI platforms to figure it out.
Yeah, something. They'll kick me out of the table if I give too many specific stocks. But no, you just think about that right, one hundred years ago to eleven and like by tomorrow they want another fifteen that is really expensive, and so you're seeing this tension and I think that's that's reasonable.
Do you play power Grid ever? Do you know that game?
No? But I feel like I should.
It's a board game. It's a board game where you're in charge of supplying electricity to various cities. It's kind of fun.
I played the board game Pandemic in like late nineteen and look what that led to. So maybe I'm a little bit scary.
It's your fault. Well play power Grid and then we can all enjoy an efficient electricity system. Maybe maybe things will change.
That was a great conversation, Tyler Rosenlick, Thank you so much for coming on odd lot. So let's stay in touch. Now we're going to use our AI skills to backwards figure out what that one hundred years.
To draw energy from the data centers, to crunch the numbers.
Crunch the numbers, claw or whatever. Yeah, Tracy, I really enjoyed that. It does feel as though if you're in the right place right now, there's just a mountain of money coming. I mean, who knows if you're like going to get it. But you know, between all of them, he talked about every country wanting to have more domestic
energy security, the secular trends, et cetera. If you're in the right place, government spending more money, it feels like you could get you stand in the right way of an absolute fire hose of money right now in this space.
I mean it feels to me, and you know, he kind of said it, but the government is the key risk, the regulatory risk. And also I take his point about even though maybe the numbers pencil out at current commodity levels, if you look at future demand and stuff like that, it might not work because your assumption is, well, you know, in three years will have a new administration, yeah, or maybe in another ten years the pendulum will swing back
towards clean energy or something like that. So that to me seems to be the big risk.
Just on the Venezuela point, I mean, it's gonna be a hard sell. I mean, imagine, who wants to plony up one hundred billion dollars and granted shared between a bunch of different companies. Presumably it's still the same old regime there hasn't been, you know, and then all the uncertainty there and then the fact that you know, oil just isn't as valuable as it was several years.
Who are the brave cell side analysts that are going to go on a field chirp to Venezuela in order to inform their research on time like PDVSA bonds or something.
Yeah, definitely need we need a sell side report, like because the thing that's fun about the reports that you like is they often take a lot of pictures. Oh yeah, so we need someone to do report, like go into the paveous facilities, like just someone takes a thousand photographs of like here is the state of this product, this facility.
This spot goes an oil tanker being loaded up in Venezuela and tell us everything that you see.
How is it, how efficient is it, and so forth, what it would actually take to repair.
It to I feel like I need to add a disclaimer onto that. Please do not go to Venezuela and do all this on our account. On our account, No, we're not asking anyone to go to Venezuela.
We're asking someone in a professional capacity to whose job would be to go there anyway, to please include a lot of pictures in the cell side report. But we're not asking you to do it on our behalf.
Is that big enough cavea? Are we going to get the lawyers?
We got to reverse engineer what that utility company is in the Midwest, because those numbers are staggering. I mean the fact that what is it eleven gigles? By the way, can I on the side here, yeah, energy math, I have the hardest time wrapping my hedge around.
I was thinking that like measuring one gigawat as like powering Denver was actually a really really useful.
Except the prom is already I always forget that. But okay, one giglet denver, one gign.
Just tattoo it onto your arm, Joe, because you know that's a useful fact that you're probably going to be referencing for many years.
TI.
And then a gigle WoT is different than a gigwatt hour, and so these are like separate things and so forth. But the idea that here one hundred years took them took them one hundred years to get to eleven gigawads, and now they're projecting fifteen gigawads. More staggering, staggering numbers. And I guess it makes sense why literally every company in this space is saying it's not chips, it's not
it's the energy. On the other hand, maybe we have some incredible technological breakthrough, a deep seek moment for chips, and these chips use you know, one hundredth of the electricity.
That could have well, I mean again, going back to how we started the episode, you kind of saw a hint of that potential today.
So such a fascinating space.
Absolutely, shall we leave it there?
Let's leave it there.
This has been another episode of the All Thoughts podcast. I'm Tracy Alloway. You can follow me at Tracy All the Way.
And I'm Joe wisanth Thought. You can follow me at The Stalwart. Follow our producers Carmen Rodriguez at Carmen Arman, dash Ol Bennett at Dashbott and Kelbrooks at Kelbrooks and for more Odd Lots content, go to Bloomberg dot com slash odd Lots for the daily newsletter and all of our episodes and You can chat about all of these topics twenty four to seven in our discord discord dot gg slash odlocks.
And if you enjoy odd Lots. If you like it when we do these energy episodes, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening, Stood in a