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Speaker 1: Welcome to the Bloomberg Markets Podcast. I'm Paul Sweeney, alongside

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Speaker 1: my co host Matt Miller. Every business day, we bring

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Speaker 1: you interviews from CEOs, market pros, and Bloomberg experts, along

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Speaker 1: with essential market moving news. Find the Bloomberg Markets Podcast

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Speaker 1: on Apple Podcasts or wherever you listen to podcasts, and

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Speaker 1: at Bloomberg dot com slash podcast. So when I think, uh,

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Speaker 1: infrastructure plans, all I think about really is the Gateway project,

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Speaker 1: getting those railroad tunnels under the Hudson River. So these

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Speaker 1: tunnels that are there and a hundred years old tumble

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Speaker 1: in on me one day while I'm commuting. But there's

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Speaker 1: a lot more to it than that, and a lot

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Speaker 1: of folks think this is an opportunity for America to

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Speaker 1: get smart with their infrastructure. Andre Brumfield, Cities and Urban

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Speaker 1: design leader for Gensler, joins us. Andre, thanks so much

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Speaker 1: for joining us here. Again, people think about infrastructure, and

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Speaker 1: I think bridges and tunnels and roads. How should we

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Speaker 1: be thinking about infrastructure in this country? We're about to

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Speaker 1: go on a pretty big spending spree. Well, good morning.

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Speaker 1: The first, thanks for having me on. Second, I think

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Speaker 1: to at least address your question I think this is

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Speaker 1: an opportunity to think much bigger uh than than uh

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Speaker 1: you know, tunnels, uh and some of the obvious things

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Speaker 1: that we see day to day. But if you look

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Speaker 1: back at history, you think about the aspirations of Lenny

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Speaker 1: Johnson's Great Society Programs in the nineteen sixties, you know,

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Speaker 1: or some of the successful elements of President rooseveltsd Deal

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Speaker 1: program as related to pw A profit projects. I think

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Speaker 1: this is our opportunity for the Infrastructure Bill to, you know,

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Speaker 1: think about how we can actually have a lasting impact

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Speaker 1: on a number of things that have been neglected over

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Speaker 1: the last twenty, maybe even thirty years as it relates

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Speaker 1: to roadways, public transportation. You know. Hopefully, I think we

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Speaker 1: look back in another ten or fifteen years, you know,

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Speaker 1: we will know that this was not only money well spent,

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Speaker 1: the money well invested, but this could be a turning

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Speaker 1: point of how we actually start to reposition a number

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Speaker 1: of our cities. You Know. The problem is, I think

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Speaker 1: a lot of people would agree that we need to

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Speaker 1: do something about the infrastructure in the US, and would

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Speaker 1: have no problem paying for it as well. If they

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Speaker 1: trusted the government to spend the money well Isn't that

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Speaker 1: a big concern. Doesn't the federal government waste a ton

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Speaker 1: of money? Isn't there even in America a lot of corruption? Well,

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Speaker 1: I think this is where you know, and I know

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Speaker 1: that the Biden administration will be open to this, which

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Speaker 1: is you know, really about transparency and it really comes

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Speaker 1: from you know, not only at the federal level, but

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Speaker 1: also at the state in the local level. I think

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Speaker 1: when you talk about and you think about transparency through

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Speaker 1: this process and how the money is invested and where

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Speaker 1: it's invested, you know, I think the more that people

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Speaker 1: are aware and the more that people have a say

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Speaker 1: in this, or more that people actually understand how the

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Speaker 1: moneys are being spent, you know that you trust will

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Speaker 1: get stronger over time. So you know, I think for me,

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Speaker 1: this is not about criticizing at least you know, um,

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Speaker 1: how the money is going to necessarily be spent, uh,

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Speaker 1: in terms of you know, distrust with the government. It's

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Speaker 1: really more about you know, how it to we actually

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Speaker 1: be creative and making sure that you know, this infrastructure

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Speaker 1: bill is really touching you know, the places in our

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Speaker 1: urban and our suburban environments, even our rural environments where

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Speaker 1: it needs to be touching. You know, I just read

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Speaker 1: the book on Robert Moses, the guy who effectively built

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Speaker 1: modern New York City, and it's just we're amazing the

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Speaker 1: long ranging impact that guy had about a lot of

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Speaker 1: good but a lot of bad. Um. I'm thinking about

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Speaker 1: the highways that cut apart neighborhoods all across New York

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Speaker 1: City and kind of read, you know, kind of redistricted,

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Speaker 1: if you will, neighborhoods that have been around forever. Going forward,

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Speaker 1: You've got to feel like mass transportation needs to be

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Speaker 1: more ingrained or integrated into our infrastructures. That's something you

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Speaker 1: think has support. I think that's something that's critical. And

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Speaker 1: you know you can't drop Robert Moses into power broker

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Speaker 1: here in this short interview. I mean that's going to

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Speaker 1: take them exactly. Have you read the book, oh, I mean,

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Speaker 1: you know, that's one of the few books and if

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Speaker 1: you haven't read it, for those are listening, it's it's

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Speaker 1: a must read. But you have to allocate a lot

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Speaker 1: of time because it is a very big book and

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Speaker 1: very long. It took me the entire summer on the beach,

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Speaker 1: right and you almost have to jump around depending on

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Speaker 1: what your sweet spot is it relates to urban planning

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Speaker 1: and the built environment. But I think you know, UM,

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Speaker 1: we you know, to answer the second part of your question,

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Speaker 1: UH related to infrastructure and public transportation. If we think

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Speaker 1: about where we've been and where we currently are with

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Speaker 1: COVID UH and public transportation of how people do get

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Speaker 1: around what we can't do is slide back into or

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Speaker 1: go deeper into an auto dominated society or at least

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Speaker 1: how we actually moved throughout our cities. UM. If anything

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Speaker 1: that we've learned, at least in the last two or

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Speaker 1: three weeks with some of the latest reports coming back

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Speaker 1: on where we are in terms of climate change and UM,

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Speaker 1: how that's impacting our built environment. UH, in our world

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Speaker 1: as a whole, we have to think about public transportation.

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Speaker 1: And if you look at um, you know this is

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Speaker 1: also not about rails. If you look at some of

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Speaker 1: the great investment I think that the city of Cleveland,

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Speaker 1: for instance, has done over the past uh seven eight years,

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Speaker 1: are really expanding and implementing your blessed blessed rapid transit

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Speaker 1: systems throughout their city. And this is about how not

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Speaker 1: only get people moving to different parts of the city,

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Speaker 1: but how you actually get people who are underserved in

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Speaker 1: you know, um underserved neighborhoods to employment centers without having

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Speaker 1: to necessarily get in their car and sometimes people don't

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Speaker 1: have public transfer a car to get to the places

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Speaker 1: of employment. This is about connecting I think, you know,

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Speaker 1: UM different employment centers, you know, through blessed rap or transit,

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Speaker 1: through other investment that's needed, uh and public transportation as

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Speaker 1: a whole. So I think there's anything that this bill

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Speaker 1: will do will start to not only address that in

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Speaker 1: terms of you know, getting beyond just you know, repairing

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Speaker 1: of streets and bridges, you know, but how do we

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Speaker 1: actually think about manstering expectation of where we actually need

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Speaker 1: to kind of double down and invest because it's a

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Speaker 1: long run. It's a long term investment that I know

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Speaker 1: the next generation will benefit from, even though we can't

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Speaker 1: fully realize it now. All right, Andre, thank you so

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Speaker 1: much for joining us. We really appreciate it. Andre Brumfeld,

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Speaker 1: Cities and Urban Design leader firm name is Gensler. Talking

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Speaker 1: about the you know, fiscal stimulus coming down, We're looking

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Speaker 1: at some infrastructure bill winding its way through Congress. UH,

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Speaker 1: many many billions of dollars UH need to spend it.

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Speaker 1: Invested wisely is the operative word here. We're gonna more

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Speaker 1: coming up. This is Bloomberg. Now, the Conference Boards Leading

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Speaker 1: Economic Index rose zero point nine percent in July. UM.

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Speaker 1: The estimate was for a gain of zero point seven

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Speaker 1: per cent. So looks good. I guess let's bring in

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Speaker 1: Adam on ozol Drum. He's the director of Economic Research

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Speaker 1: and a global Research Chair at the Conference Board. UM,

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Speaker 1: what do we take from these numbers? Out of on?

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Speaker 1: Good morning, good to be here. UM, the l EI

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Speaker 1: has been rising pretty strongly over the last several months,

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Speaker 1: in fact since last year. So all of that really

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Speaker 1: points to UH, strong growth, a robust growth environment for

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Speaker 1: the economy in the US, at least for the second

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Speaker 1: half of the year. I don't give us that what

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Speaker 1: really drives this index that a lot of investors really

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Speaker 1: focused on one of the key drivers. Sure, the US

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Speaker 1: Leading Economic Index has ten components. Uh. These are all

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Speaker 1: leading indicators that have proven to help to anticipate major

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Speaker 1: business cycle recessions. So they turned down ahead of the recession,

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Speaker 1: and you know, putting them all together in this index

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Speaker 1: is giving us a clearer view of you know, where

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Speaker 1: the risks lie in the economy. UM, and whether a

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Speaker 1: recession peak turning point is approaching or not. So they

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Speaker 1: are objectives UM measures UM. And in this case, you know,

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Speaker 1: all ten components rose in July UM. And these types

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Speaker 1: of readings have been pretty common over the last few months,

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Speaker 1: so it is pointing to a pretty robust business cycle

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Speaker 1: expansion unfolding, although we get um other indicators like well,

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Speaker 1: housing starts is said to be a leading indicator, and

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Speaker 1: it was bad. The consumer um UH Confidence Index from

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Speaker 1: the University of Michigan was also quite rough. Um. Are

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Speaker 1: you starting to see things fray a little bit? Sure?

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Speaker 1: And and there are indicators of housing and consumer expectations

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Speaker 1: as part of the leading index as well. UM. And

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Speaker 1: that's one of the advantages of looking at the summary

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Speaker 1: measure like the leading index, because you're not really looking

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Speaker 1: at just one area, but overall how the economy of

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Speaker 1: the business cycle is doing. UM. So while the underlying

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Speaker 1: trend in the leading indicators is still positive and pointing

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Speaker 1: to you know, a good growth environment, there are some

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Speaker 1: areas of risk that might kind of raise their heads. UM.

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Speaker 1: So uh, you know, we're watching sort of how the

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Speaker 1: pandemic is evolving very closely. Uh. The economics or environment

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Speaker 1: is still you know, highly dependent on you know, how

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Speaker 1: what happens with the delta variant and whether people are

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Speaker 1: being you know, comfortable to uh go back to business

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Speaker 1: as usual in a way and go back to you know,

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Speaker 1: um using those in person services, especially as as we've

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Speaker 1: been predicting. Uh so UM, you know, if the pandemic

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Speaker 1: takes uh downturn negative turn affects confidence, UM, there there

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Speaker 1: would you some more negative impact. That's something to watch

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Speaker 1: out for as a as a risk in the economy.

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Speaker 1: And then the other area might be uh that um,

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Speaker 1: there is rising concern about inflation and whether that might

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Speaker 1: uh you know, uh leads central banks to become more

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Speaker 1: concerned and start to raise policy rates. And uh there

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Speaker 1: could be of course direct effects on the economy through

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Speaker 1: mortgage rates and other types of economic activity. Talk to

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Speaker 1: us about the labor market AUTUMNT we had another job's

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Speaker 1: claims number that came in, uh, you know, below foreigner thousand,

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Speaker 1: a little bit better than expected. How does that figure

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Speaker 1: into your index? Yeah, Again, the labor markets is an

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Speaker 1: important part of the leading indicators. UM. The UH initial

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Speaker 1: claims for unemployment is one of the components UM, and

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Speaker 1: in fact, it has been a very important component throughout

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Speaker 1: the pandemic recession then the recovery. UM. And you know,

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Speaker 1: now we're starting to see initial claims coming back to

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Speaker 1: more normal levels that we used to seeing during expansions. Uh.

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Speaker 1: And maybe you know, further gains uh from unemployment claims

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Speaker 1: is going to be limited. UM. So I don't know. UM.

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Speaker 1: You know, the the the levels in claims that we

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Speaker 1: were seeing before, we're unusually low. Um. And you know

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Speaker 1: during expansions they tend to be around that uh to

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Speaker 1: fifty two three fifty range. UM. And you know, I'm

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Speaker 1: not sure that I would expect uh, the claims to

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Speaker 1: you know, drive the leading indicators as much in the

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Speaker 1: future as it has uh throughout this recovery. All right, Otoman,

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Speaker 1: thank you so much for joining us. We must appreciate

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Speaker 1: getting your thoughts on these important economic data points. Automan

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Speaker 1: also Drum he is a director of Economic Research and

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Speaker 1: Global Research Chair at the conference board, joining us on

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Speaker 1: the phone, and we appreciate getting that. So again, the

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Speaker 1: leading economic indicator for the month of May came in

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Speaker 1: a little bit better than expected here and uh so

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Speaker 1: in the crucial variable will be this delta of virus

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Speaker 1: and when will it peak and when can we get

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Speaker 1: to the other side of that. So a lot of

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Speaker 1: folks are paying attention to that, as they should, as

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Speaker 1: well as to the vaccination rates which are doing a

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Speaker 1: little bit better. Well, we are twelve years into this

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Speaker 1: bull marketed investors are thinking about areas that may represent

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Speaker 1: some value in a market that has some stretched valuations.

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Speaker 1: That is a challenge increasingly for investors. Brian macaulay joins

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Speaker 1: US now. He's a portfolio manager at Hennessey Focus Funds

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Speaker 1: based in Arlington, Virginia. Has some thoughts here. So Brian, again,

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Speaker 1: twelve years into this bull market, the markets doubled off

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Speaker 1: of those March lows. What's an investor to do here

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Speaker 1: with fresh money? Great? Yeah, I think that's really the

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Speaker 1: question of the day. And um, you know, we we

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Speaker 1: always approach investing with a long term mindset, so we're

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Speaker 1: trying to buy businesses for the next five and ten years,

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Speaker 1: and so in today's environment, it is difficult to find

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Speaker 1: attractive investments with that type of time horizon. You know,

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Speaker 1: we've seen really tremendous price performance out of the technology

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Speaker 1: sector over the last several years, understandably so to some

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Speaker 1: extent um, but in our view, a lot of those

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Speaker 1: companies require really aggressive growth assumptions to justify their current valuations,

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Speaker 1: and so we scan across the market and look for

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Speaker 1: other opportunities. You know, we're finding opportunities and i'd say

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Speaker 1: more mundane businesses that are not technology companies but do

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Speaker 1: have an important element of innovation to what they're doing.

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Speaker 1: And so for us, we're finding opportunities and companies like

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Speaker 1: CarMax and Allegiance Travel and r H that hasnique stories

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Speaker 1: restoration formally known as restoration hardware. Let me uh, let

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Speaker 1: me start with car Max because I think it's fascinating

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Speaker 1: love the car business industry, and I wonder why would

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Speaker 1: you go with the retailer and not with a manufacturer.

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Speaker 1: I look at you know, um price earnings ratios on

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Speaker 1: companies like Ford and Volkswagen, and we're only talking about

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Speaker 1: five or six, not that it's ever been you know,

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Speaker 1: not that they've ever had really high valuations. But if

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Speaker 1: you believe in the auto industry, why not the manufacturers?

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Speaker 1: Well it's a it's a reasonable question, you know, our

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Speaker 1: our approaches, what do we think this business is going

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Speaker 1: to be worth in five years? What do we think

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Speaker 1: it's gonna be worth in ten years. And that's a

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Speaker 1: very difficult question for us. For the automakers, you know,

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Speaker 1: they generally have relatively low returns on capital and returns

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Speaker 1: on equity, so not naturally great businesses. In contrast, the

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Speaker 1: company like car actually does have a unique value proposition

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Speaker 1: and it does have very strong returns on capital and equity,

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Speaker 1: and so that means to us it's a good business

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Speaker 1: that should create a lot of value over the long term.

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Speaker 1: So we think they're going to be able to compound

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Speaker 1: their earnings that a mid teens ready for the next five,

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Speaker 1: maybe even ten years, and from today's starting price evaluation

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Speaker 1: of about twenty times earnings, um, you know, we think

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Speaker 1: we're gonna end up with a you know, a mid

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Speaker 1: teens type rate of return for annum in the stock

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Speaker 1: over those long time horizons as well. Yeah, brilliant. You know,

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Speaker 1: it's interesting, CarMax. We had news today that Toyota is

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Speaker 1: going to cut its production in September pretty significantly by here,

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Speaker 1: so some supply issues. There's just no cars out there

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Speaker 1: for the retailers to sell. My guess is you think

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Speaker 1: that's just a short term blip into what is a

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Speaker 1: better longer term story. Yes, it's certainly been a wild

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Speaker 1: ride for the auto industry and you know, used car

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Speaker 1: UH sellers such as CarMax over the last year plus,

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Speaker 1: you know, the shortage of new vehicles, driven to some

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Speaker 1: large extent by supply chain issues and semiconductor shortages, has

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Speaker 1: meant that the used car market has become the release valve.

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Speaker 1: And what we've seen more recently is that used car

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Speaker 1: pricing is up nearly according to most recent Mannheim measures.

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Speaker 1: And UH, you know, we've got supply shortages and in

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Speaker 1: use cars because there's just so much demand for vehicles

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Speaker 1: today and so um. You know, Fortunately for a company

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Speaker 1: like CarMax that's able to source vehicles directly from UH

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Speaker 1: customers through trade ins and you know, they'll buy their

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Speaker 1: your car from you, even if you don't buy a

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Speaker 1: car from them. They they've had a proprietary source of

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Speaker 1: supply for these used vehicles and safe to some large extent,

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Speaker 1: been able to better match their supply with the demand

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Speaker 1: they're seeing. And that's translated in really good results for them.

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Speaker 1: But yes, this is a transitory issue that should check

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Speaker 1: out over the next several quarters. I have a two

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Speaker 1: thousand and two thou twenty cars sitting downstairs in the garage.

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Speaker 1: Both are going for used more than I paid for them.

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Speaker 1: So it's pretty crazy to look at these prices. What

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Speaker 1: about our Age Restoration Hardware Why the furniture High end

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Speaker 1: furniture retailer, Well r H is again a little bit

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Speaker 1: like CarMax. It's it's got a very different business model

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Speaker 1: and a fairly state industry. Um. They are opening design

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Speaker 1: galleries which are really large, impressive showcases for there assortment

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Speaker 1: of products, and it is um both the direct economic

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Speaker 1: opportunity for them. They could double their sales and nearly

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Speaker 1: triple their profits when they close an old, small, small

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Speaker 1: based store and open a large design gallery. Um. But

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Speaker 1: it's also elevating the brand, and our H is striving

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Speaker 1: to become kind of unprecedented luxury brand in the home

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Speaker 1: furnishing space and here to four that's not been something

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Speaker 1: that has been done. And so our H is trying

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Speaker 1: to elevate themselves to luxury status, which would come with

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Speaker 1: luxury margins and luxury turns on equity and capital. And

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Speaker 1: they've done very well so far on that path, highest

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Speaker 1: margins in the industry by nearly two times and They've

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Speaker 1: got a lot more room to go opening up these

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Speaker 1: design droleries across the country. We think they can more

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Speaker 1: than double their U S stores through this process, and

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Speaker 1: then they've got a global opportunity beyond. Brian McAuley from

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Speaker 1: Hennessy Focus Fun thanks for joining us. This is Bloomberg.

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Speaker 1: I promised you a story on private equity offering high

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Speaker 1: net worth individuals riskier loans obviously, UM, you know, with

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Speaker 1: more risk you expect more reward. Olivia, i'man wrote the

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Speaker 1: story with Heather Pearlberg and Olivia what are we talking

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Speaker 1: about here? How risky and what kind of returns? Yeah?

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Speaker 1: For sure, you know, thank you for having me on

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Speaker 1: the thing. With private credit UM, and that's where these

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Speaker 1: investments are in there within the private credit market, loans

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Speaker 1: to middle market companies. UM. It's extremely opaque market. A

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Speaker 1: lot of the loans are not subject to ratings by

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Speaker 1: credit graders, and before the pandemic, there was a lot

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Speaker 1: of concern about how the asset class would hold up

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Speaker 1: in a downturn. At the same time, these the market

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Speaker 1: is really a liquid Lenders typically hold these loans for

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Speaker 1: the maturity of the loan, and they don't really trade

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Speaker 1: on the secondary market, so you can't an investor can't

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Speaker 1: pull their money out in a pinch like with the

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Speaker 1: soccer bond um. But that being said, some of these

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Speaker 1: annualized or turns are surpassing eight per cent, so that

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Speaker 1: looks pretty attractive. When um, you're looking at what deals

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Speaker 1: are globally right now Olivia, how much how far do

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Speaker 1: you think these pe firms are looking to go out

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Speaker 1: on the risk curve? I mean when you're talking about

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Speaker 1: some of these leverage loans, you can get some leverage

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Speaker 1: on a net that the IBATA of four or five

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Speaker 1: six times, which you know can be really challenging if

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Speaker 1: you if you go into an economic downturn like we experienced,

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Speaker 1: how much risk do you think they will take? It's

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Speaker 1: a very good point. There's actually a recent report that

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Speaker 1: just came out that leverage levels within the private credit

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Speaker 1: market have remained relatively stable through the pandemic. But you

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Speaker 1: are still talking, like you said, around four to five times.

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Speaker 1: And when you're looking at the upper middle market, UM,

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Speaker 1: where the loans are surpassing one billion dollars, we've heard

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Speaker 1: of deals that are getting done with eight times of leverage,

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Speaker 1: So there there is risk there right now, the default

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Speaker 1: level in middle market companies has dropped to a three

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Speaker 1: year low. That's data from advisory firm Lincoln International and

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Speaker 1: so so, so the risk has abated right now, but

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Speaker 1: that's also been bolstered by all the ciscal and monetary

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Speaker 1: policy that's been flooded into the economy right now. So

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Speaker 1: there's always going to be risk with these loans. And

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Speaker 1: obviously the more debt that you tap on and and

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Speaker 1: the more leverage, the riskier they're going to be. And

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Speaker 1: it would, I mean, it would strike me that you know,

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Speaker 1: if it was a more risk free scenario or a

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Speaker 1: better return scenario, institutions would be getting this. If they're

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Speaker 1: shopping it around to you know, individuals, as sophisticated as

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Speaker 1: they may be, that's got to be a concern. Well,

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Speaker 1: so it's interesting. So actually these are products that traditionally

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Speaker 1: have only gone to institutions, So institutional investors have been

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Speaker 1: the primary investor within private credit endowment funds, pension funds.

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Speaker 1: Now private equity is trying to do as they're trying

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Speaker 1: to tack this new pool of investors. Previously, retail wasn't

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Speaker 1: allowed into these funds, partly because of the risk and

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Speaker 1: now they're lowering the bar and offering it for high

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Speaker 1: net worth individuals. I guess you could say. The one

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Speaker 1: concern or critique is is that some firms allocate the

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Speaker 1: retail investors money to the same funds that the institutions

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Speaker 1: that access to, so they're they're receiving investments and returns

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Speaker 1: from the same portfolios, whereas others have wrapped up the

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Speaker 1: funds specifically charging retail only UM and the portfolio portfolio

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Speaker 1: excuse me, obviously looks different. So the concern there is,

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Speaker 1: you know, why, why is the retail client getting a

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Speaker 1: portfolio that the institutions aren't UM. But that's not for

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Speaker 1: every fund and they and they really do vary instructure. Hey, Olivia,

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Speaker 1: thank you so much for joining us. We really appreciate

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Speaker 1: getting your thoughts on this story. Oliver Raymond, private credit

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Speaker 1: reporter for Bloomberg News and a pay in State rad

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Speaker 1: There's a lot of Penn State people we've had on

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Speaker 1: the show the past a couple of days all over

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Speaker 1: the place. Uh, So we appreciate getting Olivia's report. Again.

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Speaker 1: Private equity firms want rich investors to embrace Penn State

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Speaker 1: grad We've had in this program by the way. Yeah,

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Speaker 1: I mean they're Adam ont Drum. Also, I think it's

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Speaker 1: a pen You've got his PhD at the Penn State.

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Speaker 1: I wrote a lot of twitch and checks to Penn State,

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Speaker 1: so I have invested interest, not for him or Olivia. Yeah, no, exactly.

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Speaker 1: So we're all set. Thanks for listening to the Bloomberg

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Speaker 1: Markets podcast. You can subscribe and listen to interviews with

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Speaker 1: Apple Podcasts or whatever podcast platform you prefer. I'm Matt Miller.

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Speaker 1: I'm on Twitter at Matt Miller V three pen on

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Speaker 1: Fall Sweeney, I'm on Twitter at pt Sweeney. Before the podcast.

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Speaker 1: You can always catch us worldwide at Bloomberg Radio