0:26

Hello everybody and welcome to Skeptic's

0:29

Guide to Investing with Clem Miller

0:31

and Steve Davenport . This

0:33

is Clem , and today we're going to be

0:35

talking about infrastructure

0:38

. And the reason we're

0:40

talking about infrastructure today is because

0:42

we recently had

0:44

the bridge catastrophe

0:46

in Baltimore

0:48

. I just happened to

0:50

live in the Baltimore area , about

0:53

15 miles away from where

0:55

that bridge calamity

0:57

happened , and so it

1:00

really leads Steve and I to think about

1:02

infrastructure

1:04

and where we stand and the

1:06

role of infrastructure as an investment

1:09

. You know it

1:11

was an unfortunate accident . It

1:14

happened in

1:16

a major artery , it

1:18

was on the Baltimore Beltway , and

1:22

you know it

1:24

was a calamity , a catastrophe

1:27

that sort of linked . You

1:29

know two different issues . One

1:32

is the aging infrastructure

1:34

in America really

1:53

capable enough of handling these giant ships , with these giant container ships which have only

1:55

gotten bigger and bigger and bigger over the years ? So

1:59

, steve , why don't you tell us what your thoughts

2:01

are on infrastructure

2:03

?

2:05

Well , I always look at these events and

2:07

people say , well , this is a one in a hundred

2:10

year event , because

2:13

this shouldn't have happened . I

2:15

just kind of wonder why we keep having so

2:18

many issues . First , I'd say we've

2:20

got harbors and

2:23

ports which were developed in

2:25

the 16 and 1700s . I

2:27

realize they've been updated , but if

2:30

I look at us as a country , it

2:32

feels like we just have

2:34

trouble spending money on infrastructure

2:36

. We should feel like

2:38

we've got one of the most advanced highway

2:40

systems in the world , we've got a great

2:43

train network , we're

2:46

now adding to our fiber

2:48

network and some of the other things . I

2:51

just feel there's a real

2:53

need for us to constantly

2:55

be improving our infrastructure and

2:58

therefore making , keep

3:00

making and making

3:02

our systems and our

3:04

structures last

3:07

for the future . Structures

3:12

last for the future . When I look at Boston Harbor , I look at Baltimore

3:14

and I think about all of the East Coast and how those harbors

3:16

and those assets to me have been

3:18

underappreciated

3:21

and undermaintained , and I

3:24

worry about how that is

3:26

going to ultimately lead to . You

3:28

know , look at the train system in New York . It's

3:32

a piece of infrastructure that millions of

3:34

people use every day and

3:36

it's going bankrupt and it's not

3:39

properly maintained . They've got

3:42

water problems , they've got different

3:44

problems with the maintenance of those

3:46

assets and if

3:48

you don't take care of those assets , I

3:50

can tell you what happens they break

3:52

down . And so I

3:54

think it hopefully what

3:57

we can look for . And I hate to see what

3:59

happened to those people who were on the bridge when it collapsed

4:01

and I hate to see what happens to

4:04

the whole area around

4:06

Baltimore and how it will affect them economically

4:09

, because they're the number

4:11

one transport point for transportation

4:14

in the country . So those vehicles

4:16

coming in the auto industry

4:18

has enough challenges with EVs

4:21

and carbon

4:23

rules and different things going

4:25

on , that you take away

4:27

their port of entry and you start

4:29

to make them transmit to other assets

4:31

. This gets back to

4:33

that point I had about friction . Right

4:36

, we want the systems in our country

4:38

to have as little friction so

4:41

that if a person says , hey , I want to transmit these

4:43

50 vehicles over car

4:45

, I can do it , over

4:47

train , I can do it , over boat

4:49

, I can do it . And I think

4:51

that the more we can adjust

4:53

and maintain these different systems

4:56

, I think the stronger

4:58

our economy gets , because we can take

5:00

an event like this , which is tragic , and

5:02

then say , hey

5:05

, we have these other methods and we can

5:07

switch over for a period of time . I

5:10

think that's really where you

5:12

can differentiate why American

5:15

capitalism might be better

5:17

than others , because people

5:19

are going to step forward with ideas

5:23

and ways to solve this problem that

5:25

I think ultimately could be very

5:27

good for us on the whole

5:29

, for the economy . So

5:32

I think it's tragic that lives were lost

5:34

. I think that as an asset . I've

5:37

heard there were two main solutions that people

5:39

talk about . One is to put some

5:43

type of a barrier and design

5:46

all these critical posts for these bridges

5:48

with barriers such that they

5:50

could maintain a much harder pit . And

5:53

then I've heard others say that

5:55

you need to have tugs

5:58

pulling these boats through instead

6:01

of letting them go under their own power , and

6:04

I think that it would be great for the tugboat

6:06

people if we ruled

6:08

on option number two . I

6:11

think it will be great for the cement and steel

6:13

producers if we ruled on option number

6:15

one . I think there's probably

6:17

some combination of things that we need

6:20

to do to make the

6:22

travel in these waters

6:24

safer for everyone . I

6:27

think it's a very interesting

6:29

discussion because I think , when

6:31

we look , there's

6:34

really no clear way for

6:36

us to know what the future holds for water

6:38

transport .

6:40

Yeah , I agree , you mentioned tugs

6:42

and I was just thinking that

6:46

downtown Baltimore , I

6:57

was just thinking that , you know , downtown Baltimore , fells Point , there were

6:59

a lot of , there's a lot of tugs that are tugboats that are stationed down there and I'm

7:01

just wondering why they weren't used to take this ship out and through the channel

7:03

.

7:05

So it comes down to money .

7:06

Yeah , it might . It

7:08

might just be that it was just too

7:10

expensive to

7:13

use that .

7:14

Obviously it takes a lot of fuel to

7:16

move a ship , but yeah

7:18

, I also wonder , when you get that

7:20

large and I don't remember exactly

7:22

the dimensions of the ship , but when you

7:25

get that large it needs like eight

7:27

tugs , right , it doesn't just

7:29

get tugged by one little boat .

7:32

And so I think the

7:34

expansion in the economics

7:36

of transit over the sea is

7:38

that these boats are getting bigger

7:40

and bigger and therefore

7:43

we need to say , okay

7:45

, for this size boat . I

7:48

know that the Panama Canal is

7:50

a gating point because so

7:53

many need to use the Panama Canal and they

7:55

can't get larger than they could

7:57

to fit through there . But I

7:59

feel there's

8:01

a lesson for us here , and

8:04

whether it's bridge , whether it's

8:06

roads , whether it's-speed

8:08

internet , we need

8:10

to always be thinking . If

8:13

I look at our government and our system

8:16

in the United States , I think

8:18

short-termism is our biggest enemy

8:20

. We have people who think short-term

8:22

and don't think longer-term . Our

8:24

energy policy is short-term . Everybody's

8:27

focused on just getting elected . The

8:29

presidential election will take all

8:32

energy away from any new ideas

8:34

for the next nine months . What

8:37

if we just said always

8:39

, you know , in our budget we need to have

8:41

a component that is the future and

8:44

infrastructure and said

8:47

instead of classifying it as military

8:49

expense or road expense or

8:51

banking expense , we

8:54

just classify it as future

8:56

and we take that allocation

8:58

and we allocate it every

9:00

year . We take 1% of the budget and we

9:02

put it into those different areas

9:05

, because I don't

9:07

understand how we can expect

9:09

the people in those sectors

9:11

to be able to make the decisions that benefit

9:14

everyone if they're ultimately

9:17

profit-seeking . Somehow

9:19

the government needs to help prescribe

9:21

a different

9:24

equation that sort

9:31

of equation that considers resources like this as critical

9:33

.

9:39

It requires a mindset of thinking about the budget as the federal budget , as having two

9:41

parts , one being current expenditure and the other one being

9:43

capital expenditure , and thinking

9:45

about capital expenditure in terms

9:47

of the return , the overall all-inclusive

9:51

economic return on

9:53

that investment . And I think

9:55

the government , the federal government , has made

9:57

some moves in that direction by

10:00

funding roads and

10:03

bridges and whatnot from the Federal Highway

10:05

Trust Fund . But the only

10:08

problem with the Federal Highway Trust Fund is it's

10:10

funded from gasoline taxes

10:13

, from fuel taxes , and

10:15

the rates of

10:17

taxation on those have

10:19

not been increased or

10:21

have not been increased to the degree

10:24

that they are actually sufficient

10:26

to fund some of these projects . So

10:29

I know the Biden administration

10:32

has done some work in terms of infrastructure

10:35

acts , increasing

10:38

infrastructure spending , but at the same time I know that

10:40

some of that spending has gone

10:42

more into renewable energy . So

10:45

I don't know to what extent there , I don't know

10:47

to what extent you know there's enough in

10:50

terms of resources to to direct

10:52

toward repairing all

10:54

of the bridges and roads that

10:57

need repairing . Just saying you're going

10:59

to finance the reconstruction

11:02

of the of the key bridge in Baltimore

11:04

. You know

11:07

, yeah , sure , there's enough resources to do

11:09

one bridge , but there are lots of bridges

11:11

in the US that need repair . And

11:14

where is the money for that ?

11:16

Well , I read somewhere that the annual

11:18

income from that bridge

11:21

is millions

11:23

and millions of dollars that come into the

11:25

economy to help the

11:28

bridge has been paid for , I think right . So

11:31

I believe that when

11:33

you get a toll like that , it's

11:36

a source of income instead of looking

11:38

at it as an investment in the community

11:40

, right ? And I think

11:42

that politicians can look

11:44

at something and say , look at the money it generates

11:46

, and then other people will look at

11:49

it and say , ok , but as a part

11:51

of our economy , it helps this

11:53

, this and this , and therefore

11:55

it involves more support or

11:57

it needs more attention from

12:00

our leaders . I

12:02

mean , I think the question about infrastructure is

12:05

really a much broader topic

12:07

than the bridge . I think

12:09

the bridge is , similar to

12:12

the tip of the iceberg , and

12:14

when we get into all of the other

12:17

pieces of infrastructure and

12:19

you talked about in one of the prior

12:21

podcasts about income for

12:23

the future , and you look at some

12:25

roads and you look at bridges , and you look at bridges

12:27

and you look at these different assets airlines

12:31

, airport leases , all

12:33

these different types of assets all

12:35

over the world , utilities

12:37

they're part of that infrastructure

12:40

that we have to figure out

12:42

. You know , how do those investments

12:45

fit ? Are they , you

12:47

know ? Are they quasi-fixed

12:50

income ? The utilities , are

12:52

they really growth

12:55

opportunities with solar and

12:57

hydro and , you know

12:59

, wind farms ? Those

13:01

assets , to me are a

13:04

way

13:22

for us to think about alternatives

13:24

without having to go into the private space

13:27

, and I like them , you

13:29

know , as another way to think about

13:31

that middle . You know that messy

13:34

middle of people's portfolio between

13:36

equities who are focused on

13:38

growth , bonds that are

13:40

focused on stability and

13:42

safety , and

13:44

then there's this stuff in the middle .

13:49

I think a lot of our listeners or at least some of our listeners might

13:51

not even be aware , uh

13:53

, that you can invest in an asset class

13:55

or you know a sub asset class

13:58

called infrastructure , uh , but

14:00

you certainly can , uh , or

14:02

you can invest in certain you know

14:04

industries , like you mentioned , uh , utilities

14:07

, uh that utilities

14:10

that focus on infrastructure

14:12

, but

14:24

you can invest in , that , will

14:27

invest in the private

14:29

what I would call the private portions

14:31

of a public-private

14:33

partnership . So you've got

14:35

government putting in some money and then you've

14:38

got some private investment

14:40

that comes in . And then that private

14:42

investment , then it

14:45

either is invested

14:47

in the private markets or

14:50

it's put into funds

14:52

and is available in

14:55

a liquid form to

14:57

investors on stock exchanges . So

15:00

yeah , I mean you can certainly invest

15:02

in infrastructure and

15:05

infrastructure tends to be good

15:08

in terms of an income provider . So

15:10

yeah , back to your point , steve

15:13

. It sort of sits in an area

15:15

between equities , which

15:18

may or may not have good

15:21

income streams , and

15:23

fixed income . It's

15:26

more of an income provider and

15:28

I think a lot of investment

15:32

firms that do offer infrastructure-related

15:35

products cite

15:37

income as a

15:39

major benefit of investing

15:41

in these infrastructure projects . That

15:44

and the fact that they see a lot of growth opportunities

15:47

in the future for infrastructure .

16:06

So I think we've underspent on it and

16:09

therefore it's going

16:11

to . Could think of them alongside infrastructure

16:14

, or you could look at them as different from , but

16:17

I think there's a lot of similarities in that

16:19

there's a hard asset that

16:21

is producing some function

16:23

for the benefit of the economy

16:25

, aka a

16:28

retail distribution point , a

16:30

retail , or a storage

16:32

unit , or a hotel

16:36

, motel , or apartment

16:38

buildings for housing . They

16:41

are providing something to their community

16:43

that the person is being compensated

16:46

for , and it's a little bit different

16:48

than how do you run a technology

16:50

company and coming up with the latest three

16:53

nanometer chip . They're

16:56

running these organizations that

16:58

manage these assets in

17:00

a way that produces income

17:03

and by being in the REIT

17:05

structure , 90%

17:07

of the income is given back

17:09

to the shareholders . I like

17:11

it when somebody has to give me back income

17:14

. Because I like income

17:16

, I'm

17:22

not afraid to say it , I'm not ashamed of it either . No matter how much

17:25

you ridicule and laugh at me , I will always like income

17:27

Just because you're starting to look at it now in your

17:29

twilight years . I've

17:31

liked income my whole life . I

17:33

like somebody taking money out

17:35

of their pocket and giving me cash . So

17:38

these things in this

17:40

messy middle infrastructure

17:43

, real estate , even

17:45

this idea of you know commodities

17:47

or gold and silver producers or

17:49

you know , there's something

17:51

to be said for assets that

17:54

are operating in a different part

17:56

of the economy . One of the best

17:58

classes I had in investing was by

18:01

this Professor Kane at Austin College

18:03

and he told us . He

18:05

said look , all of this

18:07

study by all of these Markowitz

18:09

and all of these great economics people was

18:11

, he says , they made an assumption

18:14

that the market

18:16

was available and total , that

18:19

you could invest in all of the market

18:21

, but in reality , real

18:24

estate is the biggest asset in the world and

18:27

most real estate is not investable . So

18:29

therefore , you've got forests

18:31

throughout the US that are controlled by the

18:33

national , you know

18:35

government and you've got

18:37

all these other assets around the world and

18:40

you know real estate as an asset

18:43

is so big as

18:45

an asset class that it dwarfs what

18:48

is , you know , other investable assets

18:50

. So , yes , we own a home

18:52

and yes , but if we really wanted

18:54

to have a market portfolio , we

18:57

would need to have a lot more real estate , and

18:59

I think that infrastructure as a

19:02

part of the economy is

19:04

a huge part , but because we don't look

19:06

at it the same , because it's run

19:09

or controlled by local communities

19:11

, states or federal government

19:13

, we tend to put

19:15

it in the bucket of well , that's over there

19:17

somewhere in the fixed area

19:19

and in reality

19:22

, there are opportunities here for

19:24

us . So I like the idea of this

19:27

topic and I'd like us to start

19:29

to think about you know , how

19:31

do we take liquid opportunities in

19:34

these areas and think about them in terms

19:36

of you know , when do we ? If

19:38

we have hyperinflation , does it make sense to

19:40

add gold ? Does it make sense to add REITs

19:43

? I think the higher rates . If

19:46

we are going down in rates and rates are going

19:48

to go down , then the cost to borrow for all

19:50

these REITs is going to improve and there's

19:52

going to be an opportunity there at some point for

19:54

us and , I think , the infrastructure

19:56

. Similarly , if rates come down

19:58

, they'll borrow

20:00

at lower rates , so they'll likely invest

20:03

more in some of these projects .

20:06

I want to add two things to what you said

20:08

. First of all , I think there's

20:10

something to learn , you

20:12

know , from the Europeans and

20:15

also from folks in Latin America

20:17

about , about private

20:19

involvement in infrastructure , and

20:21

because there are some firms based

20:23

in Europe and and

20:26

in Latin America that are very involved

20:28

in developing toll roads and

20:31

other things that are

20:33

private , that are infrastructure . So they

20:35

work in a partnership

20:40

where the infrastructure itself

20:42

might be publicly owned but

20:44

it's operated in

20:46

private . Then the other thing I wanted to mention

20:49

is that sometimes there

20:51

are , is that sometimes there

20:53

are companies that are really real

20:55

estate companies that are masked

20:58

as other industries

21:00

. So

21:08

, for example , one of the largest owners of real estate in

21:10

this company and

21:13

maybe you so much real estate that

21:15

it's really a big component

21:18

of the revenue generation in terms of in

21:20

terms of being able to sell parcels

21:22

.

21:34

Roadhouse and some of the other . You know restaurant companies , because there was a time in New England

21:37

where you know certain companies that were on Route 128

21:39

, which goes around the city . You

21:41

know the underlying business was

21:43

some kind of a measurement company but

21:45

the whole operation the

21:47

factory and the offices

21:50

occupied the space . That made them worth

21:52

hundreds of millions of dollars

21:54

even though they didn't make any money , because

21:57

the underlying asset I mean I

21:59

love buying investments where I know there's

22:01

a floor under

22:03

it because it owns some

22:06

of its own plants and equipment . So

22:10

I believe that international

22:12

your point about international was right

22:15

on I believe that when we look at infrastructure

22:17

, we should look at it as an international or

22:19

global asset type

22:21

. I don't think we should look at domestic , because

22:24

part of the reason you're adding is less

22:26

correlation . Therefore , if

22:28

you can get less correlation even

22:30

more by having international real estate

22:32

, I think there are some

22:34

risks in some of these countries , but I think that

22:37

most of them are worth taking , given

22:39

the fact that these companies

22:42

have been around for years and

22:44

I think that some of the real estate and infrastructure

22:46

companies offer a great opportunity for

22:49

us . How would you sum up

22:51

infrastructure and the key bridge

22:53

.

22:56

Okay , so I think it certainly highlights the

22:58

need for the development of infrastructure , for

23:04

the improvement of infrastructure , for the development of new infrastructure

23:07

. I think that , as far as our podcast episodes

23:09

are concerned , I think it

23:12

leads to all sorts of new ideas

23:14

for

23:16

future discussion on

23:23

this podcast . I think that we

23:25

can be educational for

23:28

a lot of our listeners

23:30

who simply may not be aware

23:32

that infrastructure is an asset class , and

23:36

we can be educational about that as

23:38

we've been educational about

23:40

other things on this podcast

23:42

. So , like you said

23:44

, it's very unfortunate

23:47

that this bridge episode

23:49

happened . We feel very bad for the families

23:51

of those who

23:54

were killed in this accident . We

23:58

hope that repairs

24:00

are done to the bridge

24:02

are expeditious

24:04

, so that the port can more fully

24:07

reopen

24:11

. So I would sort of leave it at that , that we

24:14

hope that

24:17

there's a lesson here for the future , that

24:19

government steps up and that there are plenty

24:21

of future opportunities for private investors

24:24

in the public infrastructure space .

24:28

Thanks . Well said , clem . Thank you

24:30

everybody for listening and please like and share

24:32

Again . This is Stephen Clem

24:34

checking out for another episode

24:36

. Bye .