Discover pivotal lessons from the heart-rending bridge disaster in Baltimore as Clem Miller and Steve Davenport consider the urgent call to action it represents for infrastructure investment and maintenance. In the wake of this calamity, we delve into the development of essential systems such as harbors and examine the economic and safety consequences of neglecting such critical structures. As we seek out potential solutions, our conversation serves as a homage to the lives lost and a stark reminder of the pressing need for strategic, proactive investment to safeguard our future.
We survey the complex landscape of non-traditional infrastructure and real estate investments, including public-private partnerships and companies with secondary real estate businesses. Listen as Clem and Steve together the puzzle of how private investment can intersect with public infrastructure to foster not just growth, but a durable legacy of safety and innovation.
Discover pivotal lessons from the heart-rending bridge disaster in Baltimore as Clem Miller and Steve Davenport consider the urgent call to action it represents for infrastructure investment and maintenance. In the wake of this calamity, we delve into the development of essential systems such as harbors and examine the economic and safety consequences of neglecting such critical structures. As we seek out potential solutions, our conversation serves as a homage to the lives lost and a stark reminder of the pressing need for strategic, proactive investment to safeguard our future.
We survey the complex landscape of non-traditional infrastructure and real estate investments, including public-private partnerships and companies with secondary real estate businesses. Listen as Clem and Steve together the puzzle of how private investment can intersect with public infrastructure to foster not just growth, but a durable legacy of safety and innovation.
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Clem Miller:
Hello everybody and welcome to Skeptic's Guide to Investing with Clem Miller and Steve Davenport. This is Clem, and today we're going to be talking about infrastructure. And the reason we're talking about infrastructure today is because we recently had the bridge catastrophe in Baltimore. I just happened to live in the Baltimore area, about 15 miles away from where that bridge calamity happened, and so it really leads Steve and I to think about infrastructure and where we stand and the role of infrastructure as an investment. You know it was an unfortunate accident. It happened in a major artery, it was on the Baltimore Beltway, and you know it was a calamity, a catastrophe that sort of linked. You know two different issues. One is the aging infrastructure in America really capable enough of handling these giant ships, with these giant container ships which have only gotten bigger and bigger and bigger over the years? So, steve, why don't you tell us what your thoughts are on infrastructure?
Steve Davenport:
Well, I always look at these events and people say, well, this is a one in a hundred year event, because this shouldn't have happened. I just kind of wonder why we keep having so many issues. First, I'd say we've got harbors and ports which were developed in the 16 and 1700s. I realize they've been updated, but if I look at us as a country, it feels like we just have trouble spending money on infrastructure. We should feel like we've got one of the most advanced highway systems in the world, we've got a great train network, we're now adding to our fiber network and some of the other things. I just feel there's a real need for us to constantly be improving our infrastructure and therefore making, keep making and making our systems and our structures last for the future. Structures last for the future. When I look at Boston Harbor, I look at Baltimore and I think about all of the East Coast and how those harbors and those assets to me have been underappreciated and undermaintained, and I worry about how that is going to ultimately lead to. You know, look at the train system in New York. It's a piece of infrastructure that millions of people use every day and it's going bankrupt and it's not properly maintained. They've got water problems, they've got different problems with the maintenance of those assets and if you don't take care of those assets, I can tell you what happens they break down. And so I think it hopefully what we can look for. And I hate to see what happened to those people who were on the bridge when it collapsed and I hate to see what happens to the whole area around Baltimore and how it will affect them economically, because they're the number one transport point for transportation in the country. So those vehicles coming in the auto industry has enough challenges with EVs and carbon rules and different things going on, that you take away their port of entry and you start to make them transmit to other assets. This gets back to that point I had about friction. Right, we want the systems in our country to have as little friction so that if a person says, hey, I want to transmit these 50 vehicles over car, I can do it, over train, I can do it, over boat, I can do it. And I think that the more we can adjust and maintain these different systems, I think the stronger our economy gets, because we can take an event like this, which is tragic, and then say, hey, we have these other methods and we can switch over for a period of time. I think that's really where you can differentiate why American capitalism might be better than others, because people are going to step forward with ideas and ways to solve this problem that I think ultimately could be very good for us on the whole, for the economy. So I think it's tragic that lives were lost. I think that as an asset.
Steve Davenport:
I've heard there were two main solutions that people talk about. One is to put some type of a barrier and design all these critical posts for these bridges with barriers such that they could maintain a much harder pit. And then I've heard others say that you need to have tugs pulling these boats through instead of letting them go under their own power, and I think that it would be great for the tugboat people if we ruled on option number two. I think it will be great for the cement and steel producers if we ruled on option number one. I think there's probably some combination of things that we need to do to make the travel in these waters safer for everyone. I think it's a very interesting discussion because I think, when we look, there's really no clear way for us to know what the future holds for water transport.
Clem Miller:
Yeah, I agree, you mentioned tugs and I was just thinking that downtown Baltimore, I was just thinking that, you know, downtown Baltimore, fells Point, there were a lot of, there's a lot of tugs that are tugboats that are stationed down there and I'm just wondering why they weren't used to take this ship out and through the channel.
Steve Davenport:
So it comes down to money.
Clem Miller:
Yeah, it might. It might just be that it was just too expensive to use that.
Steve Davenport:
Obviously it takes a lot of fuel to move a ship, but yeah, I also wonder , when you get that large and I don't remember exactly the dimensions of the ship, but when you get that large it needs like eight tugs, right, it doesn't just get tugged by one little boat. And so I think the expansion in the economics of transit over the sea is that these boats are getting bigger and bigger and therefore we need to say, okay, for this size boat. I know that the Panama Canal is a gating point because so many need to use the Panama Canal and they can't get larger than they could to fit through there. But I feel there's a lesson for us here, and whether it's bridge, whether it's roads, whether it's-speed internet, we need to always be thinking.
Steve Davenport:
If I look at our government and our system in the United States, I think short-termism is our biggest enemy. We have people who think short-term and don't think longer-term. Our energy policy is short-term. Everybody's focused on just getting elected. The presidential election will take all energy away from any new ideas for the next nine months. What if we just said always, you know, in our budget we need to have a component that is the future and infrastructure and said instead of classifying it as military expense or road expense or banking expense, we just classify it as future and we take that allocation and we allocate it every year. We take 1% of the budget and we put it into those different areas, because I don't understand how we can expect the people in those sectors to be able to make the decisions that benefit everyone if they're ultimately profit-seeking. Somehow the government needs to help prescribe a different equation that sort of equation that considers resources like this as critical.
Clem Miller:
It requires a mindset of thinking about the budget as the federal budget, as having two parts, one being current expenditure and the other one being capital expenditure, and thinking about capital expenditure in terms of the return, the overall all-inclusive economic return on that investment.
Clem Miller:
And I think the government, the federal government, has made some moves in that direction by funding roads and bridges and whatnot from the Federal Highway Trust Fund. But the only problem with the Federal Highway Trust Fund is it's funded from gasoline taxes, from fuel taxes, and the rates of taxation on those have not been increased or have not been increased to the degree that they are actually sufficient to fund some of these projects. So I know the Biden administration has done some work in terms of infrastructure acts, increasing infrastructure spending, but at the same time I know that some of that spending has gone more into renewable energy. So I don't know to what extent there, I don't know to what extent you know there's enough in terms of resources to to direct toward repairing all of the bridges and roads that need repairing. Just saying you're going to finance the reconstruction of the of the key bridge in Baltimore. You know, yeah, sure, there's enough resources to do one bridge, but there are lots of bridges in the US that need repair. And where is the money for that?
Steve Davenport:
Well, I read somewhere that the annual income from that bridge is millions and millions of dollars that come into the economy to help the bridge has been paid for, I think right. So I believe that when you get a toll like that, it's a source of income instead of looking at it as an investment in the community, right? And I think that politicians can look at something and say, look at the money it generates, and then other people will look at it and say, ok, but as a part of our economy, it helps this, this and this, and therefore it involves more support or it needs more attention from our leaders. I mean, I think the question about infrastructure is really a much broader topic than the bridge.
Steve Davenport:
I think the bridge is, similar to the tip of the iceberg, and when we get into all of the other pieces of infrastructure and you talked about in one of the prior podcasts about income for the future, and you look at some roads and you look at bridges, and you look at bridges and you look at these different assets airlines, airport leases, all these different types of assets all over the world, utilities they're part of that infrastructure that we have to figure out. You know, how do those investments fit? Are they, you know? Are they quasi-fixed income? The utilities, are they really growth opportunities with solar and hydro and, you know, wind farms? Those assets, to me are a way for us to think about alternatives without having to go into the private space, and I like them, you know, as another way to think about that middle. You know that messy middle of people's portfolio between equities who are focused on growth, bonds that are focused on stability and safety, and then there's this stuff in the middle.
Clem Miller:
I think a lot of our listeners or at least some of our listeners might not even be aware, uh, that you can invest in an asset class or you know a sub asset class called infrastructure, uh, but you certainly can, uh, or you can invest in certain you know industries, like you mentioned, uh, utilities, uh that utilities that focus on infrastructure, but you can invest in, that, will invest in the private what I would call the private portions of a public-private partnership.
Clem Miller:
So you've got government putting in some money and then you've got some private investment that comes in. And then that private investment, then it either is invested in the private markets or it's put into funds and is available in a liquid form to investors on stock exchanges. So yeah, I mean you can certainly invest in infrastructure and infrastructure tends to be good in terms of an income provider. So yeah, back to your point, steve. It sort of sits in an area between equities, which may or may not have good income streams, and fixed income. It's more of an income provider and I think a lot of investment firms that do offer infrastructure-related products cite income as a major benefit of investing in these infrastructure projects. That and the fact that they see a lot of growth opportunities in the future for infrastructure.
Steve Davenport:
So I think we've underspent on it and therefore it's going to. Could think of them alongside infrastructure, or you could look at them as different from, but I think there's a lot of similarities in that there's a hard asset that is producing some function for the benefit of the economy, aka a retail distribution point, a retail, or a storage unit, or a hotel, motel, or apartment buildings for housing. They are providing something to their community that the person is being compensated for, and it's a little bit different than how do you run a technology company and coming up with the latest three nanometer chip. They're running these organizations that manage these assets in a way that produces income and by being in the REIT structure, 90% of the income is given back to the shareholders. I like it when somebody has to give me back income. Because I like income, I'm not afraid to say it, I'm not ashamed of it either.
Steve Davenport:
No matter how much you ridicule and laugh at me, I will always like income Just because you're starting to look at it now in your twilight years.
Steve Davenport:
I've liked income my whole life. I like somebody taking money out of their pocket and giving me cash. So these things in this messy middle infrastructure, real estate, even this idea of you know commodities or gold and silver producers or you know, there's something to be said for assets that are operating in a different part of the economy. One of the best classes I had in investing was by this Professor Kane at Austin College and he told us. He said look, all of this study by all of these Markowitz and all of these great economics people was, he says, they made an assumption that the market was available and total, that you could invest in all of the market, but in reality, real estate is the biggest asset in the world and most real estate is not investable. So therefore, you've got forests throughout the US that are controlled by the national, you know government and you've got all these other assets around the world and you know real estate as an asset is so big as an asset class that it dwarfs what is, you know, other investable assets.
Steve Davenport:
So, yes, we own a home and yes, but if we really wanted to have a market portfolio, we would need to have a lot more real estate, and I think that infrastructure as a part of the economy is a huge part, but because we don't look at it the same, because it's run or controlled by local communities, states or federal government, we tend to put it in the bucket of well, that's over there somewhere in the fixed area and in reality, there are opportunities here for us.
Steve Davenport:
So I like the idea of this topic and I'd like us to start to think about you know, how do we take liquid opportunities in these areas and think about them in terms of you know, when do we? If we have hyperinflation, does it make sense to add gold? Does it make sense to add REITs? I think the higher rates. If we are going down in rates and rates are going to go down, then the cost to borrow for all these REITs is going to improve and there's going to be an opportunity there at some point for us and, I think, the infrastructure. Similarly, if rates come down, they'll borrow at lower rates, so they'll likely invest more in some of these projects.
Clem Miller:
I want to add two things to what you said. First of all, I think there's something to learn, you know, from the Europeans and also from folks in Latin America about, about private involvement in infrastructure, and because there are some firms based in Europe and and in Latin America that are very involved in developing toll roads and other things that are private, that are infrastructure. So they work in a partnership where the infrastructure itself might be publicly owned but it's operated in private. Then the other thing I wanted to mention is that sometimes there are, is that sometimes there are companies that are really real estate companies that are masked as other industries. So, for example, one of the largest owners of real estate in this company and maybe you so much real estate that it's really a big component of the revenue generation in terms of in terms of being able to sell parcels.
Steve Davenport:
Roadhouse and some of the other. You know restaurant companies, because there was a time in New England where you know certain companies that were on Route 128, which goes around the city. You know the underlying business was some kind of a measurement company but the whole operation the factory and the offices occupied the space. That made them worth hundreds of millions of dollars even though they didn't make any money, because the underlying asset I mean I love buying investments where I know there's a floor under it because it owns some of its own plants and equipment.
Steve Davenport:
So I believe that international your point about international was right on I believe that when we look at infrastructure, we should look at it as an international or global asset type. I don't think we should look at domestic, because part of the reason you're adding is less correlation. Therefore, if you can get less correlation even more by having international real estate, I think there are some risks in some of these countries, but I think that most of them are worth taking, given the fact that these companies have been around for years and I think that some of the real estate and infrastructure companies offer a great opportunity for us. How would you sum up infrastructure and the key bridge.
Clem Miller:
Okay, so I think it certainly highlights the need for the development of infrastructure, for the improvement of infrastructure, for the development of new infrastructure. I think that, as far as our podcast episodes are concerned, I think it leads to all sorts of new ideas for future discussion on this podcast. I think that we can be educational for a lot of our listeners who simply may not be aware that infrastructure is an asset class, and we can be educational about that as we've been educational about other things on this podcast. So, like you said, it's very unfortunate that this bridge episode happened. We feel very bad for the families of those who were killed in this accident. We hope that repairs are done to the bridge are expeditious, so that the port can more fully reopen. So I would sort of leave it at that, that we hope that there's a lesson here for the future, that government steps up and that there are plenty of future opportunities for private investors in the public infrastructure space.
Steve Davenport:
Thanks. Well said, clem. Thank you everybody for listening and please like and share Again. This is Stephen Clem checking out for another episode. Bye.