August 19, 2025 • 24 mins
In this episode of Lead-Lag Live, I sit down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to talk about the biggest risks shaping markets right now — from sticky inflation to ballooning government debt.
We dig into why markets may be underestimating the Fed, how high interest costs could push the U.S. closer to a debt crisis, and whether equities can hold up in a higher-for-longer environment.
In this episode:
- Why inflation remains a “tough nut to crack”
- The risk of debt spiraling as Treasury costs climb
- How Fed policy is boxed in by fiscal realities
- The outlook for equities and bonds in 2025
- Where investors should look for stability in uncertain times
Lead-Lag Live brings you inside conversations with top financial minds shaping markets in real time.
Subscribe for more interviews, insights, and raw takes that cut deeper than the headlines.
#LeadLagLive #Investing #JayHatfield #DebtCrisis #Inflation #Fed #Markets
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
The current Fed is incompetent.
We don't think they're morons,as the president said, but they
use Keynesian models.
So there's monetarist modelsand Keynesian models, and the
Keynesian models prove to justnot work at all.
So as long as the Fed cuts andremains dovish in their
commentary, then the bond marketwill be continued, probably to
(00:21):
rally.
Speaker 2 (00:32):
Welcome to Lead Leg Live.
I'm your host, melanie Shaper.
So we're heading into one ofthe most historically volatile
times of the year for themarkets.
August and September areseasonally weak months and
investors are watching closelyfor signs of a slowdown, a rate
cut or both.
Joining me now is someone whoalways brings the data, jay
(00:52):
Hatfield, the CEO and portfoliomanager at Inforcap Funds.
Jay, it's great to talk withyou again.
Speaker 1 (00:59):
Thanks, melanie, great to be on.
Speaker 2 (01:00):
So let's jump right into it.
You've mentioned the marketstend to weaken this time of year
.
Why do you thinkdiversification is especially
important right now?
Speaker 1 (01:10):
Well, just to be clear, we're much more neutral
than we are negative.
So normally we would benegative this time of year and
there's a simple dynamic, and Idon't know why people don't
fully understand this, but youwant to be really long the
market, or long the market whenduring running season.
(01:30):
So we've been calling for asummer power rally for last two
or three months and we've had it, and that was a pretty easy
trade, because all you're reallybetting is that the companies
haven't warned and the economyis decent, particularly in tech.
So really all you're betting isthat the companies are going to
(01:53):
do what they always try to do,which is beat slightly, and so
that's what happened.
We got powered up to thesehighs.
So our target for the year is6,600.
Now, so our target for the yearis 6,600.
And so that would argue for ourtarget.
We don't have mid-year targets,but a mid-year target is 6,300,
(02:14):
which means we're prettyextended.
So that could lead to theconclusion that you should be
negative on the market.
But we're more neutral for tworeasons.
First of all, you do have a Fedrate cut coming in September
almost certainly, and that'susually not the case.
So September is another desertof earnings where you can have
bad news, but we do have.
(02:34):
Fed rate cuts are extremelyimportant, notwithstanding other
people's commentary to thecontrary, or implicit commentary
at least.
So don't ignore the Fed, neverignore the Fed, never ignore the
money supply, unlike our Fedchair to never ignore the money
supply.
What's happening to the moneysupply?
So?
(02:58):
But I'm drawing this distinctionbetween the normal call.
It's like if you looked overthe last 10 years and asked us
we say, oh my God, get out ofthe way, it's going to be
horrible.
We see pretty strong support at6,000, sorry, so just 300
points down.
Pretty good resistance here.
But I'd say there might be a50% chance that we power up to
(03:20):
our.
We just power through thisbecause of tech enthusiasm and
we're establishing which isbeing announced, released as we
speak a 7,000 target.
That's our upside target andthe reason we established that
is that that would be a reallystretched multiple, like 23
times.
But when you have tech boomsyou can have stretched multiples
(03:43):
, palantir being an exampletrading at a seven peg.
So we think even some of theseMAG 8 companies like Broadcom,
which is close to our target, isgoing to blow through our
target and NVIDIA is going toblow through our target because
they're trading at two pegs sowe think there's probably a 50%
(04:03):
chance of the upside case at7,000, still have our 6,600
target.
So we're bullish but just wantto acknowledge that it's a
riskier time to invest.
So it's not terrible to addless risky investments.
We've been recommendingpreferred stocks.
There are flagship funds, pffa,high yield bonds, our fund,
(04:26):
there's bnds and on televisionwhere we're kind of forced to
make individual picks.
We've been calling out philipmorris and mcdonald's, these
super low beta stocks with goodyields, because when interest
rates come down, yield stocks dotend to do better.
So that's our call, notnegative but just acknowledging
(04:48):
that the risk rewards, like thecard count if you play blackjack
.
It's kind of neutral now andduring the summer it was
extremely positive and there's aton of bases in the deck.
So you mentioned McDonald's.
Speaker 2 (05:02):
What are some of the other areas or sectors that are
the most interesting or ratesensitive areas Right.
Speaker 1 (05:12):
So normally health care would be rate sensitive.
But we're waiting for thatknife to bounce off the floor
(05:34):
Because there seems like there'salways a new regulatory problem
cost reimbursement problem,insurance rate problem, drug
blow-up problem, like Lillytoday.
So that's probably going to bea good value sector.
(05:56):
That is normally not now, butnormally interest rate sensitive
.
But we're avoiding healthcare,so we're excluding healthcare
from these defensive sectors.
But what we do like isutilities.
We've been recommending methat's a big holding in our ICAP
fund, that's NextEra greatutility plus power development
which benefits from ai.
So really derivatives to ai,not just the ai.
I would really call it mangseven, but we include brockham
and not tesla and that, but callit mad gate if you want.
(06:17):
But not just those stocks, butpower companies, pipelines, amza
.
We have a natural gas biasthere.
That's because that's used togenerate power for AI and export
natural gas.
So old economy stocks that haveleverage to the new economy,
(06:38):
because right now it's a tale oftwo cities you have recession
going on in the old economy,clearly, and you have a boom
going on in the new economy andthey're kind of offsetting and
we're at slow economic growth,like one to 2%.
So that means right now it'smore attractive to be in not
just AI but AI derivatives, likewe've been recommending Goldman
(06:59):
Sachs, which has worked reallywell because they're going to do
AI IPOs and have done themalready.
But that backlog is likely tobuild, so that's our core theme.
I mean, you're going to hearthe AI theme from everyone, but
the derivatives are less obvious.
Speaker 2 (07:15):
Right, so I wanted to talk a little bit about SCAP
and ICAP.
First of all, SCAP.
That ETF focuses on the smallcap space.
What's your view on theperformance of small caps
heading into the end of the year?
Speaker 1 (07:29):
Well, the key driver between old economy and new
economy is really interest rates.
So if you wanted to predictwhat's going on with stock
market you know whether tech wasbeing rotated into or you know
more dividend plays and oldeconomy defensive stocks the
(07:49):
only piece of information youreally need is our interest
rates up or down.
Obviously there's some othercases, like if Apple gets relief
on tariffs, then that's goingto drive tech as well, but just
on a day to day basis.
So we do think the Fed is goingto have to cut the economy
slowing because rates are waytoo high and that will be a
(08:11):
positive catalyst for small capsnot because small caps borrow
too much money and they have thebenefit from lower rates and
basically, particularly thecompanies we invest in.
We invest in low leverage, highdividend coverage and good
growth relative to P-E ratio, sogood peg ratio.
(08:35):
So with these value type stocksthat are trading at reasonable
multiples, they tend tooutperform when rates are down
because they're more likely.
Tech is only about 10% of thevalue part of small caps.
So you get utilities, get REITs.
Some of them have AI upside butsome don't so you get a lot
(08:56):
more diversified portfolio ofhigh quality companies.
They tend to do better wheninterest rates are dropping, and
interest rates almost certainlyare going to drop.
You're going to get a new Fedgovernor.
Even the existing Democrats onthe Fed are starting to figure
out that they're wrong abouttariffs, wrong about inflation,
(09:18):
and so there's going to be a newFed chair eventually, so even
if the current one isn't fired.
So rates are going lower.
Absolutely they need to golower, housing's rolling over,
and so it's a good time, wethink, to broaden out, and if
there is a pullback, it could bewell.
(09:39):
Like you saw on Friday, thatwas a high beta stock pullback.
So tech did get smashed onFriday when we had weak economic
growth, and we do thinkeconomics growing or is
shrinking, the economy shrinkingrather and so that means that
when that fear arises, then techmight take a leg down.
So we're still bullish on tech,but it's a little bit more
(10:00):
problematic.
It's had a big run during thisfall period, which is really
August and September.
Speaker 2 (10:05):
Yeah, and so another type of, or another sector,
preferred stocks.
They're often overlooked, butPFFA, your actively managed
preferred ETF, has been it'sbeen gaining a lot of attention.
Why do you think preferreds areso compelling in this market?
Speaker 1 (10:20):
Well, they're about 50% correlated with the stock
market and 30 to the bond market, and so we are bullish on the
stock market, might take a pauseduring the fall, rather, but
rates are likely to go down.
So with those two factors inplay, then that means preferreds
(10:44):
will do well and almostcertainly outperform investment
grade.
Pure investment gradeinvestments like Vanguard Total
Bond Fund, or BNDs, is our highyield fund.
There's a BND that's also runby Vanguard.
That's their ETF equivalent oftheir total bond fund, so that
(11:04):
yields four.
Ours yields eight and we thinkthat in the type of market like
the BND would do better if thestock market was terrible and we
were going into a recession andthat's why rates are coming
down.
But we think, coming out of aFed tightening cycle where rates
are going down and the stockmarket's doing well, that these
riskier elements of fixed incomewill perform well, and
(11:29):
particularly on a risk-adjustedbasis, because you're taking
half the risk of the market inthe case of PFFA and only 30%
the risk of the market in BNDSstock market.
That is so lower risk wayhigher income, potentially good
(11:50):
total returns.
Speaker 2 (11:51):
Yeah, so the BNDS ETF , that's exposure to high yield
corporate bonds.
Speaker 1 (11:56):
Correct and with an infrastructure bent.
So we'd like real assets, we'dlike real collateral.
So you'll see pipelines andutilities and other
infrastructure slash asset basedcompanies.
Speaker 2 (12:11):
If the market does start to slow down in September
and maybe even into October, andif then concerns ramp up about
the potential defaults, howshould investors be managing
risk while still, I guess,capturing yield?
Speaker 1 (12:27):
Well, we think you can.
The fact that the rates arelikely to come down will
probably offset those if thereis any spread widening, and a
lot of times the pullback reallyis more on the tech side and
there's really no tech companieswith significant credit
outstanding.
So we think it will be a goodall weather security for August
(12:48):
and September and even if itcomes in a little bit, getting
paid eight, nine percent income,you can just reinvest your
dividends and kind of benefitfrom a little volatility.
So the great thing about fixedincome is it's pretty easy to
dip by because you have a bigmargin for safety, because
you're senior In case ofpreferreds, you're senior to
common.
In case of high yield bonds,you're senior to common and
(13:12):
preferred and you're likely toget good recoveries even in
bankruptcy.
So really, the lower the pricegoes, the more compelling it is.
Sometimes that's true for techstocks and other stocks, but
it's almost always true forfixed income.
Speaker 2 (13:26):
Yeah.
So, jay, I mean, before we wrapup, your team publishes a
real-time CPI estimate usingmodern data sources.
Can you sort of walk us throughhow that works and why you
believe the Bureau of LaborStatistics needs to modernize
its inflation tracking?
Speaker 1 (13:39):
Right.
So it's very timely.
And we've been complainingabout the shelter component of
CPI that the BLS publishes andit's really two years delayed.
The scandalous part of it isit's delayed by six months just
by design, so they just don'tbother to update it more than
(14:02):
every six months.
So it's kind of like we didthis interview and then you
didn't bother to release it forsix months, so it'd be basically
worthless.
And then they have some other.
They do their same arcanesurveys of a limited number of
homes and that's very delayedbecause they use renewing rents.
So instead we use this thing.
(14:23):
So they're a very 20th centurybased organization using 20th
century methodology from the 70sand 80s.
And there's this new developmentthis century that probably a
lot of you heard about.
It's called the Internet.
It's on the internet.
You can source data that coversthe entire United States.
(14:44):
That's what we do with CPI-R.
So we utilize Zillow andapartment list.
It's basically every apartmentand every home in the United
States and that comes out everymonth, not every six months, and
then we adjust CPI for that.
So if you use that measure,cpi-r, real-time inflations,
(15:05):
1.2% year-over-year and PCE,which has less housing in it, is
two, so right at the Fed'starget.
So if the Fed just got gooddata, they should be able to
adjust it themselves.
They could literally just lookon our website, but they're not
that competent.
But the BLS itself is makingmonetary policy terrible, so
that's why I'd like some changeat the top.
(15:26):
Not for the reason theadministration cited, which they
thought the numbers are cooked.
They're not really cooked Inour opinion.
They're not cooked, they'rejust massively delayed and wrong
.
We do think the labor market'sweak not because of the Trump
administration's tariffs oreconomic policy, but overly
tight monetary policy.
(15:47):
But the ironic thing is thatthe BLS has really caused or
helped the Fed to be behind thecurve by publishing this
terrible data series using theiroutdated methodology.
Speaker 2 (15:59):
So, in terms of the rest of the year, do you see
more than one rate cut?
I know you think there will forsure be one.
Speaker 1 (16:05):
We're saying two to three, there should be three.
The Fed is the current Fed isincompetent.
They use we don't think they'remorons, as the president said,
but they use Keynesian models.
So there's monetarist modelsand Keynesian models and the
Keynesian models prove to justnot work at all.
During the pandemic they focuson just employment, driving
(16:28):
inflation, when it's reallyalmost exclusively the money
supply.
So money supply is shrinking to10%.
Should be cutting rates or not,but there's going to be.
Chris Waller is a leader, aleading candidate to be Fed
chair.
There's going to be aRepublican slash, more
monetarist, not Keynesianappointed.
(16:51):
There's already two dissenterson the core Fed board of seven,
so there's going to be somemovement in the Fed governing
body Plus.
The current members are nowfaced with this overwhelming
data that the economy is slowing.
So even they will probablyfigure it out.
So we'll definitely get two orthree cuts and some dovish
(17:13):
commentary.
Because that's important?
Because the long rates aredriven by the expected terminal
rate of Fed funds.
So that's why some people said,oh well, the Fed cut rates, but
long rates went up.
So that's terrible.
Well, that doesn't happen in avacuum.
The Fed cut rates.
Then some new data came out.
(17:33):
They interpreted it veryhawkishly inappropriately in our
opinion the long theexpectations.
The terminal rate rose by 40base points, and it's not
surprising.
The 10 terminal rate rose by 40base points, and it's not
surprising.
The 10-year rose by 40 basepoints.
10-year trades roughly 100 basepoints over the terminal Fed
funds rate.
So as long as the Fed cuts andremains dovish in their
(17:54):
commentary, then the bond marketwill be continue probably to
rally and, by the way, that willhelp stabilize the old economy,
which is housing andconstruction.
Speaker 2 (18:05):
So another question what type of investors should be
looking at your funds?
Who might not already know ofthem, and which funds in
particular should they belooking at?
Speaker 1 (18:15):
We would counsel really all investors to have a
significant income component.
It can stabilize your portfolio.
Significant income component itcan stabilize your portfolio.
If you do need proceeds to helpcover your expenses.
It's fantastic to havedividends.
And also, as we indicated withthese fixed income funds, that
on dips you can, instead ofhaving to rebalance where you
(18:37):
sell something and buy something, you can take the cash coming
off your portfolio and reinvestit.
You know, like if you hadsubstantial income, you would
have automatically reinvested atthe end of April.
Well, that would have been agreat trade.
So we recommend all investorshave some component of income.
Obviously, if you're moreconservative, maybe older and
(18:58):
closer to retirement, it's evenmore important.
So then, with regard to all ofour funds, we have three fixed
income funds, three equityincome funds.
So if you want to be moreconservative PFFA, bndes I
already mentioned those greatyields, lower volatility If you
want longer term, if you stillwant income but good total
(19:18):
returns, then all three of ourequity income funds will have no
guarantees, but we wouldestimate have low teams total
returns, good dividends, butanother 4% or 5% of capital
appreciation.
So ICAP is pretty conservative.
Large cap dividend fund, scapriskier but probably better
(19:40):
longer term returns.
All these yield over six.
And then amca is our pipelinefund.
It's pretty low correlation tothe market, good yields about
eight.
Good dividend growth throughabout five.
So all those are good additions.
You just have to realize thatyou know if we're correct and
the market's more flat to down,they'll probably be down,
(20:02):
whereas the fixed income couldbe pretty flat or possibly up if
it's a modest kind of lowvolatility decline.
So it's important if you'retrying to build income,
distinguish between equityincome and fixed income.
Speaker 2 (20:17):
And just lastly, jay, the big beautiful bill.
We didn't touch on that.
I know some of that will takeeffect at the end of 2025, but
some of it not until 2026.
How do you see that affectinganything, if at all?
Speaker 1 (20:28):
Well, the biggest misinformation about the OBBBA
is that it was a budget buster,and the reason for that is
politics.
There's a number of Republicansand, of course, all Democrats
who want to criticize the bill,so they use CBO data.
Well, cbo lives in this fantasyworld where they assume that
(20:51):
the 2017 legislation was justgoing to expire with no change
whatsoever, which is not goingto happen with the Republicans
in charge.
But if you look so they hadsaid oh, the deficit is going to
go up 2.7 trillion.
The reality is there was aminor, basically irrelevant cut
relative to current law and ifyou look even at the CBO data,
(21:13):
they were forecasting with,after the OBBA, that the budget
deficit declines from 1.9 to1.7trillion next year, but they
ignored tariffs.
So we're forecasting $1.3trillion deficit, and that
should be a tailwind for bonds,or in other words, potentially
(21:33):
lower rates, and also foreconomic growth, because it
doesn't crowd out or in otherwords, reduce private investment
because the government'sborrowing too much, or, in other
words, reduce privateinvestment because the
government's borrowing too much.
So we're actually bullish onthe OBBA.
It also gives a minor boost tolower income spending, which
(22:01):
should help stabilize theeconomy, because you get the tax
cut on tips and overtime andSocial Security benefits for
lower income recipients.
So we think it's a pretty bigpositive, particularly if you
include tariffs, because itlowers the deficits and gives a
little bit of economic stimulusparticularly to the bottom sort
of quartile of consumers.
Speaker 2 (22:16):
Well, thanks so much for joining me today, Jay.
It's always great to talk toyou and thank you for everyone
for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Like Live.
I'm Melanie Schaefer.
See you next time.
The current Fed is incompetent.
We don't think they're morons,as the president said, but they
use Keynesian models.
So there's monetarist modelsand Keynesian models, and the
Keynesian models prove to justnot work at all.
So as long as the Fed cuts andremains dovish in their
commentary, then the bond marketwill be continued, probably to
(00:21):
rally.
Speaker 2 (00:32):
Welcome to Lead Leg Live.
I'm your host, melanie Shaper.
So we're heading into one ofthe most historically volatile
times of the year for themarkets.
August and September areseasonally weak months and
investors are watching closelyfor signs of a slowdown, a rate
cut or both.
Joining me now is someone whoalways brings the data, jay
(00:52):
Hatfield, the CEO and portfoliomanager at Inforcap Funds.
Jay, it's great to talk withyou again.
Speaker 1 (00:59):
Thanks, melanie, great to be on.
Speaker 2 (01:00):
So let's jump right into it.
You've mentioned the marketstend to weaken this time of year
.
Why do you thinkdiversification is especially
important right now?
Speaker 1 (01:10):
Well, just to be clear, we're much more neutral
than we are negative.
So normally we would benegative this time of year and
there's a simple dynamic, and Idon't know why people don't
fully understand this, but youwant to be really long the
market, or long the market whenduring running season.
(01:30):
So we've been calling for asummer power rally for last two
or three months and we've had it, and that was a pretty easy
trade, because all you're reallybetting is that the companies
haven't warned and the economyis decent, particularly in tech.
So really all you're betting isthat the companies are going to
(01:53):
do what they always try to do,which is beat slightly, and so
that's what happened.
We got powered up to thesehighs.
So our target for the year is6,600.
Now, so our target for the yearis 6,600.
And so that would argue for ourtarget.
We don't have mid-year targets,but a mid-year target is 6,300,
(02:14):
which means we're prettyextended.
So that could lead to theconclusion that you should be
negative on the market.
But we're more neutral for tworeasons.
First of all, you do have a Fedrate cut coming in September
almost certainly, and that'susually not the case.
So September is another desertof earnings where you can have
bad news, but we do have.
(02:34):
Fed rate cuts are extremelyimportant, notwithstanding other
people's commentary to thecontrary, or implicit commentary
at least.
So don't ignore the Fed, neverignore the Fed, never ignore the
money supply, unlike our Fedchair to never ignore the money
supply.
What's happening to the moneysupply?
So?
(02:58):
But I'm drawing this distinctionbetween the normal call.
It's like if you looked overthe last 10 years and asked us
we say, oh my God, get out ofthe way, it's going to be
horrible.
We see pretty strong support at6,000, sorry, so just 300
points down.
Pretty good resistance here.
But I'd say there might be a50% chance that we power up to
(03:20):
our.
We just power through thisbecause of tech enthusiasm and
we're establishing which isbeing announced, released as we
speak a 7,000 target.
That's our upside target andthe reason we established that
is that that would be a reallystretched multiple, like 23
times.
But when you have tech boomsyou can have stretched multiples
(03:43):
, palantir being an exampletrading at a seven peg.
So we think even some of theseMAG 8 companies like Broadcom,
which is close to our target, isgoing to blow through our
target and NVIDIA is going toblow through our target because
they're trading at two pegs sowe think there's probably a 50%
(04:03):
chance of the upside case at7,000, still have our 6,600
target.
So we're bullish but just wantto acknowledge that it's a
riskier time to invest.
So it's not terrible to addless risky investments.
We've been recommendingpreferred stocks.
There are flagship funds, pffa,high yield bonds, our fund,
(04:26):
there's bnds and on televisionwhere we're kind of forced to
make individual picks.
We've been calling out philipmorris and mcdonald's, these
super low beta stocks with goodyields, because when interest
rates come down, yield stocks dotend to do better.
So that's our call, notnegative but just acknowledging
(04:48):
that the risk rewards, like thecard count if you play blackjack
.
It's kind of neutral now andduring the summer it was
extremely positive and there's aton of bases in the deck.
So you mentioned McDonald's.
Speaker 2 (05:02):
What are some of the other areas or sectors that are
the most interesting or ratesensitive areas Right.
Speaker 1 (05:12):
So normally health care would be rate sensitive.
But we're waiting for thatknife to bounce off the floor
(05:34):
Because there seems like there'salways a new regulatory problem
cost reimbursement problem,insurance rate problem, drug
blow-up problem, like Lillytoday.
So that's probably going to bea good value sector.
(05:56):
That is normally not now, butnormally interest rate sensitive
.
But we're avoiding healthcare,so we're excluding healthcare
from these defensive sectors.
But what we do like isutilities.
We've been recommending methat's a big holding in our ICAP
fund, that's NextEra greatutility plus power development
which benefits from ai.
So really derivatives to ai,not just the ai.
I would really call it mangseven, but we include brockham
and not tesla and that, but callit mad gate if you want.
(06:17):
But not just those stocks, butpower companies, pipelines, amza
.
We have a natural gas biasthere.
That's because that's used togenerate power for AI and export
natural gas.
So old economy stocks that haveleverage to the new economy,
(06:38):
because right now it's a tale oftwo cities you have recession
going on in the old economy,clearly, and you have a boom
going on in the new economy andthey're kind of offsetting and
we're at slow economic growth,like one to 2%.
So that means right now it'smore attractive to be in not
just AI but AI derivatives, likewe've been recommending Goldman
(06:59):
Sachs, which has worked reallywell because they're going to do
AI IPOs and have done themalready.
But that backlog is likely tobuild, so that's our core theme.
I mean, you're going to hearthe AI theme from everyone, but
the derivatives are less obvious.
Speaker 2 (07:15):
Right, so I wanted to talk a little bit about SCAP
and ICAP.
First of all, SCAP.
That ETF focuses on the smallcap space.
What's your view on theperformance of small caps
heading into the end of the year?
Speaker 1 (07:29):
Well, the key driver between old economy and new
economy is really interest rates.
So if you wanted to predictwhat's going on with stock
market you know whether tech wasbeing rotated into or you know
more dividend plays and oldeconomy defensive stocks the
(07:49):
only piece of information youreally need is our interest
rates up or down.
Obviously there's some othercases, like if Apple gets relief
on tariffs, then that's goingto drive tech as well, but just
on a day to day basis.
So we do think the Fed is goingto have to cut the economy
slowing because rates are waytoo high and that will be a
(08:11):
positive catalyst for small capsnot because small caps borrow
too much money and they have thebenefit from lower rates and
basically, particularly thecompanies we invest in.
We invest in low leverage, highdividend coverage and good
growth relative to P-E ratio, sogood peg ratio.
(08:35):
So with these value type stocksthat are trading at reasonable
multiples, they tend tooutperform when rates are down
because they're more likely.
Tech is only about 10% of thevalue part of small caps.
So you get utilities, get REITs.
Some of them have AI upside butsome don't so you get a lot
(08:56):
more diversified portfolio ofhigh quality companies.
They tend to do better wheninterest rates are dropping, and
interest rates almost certainlyare going to drop.
You're going to get a new Fedgovernor.
Even the existing Democrats onthe Fed are starting to figure
out that they're wrong abouttariffs, wrong about inflation,
(09:18):
and so there's going to be a newFed chair eventually, so even
if the current one isn't fired.
So rates are going lower.
Absolutely they need to golower, housing's rolling over,
and so it's a good time, wethink, to broaden out, and if
there is a pullback, it could bewell.
(09:39):
Like you saw on Friday, thatwas a high beta stock pullback.
So tech did get smashed onFriday when we had weak economic
growth, and we do thinkeconomics growing or is
shrinking, the economy shrinkingrather and so that means that
when that fear arises, then techmight take a leg down.
So we're still bullish on tech,but it's a little bit more
(10:00):
problematic.
It's had a big run during thisfall period, which is really
August and September.
Speaker 2 (10:05):
Yeah, and so another type of, or another sector,
preferred stocks.
They're often overlooked, butPFFA, your actively managed
preferred ETF, has been it'sbeen gaining a lot of attention.
Why do you think preferreds areso compelling in this market?
Speaker 1 (10:20):
Well, they're about 50% correlated with the stock
market and 30 to the bond market, and so we are bullish on the
stock market, might take a pauseduring the fall, rather, but
rates are likely to go down.
So with those two factors inplay, then that means preferreds
(10:44):
will do well and almostcertainly outperform investment
grade.
Pure investment gradeinvestments like Vanguard Total
Bond Fund, or BNDs, is our highyield fund.
There's a BND that's also runby Vanguard.
That's their ETF equivalent oftheir total bond fund, so that
(11:04):
yields four.
Ours yields eight and we thinkthat in the type of market like
the BND would do better if thestock market was terrible and we
were going into a recession andthat's why rates are coming
down.
But we think, coming out of aFed tightening cycle where rates
are going down and the stockmarket's doing well, that these
riskier elements of fixed incomewill perform well, and
(11:29):
particularly on a risk-adjustedbasis, because you're taking
half the risk of the market inthe case of PFFA and only 30%
the risk of the market in BNDSstock market.
That is so lower risk wayhigher income, potentially good
(11:50):
total returns.
Speaker 2 (11:51):
Yeah, so the BNDS ETF , that's exposure to high yield
corporate bonds.
Speaker 1 (11:56):
Correct and with an infrastructure bent.
So we'd like real assets, we'dlike real collateral.
So you'll see pipelines andutilities and other
infrastructure slash asset basedcompanies.
Speaker 2 (12:11):
If the market does start to slow down in September
and maybe even into October, andif then concerns ramp up about
the potential defaults, howshould investors be managing
risk while still, I guess,capturing yield?
Speaker 1 (12:27):
Well, we think you can.
The fact that the rates arelikely to come down will
probably offset those if thereis any spread widening, and a
lot of times the pullback reallyis more on the tech side and
there's really no tech companieswith significant credit
outstanding.
So we think it will be a goodall weather security for August
(12:48):
and September and even if itcomes in a little bit, getting
paid eight, nine percent income,you can just reinvest your
dividends and kind of benefitfrom a little volatility.
So the great thing about fixedincome is it's pretty easy to
dip by because you have a bigmargin for safety, because
you're senior In case ofpreferreds, you're senior to
common.
In case of high yield bonds,you're senior to common and
(13:12):
preferred and you're likely toget good recoveries even in
bankruptcy.
So really, the lower the pricegoes, the more compelling it is.
Sometimes that's true for techstocks and other stocks, but
it's almost always true forfixed income.
Speaker 2 (13:26):
Yeah.
So, jay, I mean, before we wrapup, your team publishes a
real-time CPI estimate usingmodern data sources.
Can you sort of walk us throughhow that works and why you
believe the Bureau of LaborStatistics needs to modernize
its inflation tracking?
Speaker 1 (13:39):
Right.
So it's very timely.
And we've been complainingabout the shelter component of
CPI that the BLS publishes andit's really two years delayed.
The scandalous part of it isit's delayed by six months just
by design, so they just don'tbother to update it more than
(14:02):
every six months.
So it's kind of like we didthis interview and then you
didn't bother to release it forsix months, so it'd be basically
worthless.
And then they have some other.
They do their same arcanesurveys of a limited number of
homes and that's very delayedbecause they use renewing rents.
So instead we use this thing.
(14:23):
So they're a very 20th centurybased organization using 20th
century methodology from the 70sand 80s.
And there's this new developmentthis century that probably a
lot of you heard about.
It's called the Internet.
It's on the internet.
You can source data that coversthe entire United States.
(14:44):
That's what we do with CPI-R.
So we utilize Zillow andapartment list.
It's basically every apartmentand every home in the United
States and that comes out everymonth, not every six months, and
then we adjust CPI for that.
So if you use that measure,cpi-r, real-time inflations,
(15:05):
1.2% year-over-year and PCE,which has less housing in it, is
two, so right at the Fed'starget.
So if the Fed just got gooddata, they should be able to
adjust it themselves.
They could literally just lookon our website, but they're not
that competent.
But the BLS itself is makingmonetary policy terrible, so
that's why I'd like some changeat the top.
(15:26):
Not for the reason theadministration cited, which they
thought the numbers are cooked.
They're not really cooked Inour opinion.
They're not cooked, they'rejust massively delayed and wrong
.
We do think the labor market'sweak not because of the Trump
administration's tariffs oreconomic policy, but overly
tight monetary policy.
(15:47):
But the ironic thing is thatthe BLS has really caused or
helped the Fed to be behind thecurve by publishing this
terrible data series using theiroutdated methodology.
Speaker 2 (15:59):
So, in terms of the rest of the year, do you see
more than one rate cut?
I know you think there will forsure be one.
Speaker 1 (16:05):
We're saying two to three, there should be three.
The Fed is the current Fed isincompetent.
They use we don't think they'remorons, as the president said,
but they use Keynesian models.
So there's monetarist modelsand Keynesian models and the
Keynesian models prove to justnot work at all.
During the pandemic they focuson just employment, driving
(16:28):
inflation, when it's reallyalmost exclusively the money
supply.
So money supply is shrinking to10%.
Should be cutting rates or not,but there's going to be.
Chris Waller is a leader, aleading candidate to be Fed
chair.
There's going to be aRepublican slash, more
monetarist, not Keynesianappointed.
(16:51):
There's already two dissenterson the core Fed board of seven,
so there's going to be somemovement in the Fed governing
body Plus.
The current members are nowfaced with this overwhelming
data that the economy is slowing.
So even they will probablyfigure it out.
So we'll definitely get two orthree cuts and some dovish
(17:13):
commentary.
Because that's important?
Because the long rates aredriven by the expected terminal
rate of Fed funds.
So that's why some people said,oh well, the Fed cut rates, but
long rates went up.
So that's terrible.
Well, that doesn't happen in avacuum.
The Fed cut rates.
Then some new data came out.
(17:33):
They interpreted it veryhawkishly inappropriately in our
opinion the long theexpectations.
The terminal rate rose by 40base points, and it's not
surprising.
The 10 terminal rate rose by 40base points, and it's not
surprising.
The 10-year rose by 40 basepoints.
10-year trades roughly 100 basepoints over the terminal Fed
funds rate.
So as long as the Fed cuts andremains dovish in their
(17:54):
commentary, then the bond marketwill be continue probably to
rally and, by the way, that willhelp stabilize the old economy,
which is housing andconstruction.
Speaker 2 (18:05):
So another question what type of investors should be
looking at your funds?
Who might not already know ofthem, and which funds in
particular should they belooking at?
Speaker 1 (18:15):
We would counsel really all investors to have a
significant income component.
It can stabilize your portfolio.
Significant income component itcan stabilize your portfolio.
If you do need proceeds to helpcover your expenses.
It's fantastic to havedividends.
And also, as we indicated withthese fixed income funds, that
on dips you can, instead ofhaving to rebalance where you
(18:37):
sell something and buy something, you can take the cash coming
off your portfolio and reinvestit.
You know, like if you hadsubstantial income, you would
have automatically reinvested atthe end of April.
Well, that would have been agreat trade.
So we recommend all investorshave some component of income.
Obviously, if you're moreconservative, maybe older and
(18:58):
closer to retirement, it's evenmore important.
So then, with regard to all ofour funds, we have three fixed
income funds, three equityincome funds.
So if you want to be moreconservative PFFA, bndes I
already mentioned those greatyields, lower volatility If you
want longer term, if you stillwant income but good total
(19:18):
returns, then all three of ourequity income funds will have no
guarantees, but we wouldestimate have low teams total
returns, good dividends, butanother 4% or 5% of capital
appreciation.
So ICAP is pretty conservative.
Large cap dividend fund, scapriskier but probably better
(19:40):
longer term returns.
All these yield over six.
And then amca is our pipelinefund.
It's pretty low correlation tothe market, good yields about
eight.
Good dividend growth throughabout five.
So all those are good additions.
You just have to realize thatyou know if we're correct and
the market's more flat to down,they'll probably be down,
(20:02):
whereas the fixed income couldbe pretty flat or possibly up if
it's a modest kind of lowvolatility decline.
So it's important if you'retrying to build income,
distinguish between equityincome and fixed income.
Speaker 2 (20:17):
And just lastly, jay, the big beautiful bill.
We didn't touch on that.
I know some of that will takeeffect at the end of 2025, but
some of it not until 2026.
How do you see that affectinganything, if at all?
Speaker 1 (20:28):
Well, the biggest misinformation about the OBBBA
is that it was a budget buster,and the reason for that is
politics.
There's a number of Republicansand, of course, all Democrats
who want to criticize the bill,so they use CBO data.
Well, cbo lives in this fantasyworld where they assume that
(20:51):
the 2017 legislation was justgoing to expire with no change
whatsoever, which is not goingto happen with the Republicans
in charge.
But if you look so they hadsaid oh, the deficit is going to
go up 2.7 trillion.
The reality is there was aminor, basically irrelevant cut
relative to current law and ifyou look even at the CBO data,
(21:13):
they were forecasting with,after the OBBA, that the budget
deficit declines from 1.9 to1.7trillion next year, but they
ignored tariffs.
So we're forecasting $1.3trillion deficit, and that
should be a tailwind for bonds,or in other words, potentially
(21:33):
lower rates, and also foreconomic growth, because it
doesn't crowd out or in otherwords, reduce private investment
because the government'sborrowing too much, or, in other
words, reduce privateinvestment because the
government's borrowing too much.
So we're actually bullish onthe OBBA.
It also gives a minor boost tolower income spending, which
(22:01):
should help stabilize theeconomy, because you get the tax
cut on tips and overtime andSocial Security benefits for
lower income recipients.
So we think it's a pretty bigpositive, particularly if you
include tariffs, because itlowers the deficits and gives a
little bit of economic stimulusparticularly to the bottom sort
of quartile of consumers.
Speaker 2 (22:16):
Well, thanks so much for joining me today, Jay.
It's always great to talk toyou and thank you for everyone
for watching.
Be sure to like, share andsubscribe for more episodes of
Lead Like Live.
I'm Melanie Schaefer.
See you next time.
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