September 4, 2025 • 41 mins
During this webinar, Jay Hatfield, CEO of Infrastructure Capital, cuts through the noise around jobs revisions, Fed policy, and where investors should be positioning now.
From outdated government data to the bond rally and the fate of small caps and REITs, Hatfield explains why the real risks are different from the headlines — and how investors can navigate a slowing economy without overreacting.
In this webinar:
– Why BLS jobs data is unreliable in a real-time economy
– How bond markets are signaling deeper Fed cuts ahead
– The case for small caps and REITs into year-end
– Where to find yield with less downside risk
– Why tariffs are a distraction compared to Fed policy tightening
Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.
#LeadLagLive#JobsReport #FedCuts #SmallCaps #REITs #BondMarket
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
Do you think that small caps now should start to
kind of get back into leadershipmode?
Speaker 2 (00:05):
We do.
The rates are clearly atailwind because they're more in
more.
It's not that small caps borrowtoo much, and particularly
S-Cap.
Our small cap fund is focusedon high quality companies with
low leverage.
So even if the overall indexhad a little bit more leverage
than the S&P, ours does not.
(00:27):
But what really drives it isthere's less tech.
There's about 10% tech in thevalue part.
We focused on value for smallcaps because they're risky
enough anyway.
And then you do get a lot offinancials, reits, utilities and
old economy stocks that tend tobe interest rate sensitive.
Speaker 1 (00:56):
My name is Michael Guy, a publisher of the Lead
Laguerre Pour joined me as MrJay Hatfield of Infrastructure
Capital.
Let's get right to it.
There was a little bit of anews cycle last week and a
little bit of a market reactionto the jobs revisions, and I
guess I want to start with asimple question, which is what
data is real and what's not whenit comes to what the government
(01:19):
puts out.
Speaker 2 (01:19):
Well, Michael, you know we have a complete.
We were strongly in favor ofthe firing, but for completely
different reasons, specificallythe.
The BLS lives in the 20thcentury and you know we are 25
years into the 21st century andI'm not sure you've heard of
(01:42):
this, but there was somethinginvented in the first part of
this century, which is theInternet, and there's a lot of
real time national dataavailable, none of which the BLS
utilizes.
So we're hopeful that a new BLSdirector will modernize the BLS
or will modernize the BLS, andthe reason that we in a way, we
(02:10):
agree with the president thatthe data is very inaccurate
coming out of the BLS,particularly on the jobs fund.
But it really was inaccuratebecause it was too optimistic
this whole year and we havevideos that we've made in the
past saying this is that we'vehad a view that the labor market
(02:31):
was weakening for four or fivemonths, but we were always a
little bit reluctant to poundthe table because we knew the
BLS data was unreliable.
And it's proven to be the casethat the labor market and here's
another unreliability it'seither flat or it's down 800,000
jobs, that's the householdsurvey but so what the BLS needs
(02:53):
to do is to use national datalike ADP.
There's hundreds of nationaldatabases they can draw from and
develop an algorithm forestimating this without using
the archaic survey methodologythat nobody really follows.
And just one other quick pointon that, even more important
(03:16):
than the labor data the BLS'smethodology to do the shelter
component as CPI is ridiculouslyflawed.
They purposely delay it for sixmonths.
So that alone should really becriteria for firing the BLS
director.
Because there's no, in ainternet economy, real-time
(03:39):
information AI.
Why would you delay anyinformation six months for no
reason?
So it's delayed six months.
And then you use renewing rentsand these same arcane surveys
of small panels of homeownersand apartments, when you can
simply use apartment list andZillow like we do.
They should really just use ourCPI-R, real-time CPI.
(04:03):
They could certainly make itmore complicated than that, but
so the BLS is a cesspool ofarchaic methodology that needs
to be updated.
But we don't agree with thepresident.
The economy is weakening, notbecause of tariffs, but because
of ultra-tight monetary policy.
Speaker 1 (04:23):
I don't know how many people realize that point, that
the methodology is a survey.
I kind of feel like we need toeducate people a little bit on
that.
Speaker 2 (04:32):
Right, and then they revise it, I guess because some
people don't respond to thesurvey Right, and this is just
like.
This was great technology andgreat methodology in 1960, when
I was born, or maybe 1980, butnot in 2010, 20, and now 25.
Speaker 1 (04:48):
The reaction by the bond market was particularly
interesting, I think yieldsbefore the announcement were
rising and then had a veryaggressive about face and
obviously the stock market soldoff.
I wasn't were you surprised bythe reaction of both bonds and
stocks?
I mean, I would think that,because that's just one data
point, that if the economyreally is weakening, the market
(05:11):
would have already anticipatedsome of that, not suddenly had a
whole new vision of what'shappening based on one data
point.
Speaker 2 (05:17):
Well, the reason that it was such a dramatic move,
particularly in the bond market,was Chair Powell was just on
two days before that move,particularly in the bond market
was Chair Powell was just on twodays before that.
Doesn't he have the ability tocall up the BLS and ask them
what's going on?
We had been calling forweakening labor market, but then
we were thinking, well, I guessthe Fed chair must have a sense
at least he has his owneconomists who can estimate this
(05:40):
of what this report is going tobe.
And yet, and so we werethinking, well, maybe not this
month but the next month,because the data is already
weakening on a real time basis,because continuing claims are
almost 2 million.
That's been deteriorating forquite a while.
So that kind of realization,sudden realization, was not
(06:04):
surprising to us.
And, as you know, we've said adnauseum on on your broadcast
that we're bullish on bonds andthink they're going to trade
below 4 percent by the end ofthe year.
And it's really.
The catalyst was more Fed ratecuts, and everybody knows
they're you know, particularlythe Keynesian Democrats that are
(06:28):
fearful of tariffs weren'tgoing to cut unless the labor
market weakened.
Now it's clearly weakened Again, the employment the sorry
household survey has negative800,000 jobs.
Not sure that's reliable either,but that's disconcerting and
should be paid attention to.
And also it's important to notetoo that the old economy is in
(06:52):
recession.
So normally the Fed raisesrates.
Long rates go up which theyhave and then construction and
housing decline, there's layoffsand then we have recession.
Housing is more resilientbecause we built fewer homes
after the great financial crisis.
We also have investors wedidn't have before the great
financial crisis, so that'sstabilized it.
(07:14):
And then, of course, we havethis tech boom going on.
That's very, very powerful andmore capital intensive.
So those two factors neutralizethemselves last quarter.
So we're not in a free fall,but we're definitely headed
towards recession, particularlyin the old economy.
Speaker 1 (07:31):
So is now the time to extend out duration for those
that.
Speaker 2 (07:36):
We think so We've been recommending.
It's also notwithstandingtoday's rally.
We called for a summer powerrally, which was sort of
ridiculously correct.
Um, it's good that we saidsummer, because that includes
june.
We were really thinking july,to be fair.
So we're not all knowing, butit's easy to play earning season
(07:58):
on the long side.
Earning season is winding down,so it's a little bit more
problematic.
Not that we're negative on themarket.
We have 6,600 target andbelieve that's too conservative
because AI is going to becomearguably overvalued, or fully
valued at least.
So that would imply more thanour target.
So maybe 7,000 is morereasonable.
(08:19):
But the point being that if wealready saw the volatility on
Friday, so it's just harder tomake money.
Even if the market's up 100 andthen the next, or down 100 and
up 85 the next day, that's stillmore risky and problematic than
just being long in July wherewe just ground higher by 15 to
(08:41):
25 points a day.
So in that environment, interms of new money at least, we
don't think you need to sell.
We think there's strong supportat 6,000 or maybe higher,
particularly with the Fed ratecoming.
But we've recommended PFFA, ourpreferred stock fund, and BNDES,
our high-yield bond fund,because you get paid 8% or 9%
(09:03):
and 8% respectively to waitRates are coming down.
That's a tail end.
If the market is down a little,but not a lot, then spread
should maintain and even if youknow we're wrong about
everything, you still get paideight or 9% regardless and you
can reinvest your dividends.
So we think it's okay to be alittle bit more cautious in the
(09:27):
fall, as no, is normally thecase, but we're not banning the
table.
Like I said, we're more closerto neutral, but it's just more
problematic, higher volatilityand a little bit more painful,
just to be massively long Iactually haven't uh taken a look
at the fed futures expectationchanges, but I assume a Fed cut
is back on the table now.
(09:48):
Absolutely.
And the key thing to keep inmind because a lot of
disinformation that gets putabout or probably misinformation
I don't think there's anyintent behind it the 10-year is
statistically about 70%correlated to the terminal Fed
fund rates, Fed fund rate.
So in other words, what themarket thinks that where the Fed
(10:10):
funds rate is going tostabilize and it typically
trades at 100 over.
So after the employment report,terminal Fed funds rate dropped
20 base points and our model,if you want to call it that,
worked perfectly because the10-year dropped 20 base points
and our model, if you want tocall it that, worked perfectly
because the 10-year dropped 20base points and I'd been
contradicting anothercompetitor's view that you
(10:34):
needed to be short the long endand long the Fed funds futures,
because we just think they'lltrade together, not the
near-term one but thelonger-term one.
So that's the key way topredict rates is.
Take the terminal Fed funds ratewe think it's really close to
(10:54):
two and three quarters.
That's the normal spread overinflation of two and, by the way
, inflation is below two, as weindicated, if you market to
market using any methodology,but ours works quite well.
So if you have 2% inflation, 75over is a normal spread, that's
275 gets 375.
So we are bullish on bonds, notsurprised by the activity and
(11:20):
we had feared a weak employmentreport would destabilize the
market.
Now I think people are focusedon lower rates and the fact
probably aren't going to have arecession, we just have a
slowing economy, Federal cut andfinally there also is going to
be a new Fed governor, so it'llbe four Democrats you know,
(11:41):
anti-Trump tariff Democrats andthree Republicans.
It's going to be harder for theFed chair to stand pat with,
you know, if he gets threedissents on the Fed.
I don't think that's everhappened.
Two hasn't happened since 93.
So he's going to have to makeat least two cuts.
We think three is the mostlikely case.
Speaker 1 (12:05):
Two is priced, at least two and a half is priced
into fed funds futures I wouldthink that probably means small
cap should also start to run,and they're still.
You know, I've noted myself onx that the momentum was there
and then suddenly veryaggressively did an about face.
Do you think that small capsnow should start to kind of get
back into leadership mode?
Speaker 2 (12:22):
we do the um rates are clearly a tailwind because
they're more in more.
It's not that small caps borrowtoo much, and particularly SCAP
, our small cap fund, is focusedon high-quality companies with
low leverage.
So even if the overall indexhad a little bit more leverage
(12:43):
than the S&P, ours does not.
But what really drives it isthere's less tech.
There's about 10% tech in thevalue part.
We focused on value for smallcaps because they're risky
enough anyway.
And then you do get a lot offinancials, reits, utilities and
old economy stocks that tend tobe interest rate sensitive.
(13:06):
So we do think that small capswill do well.
But just the only caveat youknow we mentioned BNDES and PFFA
.
Those have betas or in otherwords sensitivity to the market
of.
You know, in the case of BNDES,about 0.3, 0.5 for PFFA, but
small caps, arguably, are overone.
(13:27):
So people are dumping stockswilly-nilly.
They're going to sell smallcaps as well.
So you have to be more in theneutral to positive camp and
rates coming down neutral topositive on the stock market and
rates coming down to be superbulled up on small caps during
the fall, it's going to be, wethink, an easy trade in the
(13:47):
fourth quarter during the fall,it's going to be, we think, an
easy trade in the fourth quarter.
But you know we'll have to seehow rational the market is.
Rationally the market shouldjust power up to 6,600 and
beyond.
But the seasonal factor forsome reason never gets arbed out
of the market.
Speaker 1 (14:04):
Yeah, it doesn't get arbed out of the market because
it doesn't get arbed out untilit starts to actually hit and
then people start to react.
Right, Everyone's just doingrecency bias and buy.
The dip continues to work.
So it sounds to me like youjust think that this was just a
blip.
What we saw Friday.
It wasn't the start of anything, maybe more.
Speaker 2 (14:19):
Well, we had warned people I'm going to at least
publicly on TV, that just beaware that you know we, the
summer rally is becoming a fallstall it's actually not a bad
way of saying it.
So, um, you can make money.
We don't think you need to selleverything or sell even
(14:40):
significantly 60.
We think there's hard, hardsupport at 6,000.
You do have this fed cut comingin September almost certainly.
So just more neutral.
So okay to put some money towork if you're bullish long-term
.
But it's possible we'll getanother 100 down or sort of
(15:01):
drift down into the low 6,000s.
6,300 is pretty fully valuedfor midway through the year, not
at the end of the year.
That's when our target is.
So just a recognition that ifyou read any of our stuff which
you would have made a lot ofmoney if you did and played this
power summer rally, the cardcount's not as good as it was
before doesn't mean you can'tplay blackjack, but you know
(15:24):
there's not uh, it's not allaces in the deck right now, so
earlier you had mentioned it'suh bls is in the 20th century
and that it's not all aces inthe deck right now.
Speaker 1 (15:28):
So earlier you'd mentioned it's uh bls is in the
20th century and that it's notmodernized.
Um, it doesn't sound to me likeyou think it was political the
way that trump makes it out tobe uh, but correct me if I'm
wrong on that no, it's more justflat out incompetence, not of
the individuals, but just theirprocess.
Speaker 2 (15:44):
I mean, I don't think it's changed in 45 years, so
it's not anybody's fault, it'sjust you do need a new
commissioner to come in and say,ok, let's use modern techniques
.
I have a friend we were sort ofjoking around yesterday he's a
little bit more tech savvy thanme and he asked Chad GPT.
(16:05):
Well, how could you calculatethe employment situation in the
US on a real-time basis?
And it spit out like 20 datasources that could be used to
provide a reliable estimate.
So, and that's just one cutfrom ChatGPT.
So this notion of callingpeople people don't even respond
(16:25):
anymore or email and what,however they contact them, is
ridiculous because first of all,you get the unreliability of
the response and secondly, it'sso narrow, like, like I said,
for you know I'm more concernedabout CPI, the employment you
can sort of already could tellbecause of claims, but it's kind
of anybody new.
And you also get the householdsurvey as a check.
(16:46):
But on this ridiculous CPIshelter calculation, they have a
very, very narrow panel.
They only update every sixmonths and Zillow an apartment
list.
That's almost every apartmentand home in the entire US.
Why wouldn't you use that?
So what they're doing makes nosense.
(17:07):
Not blaming the people who workat the BLS.
The BLS commissioner was justdoing normal bureaucratic, you
know status quo stuff.
So it's not like she deservedto be fired per se it just.
But the truth is they'remassively incompetent and 50
years behind on the technologythey should be using.
Is there to believe it, by theway, that the but I mentioned
(17:30):
this, but it's worth emphasizingthe employment market is really
weak.
It's not in our models and weare, by the way, a member of the
greed is good party.
So we're not political, we'rejust trying to make money and
the truth of the matter is thatthe Fed is way, way too tight.
They're shrinking the moneysupply 10% a year.
(17:51):
That hasn't happened since theGreat Depression.
Rates are obviously way too high.
It's really hard to get amortgage.
It's really expensive to buy ahome relative to renting.
So the economy is slowingbecause of the Fed.
That's the reality.
So the president shouldn't be sodefensive and should just focus
on the Fed.
Should do it privately, by theway, because it doesn't really
(18:13):
work when you do it publicly.
That's what Yellen did and sheconvinced how arguably I'm not
certain of this, but it seemedlike it to carry the
administration's water on thetransitory side side.
So private lobbying can beaffected.
Public is sort ofcounterproductive.
(18:34):
But the reality is so strongthat even this incompetent Fed
will get the joke.
And that should keep the marketpretty stable, because even if
you get some quick sell-offs,people realize oh well, actually
there's a lot of bargain stocks.
Rates are coming down Rates.
Lower rates do justify highermultiples.
Our 22 multiple assumes 375 onthe 10-year and every 25 basis
(18:55):
points is one multiple of theS&P, so that's 300 points.
So if we end up only four, thatwould imply a 21 times multiple
.
I wouldn't get too concernedabout that because it's really
the AI stocks driving the marketand they're almost certainly
going to become massivelyovervalued at some point in the
next two or three years.
(19:15):
So valuation's going to be notnecessarily your best yardstick,
just like it wasn't during thelate 90s, if anybody can
remember that period.
Speaker 1 (19:26):
What's cheaper at this point from an asset class
perspective stocks or bonds?
Speaker 2 (19:30):
Well, I would say you know certain stocks, the old
economy stocks are, you know,super cheap.
Reits have been really beat up.
A lot of financials are reallycheap, so kind of the risk part
of interest sensitivity is cheap, of interest sensitivity is
(19:52):
cheap.
A lot of tech stocks are fairlyvalued, or even undervalued, I
would argue, even though it'sout of favor right now because
of conservative guidance.
Amazon's very cheap, so wethink there's value all over the
market.
I would just avoid the gamble,what I call the gambling stocks.
So I would avoid, you know,stocks that trade over a hundred
times earnings.
(20:12):
So, like Tesla, we'll see howPalantir does.
But be aware that you know wetrade some Palantir.
But going into a print, therisk reward, I would argue, is
not that good.
If they miss, it could be down60 points, if they blow it out,
maybe up 20.
So doing these gambling stocksinto earnings is problematic.
(20:35):
You might make money, just likeif you go to Vegas and bet on
red or black.
You can make money.
But there's plenty of otherstocks like Broadcom, amazon.
We've recommended KKR.
So high beta, high risk stockstrading at reasonable multiples.
Speaker 1 (20:51):
I want to touch on REITs a little bit more, since
you just referenced REITs,because they haven't been a that
has not been a good place atall.
Right, I mean, on a relativebasis, it's horrible, it's
really horrible.
So, but I've done my ownstudies on this.
It's not clear to me if REITsare kind of more of an offensive
or defensive asset.
I guess it depends on theinterest rate environment that
you're in and the economyobviously more broadly.
But let's make the argument forREITs more explicitly and then
(21:13):
what within REITs looks maybemore appealing in other areas.
Speaker 2 (21:18):
Well, you know, to be fair.
So I sort of was ridiculouslytimely because I was on TV on
Wednesday and said you know thiscould be a more problematic
market and I recommended, youknow, philip Morris and a
utility and I recommended a REIT.
(21:39):
But to be fair, that maybewasn't the greatest
recommendation, because thesestocks do, because these stocks
do, reits do have high betas.
So Philip Morris' beta is closeto zero, which is almost
unheard of.
So it's like 0.1.
Mcdonald's is 0.3.
But REITs tend to be one orhigher.
(22:00):
So it's not necessarily a greatplace to just hide out if the
market's tanking.
But they do tend to do well inmarkets where rates are dropping
and stock markets at leaststable.
So it could again be the samething with small caps.
It's more of a fourth quarterpower rally.
They will take off.
They're super cheap.
(22:21):
We think there'll start to besome buyouts.
They're trading well below whatwe at least believe is fair
value.
If you look at constructioncosts, the office sector is
normalizing because offices arebeing converted A lot of land.
We had recommended KRC ontelevision, that's Kilroy.
(22:41):
They've sold off a lot of theirland they had for office
buildings to residentialdevelopers, not necessarily
converting.
They have a building so they'renot going to convert those to
residential developers Notnecessarily converting they have
a building so they're not goingto convert those to residential
.
But there really is no newoffice supply and so we think
that the fundamentals for mostsector offices the most
challenge, by the way, theothers are strong.
(23:02):
So that good fundamentals, fedcutting rates, commies should
improve.
And, by the way, fed cuttingrates commies should improve.
And, by the way you know, evenanticipating cutting rates does
help already, because the30-year mortgage is related to
the 10-year treasury because ofduration.
That's what it gets priced offof.
So we already have what will bea 20 basis point drop in the
(23:28):
30-year, so that will have atendency to stabilize housing.
So it's OK to bet on theeconomy not tanking because the
markets cut rates for the Fed,as long as they don't completely
blow it and not cut rates atleast 25 or some talk of 50,
which is what they should do.
I'm not sure they're goodenough to do that, but lower
(23:56):
rates means the economy willstabilize.
Speaker 1 (23:57):
Reits will have good fundamentals and lower rates and
should outperform.
We don't talk about it often,but you do have a fund that
plays with the REITs.
Speaker 2 (24:02):
We have a preferred stock REIT fund, pffr.
It's got smart data so it sellspreferred trading.
But par which is critical to doIf you run your own preferred
portfolio, you need to do thatit doesn't have any leverage an
index fund, so that's a popularfund.
It's done well relative to theunmanaged index and so for
(24:27):
conservative investorscap-weighted as well, so you get
more of the higher-ratedcredits and more liquid credits.
So it's a good fund forconservative investors who want
yield from REITs.
But that is more safe and morestable with less upside, to be
fair, than REIT equities.
Speaker 1 (24:45):
So we touched on bonds and BNDS.
I was just looking at the chart, you know, nice up into the
right pattern.
What more could you ask for?
And I agreed on the tailwindthere.
Small caps really there.
Also agree with you there withthe seasonality.
So we're very much in alignmenton a lot of things.
I feel like we should touch alittle bit on the MLP space,
(25:05):
which we haven't really touchedon in a while.
Speaker 2 (25:08):
Yeah, so our fund there is AMZA.
You may have some viewers thathave been burned by MLPs in the
past.
That really is the past.
The companies have reducedtheir leverage, increased their
coverage.
They buy back shares instead ofissuing shares and, by the way,
(25:29):
the producers have as well.
So oil prices are way moresticky than they used to be,
when producers would ramp upproduction dramatically when
prices were higher.
So far more stable sector tendsto be somewhat uncorrelated,
like if tech is getting smacked.
(25:50):
Reits might be up, but the realkey point is you get to
participate in the energy upsideof North America export of
natural gas, ai, demand forelectricity that requires
natural gas.
Our fund, amca, is focused onnatural gas and so you get AI
(26:14):
and energy upside, but you gettypically deferred tax income,
like our fund yields aroundeight.
That's likely to increasebecause the underliers are
increasing their dividends.
So good, somewhat lesscorrelated asset class, good
fundamental drivers and good taxoutcome.
(26:37):
And AMZA gives you a 1099, soit's way cleaner than getting if
you bought all of our holdingsand just to replicate it, we do
write call options, which aredifficult to do, but you would
get 25 K-1s which would probablycost you a lot unless you have
a gigantic tax return, like I do, with tons of partnerships in
(27:00):
it, it's going to cost you a lotbecause your accountant may not
prefer to do partnerships andmight charge you a lot for that.
Speaker 1 (27:13):
Of all these ideas we've talked to you so far.
I mean, do you typically findthat certain advisors will favor
one over the other, or is itreally just agnostic?
It's based on views?
I mean, talk to me about sortof mixing the different funds
together.
Speaker 2 (27:20):
Well, the most important thing is distinguish
between fixed income and equityincome.
So we have three equity incomefunds.
We do love ICAP as well.
That's our large cap dividendfund.
We write a ton of very shortterm individual calls, which we
think is a phenomenal strategy.
So we have ICAP, scap and AMZI.
But the point there, as I wasalready making, is you get
(27:42):
equity risk.
So it's not going to be like ifyou look at those funds on
Friday it wasn't like they wereup and everything else was down.
But if you look at our fixedincome funds, they were
benefiting from rates beinglower.
They are very low beta, sothey're basically flattish,
maybe up a little bit.
Even so, with fixed income youget less volatility, more income
(28:05):
, somewhat more All of our fundsare pretty good income and with
the equity component you getequity risk, you know, enhanced
with more income, hopefully lessvolatility.
So that's just the more, Ithink, the no brainer.
Right now Rates are going lower,so no brainer is that PFFA and
(28:30):
kind of to your point, like wecan like PFFA kind of sells
itself, like if we spent everywaking moment assuming we
continue to manage it, which wewill appropriately positively,
trying to get people not buy it,they would buy it.
So it kind of sells itself.
You get nine plus yield, fivemorning star stars for return,
(28:53):
yield, five morning star starsfor return.
And you know, good upside toprobably the 25 area if we do
have lower rates.
So that's kind of a no brainer.
So that's where we get a lot offlows.
But you know you can get betterlonger term returns if you do
take more risk and buy some ofour equity funds or other equity
funds, of course, and you canget good income from BNDS or
(29:13):
other high-yield bond funds.
But less upside because bondsare more efficient than
preferreds and there's lessability for us to take advantage
of things like new issue and doother arbitrage not really
arbitrage, but simple trading.
Arbitrage is too complicatedbut selling above par, buying
below par, buying credits thatpeople are concerned about but
(29:36):
there really is nothing to worryabout and managing interest
rate risk.
So there's just more to do onthe preferred side.
So the returns are likely to behigher.
So a little bit more equityrisk as well.
So without risk, no return.
So that's the critical thing tokeep in mind is fixed income
lowers your equity risk.
(29:57):
If you buy equity funds, you'regetting equity risk, regardless
of what subsector, whether it'sEuropean, even.
You're going to get equity risk.
Speaker 1 (30:08):
Slow down but not recession.
What subsector whether it'sEuropean even, you're going to
get equity risk.
Slow down, but not recession.
What would make the slowdownmore significant If the Fed
doesn't cut rates?
So it's a time-loss issue interms of their own lags and
monetary policy.
Speaker 2 (30:20):
Right and, as I mentioned, it's only.
It doesn't really matterwhether they cut 50 or 25.
It just matters that they don'tbecome hawkish, like everybody
wants to say, fallaciously, inour opinion.
Oh, the Fed cut rates and thenthe 10-year went up, but it gets
back to this terminal rate.
They cut rates and then therewas some mixed I would argue
(30:44):
mixed inflation data and thenthe tariffs.
They got super hawkish and theterminal rate went up.
Well, that's what caused the10-year to go up, not that they
cut rates.
So a lot of bad analysis outthere around rates.
So it's not really much of arisk as long as they're on track
to cut.
(31:05):
And now, with another Republicanon the core Federal Reserve and
even the somewhat incompetentregional governors started, like
Bostick, starting to figure outlike oops, we should have
caught all these tariff fearsand, by the way, we were totally
(31:25):
correct.
Tariffs are not material to CPI.
But even if they were, theyneed to be ignored.
They're one time they go awayin a year.
100% it's like a sales tax andin the very short term it's a
little bit of a headwind for theeconomy.
So the Fed, except for Wallerand Bowman, was 100% wrong about
(31:50):
tariffs.
It actually means you shouldcut sooner.
And so they will cut now thatfinally the labor data is
reflecting reality, which we hadbeen predicting for too long
because we didn't realize well,we did realize actually the data
was unreliable.
We didn't know when it wouldbecome reliable.
So we don't really view it as arisk, barring some I don't know
(32:15):
what I guess.
Oil prices skyrocketing, butthey're actually dropping.
Oil prices matter, tariffs, donot.
The money supply matters themost, like 90%.
In certain very strangesituations oil can become a
factor.
Speaker 1 (32:30):
Yeah, and I feel like you know, if it were going to
be a factor, it would have beena factor earlier, when there was
the.
Weren't we at war, or close towar again, with Israel and Iran?
I forget about all this, right,right.
Speaker 2 (32:42):
We were also correct about that in that there can be
a war as long as you don'tdisrupt production.
Oil's not going any higher.
Supply and demand argues foroil around $70 a barrel.
It could be $65, which it isnow, or, by the way, $60 or $80,
but somewhere around $70.
So it ran up to $75, but supplyand demand didn't change.
(33:04):
Well, guess what?
It's going to go back to $70 orin, in this case, went below.
Opec continues to increaseproduction.
So we've been on the negativeside.
On oil, we lowered our target$10.
But we do think it's going tobe stable.
So that's a great environmentfor AMZ and pipelines because
they still get the throughput.
(33:24):
They're not commodity sensitive, put um, they're not uh
commodity sensitive.
So on the energy side we wouldbe.
If you want to participate inenergy and have that
diversification because it doestrade differently than the rest
of the market, we'd be on thepipeline side get yield, no
direct commodity risk and, um,you know, good tax outcome what
(33:47):
do we miss, jay?
Speaker 1 (33:48):
I mean you again.
It's like this typically is aslow time for markets.
I mean I just talked to anotherissuer who said it's abnormally
busy for them.
I mean, are things going to beslow, you know, in the next 30
days?
I mean, what do you think interms of just a market?
Speaker 2 (34:04):
action.
Well, you know, to be fair, wesaid that the fall would be weak
.
We weren't predicting likeAugust 1st would be down 100
handles on the S&P, or more, Iguess.
So we do have another week ofearnings, another 100 companies,
so that's good data for themarket should be all positive,
or mostly positive.
And then after that, yes,there's less news and we're
(34:27):
subject to random events whichare normally negative.
You know, like the presidentsaying he's going to reposition
our nuclear subs, things likethat, moody's downgrades, what
have you.
So that's why we're moreneutral on the market.
But we don't think it's going tobe super volatile.
And, like I said, we don'tthink you need to raise cash and
(34:48):
buy back.
You know, thousand S&P pointsdown, you can pretty much get it
up, particularly if you haveyield investments.
That's where our funds are good, because you know you're
getting your monthly dividendMarket's a little lower.
If you don't need the cash,reinvest and then you benefit
from a slight dip.
So we think it'll be probablyless volatile than most falls.
(35:10):
And keep in mind, normally theFed doesn't cut rates in
September.
You have that as a inflectionpoint, positive inflection point
.
So just more neutral.
We were totally correct inbeing completely bulled up about
the summer rally and we justtry to be realistic and say
(35:31):
you're going to get days likeFriday.
It's not going to feel so good,necessarily, we didn't get that
during the summer and butoverall we should be fine and
trade in this probably 6,000,6,400 range.
Speaker 1 (35:44):
I know we touched on this a little bit, but just
going back to Friday's marketaction, you guys were active.
Speaker 2 (36:01):
clearly A day like Friday was anything happening on
the active side that was out ofthe not hedge funds.
So we don't like go all in andtake all of our exposure off and
then go all in back.
So we just took it back to be.
We were actually, you know,greater than one time exposed
the S&P.
Now we're a little bit less.
So we shade our exposure andthat does help our alpha.
(36:21):
And if you look at like ICAPfor instance, it's right it bang
in line with the S&P, which ispretty amazing because we're
only 10% tech and the S&P is 35.
So the active management can'tpay off and so we paid a lot of
money on this rally.
So we took some of our higherbidder stocks and took huge
(36:44):
profits on them.
Actually.
And if we're wrong and themarket just keeps rocketing
higher, that's okay.
You know, we might add a littlebit exposure.
So we're market whispers.
If market tells us it justwants to go higher and higher
every day, we will shade ourexposure up a little bit, but
it's all at the margin.
It's not like a hedge fund.
We do have edge fund.
(37:05):
In that hedge fund we might becycling our exposure much more
aggressively hedge fund, andthat hedge fund we might be
cycling our exposure much moreaggressively.
Speaker 1 (37:10):
Jay, for those who want to track more of your
thoughts and learn more aboutthe funds, where would you point
them to?
Speaker 2 (37:14):
I would urge you to go to infracatfundscom but also
sign up for our mailing list andour webinars.
They've been extremely helpfulto our clients.
It's a great opportunity to askquestions about not just macro
but our funds, so easy way tostay in touch with us.
Get our mailing list, get onour webinar list and you can get
(37:37):
replays of it.
You can get the slides and ifyou do look back, you'll verify
what you were asserting.
Michael and I've asserted acouple of times because I've
given up on being humble thatour calls have been extremely
accurate, very helpful to ourclients, and we do use that to
(37:58):
manage the portfolios.
Speaker 1 (37:59):
And the returns have been positive, which, with
regard to returns, you shouldlook on the website and verify
all the returns and verify allthe returns, I can definitely
verify that you have been veryright this year, given I've been
interviewing you for the lastseveral months and it's been
playing out the way that yousaid real time.
Appreciate those that watchthis live and hopefully I'll see
you all on the next episode, orat least I'll watch with
(38:23):
Melanie Schaefer as the new host.
Thank you, jay, appreciate it.
Speaker 2 (38:26):
Thanks, michael, great questions, appreciate it.
Cheers Jay, appreciate it.
Thanks, michael, greatquestions, appreciate it.
Cheers everybody.
Do you think that small caps now should start to
kind of get back into leadershipmode?
Speaker 2 (00:05):
We do.
The rates are clearly atailwind because they're more in
more.
It's not that small caps borrowtoo much, and particularly
S-Cap.
Our small cap fund is focusedon high quality companies with
low leverage.
So even if the overall indexhad a little bit more leverage
than the S&P, ours does not.
(00:27):
But what really drives it isthere's less tech.
There's about 10% tech in thevalue part.
We focused on value for smallcaps because they're risky
enough anyway.
And then you do get a lot offinancials, reits, utilities and
old economy stocks that tend tobe interest rate sensitive.
Speaker 1 (00:56):
My name is Michael Guy, a publisher of the Lead
Laguerre Pour joined me as MrJay Hatfield of Infrastructure
Capital.
Let's get right to it.
There was a little bit of anews cycle last week and a
little bit of a market reactionto the jobs revisions, and I
guess I want to start with asimple question, which is what
data is real and what's not whenit comes to what the government
(01:19):
puts out.
Speaker 2 (01:19):
Well, Michael, you know we have a complete.
We were strongly in favor ofthe firing, but for completely
different reasons, specificallythe.
The BLS lives in the 20thcentury and you know we are 25
years into the 21st century andI'm not sure you've heard of
(01:42):
this, but there was somethinginvented in the first part of
this century, which is theInternet, and there's a lot of
real time national dataavailable, none of which the BLS
utilizes.
So we're hopeful that a new BLSdirector will modernize the BLS
or will modernize the BLS, andthe reason that we in a way, we
(02:10):
agree with the president thatthe data is very inaccurate
coming out of the BLS,particularly on the jobs fund.
But it really was inaccuratebecause it was too optimistic
this whole year and we havevideos that we've made in the
past saying this is that we'vehad a view that the labor market
(02:31):
was weakening for four or fivemonths, but we were always a
little bit reluctant to poundthe table because we knew the
BLS data was unreliable.
And it's proven to be the casethat the labor market and here's
another unreliability it'seither flat or it's down 800,000
jobs, that's the householdsurvey but so what the BLS needs
(02:53):
to do is to use national datalike ADP.
There's hundreds of nationaldatabases they can draw from and
develop an algorithm forestimating this without using
the archaic survey methodologythat nobody really follows.
And just one other quick pointon that, even more important
(03:16):
than the labor data the BLS'smethodology to do the shelter
component as CPI is ridiculouslyflawed.
They purposely delay it for sixmonths.
So that alone should really becriteria for firing the BLS
director.
Because there's no, in ainternet economy, real-time
(03:39):
information AI.
Why would you delay anyinformation six months for no
reason?
So it's delayed six months.
And then you use renewing rentsand these same arcane surveys
of small panels of homeownersand apartments, when you can
simply use apartment list andZillow like we do.
They should really just use ourCPI-R, real-time CPI.
(04:03):
They could certainly make itmore complicated than that, but
so the BLS is a cesspool ofarchaic methodology that needs
to be updated.
But we don't agree with thepresident.
The economy is weakening, notbecause of tariffs, but because
of ultra-tight monetary policy.
Speaker 1 (04:23):
I don't know how many people realize that point, that
the methodology is a survey.
I kind of feel like we need toeducate people a little bit on
that.
Speaker 2 (04:32):
Right, and then they revise it, I guess because some
people don't respond to thesurvey Right, and this is just
like.
This was great technology andgreat methodology in 1960, when
I was born, or maybe 1980, butnot in 2010, 20, and now 25.
Speaker 1 (04:48):
The reaction by the bond market was particularly
interesting, I think yieldsbefore the announcement were
rising and then had a veryaggressive about face and
obviously the stock market soldoff.
I wasn't were you surprised bythe reaction of both bonds and
stocks?
I mean, I would think that,because that's just one data
point, that if the economyreally is weakening, the market
(05:11):
would have already anticipatedsome of that, not suddenly had a
whole new vision of what'shappening based on one data
point.
Speaker 2 (05:17):
Well, the reason that it was such a dramatic move,
particularly in the bond market,was Chair Powell was just on
two days before that move,particularly in the bond market
was Chair Powell was just on twodays before that.
Doesn't he have the ability tocall up the BLS and ask them
what's going on?
We had been calling forweakening labor market, but then
we were thinking, well, I guessthe Fed chair must have a sense
at least he has his owneconomists who can estimate this
(05:40):
of what this report is going tobe.
And yet, and so we werethinking, well, maybe not this
month but the next month,because the data is already
weakening on a real time basis,because continuing claims are
almost 2 million.
That's been deteriorating forquite a while.
So that kind of realization,sudden realization, was not
(06:04):
surprising to us.
And, as you know, we've said adnauseum on on your broadcast
that we're bullish on bonds andthink they're going to trade
below 4 percent by the end ofthe year.
And it's really.
The catalyst was more Fed ratecuts, and everybody knows
they're you know, particularlythe Keynesian Democrats that are
(06:28):
fearful of tariffs weren'tgoing to cut unless the labor
market weakened.
Now it's clearly weakened Again, the employment the sorry
household survey has negative800,000 jobs.
Not sure that's reliable either,but that's disconcerting and
should be paid attention to.
And also it's important to notetoo that the old economy is in
(06:52):
recession.
So normally the Fed raisesrates.
Long rates go up which theyhave and then construction and
housing decline, there's layoffsand then we have recession.
Housing is more resilientbecause we built fewer homes
after the great financial crisis.
We also have investors wedidn't have before the great
financial crisis, so that'sstabilized it.
(07:14):
And then, of course, we havethis tech boom going on.
That's very, very powerful andmore capital intensive.
So those two factors neutralizethemselves last quarter.
So we're not in a free fall,but we're definitely headed
towards recession, particularlyin the old economy.
Speaker 1 (07:31):
So is now the time to extend out duration for those
that.
Speaker 2 (07:36):
We think so We've been recommending.
It's also notwithstandingtoday's rally.
We called for a summer powerrally, which was sort of
ridiculously correct.
Um, it's good that we saidsummer, because that includes
june.
We were really thinking july,to be fair.
So we're not all knowing, butit's easy to play earning season
(07:58):
on the long side.
Earning season is winding down,so it's a little bit more
problematic.
Not that we're negative on themarket.
We have 6,600 target andbelieve that's too conservative
because AI is going to becomearguably overvalued, or fully
valued at least.
So that would imply more thanour target.
So maybe 7,000 is morereasonable.
(08:19):
But the point being that if wealready saw the volatility on
Friday, so it's just harder tomake money.
Even if the market's up 100 andthen the next, or down 100 and
up 85 the next day, that's stillmore risky and problematic than
just being long in July wherewe just ground higher by 15 to
(08:41):
25 points a day.
So in that environment, interms of new money at least, we
don't think you need to sell.
We think there's strong supportat 6,000 or maybe higher,
particularly with the Fed ratecoming.
But we've recommended PFFA, ourpreferred stock fund, and BNDES,
our high-yield bond fund,because you get paid 8% or 9%
(09:03):
and 8% respectively to waitRates are coming down.
That's a tail end.
If the market is down a little,but not a lot, then spread
should maintain and even if youknow we're wrong about
everything, you still get paideight or 9% regardless and you
can reinvest your dividends.
So we think it's okay to be alittle bit more cautious in the
(09:27):
fall, as no, is normally thecase, but we're not banning the
table.
Like I said, we're more closerto neutral, but it's just more
problematic, higher volatilityand a little bit more painful,
just to be massively long Iactually haven't uh taken a look
at the fed futures expectationchanges, but I assume a Fed cut
is back on the table now.
(09:48):
Absolutely.
And the key thing to keep inmind because a lot of
disinformation that gets putabout or probably misinformation
I don't think there's anyintent behind it the 10-year is
statistically about 70%correlated to the terminal Fed
fund rates, Fed fund rate.
So in other words, what themarket thinks that where the Fed
(10:10):
funds rate is going tostabilize and it typically
trades at 100 over.
So after the employment report,terminal Fed funds rate dropped
20 base points and our model,if you want to call it that,
worked perfectly because the10-year dropped 20 base points
and our model, if you want tocall it that, worked perfectly
because the 10-year dropped 20base points and I'd been
contradicting anothercompetitor's view that you
(10:34):
needed to be short the long endand long the Fed funds futures,
because we just think they'lltrade together, not the
near-term one but thelonger-term one.
So that's the key way topredict rates is.
Take the terminal Fed funds ratewe think it's really close to
(10:54):
two and three quarters.
That's the normal spread overinflation of two and, by the way
, inflation is below two, as weindicated, if you market to
market using any methodology,but ours works quite well.
So if you have 2% inflation, 75over is a normal spread, that's
275 gets 375.
So we are bullish on bonds, notsurprised by the activity and
(11:20):
we had feared a weak employmentreport would destabilize the
market.
Now I think people are focusedon lower rates and the fact
probably aren't going to have arecession, we just have a
slowing economy, Federal cut andfinally there also is going to
be a new Fed governor, so it'llbe four Democrats you know,
(11:41):
anti-Trump tariff Democrats andthree Republicans.
It's going to be harder for theFed chair to stand pat with,
you know, if he gets threedissents on the Fed.
I don't think that's everhappened.
Two hasn't happened since 93.
So he's going to have to makeat least two cuts.
We think three is the mostlikely case.
Speaker 1 (12:05):
Two is priced, at least two and a half is priced
into fed funds futures I wouldthink that probably means small
cap should also start to run,and they're still.
You know, I've noted myself onx that the momentum was there
and then suddenly veryaggressively did an about face.
Do you think that small capsnow should start to kind of get
back into leadership mode?
Speaker 2 (12:22):
we do the um rates are clearly a tailwind because
they're more in more.
It's not that small caps borrowtoo much, and particularly SCAP
, our small cap fund, is focusedon high-quality companies with
low leverage.
So even if the overall indexhad a little bit more leverage
(12:43):
than the S&P, ours does not.
But what really drives it isthere's less tech.
There's about 10% tech in thevalue part.
We focused on value for smallcaps because they're risky
enough anyway.
And then you do get a lot offinancials, reits, utilities and
old economy stocks that tend tobe interest rate sensitive.
(13:06):
So we do think that small capswill do well.
But just the only caveat youknow we mentioned BNDES and PFFA
.
Those have betas or in otherwords sensitivity to the market
of.
You know, in the case of BNDES,about 0.3, 0.5 for PFFA, but
small caps, arguably, are overone.
(13:27):
So people are dumping stockswilly-nilly.
They're going to sell smallcaps as well.
So you have to be more in theneutral to positive camp and
rates coming down neutral topositive on the stock market and
rates coming down to be superbulled up on small caps during
the fall, it's going to be, wethink, an easy trade in the
(13:47):
fourth quarter during the fall,it's going to be, we think, an
easy trade in the fourth quarter.
But you know we'll have to seehow rational the market is.
Rationally the market shouldjust power up to 6,600 and
beyond.
But the seasonal factor forsome reason never gets arbed out
of the market.
Speaker 1 (14:04):
Yeah, it doesn't get arbed out of the market because
it doesn't get arbed out untilit starts to actually hit and
then people start to react.
Right, Everyone's just doingrecency bias and buy.
The dip continues to work.
So it sounds to me like youjust think that this was just a
blip.
What we saw Friday.
It wasn't the start of anything, maybe more.
Speaker 2 (14:19):
Well, we had warned people I'm going to at least
publicly on TV, that just beaware that you know we, the
summer rally is becoming a fallstall it's actually not a bad
way of saying it.
So, um, you can make money.
We don't think you need to selleverything or sell even
(14:40):
significantly 60.
We think there's hard, hardsupport at 6,000.
You do have this fed cut comingin September almost certainly.
So just more neutral.
So okay to put some money towork if you're bullish long-term
.
But it's possible we'll getanother 100 down or sort of
(15:01):
drift down into the low 6,000s.
6,300 is pretty fully valuedfor midway through the year, not
at the end of the year.
That's when our target is.
So just a recognition that ifyou read any of our stuff which
you would have made a lot ofmoney if you did and played this
power summer rally, the cardcount's not as good as it was
before doesn't mean you can'tplay blackjack, but you know
(15:24):
there's not uh, it's not allaces in the deck right now, so
earlier you had mentioned it'suh bls is in the 20th century
and that it's not all aces inthe deck right now.
Speaker 1 (15:28):
So earlier you'd mentioned it's uh bls is in the
20th century and that it's notmodernized.
Um, it doesn't sound to me likeyou think it was political the
way that trump makes it out tobe uh, but correct me if I'm
wrong on that no, it's more justflat out incompetence, not of
the individuals, but just theirprocess.
Speaker 2 (15:44):
I mean, I don't think it's changed in 45 years, so
it's not anybody's fault, it'sjust you do need a new
commissioner to come in and say,ok, let's use modern techniques
.
I have a friend we were sort ofjoking around yesterday he's a
little bit more tech savvy thanme and he asked Chad GPT.
(16:05):
Well, how could you calculatethe employment situation in the
US on a real-time basis?
And it spit out like 20 datasources that could be used to
provide a reliable estimate.
So, and that's just one cutfrom ChatGPT.
So this notion of callingpeople people don't even respond
(16:25):
anymore or email and what,however they contact them, is
ridiculous because first of all,you get the unreliability of
the response and secondly, it'sso narrow, like, like I said,
for you know I'm more concernedabout CPI, the employment you
can sort of already could tellbecause of claims, but it's kind
of anybody new.
And you also get the householdsurvey as a check.
(16:46):
But on this ridiculous CPIshelter calculation, they have a
very, very narrow panel.
They only update every sixmonths and Zillow an apartment
list.
That's almost every apartmentand home in the entire US.
Why wouldn't you use that?
So what they're doing makes nosense.
(17:07):
Not blaming the people who workat the BLS.
The BLS commissioner was justdoing normal bureaucratic, you
know status quo stuff.
So it's not like she deservedto be fired per se it just.
But the truth is they'remassively incompetent and 50
years behind on the technologythey should be using.
Is there to believe it, by theway, that the but I mentioned
(17:30):
this, but it's worth emphasizingthe employment market is really
weak.
It's not in our models and weare, by the way, a member of the
greed is good party.
So we're not political, we'rejust trying to make money and
the truth of the matter is thatthe Fed is way, way too tight.
They're shrinking the moneysupply 10% a year.
(17:51):
That hasn't happened since theGreat Depression.
Rates are obviously way too high.
It's really hard to get amortgage.
It's really expensive to buy ahome relative to renting.
So the economy is slowingbecause of the Fed.
That's the reality.
So the president shouldn't be sodefensive and should just focus
on the Fed.
Should do it privately, by theway, because it doesn't really
(18:13):
work when you do it publicly.
That's what Yellen did and sheconvinced how arguably I'm not
certain of this, but it seemedlike it to carry the
administration's water on thetransitory side side.
So private lobbying can beaffected.
Public is sort ofcounterproductive.
(18:34):
But the reality is so strongthat even this incompetent Fed
will get the joke.
And that should keep the marketpretty stable, because even if
you get some quick sell-offs,people realize oh well, actually
there's a lot of bargain stocks.
Rates are coming down Rates.
Lower rates do justify highermultiples.
Our 22 multiple assumes 375 onthe 10-year and every 25 basis
(18:55):
points is one multiple of theS&P, so that's 300 points.
So if we end up only four, thatwould imply a 21 times multiple
.
I wouldn't get too concernedabout that because it's really
the AI stocks driving the marketand they're almost certainly
going to become massivelyovervalued at some point in the
next two or three years.
(19:15):
So valuation's going to be notnecessarily your best yardstick,
just like it wasn't during thelate 90s, if anybody can
remember that period.
Speaker 1 (19:26):
What's cheaper at this point from an asset class
perspective stocks or bonds?
Speaker 2 (19:30):
Well, I would say you know certain stocks, the old
economy stocks are, you know,super cheap.
Reits have been really beat up.
A lot of financials are reallycheap, so kind of the risk part
of interest sensitivity is cheap, of interest sensitivity is
(19:52):
cheap.
A lot of tech stocks are fairlyvalued, or even undervalued, I
would argue, even though it'sout of favor right now because
of conservative guidance.
Amazon's very cheap, so wethink there's value all over the
market.
I would just avoid the gamble,what I call the gambling stocks.
So I would avoid, you know,stocks that trade over a hundred
times earnings.
(20:12):
So, like Tesla, we'll see howPalantir does.
But be aware that you know wetrade some Palantir.
But going into a print, therisk reward, I would argue, is
not that good.
If they miss, it could be down60 points, if they blow it out,
maybe up 20.
So doing these gambling stocksinto earnings is problematic.
(20:35):
You might make money, just likeif you go to Vegas and bet on
red or black.
You can make money.
But there's plenty of otherstocks like Broadcom, amazon.
We've recommended KKR.
So high beta, high risk stockstrading at reasonable multiples.
Speaker 1 (20:51):
I want to touch on REITs a little bit more, since
you just referenced REITs,because they haven't been a that
has not been a good place atall.
Right, I mean, on a relativebasis, it's horrible, it's
really horrible.
So, but I've done my ownstudies on this.
It's not clear to me if REITsare kind of more of an offensive
or defensive asset.
I guess it depends on theinterest rate environment that
you're in and the economyobviously more broadly.
But let's make the argument forREITs more explicitly and then
(21:13):
what within REITs looks maybemore appealing in other areas.
Speaker 2 (21:18):
Well, you know, to be fair.
So I sort of was ridiculouslytimely because I was on TV on
Wednesday and said you know thiscould be a more problematic
market and I recommended, youknow, philip Morris and a
utility and I recommended a REIT.
(21:39):
But to be fair, that maybewasn't the greatest
recommendation, because thesestocks do, because these stocks
do, reits do have high betas.
So Philip Morris' beta is closeto zero, which is almost
unheard of.
So it's like 0.1.
Mcdonald's is 0.3.
But REITs tend to be one orhigher.
(22:00):
So it's not necessarily a greatplace to just hide out if the
market's tanking.
But they do tend to do well inmarkets where rates are dropping
and stock markets at leaststable.
So it could again be the samething with small caps.
It's more of a fourth quarterpower rally.
They will take off.
They're super cheap.
(22:21):
We think there'll start to besome buyouts.
They're trading well below whatwe at least believe is fair
value.
If you look at constructioncosts, the office sector is
normalizing because offices arebeing converted A lot of land.
We had recommended KRC ontelevision, that's Kilroy.
(22:41):
They've sold off a lot of theirland they had for office
buildings to residentialdevelopers, not necessarily
converting.
They have a building so they'renot going to convert those to
residential developers Notnecessarily converting they have
a building so they're not goingto convert those to residential
.
But there really is no newoffice supply and so we think
that the fundamentals for mostsector offices the most
challenge, by the way, theothers are strong.
(23:02):
So that good fundamentals, fedcutting rates, commies should
improve.
And, by the way, fed cuttingrates commies should improve.
And, by the way you know, evenanticipating cutting rates does
help already, because the30-year mortgage is related to
the 10-year treasury because ofduration.
That's what it gets priced offof.
So we already have what will bea 20 basis point drop in the
(23:28):
30-year, so that will have atendency to stabilize housing.
So it's OK to bet on theeconomy not tanking because the
markets cut rates for the Fed,as long as they don't completely
blow it and not cut rates atleast 25 or some talk of 50,
which is what they should do.
I'm not sure they're goodenough to do that, but lower
(23:56):
rates means the economy willstabilize.
Speaker 1 (23:57):
Reits will have good fundamentals and lower rates and
should outperform.
We don't talk about it often,but you do have a fund that
plays with the REITs.
Speaker 2 (24:02):
We have a preferred stock REIT fund, pffr.
It's got smart data so it sellspreferred trading.
But par which is critical to doIf you run your own preferred
portfolio, you need to do thatit doesn't have any leverage an
index fund, so that's a popularfund.
It's done well relative to theunmanaged index and so for
(24:27):
conservative investorscap-weighted as well, so you get
more of the higher-ratedcredits and more liquid credits.
So it's a good fund forconservative investors who want
yield from REITs.
But that is more safe and morestable with less upside, to be
fair, than REIT equities.
Speaker 1 (24:45):
So we touched on bonds and BNDS.
I was just looking at the chart, you know, nice up into the
right pattern.
What more could you ask for?
And I agreed on the tailwindthere.
Small caps really there.
Also agree with you there withthe seasonality.
So we're very much in alignmenton a lot of things.
I feel like we should touch alittle bit on the MLP space,
(25:05):
which we haven't really touchedon in a while.
Speaker 2 (25:08):
Yeah, so our fund there is AMZA.
You may have some viewers thathave been burned by MLPs in the
past.
That really is the past.
The companies have reducedtheir leverage, increased their
coverage.
They buy back shares instead ofissuing shares and, by the way,
(25:29):
the producers have as well.
So oil prices are way moresticky than they used to be,
when producers would ramp upproduction dramatically when
prices were higher.
So far more stable sector tendsto be somewhat uncorrelated,
like if tech is getting smacked.
(25:50):
Reits might be up, but the realkey point is you get to
participate in the energy upsideof North America export of
natural gas, ai, demand forelectricity that requires
natural gas.
Our fund, amca, is focused onnatural gas and so you get AI
(26:14):
and energy upside, but you gettypically deferred tax income,
like our fund yields aroundeight.
That's likely to increasebecause the underliers are
increasing their dividends.
So good, somewhat lesscorrelated asset class, good
fundamental drivers and good taxoutcome.
(26:37):
And AMZA gives you a 1099, soit's way cleaner than getting if
you bought all of our holdingsand just to replicate it, we do
write call options, which aredifficult to do, but you would
get 25 K-1s which would probablycost you a lot unless you have
a gigantic tax return, like I do, with tons of partnerships in
(27:00):
it, it's going to cost you a lotbecause your accountant may not
prefer to do partnerships andmight charge you a lot for that.
Speaker 1 (27:13):
Of all these ideas we've talked to you so far.
I mean, do you typically findthat certain advisors will favor
one over the other, or is itreally just agnostic?
It's based on views?
I mean, talk to me about sortof mixing the different funds
together.
Speaker 2 (27:20):
Well, the most important thing is distinguish
between fixed income and equityincome.
So we have three equity incomefunds.
We do love ICAP as well.
That's our large cap dividendfund.
We write a ton of very shortterm individual calls, which we
think is a phenomenal strategy.
So we have ICAP, scap and AMZI.
But the point there, as I wasalready making, is you get
(27:42):
equity risk.
So it's not going to be like ifyou look at those funds on
Friday it wasn't like they wereup and everything else was down.
But if you look at our fixedincome funds, they were
benefiting from rates beinglower.
They are very low beta, sothey're basically flattish,
maybe up a little bit.
Even so, with fixed income youget less volatility, more income
(28:05):
, somewhat more All of our fundsare pretty good income and with
the equity component you getequity risk, you know, enhanced
with more income, hopefully lessvolatility.
So that's just the more, Ithink, the no brainer.
Right now Rates are going lower,so no brainer is that PFFA and
(28:30):
kind of to your point, like wecan like PFFA kind of sells
itself, like if we spent everywaking moment assuming we
continue to manage it, which wewill appropriately positively,
trying to get people not buy it,they would buy it.
So it kind of sells itself.
You get nine plus yield, fivemorning star stars for return,
(28:53):
yield, five morning star starsfor return.
And you know, good upside toprobably the 25 area if we do
have lower rates.
So that's kind of a no brainer.
So that's where we get a lot offlows.
But you know you can get betterlonger term returns if you do
take more risk and buy some ofour equity funds or other equity
funds, of course, and you canget good income from BNDS or
(29:13):
other high-yield bond funds.
But less upside because bondsare more efficient than
preferreds and there's lessability for us to take advantage
of things like new issue and doother arbitrage not really
arbitrage, but simple trading.
Arbitrage is too complicatedbut selling above par, buying
below par, buying credits thatpeople are concerned about but
(29:36):
there really is nothing to worryabout and managing interest
rate risk.
So there's just more to do onthe preferred side.
So the returns are likely to behigher.
So a little bit more equityrisk as well.
So without risk, no return.
So that's the critical thing tokeep in mind is fixed income
lowers your equity risk.
(29:57):
If you buy equity funds, you'regetting equity risk, regardless
of what subsector, whether it'sEuropean, even.
You're going to get equity risk.
Speaker 1 (30:08):
Slow down but not recession.
What subsector whether it'sEuropean even, you're going to
get equity risk.
Slow down, but not recession.
What would make the slowdownmore significant If the Fed
doesn't cut rates?
So it's a time-loss issue interms of their own lags and
monetary policy.
Speaker 2 (30:20):
Right and, as I mentioned, it's only.
It doesn't really matterwhether they cut 50 or 25.
It just matters that they don'tbecome hawkish, like everybody
wants to say, fallaciously, inour opinion.
Oh, the Fed cut rates and thenthe 10-year went up, but it gets
back to this terminal rate.
They cut rates and then therewas some mixed I would argue
(30:44):
mixed inflation data and thenthe tariffs.
They got super hawkish and theterminal rate went up.
Well, that's what caused the10-year to go up, not that they
cut rates.
So a lot of bad analysis outthere around rates.
So it's not really much of arisk as long as they're on track
to cut.
(31:05):
And now, with another Republicanon the core Federal Reserve and
even the somewhat incompetentregional governors started, like
Bostick, starting to figure outlike oops, we should have
caught all these tariff fearsand, by the way, we were totally
(31:25):
correct.
Tariffs are not material to CPI.
But even if they were, theyneed to be ignored.
They're one time they go awayin a year.
100% it's like a sales tax andin the very short term it's a
little bit of a headwind for theeconomy.
So the Fed, except for Wallerand Bowman, was 100% wrong about
(31:50):
tariffs.
It actually means you shouldcut sooner.
And so they will cut now thatfinally the labor data is
reflecting reality, which we hadbeen predicting for too long
because we didn't realize well,we did realize actually the data
was unreliable.
We didn't know when it wouldbecome reliable.
So we don't really view it as arisk, barring some I don't know
(32:15):
what I guess.
Oil prices skyrocketing, butthey're actually dropping.
Oil prices matter, tariffs, donot.
The money supply matters themost, like 90%.
In certain very strangesituations oil can become a
factor.
Speaker 1 (32:30):
Yeah, and I feel like you know, if it were going to
be a factor, it would have beena factor earlier, when there was
the.
Weren't we at war, or close towar again, with Israel and Iran?
I forget about all this, right,right.
Speaker 2 (32:42):
We were also correct about that in that there can be
a war as long as you don'tdisrupt production.
Oil's not going any higher.
Supply and demand argues foroil around $70 a barrel.
It could be $65, which it isnow, or, by the way, $60 or $80,
but somewhere around $70.
So it ran up to $75, but supplyand demand didn't change.
(33:04):
Well, guess what?
It's going to go back to $70 orin, in this case, went below.
Opec continues to increaseproduction.
So we've been on the negativeside.
On oil, we lowered our target$10.
But we do think it's going tobe stable.
So that's a great environmentfor AMZ and pipelines because
they still get the throughput.
(33:24):
They're not commodity sensitive, put um, they're not uh
commodity sensitive.
So on the energy side we wouldbe.
If you want to participate inenergy and have that
diversification because it doestrade differently than the rest
of the market, we'd be on thepipeline side get yield, no
direct commodity risk and, um,you know, good tax outcome what
(33:47):
do we miss, jay?
Speaker 1 (33:48):
I mean you again.
It's like this typically is aslow time for markets.
I mean I just talked to anotherissuer who said it's abnormally
busy for them.
I mean, are things going to beslow, you know, in the next 30
days?
I mean, what do you think interms of just a market?
Speaker 2 (34:04):
action.
Well, you know, to be fair, wesaid that the fall would be weak
.
We weren't predicting likeAugust 1st would be down 100
handles on the S&P, or more, Iguess.
So we do have another week ofearnings, another 100 companies,
so that's good data for themarket should be all positive,
or mostly positive.
And then after that, yes,there's less news and we're
(34:27):
subject to random events whichare normally negative.
You know, like the presidentsaying he's going to reposition
our nuclear subs, things likethat, moody's downgrades, what
have you.
So that's why we're moreneutral on the market.
But we don't think it's going tobe super volatile.
And, like I said, we don'tthink you need to raise cash and
(34:48):
buy back.
You know, thousand S&P pointsdown, you can pretty much get it
up, particularly if you haveyield investments.
That's where our funds are good, because you know you're
getting your monthly dividendMarket's a little lower.
If you don't need the cash,reinvest and then you benefit
from a slight dip.
So we think it'll be probablyless volatile than most falls.
(35:10):
And keep in mind, normally theFed doesn't cut rates in
September.
You have that as a inflectionpoint, positive inflection point
.
So just more neutral.
We were totally correct inbeing completely bulled up about
the summer rally and we justtry to be realistic and say
(35:31):
you're going to get days likeFriday.
It's not going to feel so good,necessarily, we didn't get that
during the summer and butoverall we should be fine and
trade in this probably 6,000,6,400 range.
Speaker 1 (35:44):
I know we touched on this a little bit, but just
going back to Friday's marketaction, you guys were active.
Speaker 2 (36:01):
clearly A day like Friday was anything happening on
the active side that was out ofthe not hedge funds.
So we don't like go all in andtake all of our exposure off and
then go all in back.
So we just took it back to be.
We were actually, you know,greater than one time exposed
the S&P.
Now we're a little bit less.
So we shade our exposure andthat does help our alpha.
(36:21):
And if you look at like ICAPfor instance, it's right it bang
in line with the S&P, which ispretty amazing because we're
only 10% tech and the S&P is 35.
So the active management can'tpay off and so we paid a lot of
money on this rally.
So we took some of our higherbidder stocks and took huge
(36:44):
profits on them.
Actually.
And if we're wrong and themarket just keeps rocketing
higher, that's okay.
You know, we might add a littlebit exposure.
So we're market whispers.
If market tells us it justwants to go higher and higher
every day, we will shade ourexposure up a little bit, but
it's all at the margin.
It's not like a hedge fund.
We do have edge fund.
(37:05):
In that hedge fund we might becycling our exposure much more
aggressively hedge fund, andthat hedge fund we might be
cycling our exposure much moreaggressively.
Speaker 1 (37:10):
Jay, for those who want to track more of your
thoughts and learn more aboutthe funds, where would you point
them to?
Speaker 2 (37:14):
I would urge you to go to infracatfundscom but also
sign up for our mailing list andour webinars.
They've been extremely helpfulto our clients.
It's a great opportunity to askquestions about not just macro
but our funds, so easy way tostay in touch with us.
Get our mailing list, get onour webinar list and you can get
(37:37):
replays of it.
You can get the slides and ifyou do look back, you'll verify
what you were asserting.
Michael and I've asserted acouple of times because I've
given up on being humble thatour calls have been extremely
accurate, very helpful to ourclients, and we do use that to
(37:58):
manage the portfolios.
Speaker 1 (37:59):
And the returns have been positive, which, with
regard to returns, you shouldlook on the website and verify
all the returns and verify allthe returns, I can definitely
verify that you have been veryright this year, given I've been
interviewing you for the lastseveral months and it's been
playing out the way that yousaid real time.
Appreciate those that watchthis live and hopefully I'll see
you all on the next episode, orat least I'll watch with
(38:23):
Melanie Schaefer as the new host.
Thank you, jay, appreciate it.
Speaker 2 (38:26):
Thanks, michael, great questions, appreciate it.
Cheers Jay, appreciate it.
Thanks, michael, greatquestions, appreciate it.
Cheers everybody.
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