Energy, Income, and AI: Jay Hatfield on the Fed, Housing, and Where the Real Growth Is Now

In this episode of Lead-Lag Live, I sit down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to cut through the noise on the Fed, energy markets, and how investors can prepare for the next phase of the cycle.

From the AI-driven power boom to small-cap rotation and bond opportunities, Jay shares why the Fed’s reliance on lagging data could be investors’ biggest advantage — and where long-term value is hiding in plain sight.

In this episode:
– Why the AI build-out could make natural gas the next big winner
– How money supply leads inflation, interest rates, and Fed policy
– The “Hatfield Rule” for predicting recessions through housing data
– Where small-cap and income investors should be allocating now
– Why rotation away from mega-cap tech is already starting to unfold

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#LeadLagLive #InfrastructureCapital #Fed #InterestRates #NaturalGas #Energy #Markets #Investing

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Episode Transcript

SPEAKER_00 (00:00):
We look at the um we're GARP investors, so we look
at the peg ratio or peg Y ratiofor companies with significant
yield.
So that's the P to growth plusyield.
And look for undervaluedcompanies on that basis.
And they could be tech stocks,they can be utilities.
Um, and then uh pick the mostattractive based on that

(00:22):
criteria.

SPEAKER_01 (00:34):
I'm your host, Melanie Schaefer.
Welcome to Lead Leg Live.
Now, for all us market watchers,U.S.
stocks are hitting fresh highsagain, powered by AI momentum
and optimism around upcoming Fedrate cuts.
The SP 500 and the NASDAQ havebroken out to new records, even
as gold surges past 4,000.
Traders seem to be riding bothambition and caution.

(00:58):
My guest today is Jay Hatfield,CEO of Infrastructure Capital
Advisors.
Jay leads funds like AMZA, ICAP,PFFA, and BND, and has deep
expertise in income,infrastructure, energy, and
balancing growth with cashflows.
Jay, welcome.

SPEAKER_00 (01:18):
Thanks, Melanie.
It's great to be on.

SPEAKER_01 (01:20):
So, Jay, let's start uh by talking AI infrastructure,
you know, as demand for datacenters, power networks, and
real-time computing ramps up.
How do you see that benefitingMLPs and energy companies?
And what what risks are youwatching?

SPEAKER_00 (01:35):
There was a consensus during the Biden
administration that the primarybeneficiaries of the AI power
demand is going to berenewables.
And I don't think that was everrealistic, but it isn't,
particularly now, becausewithout the subsidies that got
pulled um from the OBBA, uhrenewables are not going to fill

(02:00):
that need.
So a lot of people focus onnuclear.
That's a long, long, long waysaway, probably much longer than
investors hope.
And so it's really going to haveto come from natural gas.
Everybody's been focusing on thegenerators, but nobody seems to
care about the uh pipelines thatdeliver the gas.

(02:21):
And so we think that that's agood place to play now, because
you get good incomes, reallylike fixed income as low beta.
And then you have this long-termtailwind, even if it doesn't
become a momentum stock, like alot of other stocks, where you
do have strong fundamentals fromnot just electricity generation,

(02:42):
but also the export of naturalgas to other countries that need
to build uh displace coal andbuild more generation for AI and
other electricity demands,including electric cars.
So a really good long-termgrowth story.
Right now, nobody cares, butsometimes it's best to be in

(03:03):
sectors where nobody caresbecause your long-term, it makes
your, if you particularlyreinvest dividends, makes your
long-term returns way higher.
Because you benefit from theearnings growth without having
to pay a high multiple.
So it's not that fun while it'shappening, but um it can be
pretty lucrative if you're alonger-term investor.

SPEAKER_01 (03:23):
Yeah, J.
And also, you know, in terms ofthe markets, volatility has been
high and yields are shifting.
How do you view incomeinvestments right now,
specifically if you can talkabout PFFA and BNDS and how
those play into the toolboxduring these swings?

SPEAKER_00 (03:37):
Well, we've been correctly bullish about interest
rates for really just one simplereason, which I recommend all
investors look at very, veryclosely as their primary
indicator of not just inflation,interest rates, but also the
economy.
So we look at the money supply,we look at N zero.
And if you do that, then you'realways gonna be ahead of the

(04:00):
curve, unlike the Fed, whodoesn't look at it, they're
always behind the curve.
So we correctly predicted theinflation, um, great inflation
of 21, the Fed tightening of 22,and the Fed loosening of this
year.
And the reason we felt like wewere gonna have a cutting cycle

(04:21):
start again is that housing, andwe have data on our website
where you can see the detailshere.
Investments are key to thebusiness cycle.
Housing and constructioninvestment are in recession, so
negative year over year.
Now, thankfully, that's offsetby IP and equipment, which are

(04:41):
tech driven, being positive.
And so overall, we just havesluggish economic growth.
But we thought that that wouldimpact the employment market.
It did finally, the BLS took awhile to figure that out.
And now the Fed's on a cuttingcycle, which is great.
And the government shutdownsalmost a positive because then
we don't get other data thatmight derail that cutting.

(05:02):
And that means the terminalrates in the SCP, even, is 310.
So that's where Fed funds wouldbottom out.
10 years normally trades about100 over the terminal rate, or
if it's, you know, if we alreadyget there, the Fed funds rate at
the time.
And so that's what you've seenis the 10 years pretty anchored

(05:23):
around 410.
And that's low enough to reallycontinue to propel not so much
investment grade bonds becausethey just trade with treasuries,
but high-yield bonds.
So like BNDS is our high yieldbond fund and PFFA.
So higher risk bonds, they dowell when the stock market does
well, obviously, stock marketsbooming, and when rates are

(05:45):
either contained or dropping.
So that's why you've seen BNDSand PFFA um rally during this
once the Fed acknowledged thatthere's a problem in the labor
market and they need to cut.

SPEAKER_01 (05:57):
Yeah.
So speaking about uh Fed ratecuts, in the rate cut
environment, small cap uh valuestarts to look interesting.
Why do you prefer activemanagement and value filters?
And how do you uh stay away fromcompanies that are just losing
money?

SPEAKER_00 (06:13):
Well, small camp, there's a misunderstanding about
small camps that's perpetuatedby uh pundits on television, et
cetera, that they areover-levered companies with too
much floating rate debt, whichis not materially correct.
In other words, they're about tohave normal leverage and they do

(06:33):
swap a lot of their borrowings.
So uh they're not reallymaterially impacted by lower
rates.
But what they are, what's trueof the small cap universe is
there's much less tech focused,just because obviously you don't
get the mag 8 and small capfund.
If you do, then it's not a verygood small cap fund.
And so you're gonna end up withmore like 10% tech.

(06:56):
And so it's gonna lag when techis booming.
But what's happening now, Imean, tech is still booming, but
you're getting rotation intointerest rate sensitive
utilities, partly because of thepower element and AI, but into
really almost every stock israllying at some level.
And when that happens, smallcaps start to outperform.

(07:18):
And we do think that it's notjust with small caps, but in
general, investors should avoidmoney-losing companies.
If you're a venture capitalist,that's great.
Sit on the board, you know,nurture these companies, but you
can get wiped out.
You see that a lot in biotechswhere they miss their their drug

(07:40):
uh you know, benchmark, go down80% in a day.
So we prefer profitablecompanies trading at reasonable
multiples, and that's served youknow, SCAP.
Well, it's it's beating theindices and had less volatility
because profitable companies,you know, grow in the long run

(08:00):
because they're retainingearnings.
Unprofitable companies, somemake it, some get wiped out, a
lot of them have to issueequity, and that dilutes the
current shareholders.
So we think that's a betterstrategy.
And small caps are pretty riskyanyway, and that's why people
avoid them during Fed tighteningcycles and get into them now.
But they're pretty risky, orthey're riskier at least than

(08:22):
large cap stocks.
And so why not be conservative?
We also um only invest individend stocks, and that's why
one of the reasons why we have7% yield.
We do write some small amount ofindex calls, not too much.
So we participate in rallies.
So we do think that with smallcaps, you definitely need uh

(08:43):
active management.
We have a large cap fund, ICAP.
There, you know, in terms of thestockpits, you could sort of
just copy ours, but we writevery short-term, labor-intensive
calls that add a lot of alpha.
You can do that yourself, but ifyou have a day job, that's hard.
So on the large cap side, stockpicking is not as critical, but

(09:05):
writing calls and optimizing theportfolio can add a lot of
value.
Small caps when stay out oftrouble, not blow up on
money-losing companies.

SPEAKER_01 (09:14):
Yeah, I wanted to ask you about ICAP.
What what role do large capdividend names like the ones in
your ICAP ETF play?
How do they play during volatileperiods or when rates are
falling?
And what traits do you look foruh specifically in those picks?

SPEAKER_00 (09:28):
So we use the same methodology with all of our
funds, which is we look at theum we're GARP investors, so we
look at the peg ratio or peg Yratio for companies with
significant yield.
So that's the PE to growth plusyield, and look for undervalued
companies on a basis.
And they could be tech stocks,it can be utilities, um, and

(09:50):
then uh pick the most attractivebased on that criteria.
And with a income screen, so wewant to ICAP yields over 8%, and
a lot almost two, three-quartersof that income comes from SEC
yield or cash yield.
So we want substantial dividendpayers.

(10:11):
We do have ATT, Philip Morris.
Um, we have some that are alittle less dividends, but
really good for writing calloptions, because that provides
both alpha and some income aswell.
So that's what we think is keyto add value on the large cap
side.
Certainly stock picking,valuation, uh trimming when

(10:31):
companies run up to their fairvalue, that's important.
But you know, this is a momentummarket.
So sometimes trimming, you know,isn't the optimal thing?
Just keep holding on to yourNVIDIA or what have you.
But writing these veryshort-term calls that don't cap
your upside is a very powerfulway to add alpha.

SPEAKER_01 (10:49):
Yeah, I wanted to ask you about that next.
So looking ahead through therest of uh this year and in to
2026, what is your economicmarket outlook in in general,
with growth trends, inflationrates, et cetera, across other
people?

SPEAKER_00 (11:02):
So just we go back to our core.
So we'd like to give the facts.
So we're not like billionairepundits telling you to get out
of the market because they'renervous.
So give you the facts, and thenyou can make your own
projections.
So always look at the moneysupply, as we mentioned.
But the key what the moneysupply affects is interest rates
and interest rates affectprimarily housing.

(11:25):
Housing's caused 12 out of thelast 13 recessions, not the tech
bust of 21 recession, but everyother one.
And so we were headed for arecession.
Uh, we have something called theHapfield rule, which is when
housing starts to go below 1.1million.
We have a recession.
We were at 1.3, but dropping.
But now the 30-year uh mortgagerate has gone from well over

(11:51):
seven to about 630.
That's an attractive rate.
That should allow the housingsector to recover and
construction as well, not justhousing, but commercial
construction.
And then add that to the AIboom.
So we're projecting next year 3%growth.
And as long as the Fed stays ontheir current path of cutting

(12:15):
rates, the the tenure will bewill be conducive to that
recovery.
And that'll provide a tailwindfor earnings and support our
7,700 year-end target for nextyear, 26.
We have a 7,000 target thisyear.
So we're bullish on the economybecause of the Fed rate cuts.

(12:37):
And the budget deficit's likelyto get better next year as well.
So that'll be a tailwind forrates to go lower.
So we're quite bullish on notjust stocks, but also, as we
were talking before, higher riskfixed income because higher risk
fixed income benefits fromcoming out of the cycle more so

(12:58):
than uh fixed pure uh investmentgrade fixed income, with which
has about half the yield of highyield bonds.

SPEAKER_01 (13:06):
Very, I mean, with all the things that you've
spoken about with all theseangles, to mention just a few
infrastructure, uh, energyincome, small caps, large caps.
What how can you what would yousay to investors who are looking
for uh a message on how tobalance allocation?

SPEAKER_00 (13:22):
Well, most investors have a ton of tech.
Uh a lot of of uh investors haveindividual tech stocks because
that's what gets discussed, andthey know because they you know
obviously have an Apple iPhoneand use all these technologies.
And even if you just have SPfunds, you get 40%.
So it's great to be in tech, butit's also good to have other

(13:47):
funds, other sectors that dowell when tech isn't doing as
well because there are prettysevere downterms sometimes.
Hasn't happened in a while.
But and so that's where havingsome of these other asset
classes, ICAP, um, SCAP, AMZA isvery defensive.
So uh some people have beenfrustrated with the returns, but

(14:10):
in a really up market, may notmight lag, you still get your
7%.
So it's more like fixed incomethan um than equity type
returns.
But we do think with small caps,large caps, you can get the low
teams returns that will becompetitive with the SP.
If tech's booming, maybe notquite on top of it, but at least

(14:31):
with the equal weighted SP, andyou get diversity and you get
income.
And the income can be verypowerful.
I have all bar ETS in my IRA.
Every month I get all the incomein.
I buy more securities, I getmore income.
So it's a nice um sort of uhpositive upward cycle where

(14:51):
income begets more income, moresecurities, and uh more returns.

SPEAKER_01 (14:58):
To wrap up, for the viewers wanting to dive deeper
into your research, your funds,and uh to connect with your
team, where's the best place uhfor them to go?

SPEAKER_00 (15:06):
So to infrachefunds.com is our
website.
You can sign up for a monthlywebinar.
Uh and also are we periodicallysend out this very proprietary
and historically accurateeconomic research, which is
critical.
You need to get the economicsright to get the allocations to
your portfolio correct.

(15:28):
Uh, and like I said, we give youthe data so you can come to your
own conclusions versus justthrowing out opinions.
Um, so we think that's a veryvaluable service, and we don't
charge for it.
It's a service to our uh ETFclients.
But you can sign up and we don'tcharge you for that.
So it's a good good opportunityto get proprietary economic

(15:49):
research.

SPEAKER_01 (15:50):
Fantastic.
Well, Jay, I I thanks so muchfor joining me, and thanks to
everyone for watching.
Be sure to like, share, andsubscribe for more episodes of
Lee Plague Live.
See you next time.