September 26, 2025 • 25 mins
In this episode of Lead-Lag Live, I sit down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to unpack why the Fed keeps getting it wrong—and how investors can actually benefit from the new rate-cutting cycle.
From outdated shelter calculations to overlooked leading indicators, Jay explains why monetary policy needs modernization and where the next opportunities lie as markets adjust.
In this episode:
– Why the Fed’s reliance on lagging shelter data distorts inflation
– How the monetary base drives every economic
– Why small caps and financials stand to outperform in a lower-rate
– The case for preferred, high-yield bonds, and MLPs as overlooked
– How AI-driven energy demand is creating a hidden natural gas
Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.
#LeadLagLive #JayHatfield #Fed #InterestRates #SmallCaps #Preferreds #MLPs #AI
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:00):
It's been a very simple train trade, rather, to
not be in small caps.
So, you know, if you're worriedabout a recession, you worry
about higher rates, you'reworried about the Fed
international.
Small caps are fundamentally uhriskier companies.
They usually have a little bitlower credit rating, I'm your
(00:31):
host, Melanie Schaefer.
SPEAKER_00 (00:32):
Welcome to Lead Lag Live.
Now, the Federal Reserveannounced on September 17th that
it's lowering its benchmark rateby a quarter point, a move that
could finally bring some relieffrom the steep borrowing costs
that have been pressing onconsumers.
My guest today, Jay Hatfield,CEO of Infrastructure Capital
Advisors, has been calling forthis kind of cut.
(00:54):
And not just quietly.
He was recently quoted byPresident Donald Trump on Truth
Social for his sharp critique ofthe Fed's timing and its
reliance on outdated data,arguing that monetary policy
needs to be modernized.
Jay, thank you so much forjoining me today.
Thanks, Melanie.
It's great to be on.
(01:14):
So let me I just want to startthings right there.
You've been vocal about theFed's missteps.
Why did you make those commentsand where do you think the Fed
has gone wrong with itsapproach?
SPEAKER_01 (01:25):
This isn't the new sort of politically motivated
view.
We've we've had this view umvery stridently since the Fed
raised the money supply by 70%during the pandemic.
And then thought they could getaway with that, and so called
(01:46):
the inflation that was brewinguh transitory.
And we thought that was patentlyridiculous.
While they were saying it wastransitory, PPI was running
about 12% year over year.
The housing sector prices havegone up 20% uh year over year,
(02:07):
not just like one month, butover an entire year.
That's a obviously a predictorof rents.
And that gets to the one of thethree fundamental problems of
this Fed is that they use the uhBLS's calculation of shelter,
which is purposely delayed sixmonths, but really delayed more
(02:30):
like two years.
They use their 1970s stylesurveys and the mail and on the
phone, and they do renewingleases.
They purposely delayed sixmonths, which is just
inexplicable.
And one reason maybe the BLS hadgot fired.
But so they've they were relyingon that data, but if they looked
at leading indicators, eithermarket rents were also starting
(02:54):
to rise rapidly, not theirtwo-year delayed index, and also
housing prices, they would haverecognized that.
And now we're on the flip sideof that where housing's coming
way down, hasn't showed up inthe index.
Um, so that was that's one oftheir three fundamental flaws.
Uh, we did expect, though, forthem to cut, and that is they're
(03:14):
mostly labor economists.
And so they really are focusedon the labor market, and we did
think it was going to weaken.
And in fact, we had the oppositereaction that the president did
to the BLS failure, is thatwe've said, well, finally
they're figuring out that thelabor market is weakening.
SPEAKER_00 (03:34):
Yeah.
And so to just carry on fromthat, why do you why do you
regard the monetary base as acritical leading indicator?
And how does that inform or howwill it inform your forward
views on these?
SPEAKER_01 (03:45):
Well, most people tend to ignore it, which is a
terrible idea.
Specifically, the Fed causes alleconomic cycles.
They've caused 13 out of 13post-World War II recessions.
I'm accepting the pandemic asthe uh um caused by the federal
(04:06):
government, so that's not reallyrelevant.
So 13 out of 13 recessionscaused by a tightening of
monetary policy.
And 12 out of 13 of thoserecessions were precipitated by
decline in housing.
Another exception that provesthe rule is that um in 2001,
(04:28):
there was actually rates startedto drop because of retirement
boom.
Housing did okay, but techactually absolutely crashed.
It's kind of the reverse ofwhat's going on today.
So if you want to call theeconomic cycle, first you look
at the Fed.
The Fed only controls themonetary base, so it should
focus on that.
That's if they increase it toofast, it'll cause inflation.
(04:52):
Right now it's flat, so it couldcause a recession.
The only reason we're not inrecession, two of the four major
categories of investment are inrecession, so construction and
housing, but the tech relatedare very strong.
So IP and equipment.
So that's why we have slowgrowth, but no recession.
But now it's great that theFed's cutting rates.
(05:13):
We're projecting 3% growth nextyear as mortgage rates can come
down.
They've already come down.
And um, the housing market'sstarting to recover.
We had strong new home sales, sopossibly in anticipation of
lower mortgage rates.
So we're very bullish about themarket because of the Fed.
(05:34):
We have a 7,000 target this yearand a 7,700 target for the end
of uh 26.
SPEAKER_00 (05:42):
So, yeah, given that context, then how should how
should investors position theirportfolios to benefit in this
sort of environment?
SPEAKER_01 (05:49):
Well, we think that definitely it's better to be
with regard to fixed income.
You know, I think everybodyshould have at least some fixed
income in their portfolio.
But you don't need to have likethe most conservative fixed
income.
You can have high yield bondsand preferred, you know, our
funds are BNDS, is our highyield bond fund, PFFF, PFFA,
(06:12):
sorry, is our flagship,preferred stock fund, both yield
well over eight, eight, andnine, basically BNDS eight, PFFA
nine.
So there you get equity likereturns, but you do uh get paid
first.
So you get the benefits of fixedincome, lower volatility in the
stock market.
So as rates come down, you getkind of a double pop.
(06:34):
You should get uh, you know, thespreads will tighten because the
stock market is doing prettywell.
And of course, the treasury'srallying.
So those two factors aid in onthe fixed income side.
Um, so we do think that thoseare timely and they have been
doing really well since the Fed,really since Powell signaled
(06:55):
that they were going to cut.
SPEAKER_00 (06:56):
And so to follow up from that, Jay, what strategies
or tilts are you favoring?
SPEAKER_01 (07:00):
So, in terms of equities and sectors, we do
think small caps will do well.
They haven't done well at all.
And they, in fact, they we hadpredicted that when the Fed
started cutting rates, theywould do well.
So they're typicallyoutperforming in most on most
days because people areanticipating those rate cuts.
(07:20):
Um, higher risk um securitieslike financials.
So if you look at ICAPs, ourlarge cap um dividend fund, we
have a lot of financials there.
We do have a little bit of tech,nowhere near as much, about 10%
tech.
Um, so there's some greatcompanies there, um,
industrials.
(07:40):
So we'd be a little more out onthe risk curve, not in drugs,
not in consumer staples.
Uh so if if we're right aboutthe market being bull market,
you want to be in higher risksecurities.
SCAP is our small cap uhdividend fund that's like I said
(08:01):
has been performing well in thistype of market.
SPEAKER_00 (08:03):
Yeah, and Jay, on the fixed income side, where do
you see the 10-year treasurytrading over the next uh 12 to
24 months and how will thatimpact fixed income allocations?
SPEAKER_01 (08:13):
Well, we've been um bullish on bonds and correct.
I would guess I'd say as usual.
Uh we've been had reallyaccurate forecasting since the
pandemic, uh, again, becausewe've looked at the money
supply.
So we've been forecasting 375,sorry, 350 to 4 on the 10 year.
(08:36):
And a lot of times we areforecasting that when the 10
year was at 480 as well.
So um now we're about 410.
Uh basically the tenure is goingto trade about 100 base points
over, 1% over the expectedterminal rate of Fed funds right
now.
The last SCP, the terminal ratewas about 310.
(08:59):
That's exactly where Fed fundfeatures are.
So to get below four, and wethink that'll probably happen.
We need to have a little bitmore dovish Fed.
We do think the labor market'sgoing to continue to weaken.
We think inflation isattenuating, even though it
doesn't necessarily always showup in the data.
Tariffs haven't been thatsignificant, but they are one
(09:21):
time.
So we think the Fed will becomeincrementally dovish.
That terminal rate will go belowfour, and the treasury will go
below four.
And as I mentioned, that'sreally a tailwind for all
securities.
We have a 23 multiple both thisyear and next year on our
target.
It's implicit in our target.
(09:41):
So, in other words, our targetthis year is 305 times 23.
That gives you 7,000.
Next year it's 355 uh times 23.
But to justify a 23 multiple,you really need to be have rates
at 4% or area of 4% or lower.
Uh, because multiple, every 25base points of uh yield on the
(10:05):
10-year is theoretically equalto one SP multiple.
So our bullish target is basedon lower rates.
Um, we're in the rate zip code,but it would be more attractive
if we did get below four tosupport that 23 multiple.
The other element is, of course,you've seen it um in recent
(10:28):
earnings report from Oracle,Broadcom, very strong momentum
in um AI.
So a higher growth rate islikely, and that also supports a
higher multiple.
But rates are a key tailwind.
It's really markets taking offeven in September, which it
(10:49):
normally does terribly inSeptember.
And that's really because ofthis expectations of Fed rate
hikes or cuts, rather.
And that means the cycle's over,and that means that the risk of
recession is dropping to closeto zero.
SPEAKER_00 (11:04):
Yeah, and you mentioned AI.
That's sort of what I wanted toget into next, with AI data
centers and cloud growth drivinguh demand for energy and
infrastructure.
Where do you see opportunity forthe energy companies?
And do you believe MLPs are setto benefit?
SPEAKER_01 (11:19):
Definitely.
The I think some of thederivative plays, just some of
the power companies are prettyuh fairly valued or even
overvalued, few utilities.
But nobody's really thoughtabout um MLPs as a beneficiary
of AI.
But the companies, particularlythe ones that we have invested
(11:39):
in AMZA, are natural gasfocused.
And there's two growth storiesfor natural gas.
One is if you're gonna producesubstantially more electricity,
you need natural gas.
We're gonna have something, somegrowth in renewables, but you're
gonna need natural gas.
Nuclear is too far away rightnow.
So that's a big growth area.
(12:01):
And these big pipeline companieslike Williams, KMI, UPD, energy
transfer have big natural gaspipelines.
They're shipping that gas topower plants to be converted
into electricity.
They're also shipping that gasto the Gulf, which is then being
exported overseas.
And then those countries areusing that natural gas to burn
(12:25):
for their own electricity needs.
They don't have as many datacenters, but they do have some.
So there's a huge growth storythere.
Hasn't become overvalued.
Still, you can get 7% yield,seven, eight yields in the same
yields right around eight rightnow.
So you can get attractiveyields, good growth prospects,
but it's not overdone like someAI stocks are arguably way
(12:49):
overvalued, but MLPs are not.
We like LNG.
Um, it's a um export, theyexport Shaneer, they export
natural gas.
Um, they have uh two greatfacilities that they're
expanding.
So we like Shaneer.
(13:10):
Um in our large cap dividendfund, we do like Marvell.
They're doing well today.
It's one of our bigger holdings.
They're we think really under,unlike a lot of AS stocks that
are fully or even overvalued.
We think Marvell's undervalued.
So that's been a big contributorin ICAP.
We've had Goldman Sachs, we'vebeen recommending that since it
was at 500.
(13:31):
It's now eight out of 800, it'sgetting a little bit closer to
fair value, maybe an 850 targeton it, but benefiting from the
AI boom uh uh through IPOs andalso increase in merger
activity, which is coming fromderegulation of the merger
market.
Uh, we also like Morgan Stanley.
(13:51):
So there's a lot of good, um,these are all higher uh beta
picks, except for LNG.
So we do think it's okay to beout the on the risk curve for
these companies that areindirectly benefiting from AI.
SPEAKER_00 (14:06):
And uh uh Jay, zooming out a little bit, uh you
just updated your S P 500targets for 2026.
What analysis led you to thatadjustment and what's your
roadmap for getting there?
SPEAKER_01 (14:17):
Well, we try to keep it pretty simple.
If you follow Southsideresearch, so these are the big
investment banks, they're veryskittish.
A lot of them lowered theirtarget when the tariff tantrum
happened.
We thought the tariff reactionwas over blonde, and we were
correct.
(14:37):
So we kept our 6,600 target umall throughout that decline.
So that was the rightpositioning because it was a
huge buying opportunity.
And then we recently, just inthe last two weeks, upgraded it.
And it's really, for the reasonswe described, lower rates.
So we finally actually got lowerrates versus us just projecting
(14:59):
lower rates.
And the AI boom got further, hadfurther evidence presented,
particularly by Oracle.
There's been a lot of criticismof AI that it's, oh, it's just,
you know, checking to see howyour barbecue can be fixed, you
know, talking to Chat GPT.
(15:21):
But what Oracle demonstrates isthat major corporations need to
use AI on their own data.
So they're not going to just useChat GPT, they're gonna form
their own LLM on their own databecause they don't want to share
their data, and that's going toinform the decisions about all
aspects of their business on thecustomer side, on the
(15:43):
manufacturing side, logistics,even HR.
So there's a huge growthopportunity, and the whole
notion it's not going to be theROIs are not going to be good is
not seems ridiculous.
Companies can clearly optimizetheir operations using uh AI
(16:05):
models on their own data.
So we think that's beenunderappreciated.
Oracle started to highlightthat.
And so further momentum on AIcaused us to raise our target.
And to be fair, we actually hadindicated for most of the year
that the risk was to the upsideon our 6,600 target because of
AI.
SPEAKER_00 (16:25):
Yeah, and I uh so I want to cover it just a little
bit and ask you about a recentmilestone.
Uh, you launched the firstActive Preferred UCIT ETF.
Can you walk us through thesignificance of that launch and
what it means for investorsseeking income in today's uh
market?
SPEAKER_01 (16:39):
Well, so the um European markets behind the US
market.
So it's really an unleveredversion of PFSA, which is gonna
really not just the topperforming preferred stock ETF,
or let's call it a topperforming, but also one of the
top, if not the top, performingfixed income ETFs.
So it's really meant forEuropean investors to access
(17:04):
that great asset class where wehave expertise in managing it,
getting good yields, like around8%.
Uh and so it's uh an opportunityfor European investors who want
to use securities listed ontheir home exchanges to access
uh the preferred stock assetclass in an active form, which
(17:25):
they uh don't have any activefunds, actually, surprisingly,
in Europe.
SPEAKER_00 (17:30):
Can you walk us through?
I mean, with the the portfolioof ETFs uh that it has is is
vast and covers so many areas.
How do you see each of themplaying out?
Where do you think the bestopportunities are for investors,
right?
SPEAKER_01 (17:44):
Well, the first distinction that we always
emphasize is fixed income versusequity income.
So like sometimes people willwrite something online about
PFFA and say, well, it hasn'tkept up with the S P 500.
Well, it's done quite well,actually, but not as well as
(18:04):
that.
But it's fixed income.
So you get paid first.
So it's lower risk than themarket as a whole, about 0.5
beta, so 50% is risky.
Uh, but you're gonna get lowerreturns.
Um, so but if you want stableincome and less volatility,
maybe are drawing some out somecapital out of your uh
(18:24):
retirement accounts or yoursavings accounts or your
securities accounts.
And so you want some income, thecushion of downturns, it's great
to have fixed income.
And as I mentioned before,particularly higher yielding
fixed income because you getgood total long-term returns and
good current equity really uhsorry income.
(18:46):
And so that helps pay expenses.
So BNDS, PFFA are two of ourfixed income funds.
PFFR's a we preferred indexfunds.
So we have three, uh, well, nowfour.
We have the European UCIS, butfor US investors, three.
So but four fixed income ETFs,and then we have three income,
(19:07):
equity income ETFs.
So they're gonna be morevolatile, closer to the uh
market as a whole.
So ICAP's our large cap dividendfund, SCAP's our small cap
dividend fund, and AMCA isobviously energy related, and is
a good diversifier.
Like today, actually, themarket's pretty weak.
Um and um MLPs and energy areall up.
(19:29):
So it's a good uh way to balanceout your portfolio, get really
good income, not add a lot ofbeta, and not have a lot of
interest rate risk.
SPEAKER_00 (19:39):
I wanted to ask you about uh small cap, small caps
and ask cap in particular.
Where are we in this cycle?
I mean, we usually see from thelarge caps going down to mid
caps to small caps.
That hasn't fully happened.
With the rate cuts going whereyou think they're going to go in
the economy, um, you truckinghigher, where do we're where
will small caps fall into thestory?
SPEAKER_01 (20:00):
Well, we did think we're in early, the early days
of that rally.
It's been a very simple traintrade, rather, to not be in
small caps.
So, you know, if you're worriedabout a recession, you're
worried about higher rates,you're worried about the Fed,
international.
Small caps are fundamentally uhriskier companies.
(20:21):
They usually have a little bitlower credit rating, and there's
safety in having these verylarge companies.
Um so people have used largecap, particularly large cap tech
as a safe haven.
And they were the hedge fundsare probably shorting the small
cap index.
(20:42):
Now we think it's going to be amore balanced rally.
Not that tech won't outperformbecause it's far riskier than
the rest of the market, but youhave to risk adjust it.
So if small caps are up, youknow, 20% a year and tech's up
23%, will you actuallyoutperform the small caps
because tech stocks have marketsensitivity or beta of about 1.5
(21:05):
or two.
So they're 50 to 100% more riskythan markets.
Small caps are right on top ofthe market.
So if we get returns that areclose to tech, and now we've got
a lot of tech returns already,not small cap.
So we think that rotation willcontinue.
Small caps will work, not justthe end of this year, but next
year as we finish the reefcutting cycle.
(21:28):
So we do think they're timely.
We've been saying that theywould be timing timely when we
got visibility in the Fed.
And that's exactly whathappened.
We got that visibility earlythis month, really late last
month when Powell did hisJackson Hole speech.
That's really the moment thatsmall caps started to
outperform.
We think that'll continue.
(21:48):
They are really, reallyundervalued.
So we think that'll continue,you know, up and down,
obviously, throughout uh nextyear and so into the end of 26.
SPEAKER_00 (21:59):
Do you have any stop picks in the small caps race or
what are you liking?
SPEAKER_01 (22:03):
We have a total non-consensus pick.
That is a much hated uh netlease rate.
Used to be externally managed,it's not good because you have
misaligned interests, now it'sinternally managed, used to be
over levered, now it's not, gotupgraded to investment grade.
(22:24):
Still have that overhang of allthose bad years.
So we have an 11 target, it'strading in the low eights, and
you do get paid to weigh asyielding about 9%.
SPEAKER_00 (22:36):
Well, Dave, thanks so much for joining me again,
and thanks to everyone forlistening.
I'm Melanie Schaefer.
See you next time on Lead LikeLive.
It's been a very simple train trade, rather, to
not be in small caps.
So, you know, if you're worriedabout a recession, you worry
about higher rates, you'reworried about the Fed
international.
Small caps are fundamentally uhriskier companies.
They usually have a little bitlower credit rating, I'm your
(00:31):
host, Melanie Schaefer.
SPEAKER_00 (00:32):
Welcome to Lead Lag Live.
Now, the Federal Reserveannounced on September 17th that
it's lowering its benchmark rateby a quarter point, a move that
could finally bring some relieffrom the steep borrowing costs
that have been pressing onconsumers.
My guest today, Jay Hatfield,CEO of Infrastructure Capital
Advisors, has been calling forthis kind of cut.
(00:54):
And not just quietly.
He was recently quoted byPresident Donald Trump on Truth
Social for his sharp critique ofthe Fed's timing and its
reliance on outdated data,arguing that monetary policy
needs to be modernized.
Jay, thank you so much forjoining me today.
Thanks, Melanie.
It's great to be on.
(01:14):
So let me I just want to startthings right there.
You've been vocal about theFed's missteps.
Why did you make those commentsand where do you think the Fed
has gone wrong with itsapproach?
SPEAKER_01 (01:25):
This isn't the new sort of politically motivated
view.
We've we've had this view umvery stridently since the Fed
raised the money supply by 70%during the pandemic.
And then thought they could getaway with that, and so called
(01:46):
the inflation that was brewinguh transitory.
And we thought that was patentlyridiculous.
While they were saying it wastransitory, PPI was running
about 12% year over year.
The housing sector prices havegone up 20% uh year over year,
(02:07):
not just like one month, butover an entire year.
That's a obviously a predictorof rents.
And that gets to the one of thethree fundamental problems of
this Fed is that they use the uhBLS's calculation of shelter,
which is purposely delayed sixmonths, but really delayed more
(02:30):
like two years.
They use their 1970s stylesurveys and the mail and on the
phone, and they do renewingleases.
They purposely delayed sixmonths, which is just
inexplicable.
And one reason maybe the BLS hadgot fired.
But so they've they were relyingon that data, but if they looked
at leading indicators, eithermarket rents were also starting
(02:54):
to rise rapidly, not theirtwo-year delayed index, and also
housing prices, they would haverecognized that.
And now we're on the flip sideof that where housing's coming
way down, hasn't showed up inthe index.
Um, so that was that's one oftheir three fundamental flaws.
Uh, we did expect, though, forthem to cut, and that is they're
(03:14):
mostly labor economists.
And so they really are focusedon the labor market, and we did
think it was going to weaken.
And in fact, we had the oppositereaction that the president did
to the BLS failure, is thatwe've said, well, finally
they're figuring out that thelabor market is weakening.
SPEAKER_00 (03:34):
Yeah.
And so to just carry on fromthat, why do you why do you
regard the monetary base as acritical leading indicator?
And how does that inform or howwill it inform your forward
views on these?
SPEAKER_01 (03:45):
Well, most people tend to ignore it, which is a
terrible idea.
Specifically, the Fed causes alleconomic cycles.
They've caused 13 out of 13post-World War II recessions.
I'm accepting the pandemic asthe uh um caused by the federal
(04:06):
government, so that's not reallyrelevant.
So 13 out of 13 recessionscaused by a tightening of
monetary policy.
And 12 out of 13 of thoserecessions were precipitated by
decline in housing.
Another exception that provesthe rule is that um in 2001,
(04:28):
there was actually rates startedto drop because of retirement
boom.
Housing did okay, but techactually absolutely crashed.
It's kind of the reverse ofwhat's going on today.
So if you want to call theeconomic cycle, first you look
at the Fed.
The Fed only controls themonetary base, so it should
focus on that.
That's if they increase it toofast, it'll cause inflation.
(04:52):
Right now it's flat, so it couldcause a recession.
The only reason we're not inrecession, two of the four major
categories of investment are inrecession, so construction and
housing, but the tech relatedare very strong.
So IP and equipment.
So that's why we have slowgrowth, but no recession.
But now it's great that theFed's cutting rates.
(05:13):
We're projecting 3% growth nextyear as mortgage rates can come
down.
They've already come down.
And um, the housing market'sstarting to recover.
We had strong new home sales, sopossibly in anticipation of
lower mortgage rates.
So we're very bullish about themarket because of the Fed.
(05:34):
We have a 7,000 target this yearand a 7,700 target for the end
of uh 26.
SPEAKER_00 (05:42):
So, yeah, given that context, then how should how
should investors position theirportfolios to benefit in this
sort of environment?
SPEAKER_01 (05:49):
Well, we think that definitely it's better to be
with regard to fixed income.
You know, I think everybodyshould have at least some fixed
income in their portfolio.
But you don't need to have likethe most conservative fixed
income.
You can have high yield bondsand preferred, you know, our
funds are BNDS, is our highyield bond fund, PFFF, PFFA,
(06:12):
sorry, is our flagship,preferred stock fund, both yield
well over eight, eight, andnine, basically BNDS eight, PFFA
nine.
So there you get equity likereturns, but you do uh get paid
first.
So you get the benefits of fixedincome, lower volatility in the
stock market.
So as rates come down, you getkind of a double pop.
(06:34):
You should get uh, you know, thespreads will tighten because the
stock market is doing prettywell.
And of course, the treasury'srallying.
So those two factors aid in onthe fixed income side.
Um, so we do think that thoseare timely and they have been
doing really well since the Fed,really since Powell signaled
(06:55):
that they were going to cut.
SPEAKER_00 (06:56):
And so to follow up from that, Jay, what strategies
or tilts are you favoring?
SPEAKER_01 (07:00):
So, in terms of equities and sectors, we do
think small caps will do well.
They haven't done well at all.
And they, in fact, they we hadpredicted that when the Fed
started cutting rates, theywould do well.
So they're typicallyoutperforming in most on most
days because people areanticipating those rate cuts.
(07:20):
Um, higher risk um securitieslike financials.
So if you look at ICAPs, ourlarge cap um dividend fund, we
have a lot of financials there.
We do have a little bit of tech,nowhere near as much, about 10%
tech.
Um, so there's some greatcompanies there, um,
industrials.
(07:40):
So we'd be a little more out onthe risk curve, not in drugs,
not in consumer staples.
Uh so if if we're right aboutthe market being bull market,
you want to be in higher risksecurities.
SCAP is our small cap uhdividend fund that's like I said
(08:01):
has been performing well in thistype of market.
SPEAKER_00 (08:03):
Yeah, and Jay, on the fixed income side, where do
you see the 10-year treasurytrading over the next uh 12 to
24 months and how will thatimpact fixed income allocations?
SPEAKER_01 (08:13):
Well, we've been um bullish on bonds and correct.
I would guess I'd say as usual.
Uh we've been had reallyaccurate forecasting since the
pandemic, uh, again, becausewe've looked at the money
supply.
So we've been forecasting 375,sorry, 350 to 4 on the 10 year.
(08:36):
And a lot of times we areforecasting that when the 10
year was at 480 as well.
So um now we're about 410.
Uh basically the tenure is goingto trade about 100 base points
over, 1% over the expectedterminal rate of Fed funds right
now.
The last SCP, the terminal ratewas about 310.
(08:59):
That's exactly where Fed fundfeatures are.
So to get below four, and wethink that'll probably happen.
We need to have a little bitmore dovish Fed.
We do think the labor market'sgoing to continue to weaken.
We think inflation isattenuating, even though it
doesn't necessarily always showup in the data.
Tariffs haven't been thatsignificant, but they are one
(09:21):
time.
So we think the Fed will becomeincrementally dovish.
That terminal rate will go belowfour, and the treasury will go
below four.
And as I mentioned, that'sreally a tailwind for all
securities.
We have a 23 multiple both thisyear and next year on our
target.
It's implicit in our target.
(09:41):
So, in other words, our targetthis year is 305 times 23.
That gives you 7,000.
Next year it's 355 uh times 23.
But to justify a 23 multiple,you really need to be have rates
at 4% or area of 4% or lower.
Uh, because multiple, every 25base points of uh yield on the
(10:05):
10-year is theoretically equalto one SP multiple.
So our bullish target is basedon lower rates.
Um, we're in the rate zip code,but it would be more attractive
if we did get below four tosupport that 23 multiple.
The other element is, of course,you've seen it um in recent
(10:28):
earnings report from Oracle,Broadcom, very strong momentum
in um AI.
So a higher growth rate islikely, and that also supports a
higher multiple.
But rates are a key tailwind.
It's really markets taking offeven in September, which it
(10:49):
normally does terribly inSeptember.
And that's really because ofthis expectations of Fed rate
hikes or cuts, rather.
And that means the cycle's over,and that means that the risk of
recession is dropping to closeto zero.
SPEAKER_00 (11:04):
Yeah, and you mentioned AI.
That's sort of what I wanted toget into next, with AI data
centers and cloud growth drivinguh demand for energy and
infrastructure.
Where do you see opportunity forthe energy companies?
And do you believe MLPs are setto benefit?
SPEAKER_01 (11:19):
Definitely.
The I think some of thederivative plays, just some of
the power companies are prettyuh fairly valued or even
overvalued, few utilities.
But nobody's really thoughtabout um MLPs as a beneficiary
of AI.
But the companies, particularlythe ones that we have invested
(11:39):
in AMZA, are natural gasfocused.
And there's two growth storiesfor natural gas.
One is if you're gonna producesubstantially more electricity,
you need natural gas.
We're gonna have something, somegrowth in renewables, but you're
gonna need natural gas.
Nuclear is too far away rightnow.
So that's a big growth area.
(12:01):
And these big pipeline companieslike Williams, KMI, UPD, energy
transfer have big natural gaspipelines.
They're shipping that gas topower plants to be converted
into electricity.
They're also shipping that gasto the Gulf, which is then being
exported overseas.
And then those countries areusing that natural gas to burn
(12:25):
for their own electricity needs.
They don't have as many datacenters, but they do have some.
So there's a huge growth storythere.
Hasn't become overvalued.
Still, you can get 7% yield,seven, eight yields in the same
yields right around eight rightnow.
So you can get attractiveyields, good growth prospects,
but it's not overdone like someAI stocks are arguably way
(12:49):
overvalued, but MLPs are not.
We like LNG.
Um, it's a um export, theyexport Shaneer, they export
natural gas.
Um, they have uh two greatfacilities that they're
expanding.
So we like Shaneer.
(13:10):
Um in our large cap dividendfund, we do like Marvell.
They're doing well today.
It's one of our bigger holdings.
They're we think really under,unlike a lot of AS stocks that
are fully or even overvalued.
We think Marvell's undervalued.
So that's been a big contributorin ICAP.
We've had Goldman Sachs, we'vebeen recommending that since it
was at 500.
(13:31):
It's now eight out of 800, it'sgetting a little bit closer to
fair value, maybe an 850 targeton it, but benefiting from the
AI boom uh uh through IPOs andalso increase in merger
activity, which is coming fromderegulation of the merger
market.
Uh, we also like Morgan Stanley.
(13:51):
So there's a lot of good, um,these are all higher uh beta
picks, except for LNG.
So we do think it's okay to beout the on the risk curve for
these companies that areindirectly benefiting from AI.
SPEAKER_00 (14:06):
And uh uh Jay, zooming out a little bit, uh you
just updated your S P 500targets for 2026.
What analysis led you to thatadjustment and what's your
roadmap for getting there?
SPEAKER_01 (14:17):
Well, we try to keep it pretty simple.
If you follow Southsideresearch, so these are the big
investment banks, they're veryskittish.
A lot of them lowered theirtarget when the tariff tantrum
happened.
We thought the tariff reactionwas over blonde, and we were
correct.
(14:37):
So we kept our 6,600 target umall throughout that decline.
So that was the rightpositioning because it was a
huge buying opportunity.
And then we recently, just inthe last two weeks, upgraded it.
And it's really, for the reasonswe described, lower rates.
So we finally actually got lowerrates versus us just projecting
(14:59):
lower rates.
And the AI boom got further, hadfurther evidence presented,
particularly by Oracle.
There's been a lot of criticismof AI that it's, oh, it's just,
you know, checking to see howyour barbecue can be fixed, you
know, talking to Chat GPT.
(15:21):
But what Oracle demonstrates isthat major corporations need to
use AI on their own data.
So they're not going to just useChat GPT, they're gonna form
their own LLM on their own databecause they don't want to share
their data, and that's going toinform the decisions about all
aspects of their business on thecustomer side, on the
(15:43):
manufacturing side, logistics,even HR.
So there's a huge growthopportunity, and the whole
notion it's not going to be theROIs are not going to be good is
not seems ridiculous.
Companies can clearly optimizetheir operations using uh AI
(16:05):
models on their own data.
So we think that's beenunderappreciated.
Oracle started to highlightthat.
And so further momentum on AIcaused us to raise our target.
And to be fair, we actually hadindicated for most of the year
that the risk was to the upsideon our 6,600 target because of
AI.
SPEAKER_00 (16:25):
Yeah, and I uh so I want to cover it just a little
bit and ask you about a recentmilestone.
Uh, you launched the firstActive Preferred UCIT ETF.
Can you walk us through thesignificance of that launch and
what it means for investorsseeking income in today's uh
market?
SPEAKER_01 (16:39):
Well, so the um European markets behind the US
market.
So it's really an unleveredversion of PFSA, which is gonna
really not just the topperforming preferred stock ETF,
or let's call it a topperforming, but also one of the
top, if not the top, performingfixed income ETFs.
So it's really meant forEuropean investors to access
(17:04):
that great asset class where wehave expertise in managing it,
getting good yields, like around8%.
Uh and so it's uh an opportunityfor European investors who want
to use securities listed ontheir home exchanges to access
uh the preferred stock assetclass in an active form, which
(17:25):
they uh don't have any activefunds, actually, surprisingly,
in Europe.
SPEAKER_00 (17:30):
Can you walk us through?
I mean, with the the portfolioof ETFs uh that it has is is
vast and covers so many areas.
How do you see each of themplaying out?
Where do you think the bestopportunities are for investors,
right?
SPEAKER_01 (17:44):
Well, the first distinction that we always
emphasize is fixed income versusequity income.
So like sometimes people willwrite something online about
PFFA and say, well, it hasn'tkept up with the S P 500.
Well, it's done quite well,actually, but not as well as
(18:04):
that.
But it's fixed income.
So you get paid first.
So it's lower risk than themarket as a whole, about 0.5
beta, so 50% is risky.
Uh, but you're gonna get lowerreturns.
Um, so but if you want stableincome and less volatility,
maybe are drawing some out somecapital out of your uh
(18:24):
retirement accounts or yoursavings accounts or your
securities accounts.
And so you want some income, thecushion of downturns, it's great
to have fixed income.
And as I mentioned before,particularly higher yielding
fixed income because you getgood total long-term returns and
good current equity really uhsorry income.
(18:46):
And so that helps pay expenses.
So BNDS, PFFA are two of ourfixed income funds.
PFFR's a we preferred indexfunds.
So we have three, uh, well, nowfour.
We have the European UCIS, butfor US investors, three.
So but four fixed income ETFs,and then we have three income,
(19:07):
equity income ETFs.
So they're gonna be morevolatile, closer to the uh
market as a whole.
So ICAP's our large cap dividendfund, SCAP's our small cap
dividend fund, and AMCA isobviously energy related, and is
a good diversifier.
Like today, actually, themarket's pretty weak.
Um and um MLPs and energy areall up.
(19:29):
So it's a good uh way to balanceout your portfolio, get really
good income, not add a lot ofbeta, and not have a lot of
interest rate risk.
SPEAKER_00 (19:39):
I wanted to ask you about uh small cap, small caps
and ask cap in particular.
Where are we in this cycle?
I mean, we usually see from thelarge caps going down to mid
caps to small caps.
That hasn't fully happened.
With the rate cuts going whereyou think they're going to go in
the economy, um, you truckinghigher, where do we're where
will small caps fall into thestory?
SPEAKER_01 (20:00):
Well, we did think we're in early, the early days
of that rally.
It's been a very simple traintrade, rather, to not be in
small caps.
So, you know, if you're worriedabout a recession, you're
worried about higher rates,you're worried about the Fed,
international.
Small caps are fundamentally uhriskier companies.
(20:21):
They usually have a little bitlower credit rating, and there's
safety in having these verylarge companies.
Um so people have used largecap, particularly large cap tech
as a safe haven.
And they were the hedge fundsare probably shorting the small
cap index.
(20:42):
Now we think it's going to be amore balanced rally.
Not that tech won't outperformbecause it's far riskier than
the rest of the market, but youhave to risk adjust it.
So if small caps are up, youknow, 20% a year and tech's up
23%, will you actuallyoutperform the small caps
because tech stocks have marketsensitivity or beta of about 1.5
(21:05):
or two.
So they're 50 to 100% more riskythan markets.
Small caps are right on top ofthe market.
So if we get returns that areclose to tech, and now we've got
a lot of tech returns already,not small cap.
So we think that rotation willcontinue.
Small caps will work, not justthe end of this year, but next
year as we finish the reefcutting cycle.
(21:28):
So we do think they're timely.
We've been saying that theywould be timing timely when we
got visibility in the Fed.
And that's exactly whathappened.
We got that visibility earlythis month, really late last
month when Powell did hisJackson Hole speech.
That's really the moment thatsmall caps started to
outperform.
We think that'll continue.
(21:48):
They are really, reallyundervalued.
So we think that'll continue,you know, up and down,
obviously, throughout uh nextyear and so into the end of 26.
SPEAKER_00 (21:59):
Do you have any stop picks in the small caps race or
what are you liking?
SPEAKER_01 (22:03):
We have a total non-consensus pick.
That is a much hated uh netlease rate.
Used to be externally managed,it's not good because you have
misaligned interests, now it'sinternally managed, used to be
over levered, now it's not, gotupgraded to investment grade.
(22:24):
Still have that overhang of allthose bad years.
So we have an 11 target, it'strading in the low eights, and
you do get paid to weigh asyielding about 9%.
SPEAKER_00 (22:36):
Well, Dave, thanks so much for joining me again,
and thanks to everyone forlistening.
I'm Melanie Schaefer.
See you next time on Lead LikeLive.
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