October 16, 2025 • 42 mins
In this Lead Lag Live webinar, Michael Gayed sits down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to break down the current macro landscape, why inflation fears may be overblown, and where the biggest investment opportunities lie as we enter a new market phase.
Topics Covered:
Why small caps could surge as rate cuts begin
The truth about inflation, the BLS data lag, and money supply
Outlook for the bond market, preferreds, and high-yield credit
How active management can outperform in a cutting cycle
Why “bubbles” might actually be good for investors
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:10):
If you are here for the C credits, I will uh email
you at the end of this webinarto get your information, submit
it to the CFP board.
So just stay tuned for that.
Just the trickyest folks you gotto stay to the end of the
presentation.
And I promise you it's gonna bewell worth it.
If you're an advisor and youhappen to be in a physical
office right now, do me a favorand please tell your fellow
colleagues, your fellow advisorsto tune in and watch and
(00:31):
register and attend thiswebinar.
We'll do a live QA towards theend.
I think a lot of interestinginsights here when it comes to
the rest of the year and how tothink about uh some of these big
shifts that are taking placebeneath the surface, because
believe it or not, it's morethan just a tech story now.
Uh a lot of other areas of themarketplace are starting to wake
up, uh, value, particularlysmall cap in particular.
And Jay uh is particularlyexcited for that.
(00:52):
So with that said, my name isMichael Guy.
This conversation, this webinaris sponsored by Infrastructure
Capital.
Jay, all you are, my friend, andagain, appreciate those that are
here.
SPEAKER_00 (01:00):
Great.
Thanks, Michael.
It's great to be on.
As many of you know, we thinkit's always critical to spend
time on the macro situation.
And the reason for that isMichael already alluded to it,
which is that um if you don'tget the macro right, you're not
(01:21):
gonna get in the micro or theinvesting right.
And um, so we'll spend some timeon that because you know,
particularly the Fed does reallydrive a lot of these rotations.
Uh, in other words, the reasonsmall caps are working is that
you want to own small caps whenyou're coming out of a
(01:43):
tightening cycle.
And right now we are, and that'swhy they're starting to work.
Everybody saying, Oh, well, I'vebeen out of small caps for so
long and it's worked, and I'lljust stay out of them and
they're low quality or somethinglike that.
But they're ignoring the factthat we're in this cutting
cycle, uh, and we'll get into uhour views on the on um the
(02:07):
economy and stock market, bondmarket.
And we have been extraordinarilyaccurate historically and this
year, including this year.
Uh, we had said early in theyear that the Fed would cut
three times, even though they'remaking noises that fit like they
wouldn't.
But we had expected the uh labormarket to weaken.
(02:32):
And we also were disappointed inthe BLS, but for a couple of
different reasons than thepresident.
We thought that the labor markethad already weakened, and they
took forever to figure that outand finally report that.
Whereas you could see if you useleading indicators, which the
(02:52):
Fed never does, like continuingclaims, you could have seen the
weakness or the weakness inhousing is also a leading
indicator.
Of course, the Fed ignored that,but finally they're figuring
that out.
That's why, by the way, we'renot concerned about the
shutdown.
We actually think it's a milepositive because the BLS puts
out really inaccurateinformation about both CPI and
(03:18):
the labor market.
And right now the Fed is ontrack to cut rates.
So to the extent they're in aninformation vacuum and
continuing to cut rates, that'sfine.
But it's important to knowbecause we get questions on
webinars like this well, whathappens if inflation
accelerates?
(03:38):
But what that question misses isinflation doesn't magically
accelerate.
It accelerates from really justone source, which is excessive
money supply growth.
Um, and that's what we hadduring the pandemic, obviously.
It can um be sourced from hugeincreases in energy prices, but
(04:01):
that almost never happens,except in the 70s.
We had wage and price controls,so U.S.
production collapsed.
It's probably not gonna happenagain.
So we're optimistic aboutinflation because the money
supplies dropping.
We also have the third boathere.
Uh, we calculate CPI-R, um,which is real-time inflation.
(04:24):
So the BLS purposefully delaysinexplicably their updating of
the shelter component by sixmonths, and then they use
renewing rents, which alsosubstantially delays uh the
reflection in the marketplace.
So we use Zillow and apartmentlist, come up with our own CPI,
(04:51):
real time, and also PCE.
Both of those, well, PCE realtime is around two, slightly
below two.
CPI dash R is uh 1.2.
So inflation's alreadycontained.
Um we don't think we're gonnahave recession because really
(05:11):
the only two things you need toknow to follow both inflation
and GDP is um in terms of thecycles.
Monetary policy, so it's beenvery tight.
The um housing markets startedto weaken, but the only key
financial condition that mattersis the 30-year mortgage rate.
(05:33):
It's gone from well over sevendown to about 630 in
anticipation of Fed rate cuts.
The terminal rate determines the10-year.
It's usually about 100 over.
That's extract exactly on top ofthat.
So that's driven uh 30-yearmortgages down.
If the Fed keeps cutting,housing should recover, should
(05:56):
have 3% growth.
And um a couple of other justmisconceptions.
The recent OBBBA was not abudget buster.
That's a political talkingpoint.
It was a budget buster if youlooked back eight years ago when
it was passed, but we've alreadyadjusted to that.
(06:18):
It was a mild, had a little bitof cut to the budget projection
relative to current law, but notsignificant.
And a little bit of a middleclass tax cut, if at least if
you give chips and overtime andcollect Social Security.
But so, of course, everybodydistorts that because they want
to use the same talking pointsthey did in 2017.
(06:42):
But uh even the CBO wasprojecting 1.9 trillion this
year, 1.7 next year.
But if you include tariffs,that's the last point here, um,
we're projecting 1.3 trillion.
And there's a lot of Trumpadministration policies that are
actually do reduce the deficit.
So we could even do better thanthat.
(07:04):
We'll see how it unfolds.
But if the economy's stronger,tariffs continue to bring in
revenue, then we're veryoptimistic about the budget
deficit.
Um, it is important.
So we raised our target recentlyfrom 6,600 to 7,000.
That's 23 times.
We think that's sustainable.
(07:24):
As long as the 10 yearssomewhere around four, corporate
tax rates don't go up, everybodyforgets that when they reduce
the corporate tax rate, thatincreased the long-term
sustainable multiple of the SP.
So if somebody says, well, 23times is super high over the
(07:45):
last 30 years, what you shouldsay to them is, well, what about
the last eight years?
Because that's when we had thosecorporate task cuts.
Of course, a lot of those eightyears were distorted by the
pandemic.
So we don't really have gooddata.
But we think 23 is sustainableand for this year and next year.
So if you take, and again, whenyou do uh price targets for year
(08:10):
end, you have to look at nextyear's SB earnings.
So next year's earnings wereestimated, or which is in line
with consensus 305.
The following year is about 335.
So if you just take 23 times,you get 7,700.
Both of these points arecritical because you do have a
(08:30):
lot of uh billionaires out theresaying, oh, we're in a bubble
and should get out of themarket.
But I'd say two things aboutthat.
We do think we're in a bubble.
We think it's great that we'rein a bubble, and we think it's
gonna burst in about five years.
So if you want to get out nowand listen, miss out on five
years' returns, um, that'sprobably not a good idea.
(08:54):
And the other thing I'd pointout is uh we did a regression on
the net worth of uh ofindividuals who make predictions
relative to the accuracy oftheir predictions.
And it was 100% negativelycorrelated.
So the higher their net worth,so if they were worth 50
(09:15):
billion, their their opinionswere worth virtually worthless.
And I don't know about beinghomeless, but people have to
earn a living, actually have tomake reasonable projections.
So um we do think it's it'sactually economic now bubbles.
So as stock prices rise, whichmost of the companies we follow,
not Palantir, but Pro Tesla, butBroadcom, et cetera, the MAG8,
(09:40):
if you will, ex Tesla, arereasonably priced.
They probably will becomeunreasonably priced.
Um, then there'll be just a tonof IPOs, flood of IPOs.
But you probably won't actuallyget the bubble to burst until
the Fed becomes too loose, whichthey're nowhere near right now,
money supply grows fast, you getincreased inflation, and Fed
(10:04):
tightens.
So keep in mind the 2001 bubbleburst because the Fed tightened.
And tech drove the market, uh,the wheel, the GDP lower.
So don't get scared out bynervous billionaires.
They're always nervous.
It's easy to be nervous if youhave 500 million in cash.
Um, here's a uh a couple of uhdetailed points on the economy,
(10:28):
and you can get these on ourwebsite.
But you should watch housingstarts.
We call it the Hopfield rule.
You might have heard the Psalmrule is about unemployment, but
this is a leading indicator,that's a lagging indicator.
So housing's caused 12 out of 13post-World War II recessions.
You can see in the 2001recession, housing dipped just
(10:53):
slightly, but overall wasincreasing.
And that's because that was atech bursting of the tech
bubble, and global rates werecoming down as the retirement
boom started.
So that's the one exception.
But otherwise, watch housing.
The Fed was playing with fire.
You can see starts weredeclining.
But the point also of this slideis see how these peaks here
(11:18):
were, you know, during the 70s.
I remember this housing boomvaguely.
It's not that old, but and thenyou had the boom, of course,
before the great financialcrisis.
So starts got almost to 2.5million.
But even during this recent boomwhen the Fed lowered rates
(11:38):
dramatically, we didn't getanywhere near there.
So then the decline is moremuted.
There's fewer layoffs, fewerchange, uh, less change in
economic activity.
So that's why, even though wewent through a Fed tighten
cycle, we had a slowdown in theold economy, a boom in the new
(11:59):
economy, and no recession.
We would have had a recessionthough if the Fed didn't
capitulate, but finally theyhave capitulated.
And then this is great data, youwon't get anywhere else here.
So the other uh slide that's umwe should put in here too is
that investment is what causesall recessions, not the
(12:22):
consumer.
Consumers two-thirds of theeconomy, but very um not
volatile at all.
It's not that sector's notvolatile.
Investment's very volatile.
So you can see here what I wastalking about down at the
bottom, last 12 months,structures have dropped top
percent, so they're inrecession.
(12:44):
Residential dropped 0.2, sothat's sector's in recession,
but IP products, tech andequipment, which mostly like
semiconductor related, and alsoum data centers, power is doing
quite well.
So we've had sluggish um growthor modest growth, really, in
(13:07):
investment overall, ignoringinventories are volatile.
And so that's accounts for theslowdown in the economy, but not
actual recession.
So you can see here this is oneway to look at it.
Every recession was precipitatedby a drop in investment in 2000.
(13:27):
Um we need to make these datamore clear.
It's unclear what the actualyear is, but you can the big
drop in investment at the turnof the century was in in tech,
not in housing.
But every other one is inhousing.
It's just a graphic example thatour index of inflation leads,
(13:52):
what the Fed follows, and theBLS put which the BLS puts out.
So inflation's alreadycontained.
If you're in inflation, fearinginflation, you should not.
Eventually, CPI-eu will comedown to R when the BLS finally,
when their data set finallycatches up to reality.
(14:15):
Uh, we are still getting globalrate cuts.
Most of them happened,particularly in the Eurozone.
Still have 100 left in the US,very bullish time to invest.
That's the part of our bullcase.
Fed loosening AI, easy to getalong this market.
We've been correct so far.
If people tell you, oh, thebudget deficit rates are going
(14:35):
to infinity.
Um, budget deficit's not the keydeterminant of the 10-year.
10-year trades, 100 over Fedfunds.
When we're inverted, it's really100 over the terminal rate of
Fed funds, which is roughly 310right now.
So 10 years probably gonna stallaround 410.
(14:58):
Um, and that'll be pretty staticunless there's a change of the
Fed, um, which I don't thinkthat'll happen.
We of course we'll get a new Fedchairman next year.
So inevitably we're gonna getthose cuts.
It's bullish for the bondmarket, bullish for stock
market, bullish for particularlyfor preferreds, you know, our
funds, PFFA there, BNDS on thebond side.
(15:21):
So we're bullish on rates, butas I pointed out before, it's
critical that we're right aboutrates because you cannot justify
a 23 multiple if rates are atfive.
Every 25 basis points in ourmodel costs you an SP uh
multiple.
So if we're at five, then thethe equilibrium rate, I'm sorry,
(15:43):
multiple would be 18.
So rates have to be contained tojustify 23.
Just more data to validate, justuse 100 over.
Um, if you want to predictlong-term rates over Fed funds,
Fed funds usually trade 75 overinflation, inflation's tracking
right around to not just by ourindex, but also if you take the
(16:07):
six-month running inflation,it's also below two in all
categories, PPI, CPI, PC.
So inflation is not a problem.
If there is more inflation fromtariffs, it should be ignored.
Not, I recognize that nobodywants to pay tariffs, um, but it
should be ignored for thepurposes of making monetary
(16:28):
policy.
It's unpopular, good for thebudget deficit, very unpopular.
So the base is shrinking.
It's a great indicator ofinflation.
If the Fed uh was mildlycompetent, which they're not,
when this big spike in the moneysupply would have concerned
them.
Um, it concerned us massively.
Um, and then they finallytightened rates and you know got
(16:52):
the money supply down.
Um, but Milton Friedman's theoryof inflation, which is excess
money supply growth createsinflation, worked perfectly.
It was the perfect experiment.
So the Keynesian model, PhelpsKerb, blew up, inflation was
22%, money supply grew 60%, andnominal GDP grew 38%.
(17:15):
So excessive money supply growthwill keep create inflation.
When everything's really low,it's hard to grieve that.
The Fed did this almost like acontrolled experiment, worked
perfectly.
If Nolan Friedman was stillalive, he'd be dancing in the
streets.
Nobody seems to care, but youshould if you want to accurately
(17:36):
predict the economy.
Uh, U.S.
rates are high relative to therest of the world.
So don't get too worried.
We don't think they're going tocome down a ton, but it's a
global bond market.
So these other lower rates dohelp keep U.S.
rates down.
Natural gas continues to be agrowth sector because we have
(17:57):
the cheapest natural gas in theworld.
Benefits our fund AMCA thatholds a lot of natural gas
transportation companies.
Uh, we're going to talk a littlebit about more about our funds
before we open up for questions.
So BMDS is our high-yield bondfund, invest in asset-intensive
companies, uh, which we thinkare better credits than the
(18:19):
average credit.
Um, the the yield's 8%.
This is the SEC yield, but itactually distribution yield is
eight.
Should drift up over time toeight this SEC yield.
And um, well, actually, that'sthe index and not our fund.
So that's why it's seven and noteight.
We do think active managementmakes sense for fixed income,
(18:41):
particularly, because um, ofcourse, you want to avoid bad
credits, you want to limitinterest rate risk in good total
returns.
But the higher risk fixed incomeis where you want to be if we're
close to correct about the stockmarket.
So when stock market's risingand rates are dropping or lease
statement stable, high yield andpreferreds will significantly
(19:06):
outperform investment gradebonds.
And you've seen that so far thisyear.
And we expect that to continue.
Um, one great thing about highyield bonds is they're less
volatile than other assetclasses in the fixed income sun.
So your uh return is quite highrelative to the volatility.
(19:27):
So if you're one, probably someof you on PFFAs, our flagship
fund has a great total return,great yield, but there's a
little more volatile than BNDS.
So BNDS is a good alternative.
Um, it also has more lessfavorable tax treatments.
It's good for an IRA.
(19:47):
You do we'll pay close to fulltax if you're having a taxable
account.
PFSA is more like low 20s and aneffective tax rate.
Um, we talked about thisalready.
Um, current yields, um, you cansee high yield as much is the
highest.
Senior loans are high now, buttheir floating rates are gonna
(20:10):
come down.
Um, so these are just thereturns.
And you can see that uh highyield has led uh so far over the
last 10 years.
Just if you're sort of if you'retaking more risk and get more
return.
This is actually a slide aboutum preferred stocks because
they're more inefficient thanhigh yield bonds.
(20:32):
High yield bonds are moreinstitutional, preferred stocks
are more retail.
71% of uh institutionalpreferreds are index funds.
So here's an example that whathappens is the big index funds
rebalance every month.
So if they include a securitylike this one we have graphed
(20:54):
here, you can see there's thisenormous spike in the price
because they quickly buy it atthe end of the month,
irrespective of price, bid itway up, and then it comes down
to normal, more normal levels.
And so we were able to takeadvantage of we sold all of our
position at high prices and thenbought a little bit back when it
(21:18):
came down.
So index funds are not good forfixed income, create
opportunities for us, and that'swhy PFFA is outperformed since
we launched it seven years ago.
Um, now just talking about someof our other funds, um ICAP is a
large cap dividend fund.
(21:39):
As I mentioned, um it's morechallenging with equities to add
alpha.
So what we do with uh large capdividend stocks is we not only
pick stocks, we do run lowleverage, about 20%, enhance the
yield with preferreds, and thenwe write uh individual call
(22:06):
options on stocks where we havea gain where we think they're
close to full valuation, and wewrite it very short term.
The reason I point all that outis there's big call writing
funds like Jeppy that writes thewhole portfolio.
And you'll notice that theysignificantly outperform,
(22:27):
underperform, sorry, during bullmarkets like this year.
So we don't believe in that.
We believe in very short-term uhusing HI and your judgment,
human intelligence, and we thinkyou can add a ton of alpha.
We, of course, always want toadd alpha by stock picking.
(22:48):
We look at relative valuation,but the short-term call writing
is very powerful and adds alittle bit of income.
What we don't believe is havingall of your income come from
options, particularly indexoptions.
So we think our strategy isbetter.
We have substantial SEC yield,in other words, cash yield, like
six, and about two coming fromoptions.
(23:11):
So ICAP has performed reallywell.
We think it'll continue to dowell because of that strategy of
not just picking great stocks,but also providing short-term
call options.
Um, you can see here thatdividend stocks in the long run
have outperformed.
Um, obviously, tech stocks havedone better recently.
(23:35):
But we do think there'll be arotation, as Michael was
indicating, to come out of thiscycle.
Um tech stocks were actually notjust AI for a long time, but
also just viewed as beingdefensive.
So when we're in a Fedtightening cycle, great to be
tech stocks.
We think, at least on arisk-adjusted basis, large cap
dividend stocks will performwell.
(23:56):
And in fact, uh ICAP is doeshave competitive returns, a
little bit lower, but with uh SPthis year.
And you know, we what we do topick the stocks is we use uh a
GARP valuation frame for work.
So in other words, we look atthe valuation P ratio to growth
(24:19):
plus the yield.
You need to keep the yield inmind.
Um that's really how we pick thestocks.
And we try to um, or not eventry, but we deliver monthly
income.
We've been able to grow thatincome.
And we do have substantialyields, so we do like stocks
that pay significant dividends,um, so that we're not just using
(24:43):
options to deliver income.
You can look this up on ourwebsite.
Performance has been strong,it's well diversified.
We do think financials do well,so we have a lot of financials
right now.
Um small caps, controversial.
There's a lot ofmisunderstanding about call
small caps.
(25:03):
A lot of people think that theseare just over-levered companies
and they're paying too much withall short-term debt, and they're
paying too much, and that's whythey're gonna benefit.
It's not the key dynamic.
They're essentially the sameleverage, essentially have the
same amount of floating.
You know, they can always swaptheir floating rate debt.
(25:24):
So you have to take analyzethat.
It's not the key dynamic.
Key dynamic is there are morevalue sectors, less tech.
The IWM or Russell 2000 is onlyabout 10% tech.
SP is 40.
So if we get a rotation out oftech, small caps will do well.
Um a lot of the riskiermoney-losing companies are doing
(25:46):
well.
Uh, we don't have those in SCAP,um, but we are substantially
outperforming the other indicesthat track the money-making
companies like IJR.
Um, we don't believe ininvesting in money-losing
companies.
You're basically doing um publicventure capital.
(26:08):
You want to be a venturecapitalist?
It's a great business, should doit full-time, go sit on the
boards.
Um, make sure that you have drypowder to give to those
companies.
Doing it in public form, wethink is a mistake.
Um, the biggest holding of theIWN, which is allegedly the
(26:29):
value index for the Russell, isOckla, which is projected, it's
a nuclear company, no operatingassets right now, and it's
projected to lose money for thenext five years.
Not to say you shouldn'tpotentially, if you want to
gamble on that, fine, it isgambling.
(26:50):
But we believe in moresustainable, profitable
companies, trading at reasonablemultiples, paying dividends.
You're taking enough risk insmall caps, you don't need these
money-losing venture companiesthat are publicly traded.
Um, same screening methodology.
(27:10):
We're looking for yield, we'relooking for it has to be
profitable.
And we do write a small amount,so we have substantial income.
We also have preferred using lowleverage that enhances the cash
income.
I think it's about five SECyield for SCAP.
And then we target 2% writing asmall amount of index calls,
(27:33):
usually about 30% of theportfolio.
Um, we have a small amount ofIWM, so we're writing IWM calls.
We don't believe in writingindividual small cap options.
First of all, there's noweeklies, so you have to do
longer term.
That caps your upside in bigmarket rallies like we've had
(27:54):
this year.
And also small caps tend to bepretty digital.
They get acquired often, theybeat earnings, they can be up 20
or 30 percent.
Large caps, every once in awhile that happens, like AMD.
It's not in any of our funds,but was up like 25%.
But normally they don't go uplike that.
So it's a better asset class towrite on large cap individual
(28:18):
than small caps.
So we write index calls that'sworked really well.
Should look the returns up, butwe've beaten the our computing
indices quite substantially ifyou verify that though.
Um, and small cap value is donereally well in the long run,
notwithstanding recent returns.
So don't ignore the asset classfees are lower by sector.
(28:41):
So we have it laid out here bysector, because you know,
everything gets distorted bytech.
So small caps are cheaper acrossthe sector.
So we do think they'lloutperform for that reason.
But you are making when you buysmall caps, you're making sector
bet.
You just want to gamble on techstocks, small caps are not the
best way to do that.
(29:02):
Some more background data fordisclosure.
You can look this up on ourwebsite as well.
And here's even moredisclosures.
So, with that, Michael, I wouldopen it up to see if you or
anybody else have any questions.
SPEAKER_01 (29:17):
Yeah, and just as a reminder, folks, for those are
here for the CE credits, uh,just wait uh a bit longer and
I'll email you to get theinformation.
If you have any questions, justput it in the QA or in the put
in the chat.
I'm happy to address that.
Um let's talk about BNDS for abit.
Uh, credit spread'sextraordinarily tight, uh, as
you know.
Um and I think it's relativelyunusual for the Fed, correct me
(29:39):
if I'm wrong, to do anaggressive cutting cycle in the
absence of spreads widening.
Does the uh fact that spreadshave been so tight suggest that
the Fed is going to be muchslower in this interstrade
cutting cycle?
Uh what are your thoughts onthat?
SPEAKER_00 (29:53):
Um we don't think so.
This has been a very unusualcycle, as we've mentioned.
So we never have the blowout andSpreads because we never had a
recession.
We haven't had recession for thetwo reasons I described.
Number one, we have a lesscyclical housing sector.
The other factor there is wehave investors, which we didn't
(30:15):
have in 2008, who will come inand buy houses for cash, even
when mortgage rates are high.
So very resilient housingmarket, even in the face of
these very, very high Fed fundsrates.
And then this tech boom.
So we never had the recession,but we do have an unsustainably
(30:39):
high Fed funds rate, really lowmonetary growth, slowing
employment.
So the Fed absolutely needs tocut.
Even the Democratic slashKeynesian members of the Fed
realize that now.
They may, if it was exactly thesame Fed we have now, to your
point, we might stall out in thesay 350 range.
(31:03):
So another two or three cuts.
But with the new Fed chaircoming in in May, we think that
that Fed chair will be more of amonetarist, uh less of a
Keynesian, less focused on uhtariffs as uh fallaciously as a
source of long-term inflation.
(31:24):
So we'll get down to the four.
So it actually does make sense.
And if you were wondering aboutthat, like I said, look at the
money supply.
If you looked at the moneysupply as you saw from that
chart, you would have been very,very concerned about inflation
early in 2021, unlike the Fed,that took all year to figure it
out.
(31:44):
So watch the money supply, watchhousing.
Housing's really slow, moneysupply really growing
negatively, which is verydangerous.
Fed does need to cut rates.
SPEAKER_01 (31:55):
Question from uh Adam What market developments
would favor an increase in PFFA,which Adam owns?
SPEAKER_00 (32:03):
So the the two factors.
So again, lower risk bonds dowell when rates are dropping, or
they outperform rather, ratesare dropping and the stock
market's dropping becausethey're not spread sensitive, so
they're just rate sensitive.
(32:23):
Higher risk fixed income, sothat's both high yield bonds,
BNDS, and PFFA, do better whenthey're coming out of a
tightening cycle.
Rates are going lower, but thestock market's going higher.
So the risk of recession isdropping.
The level of stock market's adecent indicator of the risk of
(32:45):
recession.
The stock market's telling youthere's no risk of recession.
That means spreads are going totighten.
And I was talking to a friend, Ihelped him manage his money.
And he was saying, Oh, well, I'mgoing to wait for a, you know, I
have cash.
I'm going to deploy it reallyslowly.
I'm going to wait for his 10 or20% pullback.
And I'm like, you know, come outof a Fed rate cycle and AI,
(33:10):
maybe you get that, but probablynot.
And so we think it's a good timeto move money off the sidelines
out of money markets intopreferreds.
But it's not just us that'shappening.
And preferreds are going higher.
Um, it may not seem like that.
They it's kind of like watchinggrass grow, but they are
(33:30):
grinding higher and more likelyto grind higher over the next
year or two as rates graduallycome down, Fed funds rate,
investors move off thesidelines, buy preferreds.
They should go back to par,which is roughly 25 on PFFA.
That's what's happened in thepast.
No guarantees this time, butthat's what the past would tell
(33:51):
you.
But it's not going to beexciting.
It's not like owning AMD thismorning when they announced
their open AI deal.
Just something where you grindit out.
And by the way, if you stall outand you get a 9% yield, that's
not so bad either.
That's competitive with moststock returns, not with tech
necessarily, but with stockreturns.
(34:12):
Tech is twice as risky as thestock market as a whole, too.
But um we do think that we're anideal environment for higher
risk fixed income versus lowerrisk fixed income.
SPEAKER_01 (34:24):
From a um valuation perspective, is there anything
from your knowledge from yourhistory that suggests that
valuations matter more in acutting cycle than a hiking
cycle?
SPEAKER_00 (34:34):
No, not necessarily.
So, of course, um valuation,therefore, would be I mean, it's
(35:00):
not a good idea to just get outof the market because you think
23 is too high.
And again, you know, 23 nextyear, right now, not next year's
earnings, but the followingyear's earnings are really like
21.
So I wouldn't use valuation asan excuse to get out of a
(35:21):
market.
Like it's unambiguously bullishfor the Fed to be cutting rates
and unambiguously bearish forthem to be increasing rates.
So even if the money was reallycheap and the Fed was increasing
rates, I would still wouldn'tnecessarily be in the market.
Usually there's a recession.
Like in 20, early 22 is horribleto be in the market, horrible to
(35:44):
be in bonds, too, by the way.
So watch the money supply.
That'll predict what the Fedwill have to do, even if they
don't understand it, because wehave an incompetent Fed.
Money supply is low, needs togrow at 5% to just keep the
economy stable.
Rates have to come down.
Want to be long stocks, and kindof as implied by your question,
(36:05):
getting super refined about oh,the multiples too eyes, not a
good idea.
You're gonna miss out, mostlikely miss out and rally.
Like if you have been concernedby evaluation, you missed out on
one heck of a power round.
SPEAKER_01 (36:18):
Let's talk about um the final few minutes here
again, folks.
If you have any questions, feelfree to type in the QA uh box.
Um your phones are active.
Um let's talk about activeversus passive in a cutting
cycle.
SPEAKER_00 (36:31):
Well, I think the the key is to look at what
strategies are being employedthat are likely to produce alpha
or outperformance.
So with fixed income, it's supereasy to outperform by being
active because you're managingcall risk, which is non-managed
managed by the index funds, um,interest rate risk, default
(36:53):
risk.
So you kind of always want to bein active when it comes to fixed
income.
You don't want to be doing thosesilly things like buying that
preferred stock at 33 that'sreally worth 25 to 26.
Then when it comes to equities,um, it could be that in a
(37:14):
downturn, active management ismore important because you can
take off exposure and uh be amore conservative element of
areas, but of course you can bein riskier areas on the way up.
But I do think that looking atsome of the techniques, like we
do think all riding, if doneproperly, can add a lot of
(37:37):
value.
Being focused on valuation,GARP, not overpaying for stocks
like Palantir.
Like stock like Palantir willwork.
When they miss earnings, though,like go look at a chart of Kava,
is a restaurant company, butthey were trading like 100 times
earnings, they disappointed andthey went down like 40%.
(37:57):
So you want to try to avoid thisblow-up.
So if your AFTA manager islooking at valuation and you
avoid the Teslas, that stuff'sworking right now, but we think
it's very, very risky.
You avoid the Kavas and the andmaybe Palantir.
So you don't blow up.
So you get your consistent, youknow, double-digit returns.
(38:21):
So we think active managementcan make sense in most markets,
as long as you use some of theseother techniques like call
writing and then are verydisciplined about valuation and
avoid blow ups like the Kava's.
Um, but to be fair, like maybein a down market, it'd be
better.
It's kind of the more risk youtake in an upmarket, the better.
(38:44):
So maybe um a passive index hasa ton of Tesla and Pollanty, and
they're doing well for now.
Um, you could outperform.
So I guess the answer isprobably down market, but we
still like ICAP's doing reallywell this year compared to any
other dividend fund.
So we're a little bit morerisk-on there.
(39:05):
We have more financials and umso less drugs and staples.
So the active manager should beable to outbreak help in both
markets.
It's probably a little biteasier in the down market
because it's easy to beconservative in a down market.
SPEAKER_01 (39:23):
Yeah, it's a uh good place to wrap this webinar up,
folks.
Again, appreciate those thatattended this.
Uh, learn more about the funds.
Uh, obviously a big fan of JayHatfield, as you can tell on my
end.
Hopefully, you found thisintriguing.
Again, I'll send you an email onthe CE credits, and hopefully,
I'll see you all in the nextwebinar.
Uh thank you, Jay.
Appreciate it.
SPEAKER_00 (39:39):
Thanks, Michael.
Great feel.
Cheers.
If you are here for the C credits, I will uh email
you at the end of this webinarto get your information, submit
it to the CFP board.
So just stay tuned for that.
Just the trickyest folks you gotto stay to the end of the
presentation.
And I promise you it's gonna bewell worth it.
If you're an advisor and youhappen to be in a physical
office right now, do me a favorand please tell your fellow
colleagues, your fellow advisorsto tune in and watch and
(00:31):
register and attend thiswebinar.
We'll do a live QA towards theend.
I think a lot of interestinginsights here when it comes to
the rest of the year and how tothink about uh some of these big
shifts that are taking placebeneath the surface, because
believe it or not, it's morethan just a tech story now.
Uh a lot of other areas of themarketplace are starting to wake
up, uh, value, particularlysmall cap in particular.
And Jay uh is particularlyexcited for that.
(00:52):
So with that said, my name isMichael Guy.
This conversation, this webinaris sponsored by Infrastructure
Capital.
Jay, all you are, my friend, andagain, appreciate those that are
here.
SPEAKER_00 (01:00):
Great.
Thanks, Michael.
It's great to be on.
As many of you know, we thinkit's always critical to spend
time on the macro situation.
And the reason for that isMichael already alluded to it,
which is that um if you don'tget the macro right, you're not
(01:21):
gonna get in the micro or theinvesting right.
And um, so we'll spend some timeon that because you know,
particularly the Fed does reallydrive a lot of these rotations.
Uh, in other words, the reasonsmall caps are working is that
you want to own small caps whenyou're coming out of a
(01:43):
tightening cycle.
And right now we are, and that'swhy they're starting to work.
Everybody saying, Oh, well, I'vebeen out of small caps for so
long and it's worked, and I'lljust stay out of them and
they're low quality or somethinglike that.
But they're ignoring the factthat we're in this cutting
cycle, uh, and we'll get into uhour views on the on um the
(02:07):
economy and stock market, bondmarket.
And we have been extraordinarilyaccurate historically and this
year, including this year.
Uh, we had said early in theyear that the Fed would cut
three times, even though they'remaking noises that fit like they
wouldn't.
But we had expected the uh labormarket to weaken.
(02:32):
And we also were disappointed inthe BLS, but for a couple of
different reasons than thepresident.
We thought that the labor markethad already weakened, and they
took forever to figure that outand finally report that.
Whereas you could see if you useleading indicators, which the
(02:52):
Fed never does, like continuingclaims, you could have seen the
weakness or the weakness inhousing is also a leading
indicator.
Of course, the Fed ignored that,but finally they're figuring
that out.
That's why, by the way, we'renot concerned about the
shutdown.
We actually think it's a milepositive because the BLS puts
out really inaccurateinformation about both CPI and
(03:18):
the labor market.
And right now the Fed is ontrack to cut rates.
So to the extent they're in aninformation vacuum and
continuing to cut rates, that'sfine.
But it's important to knowbecause we get questions on
webinars like this well, whathappens if inflation
accelerates?
(03:38):
But what that question misses isinflation doesn't magically
accelerate.
It accelerates from really justone source, which is excessive
money supply growth.
Um, and that's what we hadduring the pandemic, obviously.
It can um be sourced from hugeincreases in energy prices, but
(04:01):
that almost never happens,except in the 70s.
We had wage and price controls,so U.S.
production collapsed.
It's probably not gonna happenagain.
So we're optimistic aboutinflation because the money
supplies dropping.
We also have the third boathere.
Uh, we calculate CPI-R, um,which is real-time inflation.
(04:24):
So the BLS purposefully delaysinexplicably their updating of
the shelter component by sixmonths, and then they use
renewing rents, which alsosubstantially delays uh the
reflection in the marketplace.
So we use Zillow and apartmentlist, come up with our own CPI,
(04:51):
real time, and also PCE.
Both of those, well, PCE realtime is around two, slightly
below two.
CPI dash R is uh 1.2.
So inflation's alreadycontained.
Um we don't think we're gonnahave recession because really
(05:11):
the only two things you need toknow to follow both inflation
and GDP is um in terms of thecycles.
Monetary policy, so it's beenvery tight.
The um housing markets startedto weaken, but the only key
financial condition that mattersis the 30-year mortgage rate.
(05:33):
It's gone from well over sevendown to about 630 in
anticipation of Fed rate cuts.
The terminal rate determines the10-year.
It's usually about 100 over.
That's extract exactly on top ofthat.
So that's driven uh 30-yearmortgages down.
If the Fed keeps cutting,housing should recover, should
(05:56):
have 3% growth.
And um a couple of other justmisconceptions.
The recent OBBBA was not abudget buster.
That's a political talkingpoint.
It was a budget buster if youlooked back eight years ago when
it was passed, but we've alreadyadjusted to that.
(06:18):
It was a mild, had a little bitof cut to the budget projection
relative to current law, but notsignificant.
And a little bit of a middleclass tax cut, if at least if
you give chips and overtime andcollect Social Security.
But so, of course, everybodydistorts that because they want
to use the same talking pointsthey did in 2017.
(06:42):
But uh even the CBO wasprojecting 1.9 trillion this
year, 1.7 next year.
But if you include tariffs,that's the last point here, um,
we're projecting 1.3 trillion.
And there's a lot of Trumpadministration policies that are
actually do reduce the deficit.
So we could even do better thanthat.
(07:04):
We'll see how it unfolds.
But if the economy's stronger,tariffs continue to bring in
revenue, then we're veryoptimistic about the budget
deficit.
Um, it is important.
So we raised our target recentlyfrom 6,600 to 7,000.
That's 23 times.
We think that's sustainable.
(07:24):
As long as the 10 yearssomewhere around four, corporate
tax rates don't go up, everybodyforgets that when they reduce
the corporate tax rate, thatincreased the long-term
sustainable multiple of the SP.
So if somebody says, well, 23times is super high over the
(07:45):
last 30 years, what you shouldsay to them is, well, what about
the last eight years?
Because that's when we had thosecorporate task cuts.
Of course, a lot of those eightyears were distorted by the
pandemic.
So we don't really have gooddata.
But we think 23 is sustainableand for this year and next year.
So if you take, and again, whenyou do uh price targets for year
(08:10):
end, you have to look at nextyear's SB earnings.
So next year's earnings wereestimated, or which is in line
with consensus 305.
The following year is about 335.
So if you just take 23 times,you get 7,700.
Both of these points arecritical because you do have a
(08:30):
lot of uh billionaires out theresaying, oh, we're in a bubble
and should get out of themarket.
But I'd say two things aboutthat.
We do think we're in a bubble.
We think it's great that we'rein a bubble, and we think it's
gonna burst in about five years.
So if you want to get out nowand listen, miss out on five
years' returns, um, that'sprobably not a good idea.
(08:54):
And the other thing I'd pointout is uh we did a regression on
the net worth of uh ofindividuals who make predictions
relative to the accuracy oftheir predictions.
And it was 100% negativelycorrelated.
So the higher their net worth,so if they were worth 50
(09:15):
billion, their their opinionswere worth virtually worthless.
And I don't know about beinghomeless, but people have to
earn a living, actually have tomake reasonable projections.
So um we do think it's it'sactually economic now bubbles.
So as stock prices rise, whichmost of the companies we follow,
not Palantir, but Pro Tesla, butBroadcom, et cetera, the MAG8,
(09:40):
if you will, ex Tesla, arereasonably priced.
They probably will becomeunreasonably priced.
Um, then there'll be just a tonof IPOs, flood of IPOs.
But you probably won't actuallyget the bubble to burst until
the Fed becomes too loose, whichthey're nowhere near right now,
money supply grows fast, you getincreased inflation, and Fed
(10:04):
tightens.
So keep in mind the 2001 bubbleburst because the Fed tightened.
And tech drove the market, uh,the wheel, the GDP lower.
So don't get scared out bynervous billionaires.
They're always nervous.
It's easy to be nervous if youhave 500 million in cash.
Um, here's a uh a couple of uhdetailed points on the economy,
(10:28):
and you can get these on ourwebsite.
But you should watch housingstarts.
We call it the Hopfield rule.
You might have heard the Psalmrule is about unemployment, but
this is a leading indicator,that's a lagging indicator.
So housing's caused 12 out of 13post-World War II recessions.
You can see in the 2001recession, housing dipped just
(10:53):
slightly, but overall wasincreasing.
And that's because that was atech bursting of the tech
bubble, and global rates werecoming down as the retirement
boom started.
So that's the one exception.
But otherwise, watch housing.
The Fed was playing with fire.
You can see starts weredeclining.
But the point also of this slideis see how these peaks here
(11:18):
were, you know, during the 70s.
I remember this housing boomvaguely.
It's not that old, but and thenyou had the boom, of course,
before the great financialcrisis.
So starts got almost to 2.5million.
But even during this recent boomwhen the Fed lowered rates
(11:38):
dramatically, we didn't getanywhere near there.
So then the decline is moremuted.
There's fewer layoffs, fewerchange, uh, less change in
economic activity.
So that's why, even though wewent through a Fed tighten
cycle, we had a slowdown in theold economy, a boom in the new
(11:59):
economy, and no recession.
We would have had a recessionthough if the Fed didn't
capitulate, but finally theyhave capitulated.
And then this is great data, youwon't get anywhere else here.
So the other uh slide that's umwe should put in here too is
that investment is what causesall recessions, not the
(12:22):
consumer.
Consumers two-thirds of theeconomy, but very um not
volatile at all.
It's not that sector's notvolatile.
Investment's very volatile.
So you can see here what I wastalking about down at the
bottom, last 12 months,structures have dropped top
percent, so they're inrecession.
(12:44):
Residential dropped 0.2, sothat's sector's in recession,
but IP products, tech andequipment, which mostly like
semiconductor related, and alsoum data centers, power is doing
quite well.
So we've had sluggish um growthor modest growth, really, in
(13:07):
investment overall, ignoringinventories are volatile.
And so that's accounts for theslowdown in the economy, but not
actual recession.
So you can see here this is oneway to look at it.
Every recession was precipitatedby a drop in investment in 2000.
(13:27):
Um we need to make these datamore clear.
It's unclear what the actualyear is, but you can the big
drop in investment at the turnof the century was in in tech,
not in housing.
But every other one is inhousing.
It's just a graphic example thatour index of inflation leads,
(13:52):
what the Fed follows, and theBLS put which the BLS puts out.
So inflation's alreadycontained.
If you're in inflation, fearinginflation, you should not.
Eventually, CPI-eu will comedown to R when the BLS finally,
when their data set finallycatches up to reality.
(14:15):
Uh, we are still getting globalrate cuts.
Most of them happened,particularly in the Eurozone.
Still have 100 left in the US,very bullish time to invest.
That's the part of our bullcase.
Fed loosening AI, easy to getalong this market.
We've been correct so far.
If people tell you, oh, thebudget deficit rates are going
(14:35):
to infinity.
Um, budget deficit's not the keydeterminant of the 10-year.
10-year trades, 100 over Fedfunds.
When we're inverted, it's really100 over the terminal rate of
Fed funds, which is roughly 310right now.
So 10 years probably gonna stallaround 410.
(14:58):
Um, and that'll be pretty staticunless there's a change of the
Fed, um, which I don't thinkthat'll happen.
We of course we'll get a new Fedchairman next year.
So inevitably we're gonna getthose cuts.
It's bullish for the bondmarket, bullish for stock
market, bullish for particularlyfor preferreds, you know, our
funds, PFFA there, BNDS on thebond side.
(15:21):
So we're bullish on rates, butas I pointed out before, it's
critical that we're right aboutrates because you cannot justify
a 23 multiple if rates are atfive.
Every 25 basis points in ourmodel costs you an SP uh
multiple.
So if we're at five, then thethe equilibrium rate, I'm sorry,
(15:43):
multiple would be 18.
So rates have to be contained tojustify 23.
Just more data to validate, justuse 100 over.
Um, if you want to predictlong-term rates over Fed funds,
Fed funds usually trade 75 overinflation, inflation's tracking
right around to not just by ourindex, but also if you take the
(16:07):
six-month running inflation,it's also below two in all
categories, PPI, CPI, PC.
So inflation is not a problem.
If there is more inflation fromtariffs, it should be ignored.
Not, I recognize that nobodywants to pay tariffs, um, but it
should be ignored for thepurposes of making monetary
(16:28):
policy.
It's unpopular, good for thebudget deficit, very unpopular.
So the base is shrinking.
It's a great indicator ofinflation.
If the Fed uh was mildlycompetent, which they're not,
when this big spike in the moneysupply would have concerned
them.
Um, it concerned us massively.
Um, and then they finallytightened rates and you know got
(16:52):
the money supply down.
Um, but Milton Friedman's theoryof inflation, which is excess
money supply growth createsinflation, worked perfectly.
It was the perfect experiment.
So the Keynesian model, PhelpsKerb, blew up, inflation was
22%, money supply grew 60%, andnominal GDP grew 38%.
(17:15):
So excessive money supply growthwill keep create inflation.
When everything's really low,it's hard to grieve that.
The Fed did this almost like acontrolled experiment, worked
perfectly.
If Nolan Friedman was stillalive, he'd be dancing in the
streets.
Nobody seems to care, but youshould if you want to accurately
(17:36):
predict the economy.
Uh, U.S.
rates are high relative to therest of the world.
So don't get too worried.
We don't think they're going tocome down a ton, but it's a
global bond market.
So these other lower rates dohelp keep U.S.
rates down.
Natural gas continues to be agrowth sector because we have
(17:57):
the cheapest natural gas in theworld.
Benefits our fund AMCA thatholds a lot of natural gas
transportation companies.
Uh, we're going to talk a littlebit about more about our funds
before we open up for questions.
So BMDS is our high-yield bondfund, invest in asset-intensive
companies, uh, which we thinkare better credits than the
(18:19):
average credit.
Um, the the yield's 8%.
This is the SEC yield, but itactually distribution yield is
eight.
Should drift up over time toeight this SEC yield.
And um, well, actually, that'sthe index and not our fund.
So that's why it's seven and noteight.
We do think active managementmakes sense for fixed income,
(18:41):
particularly, because um, ofcourse, you want to avoid bad
credits, you want to limitinterest rate risk in good total
returns.
But the higher risk fixed incomeis where you want to be if we're
close to correct about the stockmarket.
So when stock market's risingand rates are dropping or lease
statement stable, high yield andpreferreds will significantly
(19:06):
outperform investment gradebonds.
And you've seen that so far thisyear.
And we expect that to continue.
Um, one great thing about highyield bonds is they're less
volatile than other assetclasses in the fixed income sun.
So your uh return is quite highrelative to the volatility.
(19:27):
So if you're one, probably someof you on PFFAs, our flagship
fund has a great total return,great yield, but there's a
little more volatile than BNDS.
So BNDS is a good alternative.
Um, it also has more lessfavorable tax treatments.
It's good for an IRA.
(19:47):
You do we'll pay close to fulltax if you're having a taxable
account.
PFSA is more like low 20s and aneffective tax rate.
Um, we talked about thisalready.
Um, current yields, um, you cansee high yield as much is the
highest.
Senior loans are high now, buttheir floating rates are gonna
(20:10):
come down.
Um, so these are just thereturns.
And you can see that uh highyield has led uh so far over the
last 10 years.
Just if you're sort of if you'retaking more risk and get more
return.
This is actually a slide aboutum preferred stocks because
they're more inefficient thanhigh yield bonds.
(20:32):
High yield bonds are moreinstitutional, preferred stocks
are more retail.
71% of uh institutionalpreferreds are index funds.
So here's an example that whathappens is the big index funds
rebalance every month.
So if they include a securitylike this one we have graphed
(20:54):
here, you can see there's thisenormous spike in the price
because they quickly buy it atthe end of the month,
irrespective of price, bid itway up, and then it comes down
to normal, more normal levels.
And so we were able to takeadvantage of we sold all of our
position at high prices and thenbought a little bit back when it
(21:18):
came down.
So index funds are not good forfixed income, create
opportunities for us, and that'swhy PFFA is outperformed since
we launched it seven years ago.
Um, now just talking about someof our other funds, um ICAP is a
large cap dividend fund.
(21:39):
As I mentioned, um it's morechallenging with equities to add
alpha.
So what we do with uh large capdividend stocks is we not only
pick stocks, we do run lowleverage, about 20%, enhance the
yield with preferreds, and thenwe write uh individual call
(22:06):
options on stocks where we havea gain where we think they're
close to full valuation, and wewrite it very short term.
The reason I point all that outis there's big call writing
funds like Jeppy that writes thewhole portfolio.
And you'll notice that theysignificantly outperform,
(22:27):
underperform, sorry, during bullmarkets like this year.
So we don't believe in that.
We believe in very short-term uhusing HI and your judgment,
human intelligence, and we thinkyou can add a ton of alpha.
We, of course, always want toadd alpha by stock picking.
(22:48):
We look at relative valuation,but the short-term call writing
is very powerful and adds alittle bit of income.
What we don't believe is havingall of your income come from
options, particularly indexoptions.
So we think our strategy isbetter.
We have substantial SEC yield,in other words, cash yield, like
six, and about two coming fromoptions.
(23:11):
So ICAP has performed reallywell.
We think it'll continue to dowell because of that strategy of
not just picking great stocks,but also providing short-term
call options.
Um, you can see here thatdividend stocks in the long run
have outperformed.
Um, obviously, tech stocks havedone better recently.
(23:35):
But we do think there'll be arotation, as Michael was
indicating, to come out of thiscycle.
Um tech stocks were actually notjust AI for a long time, but
also just viewed as beingdefensive.
So when we're in a Fedtightening cycle, great to be
tech stocks.
We think, at least on arisk-adjusted basis, large cap
dividend stocks will performwell.
(23:56):
And in fact, uh ICAP is doeshave competitive returns, a
little bit lower, but with uh SPthis year.
And you know, we what we do topick the stocks is we use uh a
GARP valuation frame for work.
So in other words, we look atthe valuation P ratio to growth
(24:19):
plus the yield.
You need to keep the yield inmind.
Um that's really how we pick thestocks.
And we try to um, or not eventry, but we deliver monthly
income.
We've been able to grow thatincome.
And we do have substantialyields, so we do like stocks
that pay significant dividends,um, so that we're not just using
(24:43):
options to deliver income.
You can look this up on ourwebsite.
Performance has been strong,it's well diversified.
We do think financials do well,so we have a lot of financials
right now.
Um small caps, controversial.
There's a lot ofmisunderstanding about call
small caps.
(25:03):
A lot of people think that theseare just over-levered companies
and they're paying too much withall short-term debt, and they're
paying too much, and that's whythey're gonna benefit.
It's not the key dynamic.
They're essentially the sameleverage, essentially have the
same amount of floating.
You know, they can always swaptheir floating rate debt.
(25:24):
So you have to take analyzethat.
It's not the key dynamic.
Key dynamic is there are morevalue sectors, less tech.
The IWM or Russell 2000 is onlyabout 10% tech.
SP is 40.
So if we get a rotation out oftech, small caps will do well.
Um a lot of the riskiermoney-losing companies are doing
(25:46):
well.
Uh, we don't have those in SCAP,um, but we are substantially
outperforming the other indicesthat track the money-making
companies like IJR.
Um, we don't believe ininvesting in money-losing
companies.
You're basically doing um publicventure capital.
(26:08):
You want to be a venturecapitalist?
It's a great business, should doit full-time, go sit on the
boards.
Um, make sure that you have drypowder to give to those
companies.
Doing it in public form, wethink is a mistake.
Um, the biggest holding of theIWN, which is allegedly the
(26:29):
value index for the Russell, isOckla, which is projected, it's
a nuclear company, no operatingassets right now, and it's
projected to lose money for thenext five years.
Not to say you shouldn'tpotentially, if you want to
gamble on that, fine, it isgambling.
(26:50):
But we believe in moresustainable, profitable
companies, trading at reasonablemultiples, paying dividends.
You're taking enough risk insmall caps, you don't need these
money-losing venture companiesthat are publicly traded.
Um, same screening methodology.
(27:10):
We're looking for yield, we'relooking for it has to be
profitable.
And we do write a small amount,so we have substantial income.
We also have preferred using lowleverage that enhances the cash
income.
I think it's about five SECyield for SCAP.
And then we target 2% writing asmall amount of index calls,
(27:33):
usually about 30% of theportfolio.
Um, we have a small amount ofIWM, so we're writing IWM calls.
We don't believe in writingindividual small cap options.
First of all, there's noweeklies, so you have to do
longer term.
That caps your upside in bigmarket rallies like we've had
(27:54):
this year.
And also small caps tend to bepretty digital.
They get acquired often, theybeat earnings, they can be up 20
or 30 percent.
Large caps, every once in awhile that happens, like AMD.
It's not in any of our funds,but was up like 25%.
But normally they don't go uplike that.
So it's a better asset class towrite on large cap individual
(28:18):
than small caps.
So we write index calls that'sworked really well.
Should look the returns up, butwe've beaten the our computing
indices quite substantially ifyou verify that though.
Um, and small cap value is donereally well in the long run,
notwithstanding recent returns.
So don't ignore the asset classfees are lower by sector.
(28:41):
So we have it laid out here bysector, because you know,
everything gets distorted bytech.
So small caps are cheaper acrossthe sector.
So we do think they'lloutperform for that reason.
But you are making when you buysmall caps, you're making sector
bet.
You just want to gamble on techstocks, small caps are not the
best way to do that.
(29:02):
Some more background data fordisclosure.
You can look this up on ourwebsite as well.
And here's even moredisclosures.
So, with that, Michael, I wouldopen it up to see if you or
anybody else have any questions.
SPEAKER_01 (29:17):
Yeah, and just as a reminder, folks, for those are
here for the CE credits, uh,just wait uh a bit longer and
I'll email you to get theinformation.
If you have any questions, justput it in the QA or in the put
in the chat.
I'm happy to address that.
Um let's talk about BNDS for abit.
Uh, credit spread'sextraordinarily tight, uh, as
you know.
Um and I think it's relativelyunusual for the Fed, correct me
(29:39):
if I'm wrong, to do anaggressive cutting cycle in the
absence of spreads widening.
Does the uh fact that spreadshave been so tight suggest that
the Fed is going to be muchslower in this interstrade
cutting cycle?
Uh what are your thoughts onthat?
SPEAKER_00 (29:53):
Um we don't think so.
This has been a very unusualcycle, as we've mentioned.
So we never have the blowout andSpreads because we never had a
recession.
We haven't had recession for thetwo reasons I described.
Number one, we have a lesscyclical housing sector.
The other factor there is wehave investors, which we didn't
(30:15):
have in 2008, who will come inand buy houses for cash, even
when mortgage rates are high.
So very resilient housingmarket, even in the face of
these very, very high Fed fundsrates.
And then this tech boom.
So we never had the recession,but we do have an unsustainably
(30:39):
high Fed funds rate, really lowmonetary growth, slowing
employment.
So the Fed absolutely needs tocut.
Even the Democratic slashKeynesian members of the Fed
realize that now.
They may, if it was exactly thesame Fed we have now, to your
point, we might stall out in thesay 350 range.
(31:03):
So another two or three cuts.
But with the new Fed chaircoming in in May, we think that
that Fed chair will be more of amonetarist, uh less of a
Keynesian, less focused on uhtariffs as uh fallaciously as a
source of long-term inflation.
(31:24):
So we'll get down to the four.
So it actually does make sense.
And if you were wondering aboutthat, like I said, look at the
money supply.
If you looked at the moneysupply as you saw from that
chart, you would have been very,very concerned about inflation
early in 2021, unlike the Fed,that took all year to figure it
out.
(31:44):
So watch the money supply, watchhousing.
Housing's really slow, moneysupply really growing
negatively, which is verydangerous.
Fed does need to cut rates.
SPEAKER_01 (31:55):
Question from uh Adam What market developments
would favor an increase in PFFA,which Adam owns?
SPEAKER_00 (32:03):
So the the two factors.
So again, lower risk bonds dowell when rates are dropping, or
they outperform rather, ratesare dropping and the stock
market's dropping becausethey're not spread sensitive, so
they're just rate sensitive.
(32:23):
Higher risk fixed income, sothat's both high yield bonds,
BNDS, and PFFA, do better whenthey're coming out of a
tightening cycle.
Rates are going lower, but thestock market's going higher.
So the risk of recession isdropping.
The level of stock market's adecent indicator of the risk of
(32:45):
recession.
The stock market's telling youthere's no risk of recession.
That means spreads are going totighten.
And I was talking to a friend, Ihelped him manage his money.
And he was saying, Oh, well, I'mgoing to wait for a, you know, I
have cash.
I'm going to deploy it reallyslowly.
I'm going to wait for his 10 or20% pullback.
And I'm like, you know, come outof a Fed rate cycle and AI,
(33:10):
maybe you get that, but probablynot.
And so we think it's a good timeto move money off the sidelines
out of money markets intopreferreds.
But it's not just us that'shappening.
And preferreds are going higher.
Um, it may not seem like that.
They it's kind of like watchinggrass grow, but they are
(33:30):
grinding higher and more likelyto grind higher over the next
year or two as rates graduallycome down, Fed funds rate,
investors move off thesidelines, buy preferreds.
They should go back to par,which is roughly 25 on PFFA.
That's what's happened in thepast.
No guarantees this time, butthat's what the past would tell
(33:51):
you.
But it's not going to beexciting.
It's not like owning AMD thismorning when they announced
their open AI deal.
Just something where you grindit out.
And by the way, if you stall outand you get a 9% yield, that's
not so bad either.
That's competitive with moststock returns, not with tech
necessarily, but with stockreturns.
(34:12):
Tech is twice as risky as thestock market as a whole, too.
But um we do think that we're anideal environment for higher
risk fixed income versus lowerrisk fixed income.
SPEAKER_01 (34:24):
From a um valuation perspective, is there anything
from your knowledge from yourhistory that suggests that
valuations matter more in acutting cycle than a hiking
cycle?
SPEAKER_00 (34:34):
No, not necessarily.
So, of course, um valuation,therefore, would be I mean, it's
(35:00):
not a good idea to just get outof the market because you think
23 is too high.
And again, you know, 23 nextyear, right now, not next year's
earnings, but the followingyear's earnings are really like
21.
So I wouldn't use valuation asan excuse to get out of a
(35:21):
market.
Like it's unambiguously bullishfor the Fed to be cutting rates
and unambiguously bearish forthem to be increasing rates.
So even if the money was reallycheap and the Fed was increasing
rates, I would still wouldn'tnecessarily be in the market.
Usually there's a recession.
Like in 20, early 22 is horribleto be in the market, horrible to
(35:44):
be in bonds, too, by the way.
So watch the money supply.
That'll predict what the Fedwill have to do, even if they
don't understand it, because wehave an incompetent Fed.
Money supply is low, needs togrow at 5% to just keep the
economy stable.
Rates have to come down.
Want to be long stocks, and kindof as implied by your question,
(36:05):
getting super refined about oh,the multiples too eyes, not a
good idea.
You're gonna miss out, mostlikely miss out and rally.
Like if you have been concernedby evaluation, you missed out on
one heck of a power round.
SPEAKER_01 (36:18):
Let's talk about um the final few minutes here
again, folks.
If you have any questions, feelfree to type in the QA uh box.
Um your phones are active.
Um let's talk about activeversus passive in a cutting
cycle.
SPEAKER_00 (36:31):
Well, I think the the key is to look at what
strategies are being employedthat are likely to produce alpha
or outperformance.
So with fixed income, it's supereasy to outperform by being
active because you're managingcall risk, which is non-managed
managed by the index funds, um,interest rate risk, default
(36:53):
risk.
So you kind of always want to bein active when it comes to fixed
income.
You don't want to be doing thosesilly things like buying that
preferred stock at 33 that'sreally worth 25 to 26.
Then when it comes to equities,um, it could be that in a
(37:14):
downturn, active management ismore important because you can
take off exposure and uh be amore conservative element of
areas, but of course you can bein riskier areas on the way up.
But I do think that looking atsome of the techniques, like we
do think all riding, if doneproperly, can add a lot of
(37:37):
value.
Being focused on valuation,GARP, not overpaying for stocks
like Palantir.
Like stock like Palantir willwork.
When they miss earnings, though,like go look at a chart of Kava,
is a restaurant company, butthey were trading like 100 times
earnings, they disappointed andthey went down like 40%.
(37:57):
So you want to try to avoid thisblow-up.
So if your AFTA manager islooking at valuation and you
avoid the Teslas, that stuff'sworking right now, but we think
it's very, very risky.
You avoid the Kavas and the andmaybe Palantir.
So you don't blow up.
So you get your consistent, youknow, double-digit returns.
(38:21):
So we think active managementcan make sense in most markets,
as long as you use some of theseother techniques like call
writing and then are verydisciplined about valuation and
avoid blow ups like the Kava's.
Um, but to be fair, like maybein a down market, it'd be
better.
It's kind of the more risk youtake in an upmarket, the better.
(38:44):
So maybe um a passive index hasa ton of Tesla and Pollanty, and
they're doing well for now.
Um, you could outperform.
So I guess the answer isprobably down market, but we
still like ICAP's doing reallywell this year compared to any
other dividend fund.
So we're a little bit morerisk-on there.
(39:05):
We have more financials and umso less drugs and staples.
So the active manager should beable to outbreak help in both
markets.
It's probably a little biteasier in the down market
because it's easy to beconservative in a down market.
SPEAKER_01 (39:23):
Yeah, it's a uh good place to wrap this webinar up,
folks.
Again, appreciate those thatattended this.
Uh, learn more about the funds.
Uh, obviously a big fan of JayHatfield, as you can tell on my
end.
Hopefully, you found thisintriguing.
Again, I'll send you an email onthe CE credits, and hopefully,
I'll see you all in the nextwebinar.
Uh thank you, Jay.
Appreciate it.
SPEAKER_00 (39:39):
Thanks, Michael.
Great feel.
Cheers.
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