March 10, 2025 • 46 mins
Jay Hatfield cuts through market noise with a refreshingly clear perspective on inflation: stick a yellow sticky note on your mirror that says "inflation is caused by excessive monetary growth." This fundamental principle helps investors avoid being misled by commodity price fluctuations that resolve naturally through market mechanisms rather than representing true inflation.
The current market volatility, Hatfield explains, largely reflects normal seasonal patterns during non-earnings periods when high-flying stocks typically experience pullbacks. While acknowledging a potential growth slowdown with Fed policy about "150 basis points too tight," he maintains a bullish long-term outlook on both bonds and stocks, expecting rates to continue dropping as the Fed eventually recognizes the economic deceleration.
Hatfield's investment approach emphasizes human intelligence over algorithmic trading – a philosophy he applies across his firm's six ETFs managing $2.6 billion in assets. He articulates clear distinctions between fixed income investment strategies, where active management provides significant advantages through understanding call risk and credit dynamics, unlike equity markets where momentum sometimes prevails. His firm conducts granular analysis of individual securities, even examining specific buildings within REIT portfolios to identify value opportunities where others see only sector-wide challenges.
Particularly illuminating is Hatfield's contrarian view on recession dynamics, noting they typically begin with investment declines that impact employment before affecting consumer spending. This framework, combined with his assessment of China's economy continuing to grow at around 5% despite negative narratives, provides investors with valuable perspective for navigating current market conditions.
For income-focused investors, Hatfield offers practical insights on preferred securities, bonds, and midstream energy companies, explaining how these complement each other with different risk-volatility profiles while generating reliable income streams in various economic environments. His call-writing strategy for large-cap equities demonstrates how active management can enhance returns when applied with judgment rather than mechanical rules.
Human-powered market intelligence, developed through decades of experience and rigorous fundamental analysis, remains Hatfield's core advantage in a world increasingly dominated by algorithms and momentum trading.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Infrastructure Capital and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other mate
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
I would urge everybody to put a yellow sticky
on their mirror in theirbathroom that inflation is
caused by excessive monetarygrowth, and if you just stick to
that you'll save yourself a lotof adjectives.
The one exception majorexception to that was during the
70s.
We had a 1,200% increase in theprice of oil from three to to
(00:23):
forty two dollars a barrel.
But that was when we had wageand price controls, so the
market wasn't allowed to operateand us production plunged, and
so normally these commodity andother random fluctuations which
aren't really inflation butrather random fluctuations they
just resolve themselves time,like a bunch of chickens die and
(00:47):
then the weather changes andthey stop dying and then the
prices go back down.
Speaker 2 (00:52):
My name is Michael Guy, a publisher of the Lead
Lagopore.
This conversation is sponsoredby Infrastructure Capital
Advisors, jay Hatfield's firm,and Jay is one of the most
knowledgeable guys in theindustry, so we're going to be
talking about a lot of thingshere, jay.
I know we've done this a numberof times, but for those who
don't know your background, alittle bit of context as far as
who you are would be great.
Speaker 1 (01:10):
I've been on, thanks, michael.
I've been on Wall Street for 35years.
About half of that time I wasan investment banker doing
energy and utilities.
The rest on the buy side.
I worked side, worked at twomajor hedge funds Zimmer Lucas
(01:30):
and what's now called 72 Pointand then launched my own company
about 15 years ago and launchedmy own MLP and then launched
AMC.
It was our first active fund in2014.
And now we have six ETFs thatwe've launched over the last 10
years and $2.6 billion of AUM.
Speaker 2 (01:49):
Yet a fairly sizable drop on Friday and some
volatility, obviously, last 48hours.
I'm saying that because it doeslook like the market responding
(02:10):
off of some kind of maybe thestart of a growth scale.
We're now seeing something wehaven't seen in a while, which
is when markets get volatile andstocks go down, long duration
yields are dropping with it.
You're getting a little bit ofa flight to safety dynamic kind
of come back in.
I'm curious your take, jay onif something's shifting here in
terms of the way the market isacting.
Speaker 1 (02:28):
Well, we might be deploying for this growth scare
because we've been talking aboutit for like two or three weeks.
So we don't think that'stotally rational.
But, I would point out, becausewe still are bullish on the
market long-term, we're neutral,not super negative, but neutral
on the market right now.
But if more we can talk aboutthis slowdown.
(02:53):
But this is just normalseasonal activity.
Everybody kind of makesseasonality too complicated.
There's two seasons earningseason and not earning season.
And we're in not, notwithstanding the fact that
NVIDIA is going to report.
We're in not earning season andso there's no real catalyst to
(03:15):
old stocks and most bad newscomes from not some companies
but some politics and globalaffairs and other issues.
So it's normal to have apullback when there's no
earnings.
The highest flyers are normallyto pull back the most, which is
exactly what we're saying.
(03:35):
The high beta stocks.
You know Bitcoin, the riskiestof the risky, so that's going to
90% of the driver is justnormal seasonality.
We do think that the market wasmissing this gross slowdown.
The fed's policy is ultra tight.
It's in our models.
They're about 150 basis pointstoo tight, and so the old
(03:58):
economy's slowing, the techeconomy's booming and so we
think growth will decelerate tothe one to two percent level.
But the fed will eventuallyfigure it out.
They're buying the curve butthey're sort of dumb but not
stupid, so they'll start tofigure this out.
Rates will continue to drop.
That's bullish for the market.
It's actually good for thefundamental economy too.
(04:21):
So so in effect, the market'scutting rates for the Fed.
So we may remain bullishlong-term on bonds and stocks,
but would just be cautious aheadof NVIDIA.
We don't know if they're goingto beat expectations or not.
It's really the guide andexpectations and that's just
(04:44):
very, very difficult call.
So, um, we're on the riskierside.
Tough to put in the new money.
We do think it's a good time toput money at preferreds, and
bnds is our new fund, becausethose just kind of drift higher
as rates go lower.
So it's not like buying, youknow, rodcom at 220 and it goes
(05:05):
to 205.
Speaker 2 (05:07):
And let's talk about BNDS First of all, when we talk
about being bullish on bonds,there's being bullish on bonds
overall.
Then there's being bullish onduration, being bullish on
credit risk.
I don't think I've asked thisbefore, but I'm curious at what
point do you think it's time toreally start to play with the
longer duration side, and atwhat point do you think it's
time to really start to play?
Speaker 1 (05:25):
with the longer duration side.
Well, we think now.
You know that looked like alittle bit of a crazy call at
480.
But it looks.
It's just kind of better tomake the call, like when the
knife stopped spalling.
But we did it and we were.
The knife was spalling and westill made the call because we
just thought it was ridiculous.
And now we're half rightbecause our target's 375 on the
(05:48):
10 here.
So it feels like a better callnow.
It does.
Probably to get lower from herewe do need a little bit of
insight from the Fed.
We've actually been calling forthe Fed chair to be removed so
we can reform the Fed's brokenpolicy framework.
I don't think that's reallyvery likely to occur.
So the existing Fed is going tohave to garner some insight.
(06:11):
But we do think these Dogelayoffs are going to be
something that they focus on.
They're pretty obsessed withthe labor market, so that
weakens up.
So we do think that we'll getto our 375 target, maybe sooner
rather than later.
And, you know, maybe the stockrally, though, doesn't occur
(06:31):
until earnings season starts inApril.
Speaker 2 (06:35):
One of the things I got a kick out of which makes a
lot of sense to me now that youhad articulated it the way you
did last week in Vegas is Idon't want to call it a
conspiracy theory, but I thinkit makes sense this idea that
Trump is wanting to cause anincrease in the unemployment
rate by laying off as manyfederal workers as possible to
force Powell's hand to lowerrates.
(06:55):
I love that as a concept and itsounds like a very Trump thing
to do.
And you can argue it's probablyjustified because there's a lot
of hiring that's happening.
That's probably unnecessary onthe federal side of things.
But where are we in terms of umthat impacting the economy, as
opposed to just being on thefringe and people hearing about
headlines?
Speaker 1 (07:15):
yeah.
So I sort of wish they werethat smart like that would be
extremely clever, but I'm notsure they are.
So.
Typically conspiracy theoriesare conspiracy theories, but I
don't I wouldn't like completelyignore it.
I think it's more importantbecause it's going to impact the
Fed.
But that is the normal wayrecessions occur, is it?
(07:36):
It really everybody misses thatrecessions come from a decline
in investment and then thatimpacts employment and then
consumers spend less.
They don't spontaneously spendless.
So it's been a long time sincewe had a major federal layoff.
I think it was like 30 years orsomething during the Clinton
(07:57):
administration.
But you know, those people thathave laid off, they are going
to tend to consume less.
I wouldn't completely ignore it.
I mean there's a lot of peopleit's really hard to keep track
of, but it seems like300,000-ish so far.
So I wouldn't totally ignore it.
I mean that might argue thatmaybe growth rates, you know are
(08:18):
one to two, might be closer toone than two.
And I do think.
But I do think it's mostimportant just because that's
what the Fed obsesses about,versus, like, those people are
just going to spend nothing andwe're going to go into a
tailspin.
Speaker 2 (08:31):
Yeah, I mean I can't imagine it's not knowing the
income levels of these peoplethat it's a huge driver of
consumer spending.
But I don't know.
Speaker 1 (08:39):
Yeah, and they get the unemployment insurance and
the you know the ones that getbought out, get packages, so but
but the federal it'll make themfed nervous Cause.
I looked at the employmentreport and normally federal job
growth was slow, like small,like 7,000 a month.
But if that drops to negative ahundred or two, that's going to
impact the employment reportand the bond market will rally.
(09:01):
So it's a potential catalyst.
I mean, you always, employmentreport is probably the dirtiest
report of all.
So I wouldn't like bet, youknow, millions of dollars on a
weak employment report becausethere's season, huge seasonal
adjustments in january.
So be aware, I wouldn't.
You know, let's see.
I would say, like the next twounemployment reports, you're
(09:21):
likely to see some weakness.
Speaker 2 (09:23):
I saw a post on it showing various commodity prices
since Trump came into officeand the argument was that you
know we're about to seesignificant cost push inflation
because of some of the not justeggs other things that have gone
up quite a bit.
Any chance that there's somelike springboard of inflation
that could suddenly just kick inin the next several months, or
(09:46):
are we kind of on thatdisinflation path no matter what
?
Speaker 1 (09:49):
Well, I would urge everybody to like put a yellow
sticky on their mirror in theirbathroom.
That inflation is caused byexcessive monetary growth, and
if you just stick to that you'llsave yourself a lot of agita.
If you just stick to thatyou'll save yourself a lot of
agita.
The one exception, majorexception to that was during the
(10:20):
70s we had a 1,200% increase inthe price of oil from $3 to $42
a barrel.
But that was when we had wageand price controls, so the
market wasn't allowed to operateand US production plunged.
And so normally these commodityand other random fluctuations
which aren't really inflationbut rather random fluctuations
(10:41):
they just resolve themselvesover time, like a bunch of
chickens die and then theweather changes and they stop
dying, dying and then the pricesgo back down.
And the commodities I'd focus on, oil is by far the most
important and it's actually beenvery low.
What people miss about tariffsis it makes the dollar very
strong.
That's very deflationary, maybelike gold's been running, but
that really doesn't impactinflation.
(11:03):
Oil does.
Oil's very, very contained, andI would also say that we
lowered our target on oil from$10, from $80 to $70, because
it's very clear that Trump isgoing to influence the Saudis to
pump more if prices run,particularly if he has sanctions
(11:24):
on Iran.
So we think the oil prices arecapped.
So that's bullish for inflation.
So point one is just normallyfocused on my supply, not random
factors, but oil matters, andoil is highly contained.
It's actually decliningslightly year over year.
Speaker 2 (11:46):
What happens if China suddenly magically
re-accelerates?
There's been some interestingmovement on the China market
side, a lot of deep-seeking kindof realization that they're in
the AI game too.
But is there a chance thatChina could throw off some of
the inflation narrative if theybecome a bigger driver of
commodity?
Speaker 1 (12:03):
movement.
Well, you know one thing wehave an almost 100%
non-consensus view on China.
They saved 45% of their GDP andthere's an IMF study across the
whole world that shows thatevery 10% of savings produces
(12:23):
1.5% of growth.
So if you use that formula,china would normally grow, you
know, at four and a half timesone and a half, which is like
seven.
But you know they're acommunist country like destroy a
lot of value.
But everybody's like oh,china's terrible, it's not
growing, it's going intooblivion.
The reality is growing aroundfive.
(12:44):
It's not great, don't techstocks?
Because of their, you know thegovernment was sort of
persecuting them.
So the tech stocks all got ahand word until recently.
But just because tech stocksare doing well and maybe the
consumer consumes a little bitmore, it's not going to.
In the industrial part of theeconomy, oil consumption is
(13:06):
going to be pretty stable,copper, all those commodities.
The Chinese economy has beenoperating relatively normal,
notwithstanding all thecommentary to the contrary.
Speaker 2 (13:18):
So let's go back to this possible growth scare,
assuming it persists.
Again it could just be likenoise.
And to your point aboutseasonality, anyway, latter part
of February, it has to be weak,so on par with what we see
historically.
But again it could just be likenoise.
And to your point aboutseasonality, anyway, latter part
of February, it has to be weak.
So on par with sort of what wesee historically.
But let's do some severityanalysis.
(13:39):
So growth slows, disinflationpicks up and it's more than just
inflation slowing, it's growthslowing.
Speaker 1 (13:43):
Talk to me how that impacts the preferred
marketplace.
Yeah, so I mean, there's kindof like, I guess, three, three
scenarios.
So our scenario is one to twopercent growth, which is sort of
goldilocks, because that'senough to scare the fed, get
them off.
This like, oh, trump's aninflation, you know, disaster,
because it's really certain webelieve he's the opposite, and
not from a political standpointbut from just trying to actually
(14:06):
analyze economics versustalking points, which almost
never happens, by the way.
But so, um, we're one to two, Iguess.
The other scenario is kind oflike zero to one, like sort of
complete stall and then a deeprecession, and so two out of
those three scenarios like arepreferred and bond funds are
(14:28):
spectacular, because, like kindof one to two and zero to one,
you're going to get probably getour 375 or even 350 on the 10
year, and that'll probably driveboth of those funds higher from
a price perspective, like 10 to15%, and so those are great
news, and those are great news.
(14:49):
If we have a really deeprecession, which I think is
almost impossible, but could youknow, I mean nothing's
impossible Then spreads couldwiden and we could get a little
weakening, but it would beoffset by the fact that rates
will be way lower.
So probably more like stall.
So that's what we'd like abouthigher yielding fixed income
securities is they just end upbeing all weather securities?
(15:12):
I mean like, if you look at PFF, it's roughly than 8% annually
over six years.
Well, I would like challengeyou to find a worse six years
for fixed income in terms ofvolatility and outcomes.
So as long as you pick goodcredits and they keep paying,
it's an all-weather security.
So I'd say two out of the threelikely growth scenarios are
(15:40):
actually good to great andsignificant downturns not
wonderful, but of course, yourstock portfolio is probably
going to get way more smashedthan preferred in bonds.
Speaker 2 (15:48):
The preferred space, as I recall, is primarily
financials and industrials.
Am I right on that?
Speaker 1 (15:52):
Most funds are.
Ours is pretty well diversifiedbecause we love REITs.
We like old economy assets likethe rating agencies don't love.
So we like utilities, reits,pipelines, places where you have
collateral.
We do have a fair amount offinancials now because we've
added them as they got cheap.
If financials are really reallystrong credit they're fine for
(16:15):
preferred.
But ours is our funds way morediversified than the index.
The index is like up to 65%financials.
Speaker 2 (16:23):
So talk to me about how analysis on preferred
differs from analysis on stocks,as an example, well there.
Speaker 1 (16:32):
There's a huge advantage to active management
because a lot of times, as weknow from game stock another
situation like the worst stocksbecome the best.
So you and I can agree oh mygod, tesla and game stock are
overvalued and palantir isovervalued, but they just become
more and more overvalued.
So momentum works pretty wellwith equities, but it's terrible
(16:53):
for fixed income.
So fixed income securities,bonds or preferreds are callable
at par.
So you have to manage that risk.
The risk is also asymmetric.
Like heads, you get paid backtails.
If there's a credit problem,you lose everything.
So you need to monitor creditrisk and you have interest rate
(17:14):
risk, which of course you don'thave with stocks.
So all these things need to beactively managed.
So that's.
The difference is that activemanagement sort of reliably pays
, and with equities it can.
But sometimes just investing inmomentum you know, cap weighted
(17:35):
, basically momentum type fundscan be better than a active
manager.
Speaker 2 (17:41):
So obviously these are all your babies.
Different funds, Um, and BNDSis the newer one.
Pffa has been around for awhile.
If someone were to look at bothfunds, why choose one over the
other?
Or are they compliments to eachother?
How should one think aboutcombining these?
Speaker 1 (17:59):
Well, bndes is safer.
So you know the way the capitalstructure works is equities are
the most junior and thenpreferreds get paid ahead of the
equities and then bonds.
So economically, bond BNDS orbond it's a great checker, of
course, but are lower risk thanpreferreds and that's also the
(18:23):
way they trade.
So they have roughly high yieldbonds.
Not just our fund, but all highyield bonds are about a third
of as volatile as the stockmarket but half as volatile as
preferreds.
So BNDFs is ideal if you want ahigh income with the lowest
possible volatility.
(18:45):
Preferreds tend to getdislocated so we can add more
value as an active measure.
So we would guess that youwould get better total returns
from preferreds, but notnecessarily risk adjusted,
because they're owned by retailinvestors.
They tend to dump them whenanything goes wrong.
They get more volatile thanthey should, whereas
(19:07):
institutions don't high yieldbonds, so they tend to support
the price when they get morevolatile than they should,
whereas institutions don'thigh-yield bonds, so they tend
to support the price when theyget dumped.
So BNDS is lower risk.
It has no leverage PFFA we'retargeting 20% leverage, so it
adds a little bit of volatilityand risk to it.
So just what flavor of risk.
Now, pffa is 75% of my IRA, soI consider it to be appropriate
(19:33):
for lower-risk investors lookingfor retirement.
But BNDES is even more sobecause there's no leverage and
it's senior to the preferreds.
Speaker 2 (19:43):
I had written about preferred REITs in the past.
I was seeking alpha, and it'san area that not too many people
look at at all, and I'm lookingat PFFA.
On the Q4 fact sheet, 20% is inthe real estate side.
On that end, are there nuanceswhen it comes to preferreds,
(20:03):
like you know?
Is it an office necessarily?
I mean, what type of realestate preferreds is the focus
there?
Speaker 1 (20:09):
Well, you know, we just we focus on risk return.
So we did add a lot of officebecause everybody was freaking
about office.
But they failed to distinguishbetween high-quality office and
low-quality office.
And they also failed todistinguish between REITs and
buildings.
So buildings are 70% levered,reits are 40.
(20:30):
So I used to be an investmentbanker and we wouldn't let REITs
go public unless they were fullcycle.
So they, you know, modestinvestment grade, leverage and
then.
So what we do is if somethinglooks interesting from a yield
perspective, we go in andanalyze every single building.
A lot of them have no mortgages.
So in effect, the preferred isby unlevered building, which is
(20:54):
the case with bernardo.
This was about three.
The preferred was like threetimes covered with an
unmortgaged building.
So in effect, kind of we werelike second lien debt on the
building, not not legally buteconomically.
So that's the type of work wedo.
We go building by building.
I went and visited thebuildings or New York city, so
(21:17):
it was easy to do.
But I mean, of course, the NewYork city markets where you want
to have office, because that'sthe kind of the capital of the
world and people are prettytough, like Jamie Dimon keeps
yelling at everybody at jpmorgan, so they kind of make
them work.
I love, I love that clip by theway.
Speaker 2 (21:35):
Yeah, right that it's like um, thank you right.
It's like I know there's morerespect for the guy, but it's
like it's so true yeah, now wedon't.
Speaker 1 (21:42):
We have small amount of employees so I don't have to
yell at them because they, theyjust know that they have to go
to work.
But so we, just we, we, wedon't I like the talking heads
like, oh my god, real estate'sgoing to zero.
We did take it, building bybuilding, preferred by preferred
, find the attractive ones.
That's worked really well, likewe have like a 40 gain and
(22:03):
those tornadoes, becauseeverybody's freaking out.
But we're, we don't fool.
We've got models on every assetand are looking for huge,
pretty significant margins ofsafety.
Speaker 2 (22:16):
Since you mentioned having big gains in some of
these positions, do you havelike an explicit target?
I mean, the old adage is, youwant to obviously let your
winners run, and it's notexactly the same as equities,
obviously, when it comes topreferrits and bonds.
But what makes you get out of aposition when it's done very
well, or do it all?
Speaker 1 (22:34):
Well, we do.
You know, with equities, youknow, like with ICAP, we have
relative multiples that arebased on GARPY, which means, you
know, just basically growth ata reasonable price, correcting
for yield, and so we'lldefinitely, if something hits
our target, we'll trim it orsell it all.
If it keeps running On thepreferred side, it's easier.
(22:56):
Clearly, if anything tradesabove par we're going to likely
sell it.
You know, with the Vernadosthere's some lower coupon
securities and they're gettingwe do have like gigantic gains.
So to the extent they tradelike this is somewhat arbitrary.
But you know we have bogeys todeliver good income.
So we use seven as kind of ourboat, like we want things that
(23:18):
yield more than seven.
So if Bernado starts yieldingless than that, we would start
to trim it.
But we're extremely patient andtrimming, particularly with
preferreds, because you benefitfrom being patient.
You know, icap, all thosesecurities trade like absolute
water, so there's no benefitfrom that.
(23:38):
But preferreds would just allowthe other funds to bid it up.
Index funds get imploded, theybid it up arbitrarily.
So we're getting close totrimming our brenados.
Speaker 2 (23:51):
You mentioned ICAP a few times.
Let's talk about that fund fora bit.
Let me share my screen here.
I think, again, the nice thingabout what you do is that you're
active.
You've got various funds,various parts of the marketplace
, all largely income focused.
Let's talk about ICAP.
What's unique about that fundmarketplace?
All largely income focused.
Let's talk about ICAM.
Speaker 1 (24:10):
What's unique about that fund?
Well, what's great about it isit's lower risk securities.
If you look at the holdings,you would recognize like 69 out
of 70 of them or something likethat, because they're just like
household names, like averagemarket cap's 200 billion.
So these are like really bigcompanies Average market cap's
$200 billion so these are likereally big companies.
(24:32):
And so what's good about it islike you actually could just
cherry pick our holdings andcreate your own fund and so you
could say, well, that's anargument for not owning it.
But what we do which we think isspectacular, is we write very
short-term calls at prices wherewe want to sell the security.
So, to your point, one way totrim is just to blow it out the
door.
(24:52):
The second is to say, well,this is pretty fully valued, but
really fully valued for 5%.
So let's keep writing calls 5%higher and if it gets called
away, great, and if it doesn't,we make all that money on
options.
So it's just a very lucrative.
We do it extremely actively.
We monitor our exposure becausewe don't want to get capped out
(25:12):
like JEPI and some big callwriting funds.
So we're confident we can addalpha.
That's been the case.
It's likely to continue to bethe case.
It kind of makes sense.
You can, because it's a lot ofwork and you have to look at it
every you know every trading day.
Because it's a lot of work andyou have to look at it every you
know every trading day.
But with these large cap stocksit's very easy because you get
(25:32):
weekly options.
We don't do this with S cap orsmall cap fund.
We do the index options therebecause you don't want to cap
out your returns on small caps.
The other thing is that largecaps tend to not move nearly as
much as small caps, so they tendto not be bought out that often
.
You know, for $200 billion ispossible but unlikely.
(25:53):
When you beat earnings you knoweverybody's already in it.
So there it goes up a little.
There's no like short coveringrally, irrational short covering
rallies, so you rarely getcapped out just because you
wrote some short term calls.
And of course we don't do itaround earnings anyway.
Speaker 2 (26:11):
Yeah, I mean.
What I like about strategieslike this now is, especially in
an expensive market, you want totilt more towards.
You know lower beta, higherincome type.
You know stalwart type namesright, because those will in
general not be, as in quote,sexy as the big cap tech names,
but also be a lot lessvulnerable to a big doubter.
Speaker 1 (26:32):
Yeah, absolutely so.
It's.
It's like popular fun, becauseit's something that you can
sleep at night but know thatwe're adding value to every day
and that's might seem psychoticbut we enjoy doing it and it's
if you do use HI.
So, in other words, usejudgment.
Look at fundamentals, not justlike dealt with, like we don't
(26:53):
just look at, oh, the volatilityis higher than the realized
volatility, like sort of don'tcare.
I mean not that we we know whatthose numbers are, but, like I
said, like we wrote a lot oflike Southern calls at 90 when I
used to meet my investmentbanking client.
Well, you can sell Southern allday long at 90 and that's a
good sale.
So just have to use yourjudgment, not because the ball
(27:16):
is higher than this or that it'sjust too high, too expensive.
You have a huge gain in any way, so it's fine to sell it and if
it expires this week, you justrewrite it the next week.
I heard you use that term quitea bit.
Speaker 2 (27:32):
Yeah, and you talk to other people in Vegas, this HI
human intelligence right angle,which is to me a very old school
way of thinking about markets,and it's one that you don't hear
too often nowadays, this ideathat it is about judgment.
It's not just a a game ofscience, right, there's an art
to it.
Then, um, do you think that'sit's a lost art?
I mean, in a world whereeverything's computerized,
(27:52):
everybody, just you know, canoverlay a technical chart on
anything.
Um, is there, is there really alot of alpha from just that
doing side of it?
Speaker 1 (28:01):
absolutely, and we're big critics of people like
particularly people go ontelevision like pontificate
about like every single stockinto the universe, like if, if
you're gonna buy your I meanactually it's not quite true
like you're buying, like youknow chevron or something, but
if you're going to apply onstocks or trade your own stocks,
(28:21):
you should have a model on it,you should be talking to the
company.
You should be able to adjustyour model when things change,
change your target.
You know, trim it or add to itbased on your target.
So I think that people havekind of moved away from that.
It's's a huge grind, takes alot of labor, but the key thing
(28:43):
is you will not blow up.
If you do that, you'll makegood decisions.
You'll get out of situationsthat are unattractive.
So that's what we do.
I don't think a lot of peopledo it.
I learned it from the firsthedge fund.
I worked for a great analystthere.
So I think it's pretty unusualand gives us a huge advantage.
Yeah, no.
Speaker 2 (29:04):
I think it's.
I think the industry needs moreof that because as algos keep
trading with algos, it createsother distortions and I don't
think you can fully automateintuition.
Speaker 1 (29:17):
Right, and I mean we don't just make it up though.
Automates intuition, davidPérez Right, and I mean we don't
just make it up though, but solike, if you call a SEP, which
people are welcome to do, andsay, okay, well, why do you
don't call with tax, then we'reprepared to say, well, we're
carrying estimates 30% aboveconsensus, our target is 750.
But what can give you comfortis like, by the way, if it runs
(29:38):
to 750, guess what?
It won't be our largestposition, it'll probably be our
smallest because it hit ourtarget.
So, just pretty objective,using data to then overlay the
options, I think is the best way, not just like use some algo
that says, oh, the ball is cheapor expensive to this, and that
we'll just blow it out.
It says, oh, the ball is cheapor expensive to this, and then
(29:58):
we'll just blow it out and likeI'll say, like using judgment,
like I watched Southern Companyfor 20, 35 years, I guess, so I
just know 90 bucks like got like22 times earning.
That's just an easy sale.
Speaker 2 (30:12):
Let's talk about AMSA for a bit.
We haven't really spent toomuch time on that in prior
podcasts, but the midstream partof the energy space.
Somebody was remarking to methat about sort of the idea of
narratives versus what ends uphappening under Trump's first
term.
Everyone thought energy wouldbe like among the best
(30:33):
performing sector.
It's ended up not being thecase.
I am curious your thoughts onhow the Trump administration
could impact this part of themarketplace and then, in
particular, why should investorsconsider more midstream versus
up and down?
Speaker 1 (30:51):
well, as I mentioned before, we're not super bullish
about oil prices because, I dothink to be clear, the president
really doesn other thanappointing the Fed chair really
doesn't affect inflation, exceptfor oil prices too.
So, like arguably Biden, itwasn't really effective in
restricting production but hewas essentially trying to get
(31:14):
rid of oil, which would tend todrive the price higher.
But the president does havesome impact on that and, as I
mentioned, this president has alot of stroke with the Saudis.
Saudis have excess capacity.
He's laser-focused on keepingoil prices low.
So we're not bullish about thecommodity but we are bullish
(31:35):
about throughput, particularlyon the natural gas side.
A lot of people don'tappreciate that to generate
electricity at the margin youhave to burn natural gas.
So just the bottom line.
You can always increment alittle bit of wind and solar,
but it's very site specific andnot material.
So that's bullish forthroughput and natural gas,
which is bullish for all thepipeline companies and unlike
(31:57):
exact polar opposite of theBiden administration, which is
really tragic because they triedto restrict LNG exports, which
is just horrific for everybodybecause it's not just uneconomic
, it's terrible for theenvironment because you want
more natural gas and less coal.
So both the export of naturalgas and the burning of it in the
(32:17):
US, or electricity for AI andknow AI and electric vehicles
and everything else is a goodtailwind.
And then also, companies arereally solid.
Great credits Now.
They used to be not solid, theyhave had modest growth.
They have dividend growth,great dividend coverage, great
credit ratings, so you're notgoing to crush it anymore.
(32:41):
I mean, AMJ is up like 500%since the pandemic.
That was just because everybodyirrationally sold it, so you're
likely to get low teens, mostlydeferred dividends.
From a tax perspective it'spretty uncorrelated now to the
rest of the market.
So it's a good, you know.
5%.
(33:02):
Add 3% to 5%.
Add to most portfolios who aremore conservative and want a
little diversification, a littlebit of income.
Speaker 2 (33:10):
Is the?
Is the midstream space.
When you look at the differentcompanies, do they tend to
co-move pretty highly, or arethere a lot of idiosyncratic
momentum movements that takeplace?
Speaker 1 (33:21):
pretty highly, or are there a lot of idiosyncratic
momentum movements that takeplace?
They do trade together.
So we do write some calls toenhance income, but not a lot,
because it's sort of like theopposite of ICAP, where Sundar
is doing well and something elseis doing badly.
If we write too many calls inAMZA, like the whole portfolio,
well, we would never do thewhole portfolio.
You know everything gets calledaway and there's nothing cheap
(33:41):
to recycle into.
But there's, there'sopportunities at alpha and we
have, you know, by doing thesame process we do with every
other fund, looking at companiesthat are reasonably priced
relative to their growth rate.
So I'm looking more for naturalgas, as I mentioned, versus oil
.
So you can add value.
But perfectly fine to just likeown AMCA, because it's going to
(34:06):
be really hard to beat it,picking individual stocks.
Speaker 2 (34:11):
And the yield on that is pretty, pretty solid and
consistent over time.
Speaker 1 (34:15):
It's likely to continue to grow pretty
significantly because ourborrowing costs are coming down,
the companies are increasingdividends and, of course, you
get a 1099, so it cleans up allthe tax problems you get by
owning K1 reporters.
Speaker 2 (34:30):
And all the funds are like that.
No K1s, correct, yes, yeah,it's interesting because a lot
of as you know, I deal with alot of different issuers and
some have to do the K1s andadvisors in particular, hate
that it's a mess and we do.
Speaker 1 (34:44):
We pay to clean it up for clients we pay like a
gigantic amount for because wehave a corporate tax return that
files all the K-1s, so FBs areall inclusive, so we pay for the
tax filing.
Basically.
Speaker 2 (34:59):
Some of the things I could throw off here.
Your thesis around oil, aroundthe economy I mean part of doing
any analysis is what if I'mwrong?
How does that impact positions,portfolios, even if it's low
probability?
Talk to me about scenarioanalysis again.
As far as things turn out to betotally different by end of
year, how does that impact thepositions, the sizing, anything
(35:22):
on the funds individually?
Speaker 1 (35:24):
Well, you know, I don't see a lot of huge risk,
the only risk I would see, whichI don't think is really
possible.
But if the Fed was justcompletely out to lunch for the
whole year and we go intorecession, I don't think that's
going to happen.
I don't think that's going tohappen.
In terms of you know, downsidescenarios, I guess we don't.
(35:45):
We know Pat's corporate taxdecreased and our target's
$6,500 on the S&P, so that's notthat exciting.
That's like 10% from here.
It's a normal year, so it'sfine.
But that our funds would dofine, probably better than tech
funds would.
So they work in mostenvironments.
I don't.
(36:09):
I don't really like theconspiracy theory slash like Six
Sigma analysis.
I don't think it does anybodymuch good.
So you know I could come upwith like there's a nuclear war
or something in Ukraine, but Idon't think that really is
helpful.
Speaker 2 (36:25):
Yeah, and that's.
There's a lot of noise aroundthat.
For sure, of the various funds,which ones tend to have the
most hands on approach?
I mean they're all active, buta certain.
Is it ICAP, is it BNBS?
I mean which one tends to havethe most activity?
Speaker 1 (36:41):
Is it ICAP, is it BMS ?
Which one does have the mostactivity?
Well, I think ICAP DAG, becausewe're just writing all these
short-term calls, using judgment.
There's a lot of activity inPFFA because we sell everything
above par, but that's kind oflike sort of mechanical right,
like kind of obvious.
Like if it's called what 25,you sell it at 25 50, so you
(37:04):
will see trades go off every day.
But it's not really that youknow.
It's kind of like required.
Really.
It's really iCap.
You know there's like a lot ofreported activity because of the
options.
Scap, a little bit more longerterm.
We write index calls, butthat's less active than writing
the individual calls.
(37:25):
Amca, pretty long-term oriented.
There we own the same companiesfor 11 years there.
Pffr is an index fund, so thatbarely turns over at all and
BNDES is extremely long-term, sothat is pretty close to zero
turnover?
Speaker 2 (37:43):
I don't think we've.
I've asked this question before.
Why is it that PFFR is indexedversus the others that are
active?
Speaker 1 (37:48):
You know, it was just at the time it was launched, in
2017, it was much faster tolaunch index funds.
That's no longer the case.
So if we were probably to redoit, it would just be part of
PFFA.
But we treat all of our fundslike our children.
Speaker 2 (38:10):
So it'll, you know it'll be there and continue to
do well, but probably not aswell as PFFA.
As you look across theinvisible landscape, you're
going to say this is the mostexpensive part of the
marketplace, which is the mosttoxic, that you would just not
touch until there's some massivedislocation and that generates
income.
I'm trying to get to thequestion of what's the most
expensive income generatingaspect of the marketplace.
What would that area be?
Speaker 1 (38:31):
Well, I was going to say Palantir, tesla, before you
finish your sentence and microstrategy, but there's, of course
that would have been a betterquestion after last week if I'd
said that, yeah, I'd bereplaying those clips.
Yeah because, like we are GARP Yinvestors.
So like, if I did, I'm nottelling you to short Palantir or
(38:54):
like panic if you're on it, butit's arguably worth 50 bucks on
a GARP basis.
So it's a momentum stack forsure on the um.
On the yield side I think it'sthere really isn't much because
people are pretty negative onyield.
They're all excited about theirgame stop well, not game stop,
but their palantir and they'reworried about rates because of,
(39:16):
I think, political talk topoints.
So I don't think there isanything that comes to mind.
I mean I don't really loveBesser and Gray Bond, but
they'll do fine.
If we're worried about rates,they'll do fine.
I would rather be in high yieldthan preferreds, but they'll do
fine.
So I don't really buy the highyield credit spreads or risk
because I just don't see anyscenarios where we have a
(39:38):
significant recession.
I mean we don't see anyscenarios where we have a
significant recession.
I mean we don't really havetight spreads in our funds.
We look for dislocations but wedon't buy that their spreads
are going to blow out because ofsome economic dislocation.
But some people are concernedabout that.
Speaker 2 (39:54):
Okay, and obviously you can have dislocations
without recessions, but they'vecrashed, as it happened in bull
markets, right?
So tell me about that.
So, as an active fund manager,you know, let's say, you've got
a two, three-week dislocation,not as severe as COVID, but
something that's sizable inexpansion.
What are you doing at thatpoint, I mean?
But the problem is, by the timeyou recognize it, it could
already be over, right?
Speaker 1 (40:14):
Well, yeah, that's important because you know we do
have a hedge fund and we kindof know by running that like you
can go buy puts and be superclever and think you're like the
new Steve Cohen and you'reusually lose money doing that.
So but on the other hand, we dohave a very successful hedge
fund and we're really good atcalling the market.
So we just do the same thing wedo at the hedge fund, but like
(40:36):
way less so.
Like right now, our hedge fundis like 30 exposure and 30 cash
and our other funds are justlike a little bit below market,
so maybe like 95 exposure.
You know theoretical exposureto the market so we just dumb it
down.
Or, you know, just be moreconservative because, as you
(40:56):
pointed out, you can be wrong aswell.
Right, so we're getting mostlylonger term focus, but try to
take advantage of our marketinsights and we might write more
calls.
That the market bad, we'llwrite more calls.
If we think it's going to rallyhard, hard, we'll write fewer
calls.
So it's just at the margin andyou know you can see it in the
(41:19):
returns because we just, youknow we beat the index usually
pretty significantly, but justby doing really small steps, not
doing like.
You know, steve cohen like haszero percent exposure and 150
and 75 and that's all within thesame day, you know but but how
do you manage that like soyou've got a team of analysts.
Speaker 2 (41:38):
are you literally saying that we're gonna do an
emergency meeting and talkthrough the ideas?
Or do you manage that so you'vegot a team of analysts?
Are you literally saying thatwe're going to do an emergency
meeting and talk through theideas, or do you have sort of a
playbook when that happens?
I mean, I'm just curious aboutsort of the behind the scenes of
that.
Speaker 1 (41:47):
Well, I mean, it sounds sort of authoritarian,
but I've been doing it for 35years.
So it's me.
I tell them what's going tohappen in the market, and they
have learned that it's better tolisten to me than their fears
and hopes, because we have, likeI said, we have simple things.
You know, I learned some ofthis from shorter term traders
(42:09):
like Steve Cohen.
It's just like what's thecatalyst?
Like, why do you want to belong now?
Okay?
Well, maybe you're bulled up byNVIDIA, I don't know.
So I'm like neutral.
We are bulled up about Friday,that's PCE, about bindi, nvidia,
I don't know.
So I'm like neutral.
We are bulled up about friday,that's pce.
I don't know if that's reallygoing to move the market, but,
to be fair, that's positive.
And so we're just really goodat looking at short-term
catalysts, looking at if it'searning season.
(42:29):
We estimate all the economicdata, but at the end of the day,
it's me like I'm trading themarket all day long.
I got a feel for the marketLike the market's pretty to use
a technical term disgustingright now.
It's not horrible, but it'sclearly neutral at best.
So we just proceed cautiouslyand you know, and, like you said
(42:51):
, don't overtrade, like we don'tpanic and go.
Let's go to all cash Likebecause you can.
You know we don't want to makeany significant mistakes.
Speaker 2 (42:59):
Jay, for those who want to learn more about the
funds, where would you pointthem to?
I know you also have a sub-sack, but you're getting some nice
traction.
But talk to me about wherepeople can learn more.
Speaker 1 (43:08):
So wwwimprocaptfundscom and you can
register for our webinar.
You can send direct questionsto us.
We do love talking to ourclients, so feel free to call or
email us directly.
Speaker 2 (43:23):
For those that are listening, I am a big fan of
Jay's.
I've gotten to know him moreover time, as you can tell.
Very knowledgeable, and I likelistening to guys who have been
in the business as long as Jayhas, especially relative to
these younger kids that have hadsuccess post-COVID that don't
have human intelligence at all.
There's a great quote I'm notyoung enough to know everything.
(43:46):
I feel like a lot of theseyounger traders definitely fit
into that, so it could be heresomebody like Jay.
Again, folks, this is asponsored conversation by
Infrastructure Capital Advisors.
Make sure you check out theirfunds.
We'll be doing more of these.
We're also hosting a webinarvery soon.
If you're on the lead lagreport email list, you'll be
getting that registration linksoon and Jay, as always, I
(44:08):
appreciate it.
Great Thanks.
Thanks, Michael.
Thank you, buddy, Cheers.
I would urge everybody to put a yellow sticky
on their mirror in theirbathroom that inflation is
caused by excessive monetarygrowth, and if you just stick to
that you'll save yourself a lotof adjectives.
The one exception majorexception to that was during the
70s.
We had a 1,200% increase in theprice of oil from three to to
(00:23):
forty two dollars a barrel.
But that was when we had wageand price controls, so the
market wasn't allowed to operateand us production plunged, and
so normally these commodity andother random fluctuations which
aren't really inflation butrather random fluctuations they
just resolve themselves time,like a bunch of chickens die and
(00:47):
then the weather changes andthey stop dying and then the
prices go back down.
Speaker 2 (00:52):
My name is Michael Guy, a publisher of the Lead
Lagopore.
This conversation is sponsoredby Infrastructure Capital
Advisors, jay Hatfield's firm,and Jay is one of the most
knowledgeable guys in theindustry, so we're going to be
talking about a lot of thingshere, jay.
I know we've done this a numberof times, but for those who
don't know your background, alittle bit of context as far as
who you are would be great.
Speaker 1 (01:10):
I've been on, thanks, michael.
I've been on Wall Street for 35years.
About half of that time I wasan investment banker doing
energy and utilities.
The rest on the buy side.
I worked side, worked at twomajor hedge funds Zimmer Lucas
(01:30):
and what's now called 72 Pointand then launched my own company
about 15 years ago and launchedmy own MLP and then launched
AMC.
It was our first active fund in2014.
And now we have six ETFs thatwe've launched over the last 10
years and $2.6 billion of AUM.
Speaker 2 (01:49):
Yet a fairly sizable drop on Friday and some
volatility, obviously, last 48hours.
I'm saying that because it doeslook like the market responding
(02:10):
off of some kind of maybe thestart of a growth scale.
We're now seeing something wehaven't seen in a while, which
is when markets get volatile andstocks go down, long duration
yields are dropping with it.
You're getting a little bit ofa flight to safety dynamic kind
of come back in.
I'm curious your take, jay onif something's shifting here in
terms of the way the market isacting.
Speaker 1 (02:28):
Well, we might be deploying for this growth scare
because we've been talking aboutit for like two or three weeks.
So we don't think that'stotally rational.
But, I would point out, becausewe still are bullish on the
market long-term, we're neutral,not super negative, but neutral
on the market right now.
But if more we can talk aboutthis slowdown.
(02:53):
But this is just normalseasonal activity.
Everybody kind of makesseasonality too complicated.
There's two seasons earningseason and not earning season.
And we're in not, notwithstanding the fact that
NVIDIA is going to report.
We're in not earning season andso there's no real catalyst to
(03:15):
old stocks and most bad newscomes from not some companies
but some politics and globalaffairs and other issues.
So it's normal to have apullback when there's no
earnings.
The highest flyers are normallyto pull back the most, which is
exactly what we're saying.
(03:35):
The high beta stocks.
You know Bitcoin, the riskiestof the risky, so that's going to
90% of the driver is justnormal seasonality.
We do think that the market wasmissing this gross slowdown.
The fed's policy is ultra tight.
It's in our models.
They're about 150 basis pointstoo tight, and so the old
(03:58):
economy's slowing, the techeconomy's booming and so we
think growth will decelerate tothe one to two percent level.
But the fed will eventuallyfigure it out.
They're buying the curve butthey're sort of dumb but not
stupid, so they'll start tofigure this out.
Rates will continue to drop.
That's bullish for the market.
It's actually good for thefundamental economy too.
(04:21):
So so in effect, the market'scutting rates for the Fed.
So we may remain bullishlong-term on bonds and stocks,
but would just be cautious aheadof NVIDIA.
We don't know if they're goingto beat expectations or not.
It's really the guide andexpectations and that's just
(04:44):
very, very difficult call.
So, um, we're on the riskierside.
Tough to put in the new money.
We do think it's a good time toput money at preferreds, and
bnds is our new fund, becausethose just kind of drift higher
as rates go lower.
So it's not like buying, youknow, rodcom at 220 and it goes
(05:05):
to 205.
Speaker 2 (05:07):
And let's talk about BNDS First of all, when we talk
about being bullish on bonds,there's being bullish on bonds
overall.
Then there's being bullish onduration, being bullish on
credit risk.
I don't think I've asked thisbefore, but I'm curious at what
point do you think it's time toreally start to play with the
longer duration side, and atwhat point do you think it's
time to really start to play?
Speaker 1 (05:25):
with the longer duration side.
Well, we think now.
You know that looked like alittle bit of a crazy call at
480.
But it looks.
It's just kind of better tomake the call, like when the
knife stopped spalling.
But we did it and we were.
The knife was spalling and westill made the call because we
just thought it was ridiculous.
And now we're half rightbecause our target's 375 on the
(05:48):
10 here.
So it feels like a better callnow.
It does.
Probably to get lower from herewe do need a little bit of
insight from the Fed.
We've actually been calling forthe Fed chair to be removed so
we can reform the Fed's brokenpolicy framework.
I don't think that's reallyvery likely to occur.
So the existing Fed is going tohave to garner some insight.
(06:11):
But we do think these Dogelayoffs are going to be
something that they focus on.
They're pretty obsessed withthe labor market, so that
weakens up.
So we do think that we'll getto our 375 target, maybe sooner
rather than later.
And, you know, maybe the stockrally, though, doesn't occur
(06:31):
until earnings season starts inApril.
Speaker 2 (06:35):
One of the things I got a kick out of which makes a
lot of sense to me now that youhad articulated it the way you
did last week in Vegas is Idon't want to call it a
conspiracy theory, but I thinkit makes sense this idea that
Trump is wanting to cause anincrease in the unemployment
rate by laying off as manyfederal workers as possible to
force Powell's hand to lowerrates.
(06:55):
I love that as a concept and itsounds like a very Trump thing
to do.
And you can argue it's probablyjustified because there's a lot
of hiring that's happening.
That's probably unnecessary onthe federal side of things.
But where are we in terms of umthat impacting the economy, as
opposed to just being on thefringe and people hearing about
headlines?
Speaker 1 (07:15):
yeah.
So I sort of wish they werethat smart like that would be
extremely clever, but I'm notsure they are.
So.
Typically conspiracy theoriesare conspiracy theories, but I
don't I wouldn't like completelyignore it.
I think it's more importantbecause it's going to impact the
Fed.
But that is the normal wayrecessions occur, is it?
(07:36):
It really everybody misses thatrecessions come from a decline
in investment and then thatimpacts employment and then
consumers spend less.
They don't spontaneously spendless.
So it's been a long time sincewe had a major federal layoff.
I think it was like 30 years orsomething during the Clinton
(07:57):
administration.
But you know, those people thathave laid off, they are going
to tend to consume less.
I wouldn't completely ignore it.
I mean there's a lot of peopleit's really hard to keep track
of, but it seems like300,000-ish so far.
So I wouldn't totally ignore it.
I mean that might argue thatmaybe growth rates, you know are
(08:18):
one to two, might be closer toone than two.
And I do think.
But I do think it's mostimportant just because that's
what the Fed obsesses about,versus, like, those people are
just going to spend nothing andwe're going to go into a
tailspin.
Speaker 2 (08:31):
Yeah, I mean I can't imagine it's not knowing the
income levels of these peoplethat it's a huge driver of
consumer spending.
But I don't know.
Speaker 1 (08:39):
Yeah, and they get the unemployment insurance and
the you know the ones that getbought out, get packages, so but
but the federal it'll make themfed nervous Cause.
I looked at the employmentreport and normally federal job
growth was slow, like small,like 7,000 a month.
But if that drops to negative ahundred or two, that's going to
impact the employment reportand the bond market will rally.
(09:01):
So it's a potential catalyst.
I mean, you always, employmentreport is probably the dirtiest
report of all.
So I wouldn't like bet, youknow, millions of dollars on a
weak employment report becausethere's season, huge seasonal
adjustments in january.
So be aware, I wouldn't.
You know, let's see.
I would say, like the next twounemployment reports, you're
(09:21):
likely to see some weakness.
Speaker 2 (09:23):
I saw a post on it showing various commodity prices
since Trump came into officeand the argument was that you
know we're about to seesignificant cost push inflation
because of some of the not justeggs other things that have gone
up quite a bit.
Any chance that there's somelike springboard of inflation
that could suddenly just kick inin the next several months, or
(09:46):
are we kind of on thatdisinflation path no matter what
?
Speaker 1 (09:49):
Well, I would urge everybody to like put a yellow
sticky on their mirror in theirbathroom.
That inflation is caused byexcessive monetary growth, and
if you just stick to that you'llsave yourself a lot of agita.
If you just stick to thatyou'll save yourself a lot of
agita.
The one exception, majorexception to that was during the
(10:20):
70s we had a 1,200% increase inthe price of oil from $3 to $42
a barrel.
But that was when we had wageand price controls, so the
market wasn't allowed to operateand US production plunged.
And so normally these commodityand other random fluctuations
which aren't really inflationbut rather random fluctuations
(10:41):
they just resolve themselvesover time, like a bunch of
chickens die and then theweather changes and they stop
dying, dying and then the pricesgo back down.
And the commodities I'd focus on, oil is by far the most
important and it's actually beenvery low.
What people miss about tariffsis it makes the dollar very
strong.
That's very deflationary, maybelike gold's been running, but
that really doesn't impactinflation.
(11:03):
Oil does.
Oil's very, very contained, andI would also say that we
lowered our target on oil from$10, from $80 to $70, because
it's very clear that Trump isgoing to influence the Saudis to
pump more if prices run,particularly if he has sanctions
(11:24):
on Iran.
So we think the oil prices arecapped.
So that's bullish for inflation.
So point one is just normallyfocused on my supply, not random
factors, but oil matters, andoil is highly contained.
It's actually decliningslightly year over year.
Speaker 2 (11:46):
What happens if China suddenly magically
re-accelerates?
There's been some interestingmovement on the China market
side, a lot of deep-seeking kindof realization that they're in
the AI game too.
But is there a chance thatChina could throw off some of
the inflation narrative if theybecome a bigger driver of
commodity?
Speaker 1 (12:03):
movement.
Well, you know one thing wehave an almost 100%
non-consensus view on China.
They saved 45% of their GDP andthere's an IMF study across the
whole world that shows thatevery 10% of savings produces
(12:23):
1.5% of growth.
So if you use that formula,china would normally grow, you
know, at four and a half timesone and a half, which is like
seven.
But you know they're acommunist country like destroy a
lot of value.
But everybody's like oh,china's terrible, it's not
growing, it's going intooblivion.
The reality is growing aroundfive.
(12:44):
It's not great, don't techstocks?
Because of their, you know thegovernment was sort of
persecuting them.
So the tech stocks all got ahand word until recently.
But just because tech stocksare doing well and maybe the
consumer consumes a little bitmore, it's not going to.
In the industrial part of theeconomy, oil consumption is
(13:06):
going to be pretty stable,copper, all those commodities.
The Chinese economy has beenoperating relatively normal,
notwithstanding all thecommentary to the contrary.
Speaker 2 (13:18):
So let's go back to this possible growth scare,
assuming it persists.
Again it could just be likenoise.
And to your point aboutseasonality, anyway, latter part
of February, it has to be weak,so on par with what we see
historically.
But again it could just be likenoise.
And to your point aboutseasonality, anyway, latter part
of February, it has to be weak.
So on par with sort of what wesee historically.
But let's do some severityanalysis.
(13:39):
So growth slows, disinflationpicks up and it's more than just
inflation slowing, it's growthslowing.
Speaker 1 (13:43):
Talk to me how that impacts the preferred
marketplace.
Yeah, so I mean, there's kindof like, I guess, three, three
scenarios.
So our scenario is one to twopercent growth, which is sort of
goldilocks, because that'senough to scare the fed, get
them off.
This like, oh, trump's aninflation, you know, disaster,
because it's really certain webelieve he's the opposite, and
not from a political standpointbut from just trying to actually
(14:06):
analyze economics versustalking points, which almost
never happens, by the way.
But so, um, we're one to two, Iguess.
The other scenario is kind oflike zero to one, like sort of
complete stall and then a deeprecession, and so two out of
those three scenarios like arepreferred and bond funds are
(14:28):
spectacular, because, like kindof one to two and zero to one,
you're going to get probably getour 375 or even 350 on the 10
year, and that'll probably driveboth of those funds higher from
a price perspective, like 10 to15%, and so those are great
news, and those are great news.
(14:49):
If we have a really deeprecession, which I think is
almost impossible, but could youknow, I mean nothing's
impossible Then spreads couldwiden and we could get a little
weakening, but it would beoffset by the fact that rates
will be way lower.
So probably more like stall.
So that's what we'd like abouthigher yielding fixed income
securities is they just end upbeing all weather securities?
(15:12):
I mean like, if you look at PFF, it's roughly than 8% annually
over six years.
Well, I would like challengeyou to find a worse six years
for fixed income in terms ofvolatility and outcomes.
So as long as you pick goodcredits and they keep paying,
it's an all-weather security.
So I'd say two out of the threelikely growth scenarios are
(15:40):
actually good to great andsignificant downturns not
wonderful, but of course, yourstock portfolio is probably
going to get way more smashedthan preferred in bonds.
Speaker 2 (15:48):
The preferred space, as I recall, is primarily
financials and industrials.
Am I right on that?
Speaker 1 (15:52):
Most funds are.
Ours is pretty well diversifiedbecause we love REITs.
We like old economy assets likethe rating agencies don't love.
So we like utilities, reits,pipelines, places where you have
collateral.
We do have a fair amount offinancials now because we've
added them as they got cheap.
If financials are really reallystrong credit they're fine for
(16:15):
preferred.
But ours is our funds way morediversified than the index.
The index is like up to 65%financials.
Speaker 2 (16:23):
So talk to me about how analysis on preferred
differs from analysis on stocks,as an example, well there.
Speaker 1 (16:32):
There's a huge advantage to active management
because a lot of times, as weknow from game stock another
situation like the worst stocksbecome the best.
So you and I can agree oh mygod, tesla and game stock are
overvalued and palantir isovervalued, but they just become
more and more overvalued.
So momentum works pretty wellwith equities, but it's terrible
(16:53):
for fixed income.
So fixed income securities,bonds or preferreds are callable
at par.
So you have to manage that risk.
The risk is also asymmetric.
Like heads, you get paid backtails.
If there's a credit problem,you lose everything.
So you need to monitor creditrisk and you have interest rate
(17:14):
risk, which of course you don'thave with stocks.
So all these things need to beactively managed.
So that's.
The difference is that activemanagement sort of reliably pays
, and with equities it can.
But sometimes just investing inmomentum you know, cap weighted
(17:35):
, basically momentum type fundscan be better than a active
manager.
Speaker 2 (17:41):
So obviously these are all your babies.
Different funds, Um, and BNDSis the newer one.
Pffa has been around for awhile.
If someone were to look at bothfunds, why choose one over the
other?
Or are they compliments to eachother?
How should one think aboutcombining these?
Speaker 1 (17:59):
Well, bndes is safer.
So you know the way the capitalstructure works is equities are
the most junior and thenpreferreds get paid ahead of the
equities and then bonds.
So economically, bond BNDS orbond it's a great checker, of
course, but are lower risk thanpreferreds and that's also the
(18:23):
way they trade.
So they have roughly high yieldbonds.
Not just our fund, but all highyield bonds are about a third
of as volatile as the stockmarket but half as volatile as
preferreds.
So BNDFs is ideal if you want ahigh income with the lowest
possible volatility.
(18:45):
Preferreds tend to getdislocated so we can add more
value as an active measure.
So we would guess that youwould get better total returns
from preferreds, but notnecessarily risk adjusted,
because they're owned by retailinvestors.
They tend to dump them whenanything goes wrong.
They get more volatile thanthey should, whereas
(19:07):
institutions don't high yieldbonds, so they tend to support
the price when they get morevolatile than they should,
whereas institutions don'thigh-yield bonds, so they tend
to support the price when theyget dumped.
So BNDS is lower risk.
It has no leverage PFFA we'retargeting 20% leverage, so it
adds a little bit of volatilityand risk to it.
So just what flavor of risk.
Now, pffa is 75% of my IRA, soI consider it to be appropriate
(19:33):
for lower-risk investors lookingfor retirement.
But BNDES is even more sobecause there's no leverage and
it's senior to the preferreds.
Speaker 2 (19:43):
I had written about preferred REITs in the past.
I was seeking alpha, and it'san area that not too many people
look at at all, and I'm lookingat PFFA.
On the Q4 fact sheet, 20% is inthe real estate side.
On that end, are there nuanceswhen it comes to preferreds,
(20:03):
like you know?
Is it an office necessarily?
I mean, what type of realestate preferreds is the focus
there?
Speaker 1 (20:09):
Well, you know, we just we focus on risk return.
So we did add a lot of officebecause everybody was freaking
about office.
But they failed to distinguishbetween high-quality office and
low-quality office.
And they also failed todistinguish between REITs and
buildings.
So buildings are 70% levered,reits are 40.
(20:30):
So I used to be an investmentbanker and we wouldn't let REITs
go public unless they were fullcycle.
So they, you know, modestinvestment grade, leverage and
then.
So what we do is if somethinglooks interesting from a yield
perspective, we go in andanalyze every single building.
A lot of them have no mortgages.
So in effect, the preferred isby unlevered building, which is
(20:54):
the case with bernardo.
This was about three.
The preferred was like threetimes covered with an
unmortgaged building.
So in effect, kind of we werelike second lien debt on the
building, not not legally buteconomically.
So that's the type of work wedo.
We go building by building.
I went and visited thebuildings or New York city, so
(21:17):
it was easy to do.
But I mean, of course, the NewYork city markets where you want
to have office, because that'sthe kind of the capital of the
world and people are prettytough, like Jamie Dimon keeps
yelling at everybody at jpmorgan, so they kind of make
them work.
I love, I love that clip by theway.
Speaker 2 (21:35):
Yeah, right that it's like um, thank you right.
It's like I know there's morerespect for the guy, but it's
like it's so true yeah, now wedon't.
Speaker 1 (21:42):
We have small amount of employees so I don't have to
yell at them because they, theyjust know that they have to go
to work.
But so we, just we, we, wedon't I like the talking heads
like, oh my god, real estate'sgoing to zero.
We did take it, building bybuilding, preferred by preferred
, find the attractive ones.
That's worked really well, likewe have like a 40 gain and
(22:03):
those tornadoes, becauseeverybody's freaking out.
But we're, we don't fool.
We've got models on every assetand are looking for huge,
pretty significant margins ofsafety.
Speaker 2 (22:16):
Since you mentioned having big gains in some of
these positions, do you havelike an explicit target?
I mean, the old adage is, youwant to obviously let your
winners run, and it's notexactly the same as equities,
obviously, when it comes topreferrits and bonds.
But what makes you get out of aposition when it's done very
well, or do it all?
Speaker 1 (22:34):
Well, we do.
You know, with equities, youknow, like with ICAP, we have
relative multiples that arebased on GARPY, which means, you
know, just basically growth ata reasonable price, correcting
for yield, and so we'lldefinitely, if something hits
our target, we'll trim it orsell it all.
If it keeps running On thepreferred side, it's easier.
(22:56):
Clearly, if anything tradesabove par we're going to likely
sell it.
You know, with the Vernadosthere's some lower coupon
securities and they're gettingwe do have like gigantic gains.
So to the extent they tradelike this is somewhat arbitrary.
But you know we have bogeys todeliver good income.
So we use seven as kind of ourboat, like we want things that
(23:18):
yield more than seven.
So if Bernado starts yieldingless than that, we would start
to trim it.
But we're extremely patient andtrimming, particularly with
preferreds, because you benefitfrom being patient.
You know, icap, all thosesecurities trade like absolute
water, so there's no benefitfrom that.
(23:38):
But preferreds would just allowthe other funds to bid it up.
Index funds get imploded, theybid it up arbitrarily.
So we're getting close totrimming our brenados.
Speaker 2 (23:51):
You mentioned ICAP a few times.
Let's talk about that fund fora bit.
Let me share my screen here.
I think, again, the nice thingabout what you do is that you're
active.
You've got various funds,various parts of the marketplace
, all largely income focused.
Let's talk about ICAP.
What's unique about that fundmarketplace?
All largely income focused.
Let's talk about ICAM.
Speaker 1 (24:10):
What's unique about that fund?
Well, what's great about it isit's lower risk securities.
If you look at the holdings,you would recognize like 69 out
of 70 of them or something likethat, because they're just like
household names, like averagemarket cap's 200 billion.
So these are like really bigcompanies Average market cap's
$200 billion so these are likereally big companies.
(24:32):
And so what's good about it islike you actually could just
cherry pick our holdings andcreate your own fund and so you
could say, well, that's anargument for not owning it.
But what we do which we think isspectacular, is we write very
short-term calls at prices wherewe want to sell the security.
So, to your point, one way totrim is just to blow it out the
door.
(24:52):
The second is to say, well,this is pretty fully valued, but
really fully valued for 5%.
So let's keep writing calls 5%higher and if it gets called
away, great, and if it doesn't,we make all that money on
options.
So it's just a very lucrative.
We do it extremely actively.
We monitor our exposure becausewe don't want to get capped out
(25:12):
like JEPI and some big callwriting funds.
So we're confident we can addalpha.
That's been the case.
It's likely to continue to bethe case.
It kind of makes sense.
You can, because it's a lot ofwork and you have to look at it
every you know every trading day.
Because it's a lot of work andyou have to look at it every you
know every trading day.
But with these large cap stocksit's very easy because you get
(25:32):
weekly options.
We don't do this with S cap orsmall cap fund.
We do the index options therebecause you don't want to cap
out your returns on small caps.
The other thing is that largecaps tend to not move nearly as
much as small caps, so they tendto not be bought out that often
.
You know, for $200 billion ispossible but unlikely.
(25:53):
When you beat earnings you knoweverybody's already in it.
So there it goes up a little.
There's no like short coveringrally, irrational short covering
rallies, so you rarely getcapped out just because you
wrote some short term calls.
And of course we don't do itaround earnings anyway.
Speaker 2 (26:11):
Yeah, I mean.
What I like about strategieslike this now is, especially in
an expensive market, you want totilt more towards.
You know lower beta, higherincome type.
You know stalwart type namesright, because those will in
general not be, as in quote,sexy as the big cap tech names,
but also be a lot lessvulnerable to a big doubter.
Speaker 1 (26:32):
Yeah, absolutely so.
It's.
It's like popular fun, becauseit's something that you can
sleep at night but know thatwe're adding value to every day
and that's might seem psychoticbut we enjoy doing it and it's
if you do use HI.
So, in other words, usejudgment.
Look at fundamentals, not justlike dealt with, like we don't
(26:53):
just look at, oh, the volatilityis higher than the realized
volatility, like sort of don'tcare.
I mean not that we we know whatthose numbers are, but, like I
said, like we wrote a lot oflike Southern calls at 90 when I
used to meet my investmentbanking client.
Well, you can sell Southern allday long at 90 and that's a
good sale.
So just have to use yourjudgment, not because the ball
(27:16):
is higher than this or that it'sjust too high, too expensive.
You have a huge gain in any way, so it's fine to sell it and if
it expires this week, you justrewrite it the next week.
I heard you use that term quitea bit.
Speaker 2 (27:32):
Yeah, and you talk to other people in Vegas, this HI
human intelligence right angle,which is to me a very old school
way of thinking about markets,and it's one that you don't hear
too often nowadays, this ideathat it is about judgment.
It's not just a a game ofscience, right, there's an art
to it.
Then, um, do you think that'sit's a lost art?
I mean, in a world whereeverything's computerized,
(27:52):
everybody, just you know, canoverlay a technical chart on
anything.
Um, is there, is there really alot of alpha from just that
doing side of it?
Speaker 1 (28:01):
absolutely, and we're big critics of people like
particularly people go ontelevision like pontificate
about like every single stockinto the universe, like if, if
you're gonna buy your I meanactually it's not quite true
like you're buying, like youknow chevron or something, but
if you're going to apply onstocks or trade your own stocks,
(28:21):
you should have a model on it,you should be talking to the
company.
You should be able to adjustyour model when things change,
change your target.
You know, trim it or add to itbased on your target.
So I think that people havekind of moved away from that.
It's's a huge grind, takes alot of labor, but the key thing
(28:43):
is you will not blow up.
If you do that, you'll makegood decisions.
You'll get out of situationsthat are unattractive.
So that's what we do.
I don't think a lot of peopledo it.
I learned it from the firsthedge fund.
I worked for a great analystthere.
So I think it's pretty unusualand gives us a huge advantage.
Yeah, no.
Speaker 2 (29:04):
I think it's.
I think the industry needs moreof that because as algos keep
trading with algos, it createsother distortions and I don't
think you can fully automateintuition.
Speaker 1 (29:17):
Right, and I mean we don't just make it up though.
Automates intuition, davidPérez Right, and I mean we don't
just make it up though, but solike, if you call a SEP, which
people are welcome to do, andsay, okay, well, why do you
don't call with tax, then we'reprepared to say, well, we're
carrying estimates 30% aboveconsensus, our target is 750.
But what can give you comfortis like, by the way, if it runs
(29:38):
to 750, guess what?
It won't be our largestposition, it'll probably be our
smallest because it hit ourtarget.
So, just pretty objective,using data to then overlay the
options, I think is the best way, not just like use some algo
that says, oh, the ball is cheapor expensive to this, and that
we'll just blow it out.
It says, oh, the ball is cheapor expensive to this, and then
(29:58):
we'll just blow it out and likeI'll say, like using judgment,
like I watched Southern Companyfor 20, 35 years, I guess, so I
just know 90 bucks like got like22 times earning.
That's just an easy sale.
Speaker 2 (30:12):
Let's talk about AMSA for a bit.
We haven't really spent toomuch time on that in prior
podcasts, but the midstream partof the energy space.
Somebody was remarking to methat about sort of the idea of
narratives versus what ends uphappening under Trump's first
term.
Everyone thought energy wouldbe like among the best
(30:33):
performing sector.
It's ended up not being thecase.
I am curious your thoughts onhow the Trump administration
could impact this part of themarketplace and then, in
particular, why should investorsconsider more midstream versus
up and down?
Speaker 1 (30:51):
well, as I mentioned before, we're not super bullish
about oil prices because, I dothink to be clear, the president
really doesn other thanappointing the Fed chair really
doesn't affect inflation, exceptfor oil prices too.
So, like arguably Biden, itwasn't really effective in
restricting production but hewas essentially trying to get
(31:14):
rid of oil, which would tend todrive the price higher.
But the president does havesome impact on that and, as I
mentioned, this president has alot of stroke with the Saudis.
Saudis have excess capacity.
He's laser-focused on keepingoil prices low.
So we're not bullish about thecommodity but we are bullish
(31:35):
about throughput, particularlyon the natural gas side.
A lot of people don'tappreciate that to generate
electricity at the margin youhave to burn natural gas.
So just the bottom line.
You can always increment alittle bit of wind and solar,
but it's very site specific andnot material.
So that's bullish forthroughput and natural gas,
which is bullish for all thepipeline companies and unlike
(31:57):
exact polar opposite of theBiden administration, which is
really tragic because they triedto restrict LNG exports, which
is just horrific for everybodybecause it's not just uneconomic
, it's terrible for theenvironment because you want
more natural gas and less coal.
So both the export of naturalgas and the burning of it in the
(32:17):
US, or electricity for AI andknow AI and electric vehicles
and everything else is a goodtailwind.
And then also, companies arereally solid.
Great credits Now.
They used to be not solid, theyhave had modest growth.
They have dividend growth,great dividend coverage, great
credit ratings, so you're notgoing to crush it anymore.
(32:41):
I mean, AMJ is up like 500%since the pandemic.
That was just because everybodyirrationally sold it, so you're
likely to get low teens, mostlydeferred dividends.
From a tax perspective it'spretty uncorrelated now to the
rest of the market.
So it's a good, you know.
5%.
(33:02):
Add 3% to 5%.
Add to most portfolios who aremore conservative and want a
little diversification, a littlebit of income.
Speaker 2 (33:10):
Is the?
Is the midstream space.
When you look at the differentcompanies, do they tend to
co-move pretty highly, or arethere a lot of idiosyncratic
momentum movements that takeplace?
Speaker 1 (33:21):
pretty highly, or are there a lot of idiosyncratic
momentum movements that takeplace?
They do trade together.
So we do write some calls toenhance income, but not a lot,
because it's sort of like theopposite of ICAP, where Sundar
is doing well and something elseis doing badly.
If we write too many calls inAMZA, like the whole portfolio,
well, we would never do thewhole portfolio.
You know everything gets calledaway and there's nothing cheap
(33:41):
to recycle into.
But there's, there'sopportunities at alpha and we
have, you know, by doing thesame process we do with every
other fund, looking at companiesthat are reasonably priced
relative to their growth rate.
So I'm looking more for naturalgas, as I mentioned, versus oil
.
So you can add value.
But perfectly fine to just likeown AMCA, because it's going to
(34:06):
be really hard to beat it,picking individual stocks.
Speaker 2 (34:11):
And the yield on that is pretty, pretty solid and
consistent over time.
Speaker 1 (34:15):
It's likely to continue to grow pretty
significantly because ourborrowing costs are coming down,
the companies are increasingdividends and, of course, you
get a 1099, so it cleans up allthe tax problems you get by
owning K1 reporters.
Speaker 2 (34:30):
And all the funds are like that.
No K1s, correct, yes, yeah,it's interesting because a lot
of as you know, I deal with alot of different issuers and
some have to do the K1s andadvisors in particular, hate
that it's a mess and we do.
Speaker 1 (34:44):
We pay to clean it up for clients we pay like a
gigantic amount for because wehave a corporate tax return that
files all the K-1s, so FBs areall inclusive, so we pay for the
tax filing.
Basically.
Speaker 2 (34:59):
Some of the things I could throw off here.
Your thesis around oil, aroundthe economy I mean part of doing
any analysis is what if I'mwrong?
How does that impact positions,portfolios, even if it's low
probability?
Talk to me about scenarioanalysis again.
As far as things turn out to betotally different by end of
year, how does that impact thepositions, the sizing, anything
(35:22):
on the funds individually?
Speaker 1 (35:24):
Well, you know, I don't see a lot of huge risk,
the only risk I would see, whichI don't think is really
possible.
But if the Fed was justcompletely out to lunch for the
whole year and we go intorecession, I don't think that's
going to happen.
I don't think that's going tohappen.
In terms of you know, downsidescenarios, I guess we don't.
(35:45):
We know Pat's corporate taxdecreased and our target's
$6,500 on the S&P, so that's notthat exciting.
That's like 10% from here.
It's a normal year, so it'sfine.
But that our funds would dofine, probably better than tech
funds would.
So they work in mostenvironments.
I don't.
(36:09):
I don't really like theconspiracy theory slash like Six
Sigma analysis.
I don't think it does anybodymuch good.
So you know I could come upwith like there's a nuclear war
or something in Ukraine, but Idon't think that really is
helpful.
Speaker 2 (36:25):
Yeah, and that's.
There's a lot of noise aroundthat.
For sure, of the various funds,which ones tend to have the
most hands on approach?
I mean they're all active, buta certain.
Is it ICAP, is it BNBS?
I mean which one tends to havethe most activity?
Speaker 1 (36:41):
Is it ICAP, is it BMS ?
Which one does have the mostactivity?
Well, I think ICAP DAG, becausewe're just writing all these
short-term calls, using judgment.
There's a lot of activity inPFFA because we sell everything
above par, but that's kind oflike sort of mechanical right,
like kind of obvious.
Like if it's called what 25,you sell it at 25 50, so you
(37:04):
will see trades go off every day.
But it's not really that youknow.
It's kind of like required.
Really.
It's really iCap.
You know there's like a lot ofreported activity because of the
options.
Scap, a little bit more longerterm.
We write index calls, butthat's less active than writing
the individual calls.
(37:25):
Amca, pretty long-term oriented.
There we own the same companiesfor 11 years there.
Pffr is an index fund, so thatbarely turns over at all and
BNDES is extremely long-term, sothat is pretty close to zero
turnover?
Speaker 2 (37:43):
I don't think we've.
I've asked this question before.
Why is it that PFFR is indexedversus the others that are
active?
Speaker 1 (37:48):
You know, it was just at the time it was launched, in
2017, it was much faster tolaunch index funds.
That's no longer the case.
So if we were probably to redoit, it would just be part of
PFFA.
But we treat all of our fundslike our children.
Speaker 2 (38:10):
So it'll, you know it'll be there and continue to
do well, but probably not aswell as PFFA.
As you look across theinvisible landscape, you're
going to say this is the mostexpensive part of the
marketplace, which is the mosttoxic, that you would just not
touch until there's some massivedislocation and that generates
income.
I'm trying to get to thequestion of what's the most
expensive income generatingaspect of the marketplace.
What would that area be?
Speaker 1 (38:31):
Well, I was going to say Palantir, tesla, before you
finish your sentence and microstrategy, but there's, of course
that would have been a betterquestion after last week if I'd
said that, yeah, I'd bereplaying those clips.
Yeah because, like we are GARP Yinvestors.
So like, if I did, I'm nottelling you to short Palantir or
(38:54):
like panic if you're on it, butit's arguably worth 50 bucks on
a GARP basis.
So it's a momentum stack forsure on the um.
On the yield side I think it'sthere really isn't much because
people are pretty negative onyield.
They're all excited about theirgame stop well, not game stop,
but their palantir and they'reworried about rates because of,
(39:16):
I think, political talk topoints.
So I don't think there isanything that comes to mind.
I mean I don't really loveBesser and Gray Bond, but
they'll do fine.
If we're worried about rates,they'll do fine.
I would rather be in high yieldthan preferreds, but they'll do
fine.
So I don't really buy the highyield credit spreads or risk
because I just don't see anyscenarios where we have a
(39:38):
significant recession.
I mean we don't see anyscenarios where we have a
significant recession.
I mean we don't really havetight spreads in our funds.
We look for dislocations but wedon't buy that their spreads
are going to blow out because ofsome economic dislocation.
But some people are concernedabout that.
Speaker 2 (39:54):
Okay, and obviously you can have dislocations
without recessions, but they'vecrashed, as it happened in bull
markets, right?
So tell me about that.
So, as an active fund manager,you know, let's say, you've got
a two, three-week dislocation,not as severe as COVID, but
something that's sizable inexpansion.
What are you doing at thatpoint, I mean?
But the problem is, by the timeyou recognize it, it could
already be over, right?
Speaker 1 (40:14):
Well, yeah, that's important because you know we do
have a hedge fund and we kindof know by running that like you
can go buy puts and be superclever and think you're like the
new Steve Cohen and you'reusually lose money doing that.
So but on the other hand, we dohave a very successful hedge
fund and we're really good atcalling the market.
So we just do the same thing wedo at the hedge fund, but like
(40:36):
way less so.
Like right now, our hedge fundis like 30 exposure and 30 cash
and our other funds are justlike a little bit below market,
so maybe like 95 exposure.
You know theoretical exposureto the market so we just dumb it
down.
Or, you know, just be moreconservative because, as you
(40:56):
pointed out, you can be wrong aswell.
Right, so we're getting mostlylonger term focus, but try to
take advantage of our marketinsights and we might write more
calls.
That the market bad, we'llwrite more calls.
If we think it's going to rallyhard, hard, we'll write fewer
calls.
So it's just at the margin andyou know you can see it in the
(41:19):
returns because we just, youknow we beat the index usually
pretty significantly, but justby doing really small steps, not
doing like.
You know, steve cohen like haszero percent exposure and 150
and 75 and that's all within thesame day, you know but but how
do you manage that like soyou've got a team of analysts.
Speaker 2 (41:38):
are you literally saying that we're gonna do an
emergency meeting and talkthrough the ideas?
Or do you manage that so you'vegot a team of analysts?
Are you literally saying thatwe're going to do an emergency
meeting and talk through theideas, or do you have sort of a
playbook when that happens?
I mean, I'm just curious aboutsort of the behind the scenes of
that.
Speaker 1 (41:47):
Well, I mean, it sounds sort of authoritarian,
but I've been doing it for 35years.
So it's me.
I tell them what's going tohappen in the market, and they
have learned that it's better tolisten to me than their fears
and hopes, because we have, likeI said, we have simple things.
You know, I learned some ofthis from shorter term traders
(42:09):
like Steve Cohen.
It's just like what's thecatalyst?
Like, why do you want to belong now?
Okay?
Well, maybe you're bulled up byNVIDIA, I don't know.
So I'm like neutral.
We are bulled up about Friday,that's PCE, about bindi, nvidia,
I don't know.
So I'm like neutral.
We are bulled up about friday,that's pce.
I don't know if that's reallygoing to move the market, but,
to be fair, that's positive.
And so we're just really goodat looking at short-term
catalysts, looking at if it'searning season.
(42:29):
We estimate all the economicdata, but at the end of the day,
it's me like I'm trading themarket all day long.
I got a feel for the marketLike the market's pretty to use
a technical term disgustingright now.
It's not horrible, but it'sclearly neutral at best.
So we just proceed cautiouslyand you know, and, like you said
(42:51):
, don't overtrade, like we don'tpanic and go.
Let's go to all cash Likebecause you can.
You know we don't want to makeany significant mistakes.
Speaker 2 (42:59):
Jay, for those who want to learn more about the
funds, where would you pointthem to?
I know you also have a sub-sack, but you're getting some nice
traction.
But talk to me about wherepeople can learn more.
Speaker 1 (43:08):
So wwwimprocaptfundscom and you can
register for our webinar.
You can send direct questionsto us.
We do love talking to ourclients, so feel free to call or
email us directly.
Speaker 2 (43:23):
For those that are listening, I am a big fan of
Jay's.
I've gotten to know him moreover time, as you can tell.
Very knowledgeable, and I likelistening to guys who have been
in the business as long as Jayhas, especially relative to
these younger kids that have hadsuccess post-COVID that don't
have human intelligence at all.
There's a great quote I'm notyoung enough to know everything.
(43:46):
I feel like a lot of theseyounger traders definitely fit
into that, so it could be heresomebody like Jay.
Again, folks, this is asponsored conversation by
Infrastructure Capital Advisors.
Make sure you check out theirfunds.
We'll be doing more of these.
We're also hosting a webinarvery soon.
If you're on the lead lagreport email list, you'll be
getting that registration linksoon and Jay, as always, I
(44:08):
appreciate it.
Great Thanks.
Thanks, Michael.
Thank you, buddy, Cheers.
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