July 31, 2025 • 38 mins
The financial world is plagued by misconceptions about the budget deficit, with both political parties incentivized to make our fiscal situation appear worse than reality. Diving into the actual numbers reveals a fundamentally different picture than what dominates headlines.
Examining Congressional Budget Office projections shows they completely omit approximately $300 billion in annual tariff revenue. When properly accounted for, next year's projected deficit falls to roughly $1.4 trillion or 4.5% of GDP—a level that becomes sustainable when compared to our nominal economic growth rate. The relationship between debt sustainability, economic growth, and monetary policy creates a more nuanced story than the oversimplified crisis narratives that dominate public discourse.
The Federal Reserve's current policy has resulted in an extraordinary 9% annual contraction of the money supply, a condition not seen since the Great Depression. This monetary tightening creates deflationary pressures that will eventually force rate cuts—likely beginning in September. Understanding these dynamics provides crucial context for investment decisions across asset classes.
For equity markets, our analysis maintains a year-end S&P target of 6,600 despite near-term challenges. The market appears fully valued with earnings expectations running high, particularly for technology companies, creating potential volatility through August and September. Small-cap stocks, despite recent underperformance, stand to benefit significantly from upcoming Fed rate cuts, particularly those with strong balance sheets and meaningful dividends.
The most profound insights often come from following the money supply data that mainstream financial media consistently overlooks. Whether you're positioning for potential market turbulence or seeking income through high-yield bonds yielding around 8%, having a clear-eyed view of these economic fundamentals provides an edge in navigating what promises to be an eventful conclusion to 2024.
Start your adventure with TableTalk Friday: A D&D Podcast at the link below or wherever you get your podcasts! Sign up to The Lead-Lag Report on Substack and get 30% off the annual subscription today by visiting http://theleadlag.report/leadlaglive.
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:00):
I want to get your take on where we are in terms of
the market for the last part ofthe year.
Speaker 2 (00:04):
So we've been consistent that, with no
corporate tax decrease, which iswhat we had that our target was
$6,600.
And we had that target when wewere at $5,000, and we still
have that target.
And that's the value of ourresearch is we have underpinning
(00:24):
data that supports 6,600.
So we don't panic and cut itlike most of Wall Street did
when it went to 5,000, nor do weincrease it randomly.
Speaker 1 (00:41):
My name is Michael Guy, publisher of the Lead Lag
Report.
Joining me is Mr Jay Hatfield.
This is a sponsoredconversation by Infrastructure
Capital, one of my clients, andmaybe you've seen that.
I've interviewed Jay and seenhow right he's been on a number
of things and I think he and Iare actually very aligned here.
But let's talk about something.
You teased me, jay, at thebeginning, prior to going live,
you got some new research you'vedone on tariffs and the deficit
(01:04):
prior to going live.
Speaker 2 (01:05):
You got some new research you've done on tariffs
and the deficit, yeah.
So it's kind of shocking howmuch disinformation you know,
aka talking points get put outabout the budget deficit so
specifically and it'sunderstandable, because both
Democrats and Republican deficithawks want to make the deficit
(01:25):
seem worse than it is.
So we actually get cuts and Ido too but we still have to make
money trading stocks, so wehave to be objective.
So, specifically, a whole bunchof talking points about how,
basically focusing on the taxbill relative to this
theoretical, ridiculous scenariowhere the Republicans would
(01:47):
just let it expire, so all thedeficit reporting was relative
to that, so it wasn't.
So I think that number wasmoved around at the last minute,
but roughly say, 2.5 trillionallegedly added to the deficit.
The reality was that there wasa minor cut, almost not worth
(02:08):
mentioning, but, say, 50 billiona year, which would be 500
million in their swap math.
They multiplied everything by10 because it's over 10 years.
So minor cut.
Basically, you add the from anincremental perspective.
Because the other talking pointwas well, all this tax cut went
to the wealthy.
Well, that was what happened in2017.
(02:30):
This tax cut, the incrementaltax cut, went to tip for tipped
wages, social security andovertime, which are not earned
by the wealthy pretty much Evenmost of the wealth.
If you still get income, yoursocial security gets wiped out.
So that doesn't matter thatmuch.
(02:51):
For a macro perspective I thinkit matters and it's not that
stimulative to the economybecause you're not helping
capital formation.
But so that was the deficit.
Focus was, oh, they blew up thedeficit.
But the reality is there wasthis minor cut.
We cut those who had the taxcuts I mentioned and then
(03:13):
reduced the IRA subsidies andreduced eligibility for Medicaid
.
So the net of those two was aminor cut.
But even the CBO's numbersshowed that we're about $1.9
trillion this year and this ison the new tax bill and $1.7
next year.
But if you look at the CBO'snumbers which we did and then
(03:36):
did our own forecast theytotally don't include tariffs.
So the $1.7 trillion.
So we're not making some weirdthing up.
We're starting with CBO numbersand just adjusting for tariffs.
They're running at least $300billion right now, but we're
using $300 billion.
To be conservative.
That gets a $1.4 trilliondeficit next year and that's
(03:59):
only 4.5% of GDP and that'simportant because GDP normally
grows around 5%, 3%, nominal, 3%, real, 2%, inflation or some
combination of those two.
So that means that the debt issustainable.
It's roughly one times GDP.
You're going to hear a biggernumber.
(04:20):
Same thing talking points.
People want to report the wholedebt, and so that ignores the
fact that Federal Reserve ownsabout $7 trillion, social
Security Administration a coupletrillion.
So the net debt held by thepublic is roughly one times GDP
and it's going to stay that wayat least for the next year or
(04:40):
two.
There could be an uptick, orlikely to be an uptick, if
there's nothing done aboutSocial Security but, more
importantly, medicare.
But it is possible to grow outof that.
We're forecasting 3% growth.
And then the last point on thattopic is and you'll hear other
assertions, but I can go throughthe data if you care but what
(05:04):
drives economic growth issavings and investment.
There's a study from the IMSsaying it's 70% correlated.
I would say it's closer to 100,but statistically about 70 is
as high as you get, and sothat's across the globe.
So if you save 300 billion fromtariffs and then that gets
(05:25):
invested by corporations, thatshould add about 0.2% to the
long-term growth rate of the USeconomy, which is important
because we do.
You know that's not huge, it'sstill significant.
We need to grow our way out ofthe over-promising on Social
Security and Medicare.
But so that's a mild positivefor rates.
(05:46):
I'd still say the key driver ofrates is not the budget deficit
but actually Fed policy.
You can talk more about that aswell.
Speaker 1 (05:54):
Yeah, let's, let's get into that.
I mentioned that I was myselfon a show earlier and one of the
topics was around is Powellgoing to finish this term and
all the drama that we see, andhow would the market reaction be
if Powell were fired or notfired?
How much of Fed policy isPowell versus everybody else in
the Fed?
Speaker 2 (06:12):
Well, that's kind of the core point is that you have
on the.
It's important with the Fed todistinguish between the Federal
Reserve Board and the FOMC.
So there's sevenquasi-permanent board members
and then five rotating regionalbank presidents.
So the Fed chair historicallyis reluctant to have dissents in
(06:38):
the core Federal Reserve Board.
Two of them are Republicans.
Both of them have come out fora July cut.
They don't buy the Fed's, wethink, fallacious analysis of
the tariffs.
Specifically, the Fed's fear,which is irrational and not
supported by any data, is thatthe threat of tariffs will first
(07:01):
of all affect CPI significantly, which it hasn't, and we did
predict that because oil isactually offsetting it decline
in oil, that is.
But there was a little bit ofan uptick last month and could
be some more.
But it's one time and thisexpectations theory of inflation
that people say oh well,there's tariffs, so we're going
to have higher inflation and Idemand higher wages.
(07:24):
Well, there's no one in theUnited States who can demand
higher wages.
They're like 5%, but they'regoing to get their normal
increase anyway.
They're like utility work for,like utility unions, regulated,
basically regulated industriesthat can survive having unions.
So that's an antiquated notion.
So the Fed is completely offbase needs to cut rates.
But what we think will happen Imean it would be OK to fire
(07:47):
Powell.
In our opinion there would be adip in the markets and that
would be a buying opportunity.
But the real point is not thatsignificant because you still
have four Democrats, twoRepublicans and then the Fed
chair.
I would call the Fed chair moreof a Democrat right now, but
he's really more neutral.
He's like the herder of cats.
So because there's twoRepublicans that are going to
(08:10):
probably dissent on this pause,he'll probably negotiate with
them, say, well, we're going topause now, but we'll basically
lock in a September or signal aSeptember cut, and I think
that'll be favorably received.
And you've seen that in thebond market, where we are as
high as 450, which is notsustainable, by the way, that's
when mortgages go up over seven.
(08:31):
But now to 433, when the Fedactually starts cutting, I think
we'll go below four.
So we're bullish on rates andthe Fed still works, with or
without the Fed chair.
Speaker 1 (08:43):
Really, you think that Trump saying we should be
like sub 1% is him being serious?
Speaker 2 (08:51):
Well, I'm certainly serious, but wrong in the sense
that we have probably the onlyfirm in the world maybe that can
estimate inflation at everyinterest rate.
So right now we're at 4.33.
The money supply is shrinkingabout 9% a year, which is a
(09:12):
round number, is about $500billion.
That's 1.3% above what we thinkis the fair value, which would
be 3%.
So it takes about $600 billionto move the interest rate and
that's annual increase in themoney supply.
So right now they're shrinkingat $600.
(09:36):
We estimate to get it to growthe normal rate, which would be
about $300, would take a 3% rateand then if you took it down
another 100 base points, thatwould be 600 billion and then
another 100 would be 1.2 billion.
So you'd be increasing themoney supply at 1.5 billion.
(09:58):
It's roughly we use roundnumbers six trillion.
This is all trillions.
If I said billions Trillion.
So 15 or 1.5 over six is 25%,the normal growth's five.
So you'd have maybe not 20%inflation but you'd have
double-digit inflation.
(10:18):
So it'd just be a replay of thestupidity that the Fed
perpetrated during the pandemic.
They increased the money supply70%, then they shrank it to 60.
It took four or five years.
We grew at 38 and we had 22%inflation.
So if you want 1% rates you'regoing to get double digit
(10:40):
inflation.
But look the insight thatyou're never going to get from
anybody else, because they won'treally fully understand money.
The monetary policy is for theFed to peg rates.
They have to either increase ordecrease the money supply that
debases the currency and theprices of the ratio of currency
to real goods.
So if that gets out of whackproduces inflation.
(11:02):
This is Milton Friedman's usedto be theory.
It's not been proven to be justabsolutely correct because of
the pandemic.
Speaker 1 (11:10):
Yeah, and I'm sure that Trump would blame the Fed
if inflation occurred under thatscenario.
Speaker 2 (11:15):
Anyway, even the way that he is, it would be a huge
policy mistake, but I don'tthink there's anybody.
Trump is not President Trump'snot proposing a completely
random candidate who doesn'tunderstand at least something of
what I just said.
And they may not quantify itthe way I did and may not look
at the money supply, but theywill know that if you reduce
(11:37):
rates to 1% you're going to havesignificant.
Maybe they won't say doubledigit, but although they can be
quite stupid, as they were andthat's the only word, like when
I'm going to television, theyfreak out, but that's the only
real word because, keep in mind,when they were saying
transitory PPI was double digits, housing was going up 20%
(11:59):
annually.
This is year over year alreadyup 20, not just one month up 20.
Oil was up 30%.
It was completely obvious thatwe were going to double-digit
inflation.
It's just that they looked atthe lagged CPI and it hadn't
been running up yet.
Speaker 1 (12:15):
You had mentioned to me that you thought the markets
were starting to look in quotesdicey, which I happen to agree.
I'm blown away at how we seemto be back in meme stock media
all over again, although maybe Ishouldn't be blown away given
the way retail tends to come inat these junctures.
I want to get your take onwhere we are in terms of the
market for the latter part ofthe year here.
Speaker 2 (12:37):
So we've been consistent that, with no
corporate tax decrease, which iswhat we had that our target was
6,600.
And we had that target when wewere at 5,000, and we still have
that target.
And that's the value of ourresearch is we have underpinning
(12:57):
data that supports 6,600, so wedon't panic and cut it like
most of Wall Street did when itwent to 5,000, nor do we
increase it randomly.
So the key thing to think abouta target is well, if it's a
year-end target, it's based on26 earnings 19,000, 26 earnings.
(13:18):
So it shouldn't be that we getto the target in mid-year.
So we're you know you couldargue our target.
We don't do mid-year targets,but it's 6,300.
We roughly started 6,000, alittle bit below.
Now we're at 6,300.
We're saying 6,600.
So we're clearly fully valuedand it's giving a signal to at
(13:41):
least lighten up on yourpositions.
Then the two other dynamics thatmake it dicey, and dicey means
it can go either way.
It doesn't mean negative, it'snot bad.
It it dicey, and dicey means itcan go either way, doesn't mean
negative, it's not bad, it'sdicey.
So the other dicey thing isthat we have earnings and we
don't really know how they'regoing to turn out, because all
it really matters for theoverall market is tech.
Earnings expectations, asyou're indicating, michael, are
(14:03):
high, so that's going to bedicey.
It's really next week becauseGoogle and Tesla are kind of the
poor bastard childs of the Mag8.
So really the four next weekare going to determine what
happens to market.
And then we're really close tothe end of earnings season,
ending into August and September, which almost always are not
(14:26):
that good or even bad, whichalmost always are not that good
or even bad.
So we have that combination ofpending earnings that can go
either way, maybe a little bitrisky on the downside, full
valuation, and then thisimpending August September
timeframe.
So I think that's why you'reseeing the market stall.
(14:47):
It's not a full-out sell signal, but we're playing musical
chairs and we don't know exactlywhen the music's going to stop.
It's not going to be Armageddon, but we'll have some sort of a
pullback, almost certainly inAugust.
September might be driven bytariff headlines or just general
profit taking, particularlysome of those meme stocks you
(15:09):
mentioned, just a kind ofneutralist market.
You could also call it dicey,but dicey doesn't mean negative.
Speaker 1 (15:17):
Yeah, I think seasonality-wise, typically
around mid-late July fixedbottom starts to turn up,
consists with the AugustSeptember time.
From a portfolio managementperspective, do you do anything
based on that that view?
Speaker 2 (15:30):
we do.
We we cycle, unlike mostmanagers.
We do cycle our exposure to themarket, not like a hedge fund.
So we have a hedge fund.
We could very well take ourexposure from 100 to 125 to zero
using puts and some other justselling longs.
So we don't do that.
But if we, if it's prettyobvious like now it's pretty
(15:52):
obvious the market's pretty good, so we're close to fully
invested and then we have somegigantic gains.
We made some great calls atbroadcom goldman sachs.
So we don't just blow it allout like we're a hedge fund.
But you know we would trim backon those positions, write more
covered calls on an ICAP.
We do that on individual names.
(16:14):
Certainly would do it on theriskier names.
That reduces your short termexposure to the market.
So we do it at the margin.
But it's not like if we'retotally wrong about August and
September that we won'tparticipate in the rally.
We'll just have like 90%exposure and do 90% of the rally
.
And conversely, if the market'sway down, we're going to be
(16:38):
down, but without risk there'sno return.
It's very difficult to run ahedge fund where you cycle the
exposure every day.
Certain people like Steve Cohencan do it, but it's better to
be invested in the long runYou're going to do way better.
So we're always invested.
We just shade it to be a littlebit longer and a little bit
(16:59):
less long if we think themarkets are, you know, very
attractive, attractive, neutral,depending on sort of that.
Five ratings in the market andit's pretty obvious, like you
could probably get if you had 90or, say, 100 financial
professionals.
You probably could get 90 toagree like, okay, yeah, the
market's kind of neutral rightnow.
You could get 90 to agree, likeafter the tariff tantrum was
(17:24):
announced or tariff liberationday, the market was bad and then
it stabilized during earningsand everybody would probably
agree well, now it's maybeneutral.
So these aren't difficult callsto make.
You just look at the tape, justhave to be a market whisperer.
You don't need to have likestrange proprietary indicators,
(17:46):
wake up in the morning and lookat your screen and you can see
what's happening.
So just, we act a little bit onthat in our ETFs, a lot in our
hedge fund, but sometimes youcan miss big rallies and hedge
funds.
Speaker 1 (18:01):
So that's why they typically underperform.
You mentioned cover calls, youmentioned ICAP, so let's touch
on both.
Speaker 2 (18:04):
Well, we really like that fund because arguably it's
where we're adding the mostvalue.
So we write very short termcalls using our valuation models
and, where we have gains, toproduce a lot of what's called
theta or decay.
And that's what you want, Iwould argue.
(18:26):
And that's what you want, Iwould argue.
There's some option strategistswho almost exclusively argue
for buying premium and if you dothat over long periods of time,
you'll see that you're almostcertainly going to lose money.
You might hit a couple big ones, well, but on average they're
(18:47):
going to expire.
So we're playing that.
Of course we have stock thatbacks it up.
So, worst case, we take profitson the stock that's close to
our profit target.
Otherwise, in the next week ortwo it'll expire and we don't
get run over in rallies likeeverybody loves Jeffy.
(19:07):
But they don't do what we dowhere they're writing individual
calls.
They're writing index callsthrough notes, but it's
basically index calls.
That converts it to what lookslike pure income.
But there was writing calls.
So you notice like they'reunderperforming this year.
That's because they'reoverwritten on the index and the
index is up a fair amount onthe S&P.
(19:28):
So we avoid that by doing itvery short term If we start to
lose what's called beta orexposure to the market, we can
deal with that in the short run.
We can buy those very shortterm calls back.
We can add stock If it getscalled away.
We can add it on Monday If itgets called away on Friday.
So all of that allows us todynamically adjust that exposure
(19:52):
I was mentioning.
So we look at a net of options,whereas JEPI or in other funds
like that not to pick on them,but index riding funds if the
market starts running then theirexposure to the market drops a
lot and they don't participate.
So we don't want that.
We want the decay expirationthat produces income.
We want it very short term.
(20:12):
That takes a ton of work, butthat's what we enjoy doing,
that's what we're good at doingand so we expect that to
continue to add a lot of valueadd income.
Been increasing the dividend onICAP it's outperforming its
peers this year and very highquality companies as well.
So typically these companies dowell, relative to the S&P, at
(20:37):
least in a downturn, and even ifthey don't, they're going to be
around.
Most of them are going to bearound forever.
They're super high qualitylarge cap.
I think our fund, the averagemarket cap is about $130 billion
, so these companies are notgoing away anytime soon.
So a great asset class to writecalls hold in the long run
(20:57):
generate income all gooddividend payers.
So we really like that strategyin this market.
Speaker 1 (21:07):
Yeah, and to your point, it's done.
Well, if we get more volatility, how do you think it could
conceivably perform?
Speaker 2 (21:16):
Well, it would depend on how much, you know, we do
adjust our exposure.
But, to be fair, we are bullishabout the market and we do have
some higher beta names likeGoldman Sachs in that.
So if we took that downsignificantly then we would,
would you know, not lose a tonof of return.
(21:39):
But if we just sat there wherewe are because we have a pretty
big position 5% then they'rehigher beta, so it underperform.
But if you're a longer terminvestor, well, hopefully we do
something about it.
It write calls and reduce ourexposure.
But even if we didn't do that,we're still bullish about the
year.
So you get a little bit ofdrawdown in august, september
(21:59):
and then a boom and in thefourth quarter.
And that's really if you wantto beat the market and beat
hedge funds.
It's pretty easy to do.
You just stay invested in anddeal with a little bit of
volatility.
Speaker 1 (22:13):
Of course, you got a number of funds, one of which is
BNDES.
On the bond side, I put out aquestion on X yesterday.
I said what's the biggestcontrarian trade of all?
Right now?
A lot of people said healthcareand several noted bonds.
So let's talk about sort ofbonds as an investment here and
(22:36):
BNDs in particular.
Speaker 2 (22:37):
So the best way to think so BNDs is a high yield
bond fund.
There's a fund we compete BNDwith.
Bnd is their ticker, they're aninvestment grade.
It's called an aggregate fundor ag fund.
They yield four, we yield eight.
So if you buy an ag fund likeBND, you get a lot of interest
(22:59):
rate risk, say, 80% correlatedto the treasury and really zero
to negative exposure to stockmarket.
With BNDES you get about a 0.3exposure to stock market and 0.2
to interest rates, sinceinterest rates and stock market
tended to be negativelycorrelated not always like in 22
(23:22):
, but normally you kind of endup with something that doesn't
really do a lot in most marketsbut yields eight, do a lot in
most markets but yields eight.
So if you're a conservativeinvestor like me, I've been
adding it to it in my IRA and Idon't ever look at the price.
We launched it at 50, it's at47.80.
(23:42):
It's, of course, paid a ton ofdividends, so that was a
positive return.
But if you just don't want toworry about the market, if you
are worried about an AugustSeptember pullback, we are
bullish on rates, as weindicated, because of the Fed
rate cuts and global rate cutscontinuing at some level.
So, and even the budget deficit, although that's not the key
(24:03):
driver.
So if it, even if it goes up, Iwouldn't sell all of your ponds
.
So we think we'll head to the4% level when we get more rate
cuts.
So that will be a tailwind.
You know, if you really justwant to bet on rates, you should
buy BND.
But if you want an all-weatherfund, maybe rates stay here.
Maybe we're wrong.
Go higher, maybe the stockmarket goes a little bit lower.
With BND, yes, you're justgoing to get your 8, won't move
(24:26):
around that much.
We'll move around some, butjust those percentages I
mentioned 30 stock market, 20 tothe bond market.
They tend to offset.
So you're going to get not alot of movement in price and a
good amount, or really goodamount, of income, about 8% or
(24:47):
over 8%.
So that's a good conservativeholding that we think will do
well, because both the stockmarket and bond market in our
models is going to be higher atthe end of the year.
So it'll be appreciating.
But even if you don't, youstill get your 8%.
Speaker 1 (25:01):
Yeah, and those yields are still important,
independent of whatever the Feddoes.
I mean as a number, it's a goodnumber to have.
Speaker 2 (25:09):
Well, right, Because the way to sort of estimate in
your head what the interest ratesensitivity is is you take the
spread as a total of the totalincome.
So in other words 8%, theTreasury is at 430.
So you've got 370 of spread.
Bnds is yielding around fourand the treasury is at 430.
(25:34):
So you've got closer to 100%exposure to interest rates and
with ours it's I mean, it's not50, but it's way less than that,
because you're getting a lot ofextra return, because you're
taking credit risk and so higheryields produce lower duration
and lower sensitivity tointerest rates.
Speaker 1 (25:54):
Speaking of duration, I think it would be good for
small caps.
Arguably, if rates do fall, Ithink deregulation is beneficial
for small caps, but obviouslyyou want to have cost of capital
being less and you do have asmall cap fund as well.
Let's talk about small capsespecially from the standpoint
(26:15):
of the fact that small capsreally haven't hit the prior
highs of the year, while largecaps have.
Speaker 2 (26:22):
They've definitely been out of favor.
And there's a misunderstanding.
There's a notion that smallcaps are all over levered and
really exposed to interest rates.
And if you look at it, whichwe've analyzed, they really have
about the same leverage aslarge cap companies, a little
bit more floating rate but notsignificant.
(26:42):
So that's not the real reasonthey're interest rate sensitive.
The reason they're interest ratesensitive is the sector
allocation, particularly invalue funds like S-CAP tend to
favor financials and we'relooking for substantial dividend
yields too.
So financials, reits, utilitiesand a very small allocation of
(27:06):
tech.
Even the overall Russell 2000is only 10% tech.
The overall Russell 2000 isonly 10% tech.
So not just small caps butreally like today, in today's
market rates are rallying andtech is weak and everything else
(27:28):
is strong.
So interest rates typicallyproduce a rotation at the margin
out of tech into old economy.
And you mentioned health care.
They have good dividends inhealth care and utilities.
There is health care andsignificantly in small cap index
.
So it's really more the sectorallocation than it is that these
companies are just crazilyfinanced and taking all this
(27:49):
interest rate risk.
It's just the sectors they'rein have interest rate
sensitivity so and also theyhave beta.
Small caps are strange in thatthe market's doing really well.
Usually they're off-perform.
If it's stalled like this, thenthe interest rates become the
key driver.
Speaker 1 (28:08):
Yeah, I will say it's been interesting that it seems
like small caps maybe havestalled a bit.
It looked like they were goingto try to make a and you'd think
that that's going to be aproblem for all things, and
small caps still will get.
Well, you know one.
Speaker 2 (28:21):
There's always like there's always a fly in the
ointment, like if it was so easyto get short the market in
August and September, likeeverybody would do it at the end
of July and then it would neverwork Right.
But the fly in the ointment is,if we're correct about the Fed,
it's going to be a Fed rate cutin mid-September.
That's going to be great forsmall caps.
(28:43):
So there are positive catalystsbeyond earnings out there.
I mean, of course the Fed couldnot cut, but they absolutely
should.
We're going to have deflationif they don't.
The housing market I'm out inSan Francisco.
There was a report yesterdaythe housing market's weak in San
Francisco.
Like how can that be?
There's this big tech boomgoing on.
Well, it's because rates aresky high.
(29:03):
So if it's weak in SanFrancisco, it's weak across the
country.
We know what it is from otherdata.
But so we can't have thatforever.
We have to have lower rates.
That's going to benefit smallcaps and the sectors within
small caps.
So non-tech I mean I wouldn'tbet against tech right now, but
(29:24):
it's fine to be invested in theother sectors because they will
benefit when we get these Fedrate cuts.
Speaker 1 (29:27):
And let's talk about S-cap as the way to play that.
Speaker 2 (29:31):
So we are a higher quality than the index.
So we I mentioned we're value,but we're also have only
securities with significantdividends have low leverage.
So even if this overall sectorwas levered to levered it's not,
but if there was we wouldn'thave that problem because we
(29:52):
have less leverage, gooddividend coverage and then
stocks that traded reasonable Pratios compared to growth, so
peg ratios including yields.
But so with our companies itmatters.
But you can use peg ratios ontech stocks.
So there's no yield and youshould at least look at the peg
(30:13):
ratio.
Like we recommended Palantir onFox business about a year and a
half ago.
I it was at 30, it was cheap toits growth right, and now it's
like trades 150 times and growsat 30.
So that's a five peg markets ata two peg.
So we look at reasonable growthwith yield stocks.
(30:33):
You say growth plus yield, sopeg will peggy if you will um.
But that way you stay out oftrouble.
You know palantir may continueto work but it may miss earnings
.
Like look out below um, veryhigh expectations, a lot of risk
.
So we're in the lower riskreasonably.
You know companies trading areasonable multiples, paying
(30:54):
dividends, good credit quality,good dividend coverage and
that's worked really well.
And we do write index calls, buta lesser amount than the ones I
was picking on before.
Like peggy.
They run.
They can write almost 100, wewrite 30 and we only do weekly.
So we also do it short termlike we do with icap, but we
(31:18):
don't do individual options onsmall caps because they don't
have weekly options, so youdon't get all that decay or
theta.
And also small caps are eithergreat or terrible, but rarely
mediocre.
So Coke reported this morning70, it's down like 30 cents.
So we have a lot of callswritten on Coke.
(31:39):
Well, that's fine, but there isa C-O-K-E.
There was a small cap company,it's a bottler for Coke and we
owned it.
It was super cheap in ourmodels and they mentioned share
repurchase and they're up 30%.
So Coke can, ko cannot,announce a share repurchase and
be up 30, but C-O-K-E can.
This is not a good business towrite calls, in our opinion, on
(32:06):
small caps because they're toofar out, like monthlies, and the
volatility is kind of digitallike they get acquired.
Like ko, it's extremelyunlikely to be acquired, but
coke could be by ko possibly,but probably not because they
were spun off from them but bysome otherler or some other
company that wants to own it.
So we think it's a superiorstrategy to write a small amount
(32:27):
of calls for index calls forsmall caps, but don't do that,
you know, particularly in largersizes, for large caps, because
it's better to write theindividual calls.
Speaker 1 (32:40):
Anything that we missed, jay?
I mean, I feel like we were allworried about war not too long
ago, all worried about oilprices.
Suddenly, and suddenly,everyone forgot about that.
Speaker 2 (32:51):
Well, you should have read some of our notes, because
we were.
You know we're greatforecasters of oil prices but
terrible traders of oil.
So to be fair.
But we look at global supplyand demand.
It's imbalanced.
So unless you wipe out the oilfacilities, it's going to stay
in balance.
So when oil is at 75, we said,oh, it should be around 70.
(33:15):
Oil went to 60, we should sayit'd be around 70.
So but it is positive that it'sdown for the year.
So that's important.
And then, just in terms ofwrapping up, I would just
reemphasize to not ignore themoney supply like everybody else
does.
It shrank 9% year over year.
It's what drives inflation.
(33:35):
That's why we're headed todeflation.
That's why the Fed is going tohave to cut.
It's going to be decelerationin employment.
Goldman is on board for that aswell.
The last employment report wasactually quite weak 74,000
private jobs.
Pay attention to the moneysupply.
That's why the Trump 1% doesn'twork is you have to increase it
too much.
But it's also why he's correctabout the current Fed.
(33:58):
They're so tight they're havingto shrink the money supply by
9%.
That's really hasn't happenedsince the Great Depression, so
it's a very risky thing to bedoing?
They're getting away with itbecause housing never really
recovered from the greatfinancial crisis, so it can't
really crash.
And then we have this tech boomthat's offsetting it.
But eventually the Fed willfigure it out.
(34:20):
They can't forecast anything,but they can look.
They're OK to bad, at leastlooking at current data.
So they'll figure it out andwe'll have lower rates and that
would be bullish for stocks andbonds.
Speaker 1 (34:33):
That definitely would be nice if that's the case, jay
, for those who want to tracksome of that research that you
alluded to, so that they don'tmiss out, or can they find it?
Speaker 2 (34:43):
InfraCapFundscom and you can get our adjusted CPI.
We do CPI-R, so that's realtime corrects for the BLS's
terrible methodology and alsothe global money supply, which
is critical for predicting theoverall markets in the world and
global bond prices.
So never going to get that datafrom anyone else.
(35:06):
For some reason nobody seems tocare about it, but it's what
drives the markets.
Speaker 1 (35:10):
And then same side for learning about the funds.
I certainly think BNDES isinteresting here and SCAP, and
that's my only bias, because Ithink there's a tailwind, and
I'll just quickly mention, too,that we do have a monthly
webinar.
Speaker 2 (35:22):
We talk about our map research, which is highly
proprietary.
I don't hear about it anythingsimilar to what we're saying,
like no one's forecasting thebudget deficit next year.
It's very easy to do and youhave to be maybe you have to be
a CPA, like me, and be able touse a spreadsheet but so very
proprietary data, but also anopportunity to find out more
(35:45):
about our funds, ask questionsabout funds and even if you
don't own our funds, you hearwhat existing holders are asking
, and we enjoy it because welearn a lot from our clients.
So that's a monthly webinarthat you can sign up for on our
website.
Speaker 1 (35:59):
And folks, I'm a big fan of J Hatfield and
Infrastructure Capital.
Please learn more about theirfunds, check out the research
and I'll see you all on the nextepisode of Lead Lag Live, which
will literally be in about 10,15 minutes back to back today,
folks.
Thank you, jay, appreciate it.
Speaker 2 (36:13):
Thanks, mike, that was great.
Cheers everybody.
I want to get your take on where we are in terms of
the market for the last part ofthe year.
Speaker 2 (00:04):
So we've been consistent that, with no
corporate tax decrease, which iswhat we had that our target was
$6,600.
And we had that target when wewere at $5,000, and we still
have that target.
And that's the value of ourresearch is we have underpinning
(00:24):
data that supports 6,600.
So we don't panic and cut itlike most of Wall Street did
when it went to 5,000, nor do weincrease it randomly.
Speaker 1 (00:41):
My name is Michael Guy, publisher of the Lead Lag
Report.
Joining me is Mr Jay Hatfield.
This is a sponsoredconversation by Infrastructure
Capital, one of my clients, andmaybe you've seen that.
I've interviewed Jay and seenhow right he's been on a number
of things and I think he and Iare actually very aligned here.
But let's talk about something.
You teased me, jay, at thebeginning, prior to going live,
you got some new research you'vedone on tariffs and the deficit
(01:04):
prior to going live.
Speaker 2 (01:05):
You got some new research you've done on tariffs
and the deficit, yeah.
So it's kind of shocking howmuch disinformation you know,
aka talking points get put outabout the budget deficit so
specifically and it'sunderstandable, because both
Democrats and Republican deficithawks want to make the deficit
(01:25):
seem worse than it is.
So we actually get cuts and Ido too but we still have to make
money trading stocks, so wehave to be objective.
So, specifically, a whole bunchof talking points about how,
basically focusing on the taxbill relative to this
theoretical, ridiculous scenariowhere the Republicans would
(01:47):
just let it expire, so all thedeficit reporting was relative
to that, so it wasn't.
So I think that number wasmoved around at the last minute,
but roughly say, 2.5 trillionallegedly added to the deficit.
The reality was that there wasa minor cut, almost not worth
(02:08):
mentioning, but, say, 50 billiona year, which would be 500
million in their swap math.
They multiplied everything by10 because it's over 10 years.
So minor cut.
Basically, you add the from anincremental perspective.
Because the other talking pointwas well, all this tax cut went
to the wealthy.
Well, that was what happened in2017.
(02:30):
This tax cut, the incrementaltax cut, went to tip for tipped
wages, social security andovertime, which are not earned
by the wealthy pretty much Evenmost of the wealth.
If you still get income, yoursocial security gets wiped out.
So that doesn't matter thatmuch.
(02:51):
For a macro perspective I thinkit matters and it's not that
stimulative to the economybecause you're not helping
capital formation.
But so that was the deficit.
Focus was, oh, they blew up thedeficit.
But the reality is there wasthis minor cut.
We cut those who had the taxcuts I mentioned and then
(03:13):
reduced the IRA subsidies andreduced eligibility for Medicaid
.
So the net of those two was aminor cut.
But even the CBO's numbersshowed that we're about $1.9
trillion this year and this ison the new tax bill and $1.7
next year.
But if you look at the CBO'snumbers which we did and then
(03:36):
did our own forecast theytotally don't include tariffs.
So the $1.7 trillion.
So we're not making some weirdthing up.
We're starting with CBO numbersand just adjusting for tariffs.
They're running at least $300billion right now, but we're
using $300 billion.
To be conservative.
That gets a $1.4 trilliondeficit next year and that's
(03:59):
only 4.5% of GDP and that'simportant because GDP normally
grows around 5%, 3%, nominal, 3%, real, 2%, inflation or some
combination of those two.
So that means that the debt issustainable.
It's roughly one times GDP.
You're going to hear a biggernumber.
(04:20):
Same thing talking points.
People want to report the wholedebt, and so that ignores the
fact that Federal Reserve ownsabout $7 trillion, social
Security Administration a coupletrillion.
So the net debt held by thepublic is roughly one times GDP
and it's going to stay that wayat least for the next year or
(04:40):
two.
There could be an uptick, orlikely to be an uptick, if
there's nothing done aboutSocial Security but, more
importantly, medicare.
But it is possible to grow outof that.
We're forecasting 3% growth.
And then the last point on thattopic is and you'll hear other
assertions, but I can go throughthe data if you care but what
(05:04):
drives economic growth issavings and investment.
There's a study from the IMSsaying it's 70% correlated.
I would say it's closer to 100,but statistically about 70 is
as high as you get, and sothat's across the globe.
So if you save 300 billion fromtariffs and then that gets
(05:25):
invested by corporations, thatshould add about 0.2% to the
long-term growth rate of the USeconomy, which is important
because we do.
You know that's not huge, it'sstill significant.
We need to grow our way out ofthe over-promising on Social
Security and Medicare.
But so that's a mild positivefor rates.
(05:46):
I'd still say the key driver ofrates is not the budget deficit
but actually Fed policy.
You can talk more about that aswell.
Speaker 1 (05:54):
Yeah, let's, let's get into that.
I mentioned that I was myselfon a show earlier and one of the
topics was around is Powellgoing to finish this term and
all the drama that we see, andhow would the market reaction be
if Powell were fired or notfired?
How much of Fed policy isPowell versus everybody else in
the Fed?
Speaker 2 (06:12):
Well, that's kind of the core point is that you have
on the.
It's important with the Fed todistinguish between the Federal
Reserve Board and the FOMC.
So there's sevenquasi-permanent board members
and then five rotating regionalbank presidents.
So the Fed chair historicallyis reluctant to have dissents in
(06:38):
the core Federal Reserve Board.
Two of them are Republicans.
Both of them have come out fora July cut.
They don't buy the Fed's, wethink, fallacious analysis of
the tariffs.
Specifically, the Fed's fear,which is irrational and not
supported by any data, is thatthe threat of tariffs will first
(07:01):
of all affect CPI significantly, which it hasn't, and we did
predict that because oil isactually offsetting it decline
in oil, that is.
But there was a little bit ofan uptick last month and could
be some more.
But it's one time and thisexpectations theory of inflation
that people say oh well,there's tariffs, so we're going
to have higher inflation and Idemand higher wages.
(07:24):
Well, there's no one in theUnited States who can demand
higher wages.
They're like 5%, but they'regoing to get their normal
increase anyway.
They're like utility work for,like utility unions, regulated,
basically regulated industriesthat can survive having unions.
So that's an antiquated notion.
So the Fed is completely offbase needs to cut rates.
But what we think will happen Imean it would be OK to fire
(07:47):
Powell.
In our opinion there would be adip in the markets and that
would be a buying opportunity.
But the real point is not thatsignificant because you still
have four Democrats, twoRepublicans and then the Fed
chair.
I would call the Fed chair moreof a Democrat right now, but
he's really more neutral.
He's like the herder of cats.
So because there's twoRepublicans that are going to
(08:10):
probably dissent on this pause,he'll probably negotiate with
them, say, well, we're going topause now, but we'll basically
lock in a September or signal aSeptember cut, and I think
that'll be favorably received.
And you've seen that in thebond market, where we are as
high as 450, which is notsustainable, by the way, that's
when mortgages go up over seven.
(08:31):
But now to 433, when the Fedactually starts cutting, I think
we'll go below four.
So we're bullish on rates andthe Fed still works, with or
without the Fed chair.
Speaker 1 (08:43):
Really, you think that Trump saying we should be
like sub 1% is him being serious?
Speaker 2 (08:51):
Well, I'm certainly serious, but wrong in the sense
that we have probably the onlyfirm in the world maybe that can
estimate inflation at everyinterest rate.
So right now we're at 4.33.
The money supply is shrinkingabout 9% a year, which is a
(09:12):
round number, is about $500billion.
That's 1.3% above what we thinkis the fair value, which would
be 3%.
So it takes about $600 billionto move the interest rate and
that's annual increase in themoney supply.
So right now they're shrinkingat $600.
(09:36):
We estimate to get it to growthe normal rate, which would be
about $300, would take a 3% rateand then if you took it down
another 100 base points, thatwould be 600 billion and then
another 100 would be 1.2 billion.
So you'd be increasing themoney supply at 1.5 billion.
(09:58):
It's roughly we use roundnumbers six trillion.
This is all trillions.
If I said billions Trillion.
So 15 or 1.5 over six is 25%,the normal growth's five.
So you'd have maybe not 20%inflation but you'd have
double-digit inflation.
(10:18):
So it'd just be a replay of thestupidity that the Fed
perpetrated during the pandemic.
They increased the money supply70%, then they shrank it to 60.
It took four or five years.
We grew at 38 and we had 22%inflation.
So if you want 1% rates you'regoing to get double digit
(10:40):
inflation.
But look the insight thatyou're never going to get from
anybody else, because they won'treally fully understand money.
The monetary policy is for theFed to peg rates.
They have to either increase ordecrease the money supply that
debases the currency and theprices of the ratio of currency
to real goods.
So if that gets out of whackproduces inflation.
(11:02):
This is Milton Friedman's usedto be theory.
It's not been proven to be justabsolutely correct because of
the pandemic.
Speaker 1 (11:10):
Yeah, and I'm sure that Trump would blame the Fed
if inflation occurred under thatscenario.
Speaker 2 (11:15):
Anyway, even the way that he is, it would be a huge
policy mistake, but I don'tthink there's anybody.
Trump is not President Trump'snot proposing a completely
random candidate who doesn'tunderstand at least something of
what I just said.
And they may not quantify itthe way I did and may not look
at the money supply, but theywill know that if you reduce
(11:37):
rates to 1% you're going to havesignificant.
Maybe they won't say doubledigit, but although they can be
quite stupid, as they were andthat's the only word, like when
I'm going to television, theyfreak out, but that's the only
real word because, keep in mind,when they were saying
transitory PPI was double digits, housing was going up 20%
(11:59):
annually.
This is year over year alreadyup 20, not just one month up 20.
Oil was up 30%.
It was completely obvious thatwe were going to double-digit
inflation.
It's just that they looked atthe lagged CPI and it hadn't
been running up yet.
Speaker 1 (12:15):
You had mentioned to me that you thought the markets
were starting to look in quotesdicey, which I happen to agree.
I'm blown away at how we seemto be back in meme stock media
all over again, although maybe Ishouldn't be blown away given
the way retail tends to come inat these junctures.
I want to get your take onwhere we are in terms of the
market for the latter part ofthe year here.
Speaker 2 (12:37):
So we've been consistent that, with no
corporate tax decrease, which iswhat we had that our target was
6,600.
And we had that target when wewere at 5,000, and we still have
that target.
And that's the value of ourresearch is we have underpinning
(12:57):
data that supports 6,600, so wedon't panic and cut it like
most of Wall Street did when itwent to 5,000, nor do we
increase it randomly.
So the key thing to think abouta target is well, if it's a
year-end target, it's based on26 earnings 19,000, 26 earnings.
(13:18):
So it shouldn't be that we getto the target in mid-year.
So we're you know you couldargue our target.
We don't do mid-year targets,but it's 6,300.
We roughly started 6,000, alittle bit below.
Now we're at 6,300.
We're saying 6,600.
So we're clearly fully valuedand it's giving a signal to at
(13:41):
least lighten up on yourpositions.
Then the two other dynamics thatmake it dicey, and dicey means
it can go either way.
It doesn't mean negative, it'snot bad.
It it dicey, and dicey means itcan go either way, doesn't mean
negative, it's not bad, it'sdicey.
So the other dicey thing isthat we have earnings and we
don't really know how they'regoing to turn out, because all
it really matters for theoverall market is tech.
Earnings expectations, asyou're indicating, michael, are
(14:03):
high, so that's going to bedicey.
It's really next week becauseGoogle and Tesla are kind of the
poor bastard childs of the Mag8.
So really the four next weekare going to determine what
happens to market.
And then we're really close tothe end of earnings season,
ending into August and September, which almost always are not
(14:26):
that good or even bad, whichalmost always are not that good
or even bad.
So we have that combination ofpending earnings that can go
either way, maybe a little bitrisky on the downside, full
valuation, and then thisimpending August September
timeframe.
So I think that's why you'reseeing the market stall.
(14:47):
It's not a full-out sell signal, but we're playing musical
chairs and we don't know exactlywhen the music's going to stop.
It's not going to be Armageddon, but we'll have some sort of a
pullback, almost certainly inAugust.
September might be driven bytariff headlines or just general
profit taking, particularlysome of those meme stocks you
(15:09):
mentioned, just a kind ofneutralist market.
You could also call it dicey,but dicey doesn't mean negative.
Speaker 1 (15:17):
Yeah, I think seasonality-wise, typically
around mid-late July fixedbottom starts to turn up,
consists with the AugustSeptember time.
From a portfolio managementperspective, do you do anything
based on that that view?
Speaker 2 (15:30):
we do.
We we cycle, unlike mostmanagers.
We do cycle our exposure to themarket, not like a hedge fund.
So we have a hedge fund.
We could very well take ourexposure from 100 to 125 to zero
using puts and some other justselling longs.
So we don't do that.
But if we, if it's prettyobvious like now it's pretty
(15:52):
obvious the market's pretty good, so we're close to fully
invested and then we have somegigantic gains.
We made some great calls atbroadcom goldman sachs.
So we don't just blow it allout like we're a hedge fund.
But you know we would trim backon those positions, write more
covered calls on an ICAP.
We do that on individual names.
(16:14):
Certainly would do it on theriskier names.
That reduces your short termexposure to the market.
So we do it at the margin.
But it's not like if we'retotally wrong about August and
September that we won'tparticipate in the rally.
We'll just have like 90%exposure and do 90% of the rally
.
And conversely, if the market'sway down, we're going to be
(16:38):
down, but without risk there'sno return.
It's very difficult to run ahedge fund where you cycle the
exposure every day.
Certain people like Steve Cohencan do it, but it's better to
be invested in the long runYou're going to do way better.
So we're always invested.
We just shade it to be a littlebit longer and a little bit
(16:59):
less long if we think themarkets are, you know, very
attractive, attractive, neutral,depending on sort of that.
Five ratings in the market andit's pretty obvious, like you
could probably get if you had 90or, say, 100 financial
professionals.
You probably could get 90 toagree like, okay, yeah, the
market's kind of neutral rightnow.
You could get 90 to agree, likeafter the tariff tantrum was
(17:24):
announced or tariff liberationday, the market was bad and then
it stabilized during earningsand everybody would probably
agree well, now it's maybeneutral.
So these aren't difficult callsto make.
You just look at the tape, justhave to be a market whisperer.
You don't need to have likestrange proprietary indicators,
(17:46):
wake up in the morning and lookat your screen and you can see
what's happening.
So just, we act a little bit onthat in our ETFs, a lot in our
hedge fund, but sometimes youcan miss big rallies and hedge
funds.
Speaker 1 (18:01):
So that's why they typically underperform.
You mentioned cover calls, youmentioned ICAP, so let's touch
on both.
Speaker 2 (18:04):
Well, we really like that fund because arguably it's
where we're adding the mostvalue.
So we write very short termcalls using our valuation models
and, where we have gains, toproduce a lot of what's called
theta or decay.
And that's what you want, Iwould argue.
(18:26):
And that's what you want, Iwould argue.
There's some option strategistswho almost exclusively argue
for buying premium and if you dothat over long periods of time,
you'll see that you're almostcertainly going to lose money.
You might hit a couple big ones, well, but on average they're
(18:47):
going to expire.
So we're playing that.
Of course we have stock thatbacks it up.
So, worst case, we take profitson the stock that's close to
our profit target.
Otherwise, in the next week ortwo it'll expire and we don't
get run over in rallies likeeverybody loves Jeffy.
(19:07):
But they don't do what we dowhere they're writing individual
calls.
They're writing index callsthrough notes, but it's
basically index calls.
That converts it to what lookslike pure income.
But there was writing calls.
So you notice like they'reunderperforming this year.
That's because they'reoverwritten on the index and the
index is up a fair amount onthe S&P.
(19:28):
So we avoid that by doing itvery short term If we start to
lose what's called beta orexposure to the market, we can
deal with that in the short run.
We can buy those very shortterm calls back.
We can add stock If it getscalled away.
We can add it on Monday If itgets called away on Friday.
So all of that allows us todynamically adjust that exposure
(19:52):
I was mentioning.
So we look at a net of options,whereas JEPI or in other funds
like that not to pick on them,but index riding funds if the
market starts running then theirexposure to the market drops a
lot and they don't participate.
So we don't want that.
We want the decay expirationthat produces income.
We want it very short term.
(20:12):
That takes a ton of work, butthat's what we enjoy doing,
that's what we're good at doingand so we expect that to
continue to add a lot of valueadd income.
Been increasing the dividend onICAP it's outperforming its
peers this year and very highquality companies as well.
So typically these companies dowell, relative to the S&P, at
(20:37):
least in a downturn, and even ifthey don't, they're going to be
around.
Most of them are going to bearound forever.
They're super high qualitylarge cap.
I think our fund, the averagemarket cap is about $130 billion
, so these companies are notgoing away anytime soon.
So a great asset class to writecalls hold in the long run
(20:57):
generate income all gooddividend payers.
So we really like that strategyin this market.
Speaker 1 (21:07):
Yeah, and to your point, it's done.
Well, if we get more volatility, how do you think it could
conceivably perform?
Speaker 2 (21:16):
Well, it would depend on how much, you know, we do
adjust our exposure.
But, to be fair, we are bullishabout the market and we do have
some higher beta names likeGoldman Sachs in that.
So if we took that downsignificantly then we would,
would you know, not lose a tonof of return.
(21:39):
But if we just sat there wherewe are because we have a pretty
big position 5% then they'rehigher beta, so it underperform.
But if you're a longer terminvestor, well, hopefully we do
something about it.
It write calls and reduce ourexposure.
But even if we didn't do that,we're still bullish about the
year.
So you get a little bit ofdrawdown in august, september
(21:59):
and then a boom and in thefourth quarter.
And that's really if you wantto beat the market and beat
hedge funds.
It's pretty easy to do.
You just stay invested in anddeal with a little bit of
volatility.
Speaker 1 (22:13):
Of course, you got a number of funds, one of which is
BNDES.
On the bond side, I put out aquestion on X yesterday.
I said what's the biggestcontrarian trade of all?
Right now?
A lot of people said healthcareand several noted bonds.
So let's talk about sort ofbonds as an investment here and
(22:36):
BNDs in particular.
Speaker 2 (22:37):
So the best way to think so BNDs is a high yield
bond fund.
There's a fund we compete BNDwith.
Bnd is their ticker, they're aninvestment grade.
It's called an aggregate fundor ag fund.
They yield four, we yield eight.
So if you buy an ag fund likeBND, you get a lot of interest
(22:59):
rate risk, say, 80% correlatedto the treasury and really zero
to negative exposure to stockmarket.
With BNDES you get about a 0.3exposure to stock market and 0.2
to interest rates, sinceinterest rates and stock market
tended to be negativelycorrelated not always like in 22
(23:22):
, but normally you kind of endup with something that doesn't
really do a lot in most marketsbut yields eight, do a lot in
most markets but yields eight.
So if you're a conservativeinvestor like me, I've been
adding it to it in my IRA and Idon't ever look at the price.
We launched it at 50, it's at47.80.
(23:42):
It's, of course, paid a ton ofdividends, so that was a
positive return.
But if you just don't want toworry about the market, if you
are worried about an AugustSeptember pullback, we are
bullish on rates, as weindicated, because of the Fed
rate cuts and global rate cutscontinuing at some level.
So, and even the budget deficit, although that's not the key
(24:03):
driver.
So if it, even if it goes up, Iwouldn't sell all of your ponds
.
So we think we'll head to the4% level when we get more rate
cuts.
So that will be a tailwind.
You know, if you really justwant to bet on rates, you should
buy BND.
But if you want an all-weatherfund, maybe rates stay here.
Maybe we're wrong.
Go higher, maybe the stockmarket goes a little bit lower.
With BND, yes, you're justgoing to get your 8, won't move
(24:26):
around that much.
We'll move around some, butjust those percentages I
mentioned 30 stock market, 20 tothe bond market.
They tend to offset.
So you're going to get not alot of movement in price and a
good amount, or really goodamount, of income, about 8% or
(24:47):
over 8%.
So that's a good conservativeholding that we think will do
well, because both the stockmarket and bond market in our
models is going to be higher atthe end of the year.
So it'll be appreciating.
But even if you don't, youstill get your 8%.
Speaker 1 (25:01):
Yeah, and those yields are still important,
independent of whatever the Feddoes.
I mean as a number, it's a goodnumber to have.
Speaker 2 (25:09):
Well, right, Because the way to sort of estimate in
your head what the interest ratesensitivity is is you take the
spread as a total of the totalincome.
So in other words 8%, theTreasury is at 430.
So you've got 370 of spread.
Bnds is yielding around fourand the treasury is at 430.
(25:34):
So you've got closer to 100%exposure to interest rates and
with ours it's I mean, it's not50, but it's way less than that,
because you're getting a lot ofextra return, because you're
taking credit risk and so higheryields produce lower duration
and lower sensitivity tointerest rates.
Speaker 1 (25:54):
Speaking of duration, I think it would be good for
small caps.
Arguably, if rates do fall, Ithink deregulation is beneficial
for small caps, but obviouslyyou want to have cost of capital
being less and you do have asmall cap fund as well.
Let's talk about small capsespecially from the standpoint
(26:15):
of the fact that small capsreally haven't hit the prior
highs of the year, while largecaps have.
Speaker 2 (26:22):
They've definitely been out of favor.
And there's a misunderstanding.
There's a notion that smallcaps are all over levered and
really exposed to interest rates.
And if you look at it, whichwe've analyzed, they really have
about the same leverage aslarge cap companies, a little
bit more floating rate but notsignificant.
(26:42):
So that's not the real reasonthey're interest rate sensitive.
The reason they're interest ratesensitive is the sector
allocation, particularly invalue funds like S-CAP tend to
favor financials and we'relooking for substantial dividend
yields too.
So financials, reits, utilitiesand a very small allocation of
(27:06):
tech.
Even the overall Russell 2000is only 10% tech.
The overall Russell 2000 isonly 10% tech.
So not just small caps butreally like today, in today's
market rates are rallying andtech is weak and everything else
(27:28):
is strong.
So interest rates typicallyproduce a rotation at the margin
out of tech into old economy.
And you mentioned health care.
They have good dividends inhealth care and utilities.
There is health care andsignificantly in small cap index
.
So it's really more the sectorallocation than it is that these
companies are just crazilyfinanced and taking all this
(27:49):
interest rate risk.
It's just the sectors they'rein have interest rate
sensitivity so and also theyhave beta.
Small caps are strange in thatthe market's doing really well.
Usually they're off-perform.
If it's stalled like this, thenthe interest rates become the
key driver.
Speaker 1 (28:08):
Yeah, I will say it's been interesting that it seems
like small caps maybe havestalled a bit.
It looked like they were goingto try to make a and you'd think
that that's going to be aproblem for all things, and
small caps still will get.
Well, you know one.
Speaker 2 (28:21):
There's always like there's always a fly in the
ointment, like if it was so easyto get short the market in
August and September, likeeverybody would do it at the end
of July and then it would neverwork Right.
But the fly in the ointment is,if we're correct about the Fed,
it's going to be a Fed rate cutin mid-September.
That's going to be great forsmall caps.
(28:43):
So there are positive catalystsbeyond earnings out there.
I mean, of course the Fed couldnot cut, but they absolutely
should.
We're going to have deflationif they don't.
The housing market I'm out inSan Francisco.
There was a report yesterdaythe housing market's weak in San
Francisco.
Like how can that be?
There's this big tech boomgoing on.
Well, it's because rates aresky high.
(29:03):
So if it's weak in SanFrancisco, it's weak across the
country.
We know what it is from otherdata.
But so we can't have thatforever.
We have to have lower rates.
That's going to benefit smallcaps and the sectors within
small caps.
So non-tech I mean I wouldn'tbet against tech right now, but
(29:24):
it's fine to be invested in theother sectors because they will
benefit when we get these Fedrate cuts.
Speaker 1 (29:27):
And let's talk about S-cap as the way to play that.
Speaker 2 (29:31):
So we are a higher quality than the index.
So we I mentioned we're value,but we're also have only
securities with significantdividends have low leverage.
So even if this overall sectorwas levered to levered it's not,
but if there was we wouldn'thave that problem because we
(29:52):
have less leverage, gooddividend coverage and then
stocks that traded reasonable Pratios compared to growth, so
peg ratios including yields.
But so with our companies itmatters.
But you can use peg ratios ontech stocks.
So there's no yield and youshould at least look at the peg
(30:13):
ratio.
Like we recommended Palantir onFox business about a year and a
half ago.
I it was at 30, it was cheap toits growth right, and now it's
like trades 150 times and growsat 30.
So that's a five peg markets ata two peg.
So we look at reasonable growthwith yield stocks.
(30:33):
You say growth plus yield, sopeg will peggy if you will um.
But that way you stay out oftrouble.
You know palantir may continueto work but it may miss earnings
.
Like look out below um, veryhigh expectations, a lot of risk
.
So we're in the lower riskreasonably.
You know companies trading areasonable multiples, paying
(30:54):
dividends, good credit quality,good dividend coverage and
that's worked really well.
And we do write index calls, buta lesser amount than the ones I
was picking on before.
Like peggy.
They run.
They can write almost 100, wewrite 30 and we only do weekly.
So we also do it short termlike we do with icap, but we
(31:18):
don't do individual options onsmall caps because they don't
have weekly options, so youdon't get all that decay or
theta.
And also small caps are eithergreat or terrible, but rarely
mediocre.
So Coke reported this morning70, it's down like 30 cents.
So we have a lot of callswritten on Coke.
(31:39):
Well, that's fine, but there isa C-O-K-E.
There was a small cap company,it's a bottler for Coke and we
owned it.
It was super cheap in ourmodels and they mentioned share
repurchase and they're up 30%.
So Coke can, ko cannot,announce a share repurchase and
be up 30, but C-O-K-E can.
This is not a good business towrite calls, in our opinion, on
(32:06):
small caps because they're toofar out, like monthlies, and the
volatility is kind of digitallike they get acquired.
Like ko, it's extremelyunlikely to be acquired, but
coke could be by ko possibly,but probably not because they
were spun off from them but bysome otherler or some other
company that wants to own it.
So we think it's a superiorstrategy to write a small amount
(32:27):
of calls for index calls forsmall caps, but don't do that,
you know, particularly in largersizes, for large caps, because
it's better to write theindividual calls.
Speaker 1 (32:40):
Anything that we missed, jay?
I mean, I feel like we were allworried about war not too long
ago, all worried about oilprices.
Suddenly, and suddenly,everyone forgot about that.
Speaker 2 (32:51):
Well, you should have read some of our notes, because
we were.
You know we're greatforecasters of oil prices but
terrible traders of oil.
So to be fair.
But we look at global supplyand demand.
It's imbalanced.
So unless you wipe out the oilfacilities, it's going to stay
in balance.
So when oil is at 75, we said,oh, it should be around 70.
(33:15):
Oil went to 60, we should sayit'd be around 70.
So but it is positive that it'sdown for the year.
So that's important.
And then, just in terms ofwrapping up, I would just
reemphasize to not ignore themoney supply like everybody else
does.
It shrank 9% year over year.
It's what drives inflation.
(33:35):
That's why we're headed todeflation.
That's why the Fed is going tohave to cut.
It's going to be decelerationin employment.
Goldman is on board for that aswell.
The last employment report wasactually quite weak 74,000
private jobs.
Pay attention to the moneysupply.
That's why the Trump 1% doesn'twork is you have to increase it
too much.
But it's also why he's correctabout the current Fed.
(33:58):
They're so tight they're havingto shrink the money supply by
9%.
That's really hasn't happenedsince the Great Depression, so
it's a very risky thing to bedoing?
They're getting away with itbecause housing never really
recovered from the greatfinancial crisis, so it can't
really crash.
And then we have this tech boomthat's offsetting it.
But eventually the Fed willfigure it out.
(34:20):
They can't forecast anything,but they can look.
They're OK to bad, at leastlooking at current data.
So they'll figure it out andwe'll have lower rates and that
would be bullish for stocks andbonds.
Speaker 1 (34:33):
That definitely would be nice if that's the case, jay
, for those who want to tracksome of that research that you
alluded to, so that they don'tmiss out, or can they find it?
Speaker 2 (34:43):
InfraCapFundscom and you can get our adjusted CPI.
We do CPI-R, so that's realtime corrects for the BLS's
terrible methodology and alsothe global money supply, which
is critical for predicting theoverall markets in the world and
global bond prices.
So never going to get that datafrom anyone else.
(35:06):
For some reason nobody seems tocare about it, but it's what
drives the markets.
Speaker 1 (35:10):
And then same side for learning about the funds.
I certainly think BNDES isinteresting here and SCAP, and
that's my only bias, because Ithink there's a tailwind, and
I'll just quickly mention, too,that we do have a monthly
webinar.
Speaker 2 (35:22):
We talk about our map research, which is highly
proprietary.
I don't hear about it anythingsimilar to what we're saying,
like no one's forecasting thebudget deficit next year.
It's very easy to do and youhave to be maybe you have to be
a CPA, like me, and be able touse a spreadsheet but so very
proprietary data, but also anopportunity to find out more
(35:45):
about our funds, ask questionsabout funds and even if you
don't own our funds, you hearwhat existing holders are asking
, and we enjoy it because welearn a lot from our clients.
So that's a monthly webinarthat you can sign up for on our
website.
Speaker 1 (35:59):
And folks, I'm a big fan of J Hatfield and
Infrastructure Capital.
Please learn more about theirfunds, check out the research
and I'll see you all on the nextepisode of Lead Lag Live, which
will literally be in about 10,15 minutes back to back today,
folks.
Thank you, jay, appreciate it.
Speaker 2 (36:13):
Thanks, mike, that was great.
Cheers everybody.
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