November 7, 2025 • 40 mins
In this exclusive webinar hosted by Michael Gayed of Lead-Lag Media, Jay Hatfield from Infrastructure Capital shares his market outlook for 2025 — including why he believes the Fed will have to cut rates, why housing hasn’t crashed, and why the next market move could surprise to the upside.
Jay breaks down:
- Why the Fed has caused nearly every post-WWII recession
- How inflation is finally cooling (and why CPI is misleading)
- The real reason the U.S. avoided a recession in 2024
- His S&P 500 target of 7,000 for 2025
- Bullish takes on housing, tech, small caps, and preferreds
- Why regional banks and credit fears are overblown
- His contrarian forecast for the U.S. dollar and Treasury yields
Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.
#Markets #Investing #FederalReserve #InterestRates #JayHatfield #MichaelGayed #InfrastructureCapital #StockMarketOutlook
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Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
SPEAKER_01 (00:11):
Uh do me a favor and uh you know just tell other
people that this webinar ishappening.
Uh Jay and uh is always veryinsightful when it comes to
markets, a lot to talk about uhthat he's gonna go over uh as
far as the macro front, as wellas also obviously on the
infrastructure capital side ofthings, their funds.
Uh for those that are here forthe CE credits, uh I promise you
(00:31):
I will email you.
I promise you I'll get yourinformation.
Just stick to the end of thepresentation.
Uh, I'll get it from you of theCFP board.
If you have any questions, typeit in the Q ⁇ A or in the chat.
We'll do it during the end, makethis as interactive as possible.
My name is Michael Gaiad.
Thank you for attending thiswebinar, sponsored by
Infrastructure Capital.
Uh, the man of the uh 45 minutesrough hour, Mr.
(00:52):
Jay Hatfield.
SPEAKER_00 (00:53):
Great.
And so this is always a goodstart because this is definitely
not the view from our office inmidtown.
So that's the reason.
Hopefully, um you can go visitthis office.
I don't know where it is, but wewere in midtown then at, but
that's not our view.
And just um just a quickoverview of our firm.
We have three fixed incomestrategies.
(01:14):
BMDS is a high-yield bond fund,PFFA is preferred stock fund,
BFFR is a REIT preferred stockfund index fund.
Uh PFFA is low leverage, about20%.
BMDS and PFFR are unlevered.
And then we have three equityincome strategies, AMZA is
pipelines, uh, tax advantaged,ICAP, large cap dividend stocks,
(01:39):
right individual calls.
Uh with all three of thesefunds, we use our GARP
methodology to come up with arelative valuation matrix.
And that's what we what informsour purchases and our sales as
well.
And SCAP, we have um profitablecompanies.
We screen for profitablecompanies, of course, we always
(02:02):
do, but if you buy the IWM, youget a lot of unprofitable
profitable companies.
And we do write a small amountof index calls.
We write index calls with smallcaps because small caps tend to
skyrocket, they can getacquired.
And so it's better to not capyour upside.
Whereas large caps typically goup some, but they don't usually
(02:24):
get acquired because they'rejust our average capitalization
and I caps over 100 billion.
So it's okay to give up someshort-term upside.
And then you can see all of ourfunds have substantial SEC
yields.
So this is the actual cashcoming in.
We do enhance these with optionwritings, writing, uh, not with
(02:46):
PFFA, but with the equity incomefunds.
We have a unique take on theeconomy, which has been uh quite
accurate historically.
And the reason for that is thatwe look at the monetary base as
a leading indicator, um, whichis the simplest way to measure
(03:10):
the money supply.
And the reasons that that'scritical is the Fed has caused
13 out of 14 post-World War IIrecessions.
But the only exception to thatwas the pandemic.
So that was caused not by theFed, but the federal government
shutting down the economy.
(03:30):
So really, the Fed has causedevery post-World War II
recession.
And they do that by restrictingthe money supply, raising rates,
which in 12 out of 13 recessionscaused a housing recession.
The exception was a 2001recession.
That was a tech bust.
(03:51):
So all recessions come frominvestment declines and
typically housing investmentdeclines.
So you might say, well, we havehad a housing investment
decline.
We have a slide on that later.
So you might ask, well, why havewe haven't we had a recession?
And we'll get into that, butit's really the fourth bullet
(04:12):
here, fifth bullet, I guess.
Um, and I did try to talk aboutthis a little quickly on TV a
few minutes ago.
But that if you look at a chartwe have later, the housing
sector used to be way more boomand so therefore way more bust.
But post of great financialcrisis, we haven't had those
booms.
So when it comes off the boom,there's less layoffs.
(04:36):
The economy slows, but itdoesn't plummet.
And in this case, also, we havethis tremendous, not just
spending on tech, but also techinfrastructure.
So data centers, but moreimportantly, electricity
generation.
So it's a much the tech side isholding up the real economy, the
real economy or old economy,really, construction and housing
(04:58):
slowing.
So you have that dichotomy.
So that's why it's critical.
The Fed does cut.
Thankfully, there's still fourcuts priced in over the next
year.
We think Powell really signaledhe wasn't gonna cut in December,
unfortunately.
But we're gonna have a new Fedshare that's going to be
installed not as Fed share, butprobably on the Fed as early as
(05:20):
March.
So you're gonna have not evenjust a shadow Fed share, you're
really gonna have two.
So we think it's gonna be morecontroversial to not cut rates.
But even more importantly, thisis the critical new data.
We're gonna put a note out onthis.
If you looked at the CPI reporton Friday was super bullish, and
the reason for that is thisstubborn and miscalculated
(05:44):
owner's equivalent rent finallydeclined to 0.1%, so that
annualized to 1.2 versus theyear over year at four over
four.
And so this is the core of ourCPI R, the fourth bullet versus
U.
So we use real-time rents, butfinally U is going to gravitate
(06:10):
uh towards R.
So in other words, the laggingpoorly calculated BLS measure is
going to go to our measure.
So we're forecasting PC core,even as reported by the BLS,
who's has a terriblemethodology, will decline to two
by the end of next year.
So no matter, even if thereisn't a regime change, there
(06:32):
will be.
But even if there weren't, eventhis incompetent Fed would
figure out they needed a cutbecause employment's weakening
and inflation is declining,particularly if you ignore
tariffs as you should.
Um, then the other macro pointthat you won't hear anywhere
else is actually we're bullishon the budget deficit declining.
(06:56):
Two reasons.
First of all, the OBBA don'tlisten to anything here on the
news.
It's mostly political talkingpoints from both sides.
So we're not political, we're webelong to the greed is good
party.
But there was a ton ofreporting, unchallenged, that it
was a budget buster and that itwas a huge tax cut for the rich.
(07:20):
But that's like reporting on thenews eight years ago.
So that was true of the 2017bill, but not true of the OBBA.
The OBBA was mildly budgetrestrictive because there were
cuts in IRA, you know, the umCHIPS Act and the subsidies for
(07:41):
uh renewable energy.
And there was cutbacks inMedicaid eligibility, not
Medicaid, but eligibility.
So that offset the tax cuts tothe middle class from that was
structured as reductions intipped wage taxes and overtime.
So totally misreported.
So that's a little bit positivefor the budget, not that
(08:02):
positive, but what's really,really positive, and the CBO
does not include, is the$400billion in tariffs.
So we're forecasting the budgetdeficit drops from$1.8 trillion,
which was better than the CBOforecast, because again, they
ignore our tariffs, to$1.45trillion.
That's only 4.5% of GDP.
(08:23):
That's sustainable because GDPnormally grows at 5%.
So when you hear about this direfiscal situation, that's a
little bit of old news, notgreat fiscal situation, but it's
sustainable because of thetariffs.
And hopefully we slowly increasethose tariffs and reduce the
budget deficit.
(08:43):
Um, and so um we are optimistic,though, that because the the um
futures market is still pricingfour cuts in, it might be
delayed.
That means the 10-year will stayaround four, 30-year mortgage
rent six, and housing should atleast stabilize, or if not
recover.
So if you want to predict theeconomy, look at the Fed money
(09:06):
supply and housing.
If you did that, if you do that,you always will be ahead of the
curve.
And if the Fed did that, thenthey would have started
tightening about a year earlier.
Because when housing prices wentup 20% year over year, like they
did in the first quarter of2021, they should have known
that was going to translate intorent inflation because they're
(09:28):
highly correlated.
But they follow this delayedindex.
So it was delayed both on theway up and the way down.
So if you just follow thoseindicators, you don't need to
listen to us.
You can create your own economicresearch, but it's extremely
effective.
I did my master's thesis atWarden on on it.
It's very statisticallycritical.
(09:50):
And Keynesianism does not workfor predicting the economy.
Um, in terms of what's theimplications of this, we're
bullish in the stock market.
We raised our target to 7,000.
Looks like mostly most of therisks are to the upside on that
target.
I will say that earningsseason's about to end or the
(10:11):
bulk of it.
So we might have a littlepullback.
So, you know, market's a littleweak today.
So that's normal, but thatdoesn't mean that the target is
7,000.
It's not relevant.
And on the other hand, too, itdoes, if if we're right about
that 7,000 target, it means themarket probably will stall out
or pull back a little.
But it's not necessarily time toget out because we still think
(10:33):
we're going to be 7,700 nextyear.
And both of those targets are 23times the following year's
earnings.
So it's very obvious, but somepeople don't do this.
So if you have an end of 25target, you use 26 SP earnings,
and for the which is 305.
And the 27 SP earnings is 335.
(10:55):
So we're not expecting anexpansion in the multiple.
We think 23 is sustainable.
Um, a critical point about that23 times, you might say, well,
the average is 18 over the last30 years.
But what that ignores is that uhcorporate tax reduction from it
was a gigantic deductionreduction, 35 to 21.
(11:18):
That expanded in our models,expanded the sustainable
multiple by four points.
So that 18 became 22.
So 23, at least when rates arelow, is reasonable, and
particularly when you're gettingfast earnings growth from AI.
So we think the targets are umvery achievable.
(11:38):
Risk mostly the upside.
We've been extraordinarilyaccurate in our targets really
since we ramped up our PRactivities in 21.
So I wouldn't ignore ourtargets.
They worked perfectly, really,the last two years.
(12:05):
And if you want to be in fixedincome, high yield is going to
do well.
So PFFA, which is high yieldpreferred, high yield bonds like
BNDS.
You don't want to be ininvestment grade like B D, whose
ticker we arbitrage by adding anS to.
That's a Vanguard fund yieldsfour.
That's likely to be veryflattish over the next couple of
(12:27):
years because they don't havespread, spread tightens when the
stock market's up.
So be in higher risk stocks, uh,financials, industrials, tech,
and higher risk fixed income,high yield bonds, and preferred.
And then we talked about a lotof this.
The easy way to predict the10-year is first of all, you
(12:49):
have to get the terminal rate onthe Fed funds rate.
We're estimating 275, as is thefutures market.
That's the normal rate.
That's 75 basis points overinflation.
If you measure inflationproperly, which we do on our
website, CP, actually PCE-R.
So we correct the sheltercomponent to market to market
(13:11):
for real-time data.
We're at two.
So the neutral rate on the Fedfunds is uh 275.
Normally the tenure trade's 100over that.
That's 375.
So don't get confused.
Don't focus too much on thebudget deficit, although that is
a bit of a tailwind in ourmodels.
And a lot of, you know, um superbears commentary, like, oh, the
(13:34):
debts is unsustainable.
We're gonna go to rates aregonna go to infinity.
It's not the key driver ofrates.
Key driver of rates is Fedfunds, Fed policy.
So we're likely to have the 375tenure that supports 23 times.
Um this point here, four, fourthpoint.
So it's you know, you 70%correlated uh if you want to
(13:58):
predict interest rates to theterminal rate.
So that's if that's really allyou need to know.
And in fact, we're a little bitshort-term bullish on the tenure
because it's actually gapped outto about 130 over the uh Fed
fund expected Fed funds rate.
So it's a little bit high, itshould be closer to 100.
So you might see the 10-year,well, either the terminal Fed
(14:23):
funds rate will come up or thetenure will drop.
Um and we, you know, mentionedthat we'd prefer to be further
out on the risk curve.
This is a great chart.
You might say, well, why didn'twe have recession?
The Fed is has tightened rates15 times since World War II, 13
times we had a recession.
Why didn't we have recessionthis time?
(14:45):
We talked about already we dohave a tech them, but also see
that these peaks in the housingsector used to be way higher.
And keep in mind that this isn'tadjusted for population.
So um we used to top out at wellover 2 million, you know, almost
(15:06):
2.5, 2.3 million, like beforethe great financial crisis.
And then when you have thisprecipitous drop, then you have
tremendous layoffs.
People who are laid off do notconsume.
So investment leads therecession, but then consumption
drops.
But in this case, we capped outin this cycle, first of all, we
(15:28):
had really low home building fora long time.
And so we have a shortage ofhomes.
So that stabilized the market,and then we're dropping from a
much lower level, so there'sless, fewer layoffs.
And then the AI, boom, alsoabsorbs some labor.
So that's really the explanationwhy we didn't have recession.
(15:50):
But it does require the Fed tostay on track.
It doesn't have to be this Fed,it could be the next Fed with a
new Fed share on track forcutting that's to keep the
10-year somewhere near four andthe 30-year mortgage around six,
and have the housing market atleast stabilize, if not grow.
And we are bullish on theeconomy.
(16:11):
We think we're gonna have a 3%growth rate because we do think
construction and housing willstart to come out of recession,
be growing year over year oninvestment, plus you'll have
continued tech spending.
So we're bullish on the economy,really focused on housing.
That's one of the two keyindicators, the Fed, money
(16:32):
supply, which is what the Fedcontrols, and then the quote
rates, and then the housingsector.
This is a fantastic chart.
I get excited about charts,unlike most people.
But you can see thisgraphically, and we made this
actually readable, which wasnice, that uh this is year over
year, this last 12-month numberhere.
(16:53):
And then you can see that thetwo old economy sectors,
structures, and residential arein recession.
But IP, which is obviouslysoftware and then equipment, a
lot of that's tech equipment.
So it's electrical equipment,for tech.
That's kept um investmentpositive over the last year.
(17:14):
They have to ignore inventoriesbecause they're moving all over
the place uh because of tariffs.
But that positive investmentkept the economy growing but
slowly.
And um employment's slowingbecause these very employment uh
intensive sectors likestructures and residential are
(17:35):
in recession, so there's lessemployment there.
If you didn't believe me thatinvestment drives cycles, here's
every cycle since World War II.
You can see that on average,there's no decline in
consumption.
There is some that occurs, likeI said, after layoffs.
But, you know, like in 1949,actually consumption went up,
(17:57):
23% decline in investment.
So investment's only 20%.
Everybody says, oh well,consumption's 66%, so that's
what's going to cause uhrecessions, but consumers
consume, they're like woodchucks who chuck wood.
So low-income consumers have toconsume to survive.
High income consumers want tospend because they have high
(18:21):
income.
So consumption is really stable,but investments not.
Um, you can see overall we had avery shallow recession in 20 um
because that was just a quick umyou know pandemic recession.
This is just the same data, butyou can see that preceding every
(18:43):
recession, you had a dramaticdrop in investment.
Um watch our CPI-R versus U,because R, so in other words,
our our real-time calculationleads CPI.
So that's why we're bullish thateven the reported number will go
to two, because it's finallybeing reflected that shelter
(19:07):
costs, owners' equivalent rentin particular, are declining.
So the this Fed has no abilityto forecast.
We do, and we're forecastinggoods of two.
So either this Fed or new Fedwith a new Fed share will cut
rates, which is super bullishfor the market.
This is just a graph that showswhat we were asserting, which is
(19:29):
the 10-year typically trades alittle bit over 1%, 1.05 over
the Fed fund rate, Fed fundsrate.
And when the yield curve isinverted, it'll trade over the
terminal rate.
So that's why 277 right now isthe terminal rate.
105, that's like 187, the 10years, a little bit above that
(19:49):
right now.
So possibly we'll get a littlebetter rally in the 10 year.
And just another graph thatshows the essentially the same
data.
The 10 years of about 1% overthe um Fed funds rate.
Um, watts the money supply.
If you did that, unlike the Fed,you would have assumed we'd have
(20:11):
near hyperinflation.
We didn't have that, but we haddouble-digit inflation.
Um, and in fact, the uhmonetarism, we had the perfect
experiment uh to testmonetarism.
It worked absolutely perfectly.
60%.
So this net increase in themoney supply is 60%.
And uh nominal GDP grew at 38%.
(20:34):
Uh and Milton Friedman's theoremthat excessive monetary growth
above nominal GDP producesinflation worked absolutely
perfectly.
22%.
So he would be dancing in thestreets right now because we
kind of had this uhunfortunately a perfect
experiment where we massivelyjacked up the money supply.
(20:57):
The uh quantity theory of moneyworked perfectly.
And Keynesian completely blewup.
They came, the Keynesians cameup with this transitory theory
of inflation, was totally wrong.
And then just some details, morealmost disclosure about our
funds.
Uh uh PFFA is our preferredstock fund, uh, yields over nine
(21:20):
SEC yield basis, which is thegood way to evaluate,
particularly fixed income.
Um we um are constantly managingthree risk, interest rate risk,
uh, credit risk, and call risk.
And we're taking advantage ofthe fact that this is an active
(21:41):
fund, index funds uh don't uhcare whether security is trading
above par.
They just mechanically keepbuying it because if they have
inflows and they can'tparticipate in new issues, and
they're rebalancing every month,and they sell do the opposite of
what they should do.
They're cap weighted, so theybuy more of what's up, sell
(22:02):
what's down.
That's normally the exact wrongthing to do.
We take advantage of that.
So you can see that PFFA has avery strong track record versus
the index and also just provideskids stable income.
Um, and these are again, theseare almost more um disclosure,
BNDS, high yield bonds.
(22:24):
We do look just like we do withPFFA for situations where the
rating agencies are negative ona credit, but we think it's a
great credit.
So Plains All-Americans is agood example.
Rating agencies hate pipelines,particularly ones that pay
dividends because they do aforecast, they don't d-lever.
They ignore the fact you havegreat assets.
(22:45):
The company has financialflexibility, they can reduce
their dividend.
It's great for the preferredsand the bonds.
In this case, they're bonds, butso BNDS has a good track record
as well since we launched itrelative to the high yield
index.
Uh MLPs have become a greatasset class.
(23:06):
They're challenged during thepandemic, obviously, but super
stable, better capitalstructures, and they used to
have great tax characteristics.
With PFFA, you get, I'm sorry,MCA, you get a 1099, so no K1s,
so way cleaner tax reporting.
And in this fund, there's likelytailwinds to our distribution
(23:28):
because it does borrow money.
Our cost of borrowing isdropping.
Uh ICAP's our large cap dividendfund.
And that's reflected in thereturns and also good income.
As Cappy mentioned, screeningfor profitable companies,
(23:52):
writing small amount of indexcalls, uh, not enough to cap the
upside.
Uh, and also it's one of the fewways to generate income from
small caps.
And then we just havedisclosures.
So, with that, Michael, I wouldopen it up, see if there's any
questions.
SPEAKER_01 (24:09):
Yeah, and and again, folks, for those that want to
ask questions, you can uh put itin the QA.
I see a couple of people haveasked here.
Uh obtain a copy of the slidepresentation.
I'm gonna try to make this anedited uh uh webinar on the Lead
Lag Media YouTube channel.
I'll put a blast out about that.
Uh Mike here asking about PFFAtax consequences.
SPEAKER_00 (24:27):
Yeah, so the the important thing about preferreds
is the word preferred stock.
So stocks can and do benefitfrom the same tax
characteristics as common stock.
So if you own any REITs, youknow you get a 199A deduction.
That's an equalization betweenpass-through and corporate
(24:50):
taxation.
Surprisingly, but fantastically,preferreds also get that
deduction.
Uh they also preferreds benefitif there's excess tax
depreciation.
And then also to the extentthey're not cumulative, which
isn't great from a creditperspective, but it's usually
really high-quality financials,you get QDI.
(25:12):
So your effective tax ratechanges every year, but it's
probably going to be low 20s,you know, assuming you have a
40% notional tax rate.
So it is quite tax-advantaged.
And I would contrast that theBNDS, which you should assume
you get a few preferred inthere, but assume basically that
your taxable income is equal toyour income.
(25:34):
So unlike, so your effective taxrate would be 40 on bonds.
So it's more attractive to holdthat in your IRA where you don't
pay tax.
SPEAKER_01 (25:44):
I don't think you and I have talked about this,
Jay, but I'm curious to get yourtake on um what's going on with
regional banks uh the lastseveral weeks.
So there's been a little bit ofa scare around private credit.
Um, any any thoughts there?
SPEAKER_00 (25:57):
We think it's overdone.
The we would be nervous aboutcredit if it was early 2022.
So clearly you should be nervousgoing into a tightening cycle.
There's a little bit of weaknessin the auto sector.
There's definitely a big storyin your uh sorry, Wall Street
(26:18):
Journal.
There's definitely morerepossessions happening.
Low-income consumers pressured.
You're seeing that uh fromreports from Chipotle um saying
that.
But that's a very, very smallpart of the credit uh capital
market.
So we're actually bullish onregional banks.
We think when the Fed cuts goupward sloping yield curve,
(26:42):
which is better for regionalbanks as opposed to money center
banks are usually fully hedged.
Regional banks usually aren't.
And we don't think credits canbe a problem.
Although, having said that, wethink the real way to play, if
you agree with us that we're notheading into a credit crisis,
which, like I said, would bevery unusual when we're in an
(27:03):
easing cycle, uh, we wouldrecommend like our largest
holding in ICAP, which is KKR,because there's a lot of fears
around credit.
They have relatively smallprivate credit or asset-backed
credit, about 10%, a lot ofprivate equity that benefit from
a booming stock market, verydepressed stock price, great
(27:25):
franchise, great brand, gonnabenefit from realizations if the
stock market continues to bestrong.
So rather than going into, youknow, the blast of go one step
away.
Something is down, even if thereare credit problems, it's not
their money because they'remanaging other people's money.
They have a little bit invested.
(27:46):
So we think that's an easyopportunity.
Um, do you have to be patient?
You know, every other day peoplesell them off because of these
credit fears, but we thinkthere's little evidence.
If you really listen to what thebank said, not Jamie Diamond,
who's always usually wrong, butwhat the bank, other bankers
say, everything's fine withcredit.
(28:08):
Um, few spot issues like therealways is.
So we're bullish on financials.
Uh, we were bullish on Goldmanand Morgan, Stanley.
Those are up like 100% since westarted recommending them.
So now you have to be patient,but we think KKR is in that same
situation where you're notreally taking them at risk
because you're getting thesegreat franchises, but they're
(28:30):
out of favor and likely to atleast over the next year or two
become back in favor and tradeup dramatically.
SPEAKER_01 (28:36):
Let's talk about uh small caps for a second here.
Um obviously SCAP has done quitewell, and small caps are an area
that I often focus on, at leaston social media, but there seems
to be somewhat of a stopping ofmomentum.
Um any thoughts on what's maybehappening, at least kind of
short term here?
And should we expect any kind ofyear-end rally in small caps, or
at least outperformance in smallcaps?
(28:57):
I guess.
SPEAKER_00 (28:58):
So there's normally when the Fed cuts rates, so
that's risk on.
And small caps are clearlyriskier than large caps and
riskier than and you know, techstocks have, at least over the
last three years, been verydefensive, strangely.
So they did start to rally, butthe problem really, and it's not
(29:20):
happening today, is that tech istaking the oxygen out of the
room.
So it's competing for capitalwith non-tech stocks, and small
caps have only about 10%,particularly the value index
exposure to tech, whereasecoided SPs is 17, and of course
(29:40):
the SP is closer to 50 if youproperly measure it.
Because Amazon, you know, istechnically consumer cyclical,
but it's really tech stock.
So um, that's really what'shappening is the oxygen is
coming out of the room.
But we think that tech isgetting pretty fully valued.
Our models show it's not.
In a bubble, but companies likeBrockom are close to our target,
(30:04):
and video is getting closer toour target.
And so, like on days like today,it's not up, but earlier in the
day it was.
But the Russell 2000 isoutperforming.
So we think it's better to benot just all in tech.
And we do think it's going to bean everything rally.
(30:24):
So being in large cap dividendstocks like ICAP or SCAP, we
think will pay off.
You just have to be aware, likeif there's some big super
positive tech announcement that,you know, it's going to
underperform the market, butit's a good hedge, like days
like today, where you've gotFacebook falling up and
Microsoft Week, then you'regoing to outperform by having a
(30:47):
broader-based um portfolio.
And small caps are super cheap,have great growth opportunities
get acquired, uh, usually dowell, at least the ones we're in
when they report earnings.
So good long-term investment.
But just be aware that, youknow, on certain days, if tech's
(31:08):
booming, then the equal weightedSP would be down, small caps
will be down, and large capdividend stocks will be down.
SPEAKER_01 (31:17):
You often hear this term um markets are priced to
perfection, right?
So earnings come out and some ofthese companies, you know, gap
down.
We saw that with Meta,obviously.
Uh yes, say you mentionedChipotle, that's obviously a
weaker company dynamic.
But um how are earnings and andmore importantly, how are the
how's the reaction looking atyou?
Um the way things are coming up.
SPEAKER_00 (31:35):
It's not very surprising.
The companies are beatingconsensus, but not necessarily
beating the whisper number.
And then, well, in the case ofFacebook, it's really guidance.
But to your point, thesecompanies, we don't think
they're you know bubbles, butthey're fully valued, so they
(31:56):
can't really afford todisappoint.
Whereas the rest of the market,like if you pick KKR, um,
they're gonna report next week.
Maybe they'll sell off justbecause everybody hates the
financials right now,particularly anything related to
credit.
But the expectations are reallylow.
So even if they did slightlymiss, they could very well trade
(32:18):
up.
So like Amazon's pointingtonight, maybe they miss, but
the stocks only up 3%, themarket's up, excuse me, over 20.
NASDAQ is leased.
So there you have a better riskreward.
So it's pretty obvious.
If you have big runs in stocks,then going into the print could
be more risky than reward.
(32:40):
And so that's one reason wethink it does make sense to have
a broader base portfolio whereeverything's not priced for
protection for perfection, andyou have a better risk reward
going into earnings.
SPEAKER_01 (32:53):
And for the last uh question here on mine, again,
folks, if you want to askquestions, click on that QA.
I'm happy to bring it up.
But uh, let's talk about activeversus passive for the rest of
the year and then into nextyear.
I saw some chart that showed theuh the differential between high
beta and low beta stocks on thelarge cap SMP side is like
historic in terms of the lastsix-month differential.
Um what's the outlook on activeversus passive going forward
(33:16):
here?
SPEAKER_00 (33:17):
Well, the the first kind of obvious point is you
absolutely need active withfixed income because you have to
manage these somewhat obscurerisks that don't exist with
equity.
So call risk, credit risk,interest rate risk.
So absolutely critical for fixedincome.
Yeah, it's PMDS and PFFA for ourfunds.
Equity is more ambiguous becausesometimes momentum is the most
(33:42):
important factor.
So in effect, index funds aremomentum funds because they're
cap weighted.
So they buy more whatever'sgoing up.
So sometimes that works.
If we do have more of arotation, um, and we also we do
position our funds for our viewin the market.
So ICAP's done really well thisyear, but partly because we
(34:04):
positioned it in financials anda little bit of tech, not nearly
what the equalated SP has, alittle bit of tech, but more
risk-averse tech andindustrials.
So we think that activemanagement, if it's properly
implemented and then writingthese short-term calls is a huge
advantage, um, can beat, butjust be aware that it's more of
(34:29):
a fair battle because of thismomentum cap weighting factor
working in some markets, likeyou mentioned this year, really
being in the stocks that movethe most.
So they have higher market caps.
So index funds have done finethis year for that reason.
SPEAKER_01 (34:47):
Uh again, folks, if you're here for the C Credits, I
will email you uh by end of day.
Get your uh information tosubmit to the CFP board.
Uh as always, I appreciate thesupport for those that are
attending here.
Jay, take it away with any uhfinal thoughts here and we'll
wrap up.
SPEAKER_00 (35:01):
No, I wouldn't be too concerned.
You know, we were predictingthat the Fed doesn't cut in
December, but just keep lookingat the expected one-year number,
where the 10-year is, where the30-year mortgage is.
Uh, we think those will berelatively stable.
And that we're really set up fora great market where you have a
(35:22):
at least gradually easing Fed,great tech dynamics, potential
for rotation.
So don't be scared out of themarket.
We might have a little pullback,post-earnings, which we're
getting close to because techearnings is really the bulk of
earnings.
But I wouldn't panic and selleverything.
It's probably not going to be atradable route or tradable
(35:43):
pullback.
And so just stay invested.
That's the best long-termstrategy.
SPEAKER_01 (35:48):
Well, okay.
These are more about the CP, butthere's one question from
Sherry.
Let's address this real quick.
Any any thoughts on the dollaruh here?
SPEAKER_00 (35:54):
We have a unique view on the dollar.
There was kind of a notion thatthe US is going to hell in a
handbasket and the dollar wassuper weak and we're losing
reserve currency status.
And we view it completelydifferently.
If you look at the uh 25-yearaverage, the dollar index is
about 95.
(36:16):
Over the last 10 years, it'sright where we are now, around
98.
Really, what happened is peoplegot super bold up about the
dollar when it became clear thatuh Trump was going to become
president.
And we think that was kind ofirrational.
Like there's a notion there'sgonna break the budget, rates
are gonna go to infinity, andthe dollar would be ultra
(36:38):
strong.
So it's kind of the oppositewhere tariffs are reducing the
budget deficit, uh, the Fed'scutting.
But so we think the dollar isgonna stabilize here where it's
always been or where it'shistorically been.
Uh, the U.S.
is not gonna lose its reservecurrency status.
In fact, it's stronger than ithas been because this revenue
(37:01):
from tariffs is gonna fix atleast the worst of our budget
problems.
So we're not bullish on adollar, but kind of neutral on
the dollar, um, which would befine for investing in other
asset classes.
Means gold maybe will lose alittle momentum because a weak
dollar is good for gold.
SPEAKER_01 (37:21):
And stay paying attention to Jay Hatfield
Infrastructure Capital.
Thanks everybody for attending,and we'll see you on the next
webinar.
Thank you, Jay.
Uh do me a favor and uh you know just tell other
people that this webinar ishappening.
Uh Jay and uh is always veryinsightful when it comes to
markets, a lot to talk about uhthat he's gonna go over uh as
far as the macro front, as wellas also obviously on the
infrastructure capital side ofthings, their funds.
Uh for those that are here forthe CE credits, uh I promise you
(00:31):
I will email you.
I promise you I'll get yourinformation.
Just stick to the end of thepresentation.
Uh, I'll get it from you of theCFP board.
If you have any questions, typeit in the Q ⁇ A or in the chat.
We'll do it during the end, makethis as interactive as possible.
My name is Michael Gaiad.
Thank you for attending thiswebinar, sponsored by
Infrastructure Capital.
Uh, the man of the uh 45 minutesrough hour, Mr.
(00:52):
Jay Hatfield.
SPEAKER_00 (00:53):
Great.
And so this is always a goodstart because this is definitely
not the view from our office inmidtown.
So that's the reason.
Hopefully, um you can go visitthis office.
I don't know where it is, but wewere in midtown then at, but
that's not our view.
And just um just a quickoverview of our firm.
We have three fixed incomestrategies.
(01:14):
BMDS is a high-yield bond fund,PFFA is preferred stock fund,
BFFR is a REIT preferred stockfund index fund.
Uh PFFA is low leverage, about20%.
BMDS and PFFR are unlevered.
And then we have three equityincome strategies, AMZA is
pipelines, uh, tax advantaged,ICAP, large cap dividend stocks,
(01:39):
right individual calls.
Uh with all three of thesefunds, we use our GARP
methodology to come up with arelative valuation matrix.
And that's what we what informsour purchases and our sales as
well.
And SCAP, we have um profitablecompanies.
We screen for profitablecompanies, of course, we always
(02:02):
do, but if you buy the IWM, youget a lot of unprofitable
profitable companies.
And we do write a small amountof index calls.
We write index calls with smallcaps because small caps tend to
skyrocket, they can getacquired.
And so it's better to not capyour upside.
Whereas large caps typically goup some, but they don't usually
(02:24):
get acquired because they'rejust our average capitalization
and I caps over 100 billion.
So it's okay to give up someshort-term upside.
And then you can see all of ourfunds have substantial SEC
yields.
So this is the actual cashcoming in.
We do enhance these with optionwritings, writing, uh, not with
(02:46):
PFFA, but with the equity incomefunds.
We have a unique take on theeconomy, which has been uh quite
accurate historically.
And the reason for that is thatwe look at the monetary base as
a leading indicator, um, whichis the simplest way to measure
(03:10):
the money supply.
And the reasons that that'scritical is the Fed has caused
13 out of 14 post-World War IIrecessions.
But the only exception to thatwas the pandemic.
So that was caused not by theFed, but the federal government
shutting down the economy.
(03:30):
So really, the Fed has causedevery post-World War II
recession.
And they do that by restrictingthe money supply, raising rates,
which in 12 out of 13 recessionscaused a housing recession.
The exception was a 2001recession.
That was a tech bust.
(03:51):
So all recessions come frominvestment declines and
typically housing investmentdeclines.
So you might say, well, we havehad a housing investment
decline.
We have a slide on that later.
So you might ask, well, why havewe haven't we had a recession?
And we'll get into that, butit's really the fourth bullet
(04:12):
here, fifth bullet, I guess.
Um, and I did try to talk aboutthis a little quickly on TV a
few minutes ago.
But that if you look at a chartwe have later, the housing
sector used to be way more boomand so therefore way more bust.
But post of great financialcrisis, we haven't had those
booms.
So when it comes off the boom,there's less layoffs.
(04:36):
The economy slows, but itdoesn't plummet.
And in this case, also, we havethis tremendous, not just
spending on tech, but also techinfrastructure.
So data centers, but moreimportantly, electricity
generation.
So it's a much the tech side isholding up the real economy, the
real economy or old economy,really, construction and housing
(04:58):
slowing.
So you have that dichotomy.
So that's why it's critical.
The Fed does cut.
Thankfully, there's still fourcuts priced in over the next
year.
We think Powell really signaledhe wasn't gonna cut in December,
unfortunately.
But we're gonna have a new Fedshare that's going to be
installed not as Fed share, butprobably on the Fed as early as
(05:20):
March.
So you're gonna have not evenjust a shadow Fed share, you're
really gonna have two.
So we think it's gonna be morecontroversial to not cut rates.
But even more importantly, thisis the critical new data.
We're gonna put a note out onthis.
If you looked at the CPI reporton Friday was super bullish, and
the reason for that is thisstubborn and miscalculated
(05:44):
owner's equivalent rent finallydeclined to 0.1%, so that
annualized to 1.2 versus theyear over year at four over
four.
And so this is the core of ourCPI R, the fourth bullet versus
U.
So we use real-time rents, butfinally U is going to gravitate
(06:10):
uh towards R.
So in other words, the laggingpoorly calculated BLS measure is
going to go to our measure.
So we're forecasting PC core,even as reported by the BLS,
who's has a terriblemethodology, will decline to two
by the end of next year.
So no matter, even if thereisn't a regime change, there
(06:32):
will be.
But even if there weren't, eventhis incompetent Fed would
figure out they needed a cutbecause employment's weakening
and inflation is declining,particularly if you ignore
tariffs as you should.
Um, then the other macro pointthat you won't hear anywhere
else is actually we're bullishon the budget deficit declining.
(06:56):
Two reasons.
First of all, the OBBA don'tlisten to anything here on the
news.
It's mostly political talkingpoints from both sides.
So we're not political, we're webelong to the greed is good
party.
But there was a ton ofreporting, unchallenged, that it
was a budget buster and that itwas a huge tax cut for the rich.
(07:20):
But that's like reporting on thenews eight years ago.
So that was true of the 2017bill, but not true of the OBBA.
The OBBA was mildly budgetrestrictive because there were
cuts in IRA, you know, the umCHIPS Act and the subsidies for
(07:41):
uh renewable energy.
And there was cutbacks inMedicaid eligibility, not
Medicaid, but eligibility.
So that offset the tax cuts tothe middle class from that was
structured as reductions intipped wage taxes and overtime.
So totally misreported.
So that's a little bit positivefor the budget, not that
(08:02):
positive, but what's really,really positive, and the CBO
does not include, is the$400billion in tariffs.
So we're forecasting the budgetdeficit drops from$1.8 trillion,
which was better than the CBOforecast, because again, they
ignore our tariffs, to$1.45trillion.
That's only 4.5% of GDP.
(08:23):
That's sustainable because GDPnormally grows at 5%.
So when you hear about this direfiscal situation, that's a
little bit of old news, notgreat fiscal situation, but it's
sustainable because of thetariffs.
And hopefully we slowly increasethose tariffs and reduce the
budget deficit.
(08:43):
Um, and so um we are optimistic,though, that because the the um
futures market is still pricingfour cuts in, it might be
delayed.
That means the 10-year will stayaround four, 30-year mortgage
rent six, and housing should atleast stabilize, or if not
recover.
So if you want to predict theeconomy, look at the Fed money
(09:06):
supply and housing.
If you did that, if you do that,you always will be ahead of the
curve.
And if the Fed did that, thenthey would have started
tightening about a year earlier.
Because when housing prices wentup 20% year over year, like they
did in the first quarter of2021, they should have known
that was going to translate intorent inflation because they're
(09:28):
highly correlated.
But they follow this delayedindex.
So it was delayed both on theway up and the way down.
So if you just follow thoseindicators, you don't need to
listen to us.
You can create your own economicresearch, but it's extremely
effective.
I did my master's thesis atWarden on on it.
It's very statisticallycritical.
(09:50):
And Keynesianism does not workfor predicting the economy.
Um, in terms of what's theimplications of this, we're
bullish in the stock market.
We raised our target to 7,000.
Looks like mostly most of therisks are to the upside on that
target.
I will say that earningsseason's about to end or the
(10:11):
bulk of it.
So we might have a littlepullback.
So, you know, market's a littleweak today.
So that's normal, but thatdoesn't mean that the target is
7,000.
It's not relevant.
And on the other hand, too, itdoes, if if we're right about
that 7,000 target, it means themarket probably will stall out
or pull back a little.
But it's not necessarily time toget out because we still think
(10:33):
we're going to be 7,700 nextyear.
And both of those targets are 23times the following year's
earnings.
So it's very obvious, but somepeople don't do this.
So if you have an end of 25target, you use 26 SP earnings,
and for the which is 305.
And the 27 SP earnings is 335.
(10:55):
So we're not expecting anexpansion in the multiple.
We think 23 is sustainable.
Um, a critical point about that23 times, you might say, well,
the average is 18 over the last30 years.
But what that ignores is that uhcorporate tax reduction from it
was a gigantic deductionreduction, 35 to 21.
(11:18):
That expanded in our models,expanded the sustainable
multiple by four points.
So that 18 became 22.
So 23, at least when rates arelow, is reasonable, and
particularly when you're gettingfast earnings growth from AI.
So we think the targets are umvery achievable.
(11:38):
Risk mostly the upside.
We've been extraordinarilyaccurate in our targets really
since we ramped up our PRactivities in 21.
So I wouldn't ignore ourtargets.
They worked perfectly, really,the last two years.
(12:05):
And if you want to be in fixedincome, high yield is going to
do well.
So PFFA, which is high yieldpreferred, high yield bonds like
BNDS.
You don't want to be ininvestment grade like B D, whose
ticker we arbitrage by adding anS to.
That's a Vanguard fund yieldsfour.
That's likely to be veryflattish over the next couple of
(12:27):
years because they don't havespread, spread tightens when the
stock market's up.
So be in higher risk stocks, uh,financials, industrials, tech,
and higher risk fixed income,high yield bonds, and preferred.
And then we talked about a lotof this.
The easy way to predict the10-year is first of all, you
(12:49):
have to get the terminal rate onthe Fed funds rate.
We're estimating 275, as is thefutures market.
That's the normal rate.
That's 75 basis points overinflation.
If you measure inflationproperly, which we do on our
website, CP, actually PCE-R.
So we correct the sheltercomponent to market to market
(13:11):
for real-time data.
We're at two.
So the neutral rate on the Fedfunds is uh 275.
Normally the tenure trade's 100over that.
That's 375.
So don't get confused.
Don't focus too much on thebudget deficit, although that is
a bit of a tailwind in ourmodels.
And a lot of, you know, um superbears commentary, like, oh, the
(13:34):
debts is unsustainable.
We're gonna go to rates aregonna go to infinity.
It's not the key driver ofrates.
Key driver of rates is Fedfunds, Fed policy.
So we're likely to have the 375tenure that supports 23 times.
Um this point here, four, fourthpoint.
So it's you know, you 70%correlated uh if you want to
(13:58):
predict interest rates to theterminal rate.
So that's if that's really allyou need to know.
And in fact, we're a little bitshort-term bullish on the tenure
because it's actually gapped outto about 130 over the uh Fed
fund expected Fed funds rate.
So it's a little bit high, itshould be closer to 100.
So you might see the 10-year,well, either the terminal Fed
(14:23):
funds rate will come up or thetenure will drop.
Um and we, you know, mentionedthat we'd prefer to be further
out on the risk curve.
This is a great chart.
You might say, well, why didn'twe have recession?
The Fed is has tightened rates15 times since World War II, 13
times we had a recession.
Why didn't we have recessionthis time?
(14:45):
We talked about already we dohave a tech them, but also see
that these peaks in the housingsector used to be way higher.
And keep in mind that this isn'tadjusted for population.
So um we used to top out at wellover 2 million, you know, almost
(15:06):
2.5, 2.3 million, like beforethe great financial crisis.
And then when you have thisprecipitous drop, then you have
tremendous layoffs.
People who are laid off do notconsume.
So investment leads therecession, but then consumption
drops.
But in this case, we capped outin this cycle, first of all, we
(15:28):
had really low home building fora long time.
And so we have a shortage ofhomes.
So that stabilized the market,and then we're dropping from a
much lower level, so there'sless, fewer layoffs.
And then the AI, boom, alsoabsorbs some labor.
So that's really the explanationwhy we didn't have recession.
(15:50):
But it does require the Fed tostay on track.
It doesn't have to be this Fed,it could be the next Fed with a
new Fed share on track forcutting that's to keep the
10-year somewhere near four andthe 30-year mortgage around six,
and have the housing market atleast stabilize, if not grow.
And we are bullish on theeconomy.
(16:11):
We think we're gonna have a 3%growth rate because we do think
construction and housing willstart to come out of recession,
be growing year over year oninvestment, plus you'll have
continued tech spending.
So we're bullish on the economy,really focused on housing.
That's one of the two keyindicators, the Fed, money
(16:32):
supply, which is what the Fedcontrols, and then the quote
rates, and then the housingsector.
This is a fantastic chart.
I get excited about charts,unlike most people.
But you can see thisgraphically, and we made this
actually readable, which wasnice, that uh this is year over
year, this last 12-month numberhere.
(16:53):
And then you can see that thetwo old economy sectors,
structures, and residential arein recession.
But IP, which is obviouslysoftware and then equipment, a
lot of that's tech equipment.
So it's electrical equipment,for tech.
That's kept um investmentpositive over the last year.
(17:14):
They have to ignore inventoriesbecause they're moving all over
the place uh because of tariffs.
But that positive investmentkept the economy growing but
slowly.
And um employment's slowingbecause these very employment uh
intensive sectors likestructures and residential are
(17:35):
in recession, so there's lessemployment there.
If you didn't believe me thatinvestment drives cycles, here's
every cycle since World War II.
You can see that on average,there's no decline in
consumption.
There is some that occurs, likeI said, after layoffs.
But, you know, like in 1949,actually consumption went up,
(17:57):
23% decline in investment.
So investment's only 20%.
Everybody says, oh well,consumption's 66%, so that's
what's going to cause uhrecessions, but consumers
consume, they're like woodchucks who chuck wood.
So low-income consumers have toconsume to survive.
High income consumers want tospend because they have high
(18:21):
income.
So consumption is really stable,but investments not.
Um, you can see overall we had avery shallow recession in 20 um
because that was just a quick umyou know pandemic recession.
This is just the same data, butyou can see that preceding every
(18:43):
recession, you had a dramaticdrop in investment.
Um watch our CPI-R versus U,because R, so in other words,
our our real-time calculationleads CPI.
So that's why we're bullish thateven the reported number will go
to two, because it's finallybeing reflected that shelter
(19:07):
costs, owners' equivalent rentin particular, are declining.
So the this Fed has no abilityto forecast.
We do, and we're forecastinggoods of two.
So either this Fed or new Fedwith a new Fed share will cut
rates, which is super bullishfor the market.
This is just a graph that showswhat we were asserting, which is
(19:29):
the 10-year typically trades alittle bit over 1%, 1.05 over
the Fed fund rate, Fed fundsrate.
And when the yield curve isinverted, it'll trade over the
terminal rate.
So that's why 277 right now isthe terminal rate.
105, that's like 187, the 10years, a little bit above that
(19:49):
right now.
So possibly we'll get a littlebetter rally in the 10 year.
And just another graph thatshows the essentially the same
data.
The 10 years of about 1% overthe um Fed funds rate.
Um, watts the money supply.
If you did that, unlike the Fed,you would have assumed we'd have
(20:11):
near hyperinflation.
We didn't have that, but we haddouble-digit inflation.
Um, and in fact, the uhmonetarism, we had the perfect
experiment uh to testmonetarism.
It worked absolutely perfectly.
60%.
So this net increase in themoney supply is 60%.
And uh nominal GDP grew at 38%.
(20:34):
Uh and Milton Friedman's theoremthat excessive monetary growth
above nominal GDP producesinflation worked absolutely
perfectly.
22%.
So he would be dancing in thestreets right now because we
kind of had this uhunfortunately a perfect
experiment where we massivelyjacked up the money supply.
(20:57):
The uh quantity theory of moneyworked perfectly.
And Keynesian completely blewup.
They came, the Keynesians cameup with this transitory theory
of inflation, was totally wrong.
And then just some details, morealmost disclosure about our
funds.
Uh uh PFFA is our preferredstock fund, uh, yields over nine
(21:20):
SEC yield basis, which is thegood way to evaluate,
particularly fixed income.
Um we um are constantly managingthree risk, interest rate risk,
uh, credit risk, and call risk.
And we're taking advantage ofthe fact that this is an active
(21:41):
fund, index funds uh don't uhcare whether security is trading
above par.
They just mechanically keepbuying it because if they have
inflows and they can'tparticipate in new issues, and
they're rebalancing every month,and they sell do the opposite of
what they should do.
They're cap weighted, so theybuy more of what's up, sell
(22:02):
what's down.
That's normally the exact wrongthing to do.
We take advantage of that.
So you can see that PFFA has avery strong track record versus
the index and also just provideskids stable income.
Um, and these are again, theseare almost more um disclosure,
BNDS, high yield bonds.
(22:24):
We do look just like we do withPFFA for situations where the
rating agencies are negative ona credit, but we think it's a
great credit.
So Plains All-Americans is agood example.
Rating agencies hate pipelines,particularly ones that pay
dividends because they do aforecast, they don't d-lever.
They ignore the fact you havegreat assets.
(22:45):
The company has financialflexibility, they can reduce
their dividend.
It's great for the preferredsand the bonds.
In this case, they're bonds, butso BNDS has a good track record
as well since we launched itrelative to the high yield
index.
Uh MLPs have become a greatasset class.
(23:06):
They're challenged during thepandemic, obviously, but super
stable, better capitalstructures, and they used to
have great tax characteristics.
With PFFA, you get, I'm sorry,MCA, you get a 1099, so no K1s,
so way cleaner tax reporting.
And in this fund, there's likelytailwinds to our distribution
(23:28):
because it does borrow money.
Our cost of borrowing isdropping.
Uh ICAP's our large cap dividendfund.
And that's reflected in thereturns and also good income.
As Cappy mentioned, screeningfor profitable companies,
(23:52):
writing small amount of indexcalls, uh, not enough to cap the
upside.
Uh, and also it's one of the fewways to generate income from
small caps.
And then we just havedisclosures.
So, with that, Michael, I wouldopen it up, see if there's any
questions.
SPEAKER_01 (24:09):
Yeah, and and again, folks, for those that want to
ask questions, you can uh put itin the QA.
I see a couple of people haveasked here.
Uh obtain a copy of the slidepresentation.
I'm gonna try to make this anedited uh uh webinar on the Lead
Lag Media YouTube channel.
I'll put a blast out about that.
Uh Mike here asking about PFFAtax consequences.
SPEAKER_00 (24:27):
Yeah, so the the important thing about preferreds
is the word preferred stock.
So stocks can and do benefitfrom the same tax
characteristics as common stock.
So if you own any REITs, youknow you get a 199A deduction.
That's an equalization betweenpass-through and corporate
(24:50):
taxation.
Surprisingly, but fantastically,preferreds also get that
deduction.
Uh they also preferreds benefitif there's excess tax
depreciation.
And then also to the extentthey're not cumulative, which
isn't great from a creditperspective, but it's usually
really high-quality financials,you get QDI.
(25:12):
So your effective tax ratechanges every year, but it's
probably going to be low 20s,you know, assuming you have a
40% notional tax rate.
So it is quite tax-advantaged.
And I would contrast that theBNDS, which you should assume
you get a few preferred inthere, but assume basically that
your taxable income is equal toyour income.
(25:34):
So unlike, so your effective taxrate would be 40 on bonds.
So it's more attractive to holdthat in your IRA where you don't
pay tax.
SPEAKER_01 (25:44):
I don't think you and I have talked about this,
Jay, but I'm curious to get yourtake on um what's going on with
regional banks uh the lastseveral weeks.
So there's been a little bit ofa scare around private credit.
Um, any any thoughts there?
SPEAKER_00 (25:57):
We think it's overdone.
The we would be nervous aboutcredit if it was early 2022.
So clearly you should be nervousgoing into a tightening cycle.
There's a little bit of weaknessin the auto sector.
There's definitely a big storyin your uh sorry, Wall Street
(26:18):
Journal.
There's definitely morerepossessions happening.
Low-income consumers pressured.
You're seeing that uh fromreports from Chipotle um saying
that.
But that's a very, very smallpart of the credit uh capital
market.
So we're actually bullish onregional banks.
We think when the Fed cuts goupward sloping yield curve,
(26:42):
which is better for regionalbanks as opposed to money center
banks are usually fully hedged.
Regional banks usually aren't.
And we don't think credits canbe a problem.
Although, having said that, wethink the real way to play, if
you agree with us that we're notheading into a credit crisis,
which, like I said, would bevery unusual when we're in an
(27:03):
easing cycle, uh, we wouldrecommend like our largest
holding in ICAP, which is KKR,because there's a lot of fears
around credit.
They have relatively smallprivate credit or asset-backed
credit, about 10%, a lot ofprivate equity that benefit from
a booming stock market, verydepressed stock price, great
(27:25):
franchise, great brand, gonnabenefit from realizations if the
stock market continues to bestrong.
So rather than going into, youknow, the blast of go one step
away.
Something is down, even if thereare credit problems, it's not
their money because they'remanaging other people's money.
They have a little bit invested.
(27:46):
So we think that's an easyopportunity.
Um, do you have to be patient?
You know, every other day peoplesell them off because of these
credit fears, but we thinkthere's little evidence.
If you really listen to what thebank said, not Jamie Diamond,
who's always usually wrong, butwhat the bank, other bankers
say, everything's fine withcredit.
(28:08):
Um, few spot issues like therealways is.
So we're bullish on financials.
Uh, we were bullish on Goldmanand Morgan, Stanley.
Those are up like 100% since westarted recommending them.
So now you have to be patient,but we think KKR is in that same
situation where you're notreally taking them at risk
because you're getting thesegreat franchises, but they're
(28:30):
out of favor and likely to atleast over the next year or two
become back in favor and tradeup dramatically.
SPEAKER_01 (28:36):
Let's talk about uh small caps for a second here.
Um obviously SCAP has done quitewell, and small caps are an area
that I often focus on, at leaston social media, but there seems
to be somewhat of a stopping ofmomentum.
Um any thoughts on what's maybehappening, at least kind of
short term here?
And should we expect any kind ofyear-end rally in small caps, or
at least outperformance in smallcaps?
(28:57):
I guess.
SPEAKER_00 (28:58):
So there's normally when the Fed cuts rates, so
that's risk on.
And small caps are clearlyriskier than large caps and
riskier than and you know, techstocks have, at least over the
last three years, been verydefensive, strangely.
So they did start to rally, butthe problem really, and it's not
(29:20):
happening today, is that tech istaking the oxygen out of the
room.
So it's competing for capitalwith non-tech stocks, and small
caps have only about 10%,particularly the value index
exposure to tech, whereasecoided SPs is 17, and of course
(29:40):
the SP is closer to 50 if youproperly measure it.
Because Amazon, you know, istechnically consumer cyclical,
but it's really tech stock.
So um, that's really what'shappening is the oxygen is
coming out of the room.
But we think that tech isgetting pretty fully valued.
Our models show it's not.
In a bubble, but companies likeBrockom are close to our target,
(30:04):
and video is getting closer toour target.
And so, like on days like today,it's not up, but earlier in the
day it was.
But the Russell 2000 isoutperforming.
So we think it's better to benot just all in tech.
And we do think it's going to bean everything rally.
(30:24):
So being in large cap dividendstocks like ICAP or SCAP, we
think will pay off.
You just have to be aware, likeif there's some big super
positive tech announcement that,you know, it's going to
underperform the market, butit's a good hedge, like days
like today, where you've gotFacebook falling up and
Microsoft Week, then you'regoing to outperform by having a
(30:47):
broader-based um portfolio.
And small caps are super cheap,have great growth opportunities
get acquired, uh, usually dowell, at least the ones we're in
when they report earnings.
So good long-term investment.
But just be aware that, youknow, on certain days, if tech's
(31:08):
booming, then the equal weightedSP would be down, small caps
will be down, and large capdividend stocks will be down.
SPEAKER_01 (31:17):
You often hear this term um markets are priced to
perfection, right?
So earnings come out and some ofthese companies, you know, gap
down.
We saw that with Meta,obviously.
Uh yes, say you mentionedChipotle, that's obviously a
weaker company dynamic.
But um how are earnings and andmore importantly, how are the
how's the reaction looking atyou?
Um the way things are coming up.
SPEAKER_00 (31:35):
It's not very surprising.
The companies are beatingconsensus, but not necessarily
beating the whisper number.
And then, well, in the case ofFacebook, it's really guidance.
But to your point, thesecompanies, we don't think
they're you know bubbles, butthey're fully valued, so they
(31:56):
can't really afford todisappoint.
Whereas the rest of the market,like if you pick KKR, um,
they're gonna report next week.
Maybe they'll sell off justbecause everybody hates the
financials right now,particularly anything related to
credit.
But the expectations are reallylow.
So even if they did slightlymiss, they could very well trade
(32:18):
up.
So like Amazon's pointingtonight, maybe they miss, but
the stocks only up 3%, themarket's up, excuse me, over 20.
NASDAQ is leased.
So there you have a better riskreward.
So it's pretty obvious.
If you have big runs in stocks,then going into the print could
be more risky than reward.
(32:40):
And so that's one reason wethink it does make sense to have
a broader base portfolio whereeverything's not priced for
protection for perfection, andyou have a better risk reward
going into earnings.
SPEAKER_01 (32:53):
And for the last uh question here on mine, again,
folks, if you want to askquestions, click on that QA.
I'm happy to bring it up.
But uh, let's talk about activeversus passive for the rest of
the year and then into nextyear.
I saw some chart that showed theuh the differential between high
beta and low beta stocks on thelarge cap SMP side is like
historic in terms of the lastsix-month differential.
Um what's the outlook on activeversus passive going forward
(33:16):
here?
SPEAKER_00 (33:17):
Well, the the first kind of obvious point is you
absolutely need active withfixed income because you have to
manage these somewhat obscurerisks that don't exist with
equity.
So call risk, credit risk,interest rate risk.
So absolutely critical for fixedincome.
Yeah, it's PMDS and PFFA for ourfunds.
Equity is more ambiguous becausesometimes momentum is the most
(33:42):
important factor.
So in effect, index funds aremomentum funds because they're
cap weighted.
So they buy more whatever'sgoing up.
So sometimes that works.
If we do have more of arotation, um, and we also we do
position our funds for our viewin the market.
So ICAP's done really well thisyear, but partly because we
(34:04):
positioned it in financials anda little bit of tech, not nearly
what the equalated SP has, alittle bit of tech, but more
risk-averse tech andindustrials.
So we think that activemanagement, if it's properly
implemented and then writingthese short-term calls is a huge
advantage, um, can beat, butjust be aware that it's more of
(34:29):
a fair battle because of thismomentum cap weighting factor
working in some markets, likeyou mentioned this year, really
being in the stocks that movethe most.
So they have higher market caps.
So index funds have done finethis year for that reason.
SPEAKER_01 (34:47):
Uh again, folks, if you're here for the C Credits, I
will email you uh by end of day.
Get your uh information tosubmit to the CFP board.
Uh as always, I appreciate thesupport for those that are
attending here.
Jay, take it away with any uhfinal thoughts here and we'll
wrap up.
SPEAKER_00 (35:01):
No, I wouldn't be too concerned.
You know, we were predictingthat the Fed doesn't cut in
December, but just keep lookingat the expected one-year number,
where the 10-year is, where the30-year mortgage is.
Uh, we think those will berelatively stable.
And that we're really set up fora great market where you have a
(35:22):
at least gradually easing Fed,great tech dynamics, potential
for rotation.
So don't be scared out of themarket.
We might have a little pullback,post-earnings, which we're
getting close to because techearnings is really the bulk of
earnings.
But I wouldn't panic and selleverything.
It's probably not going to be atradable route or tradable
(35:43):
pullback.
And so just stay invested.
That's the best long-termstrategy.
SPEAKER_01 (35:48):
Well, okay.
These are more about the CP, butthere's one question from
Sherry.
Let's address this real quick.
Any any thoughts on the dollaruh here?
SPEAKER_00 (35:54):
We have a unique view on the dollar.
There was kind of a notion thatthe US is going to hell in a
handbasket and the dollar wassuper weak and we're losing
reserve currency status.
And we view it completelydifferently.
If you look at the uh 25-yearaverage, the dollar index is
about 95.
(36:16):
Over the last 10 years, it'sright where we are now, around
98.
Really, what happened is peoplegot super bold up about the
dollar when it became clear thatuh Trump was going to become
president.
And we think that was kind ofirrational.
Like there's a notion there'sgonna break the budget, rates
are gonna go to infinity, andthe dollar would be ultra
(36:38):
strong.
So it's kind of the oppositewhere tariffs are reducing the
budget deficit, uh, the Fed'scutting.
But so we think the dollar isgonna stabilize here where it's
always been or where it'shistorically been.
Uh, the U.S.
is not gonna lose its reservecurrency status.
In fact, it's stronger than ithas been because this revenue
(37:01):
from tariffs is gonna fix atleast the worst of our budget
problems.
So we're not bullish on adollar, but kind of neutral on
the dollar, um, which would befine for investing in other
asset classes.
Means gold maybe will lose alittle momentum because a weak
dollar is good for gold.
SPEAKER_01 (37:21):
And stay paying attention to Jay Hatfield
Infrastructure Capital.
Thanks everybody for attending,and we'll see you on the next
webinar.
Thank you, Jay.
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