Lead-Lag Live

Navigating Market Volatility: A Conversation with Wall Street Veteran Jay Hatfield

• Michael A. Gayed, CFA

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Jay Hatfield cuts through market noise with a refreshingly clear perspective on inflation: stick a yellow sticky note on your mirror that says "inflation is caused by excessive monetary growth." This fundamental principle helps investors avoid being misled by commodity price fluctuations that resolve naturally through market mechanisms rather than representing true inflation.

The current market volatility, Hatfield explains, largely reflects normal seasonal patterns during non-earnings periods when high-flying stocks typically experience pullbacks. While acknowledging a potential growth slowdown with Fed policy about "150 basis points too tight," he maintains a bullish long-term outlook on both bonds and stocks, expecting rates to continue dropping as the Fed eventually recognizes the economic deceleration.

Hatfield's investment approach emphasizes human intelligence over algorithmic trading – a philosophy he applies across his firm's six ETFs managing $2.6 billion in assets. He articulates clear distinctions between fixed income investment strategies, where active management provides significant advantages through understanding call risk and credit dynamics, unlike equity markets where momentum sometimes prevails. His firm conducts granular analysis of individual securities, even examining specific buildings within REIT portfolios to identify value opportunities where others see only sector-wide challenges.

Particularly illuminating is Hatfield's contrarian view on recession dynamics, noting they typically begin with investment declines that impact employment before affecting consumer spending. This framework, combined with his assessment of China's economy continuing to grow at around 5% despite negative narratives, provides investors with valuable perspective for navigating current market conditions.

For income-focused investors, Hatfield offers practical insights on preferred securities, bonds, and midstream energy companies, explaining how these complement each other with different risk-volatility profiles while generating reliable income streams in various economic environments. His call-writing strategy for large-cap equities demonstrates how active management can enhance returns when applied with judgment rather than mechanical rules.

Human-powered market intelligence, developed through decades of experience and rigorous fundamental analysis, remains Hatfield's core advantage in a world increasingly dominated by algorithms and momentum trading.

DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Infrastructure Capital and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other mate

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Speaker 1:

I would urge everybody to put a yellow sticky on their mirror in their bathroom that inflation is caused by excessive monetary growth, and if you just stick to that you'll save yourself a lot of adjectives. The one exception major exception to that was during the 70s. We had a 1,200% increase in the price of oil from three to to forty two dollars a barrel. But that was when we had wage and price controls, so the market wasn't allowed to operate and us production plunged, and so normally these commodity and other random fluctuations which aren't really inflation but rather random fluctuations they just resolve themselves time, like a bunch of chickens die and then the weather changes and they stop dying and then the prices go back down.

Speaker 2:

My name is Michael Guy, a publisher of the Lead Lagopore. This conversation is sponsored by Infrastructure Capital Advisors, jay Hatfield's firm, and Jay is one of the most knowledgeable guys in the industry, so we're going to be talking about a lot of things here, jay. I know we've done this a number of times, but for those who don't know your background, a little bit of context as far as who you are would be great.

Speaker 1:

I've been on, thanks, michael. I've been on Wall Street for 35 years. About half of that time I was an investment banker doing energy and utilities. The rest on the buy side. I worked side, worked at two major hedge funds Zimmer Lucas and what's now called 72 Point and then launched my own company about 15 years ago and launched my own MLP and then launched AMC. It was our first active fund in 2014. And now we have six ETFs that we've launched over the last 10 years and $2.6 billion of AUM.

Speaker 2:

Yet a fairly sizable drop on Friday and some volatility, obviously, last 48 hours. I'm saying that because it does look like the market responding off of some kind of maybe the start of a growth scale. We're now seeing something we haven't seen in a while, which is when markets get volatile and stocks go down, long duration yields are dropping with it. You're getting a little bit of a flight to safety dynamic kind of come back in. I'm curious your take, jay on if something's shifting here in terms of the way the market is acting.

Speaker 1:

Well, we might be deploying for this growth scare because we've been talking about it for like two or three weeks. So we don't think that's totally rational. But, I would point out, because we still are bullish on the market long-term, we're neutral, not super negative, but neutral on the market right now. But if more we can talk about this slowdown. But this is just normal seasonal activity. Everybody kind of makes seasonality too complicated. There's two seasons earning season and not earning season. And we're in not, not withstanding the fact that NVIDIA is going to report. We're in not earning season and so there's no real catalyst to old stocks and most bad news comes from not some companies but some politics and global affairs and other issues. So it's normal to have a pullback when there's no earnings. The highest flyers are normally to pull back the most, which is exactly what we're saying. The high beta stocks. You know Bitcoin, the riskiest of the risky, so that's going to 90% of the driver is just normal seasonality. We do think that the market was missing this gross slowdown.

Speaker 1:

The fed's policy is ultra tight. It's in our models. They're about 150 basis points too tight, and so the old economy's slowing, the tech economy's booming and so we think growth will decelerate to the one to two percent level. But the fed will eventually figure it out. They're buying the curve but they're sort of dumb but not stupid, so they'll start to figure this out. Rates will continue to drop. That's bullish for the market. It's actually good for the fundamental economy too. So so in effect, the market's cutting rates for the Fed. So we may remain bullish long-term on bonds and stocks, but would just be cautious ahead of NVIDIA. We don't know if they're going to beat expectations or not. It's really the guide and expectations and that's just very, very difficult call. So, um, we're on the riskier side. Tough to put in the new money. We do think it's a good time to put money at preferreds, and bnds is our new fund, because those just kind of drift higher as rates go lower. So it's not like buying, you know, rodcom at 220 and it goes to 205.

Speaker 2:

And let's talk about BNDS First of all, when we talk about being bullish on bonds, there's being bullish on bonds overall. Then there's being bullish on duration, being bullish on credit risk. I don't think I've asked this before, but I'm curious at what point do you think it's time to really start to play with the longer duration side, and at what point do you think it's time to really start to play?

Speaker 1:

with the longer duration side. Well, we think now. You know that looked like a little bit of a crazy call at 480. But it looks. It's just kind of better to make the call, like when the knife stopped spalling. But we did it and we were. The knife was spalling and we still made the call because we just thought it was ridiculous. And now we're half right because our target's 375 on the 10 here. So it feels like a better call now. It does.

Speaker 1:

Probably to get lower from here we do need a little bit of insight from the Fed. We've actually been calling for the Fed chair to be removed so we can reform the Fed's broken policy framework. I don't think that's really very likely to occur. So the existing Fed is going to have to garner some insight. But we do think these Doge layoffs are going to be something that they focus on. They're pretty obsessed with the labor market, so that weakens up. So we do think that we'll get to our 375 target, maybe sooner rather than later. And, you know, maybe the stock rally, though, doesn't occur until earnings season starts in April.

Speaker 2:

One of the things I got a kick out of which makes a lot of sense to me now that you had articulated it the way you did last week in Vegas is I don't want to call it a conspiracy theory, but I think it makes sense this idea that Trump is wanting to cause an increase in the unemployment rate by laying off as many federal workers as possible to force Powell's hand to lower rates. I love that as a concept and it sounds like a very Trump thing to do. And you can argue it's probably justified because there's a lot of hiring that's happening. That's probably unnecessary on the federal side of things. But where are we in terms of um that impacting the economy, as opposed to just being on the fringe and people hearing about headlines?

Speaker 1:

yeah. So I sort of wish they were that smart like that would be extremely clever, but I'm not sure they are. So. Typically conspiracy theories are conspiracy theories, but I don't I wouldn't like completely ignore it. I think it's more important because it's going to impact the Fed. But that is the normal way recessions occur, is it?

Speaker 1:

It really everybody misses that recessions come from a decline in investment and then that impacts employment and then consumers spend less. They don't spontaneously spend less. So it's been a long time since we had a major federal layoff. I think it was like 30 years or something during the Clinton administration. But you know, those people that have laid off, they are going to tend to consume less. I wouldn't completely ignore it. I mean there's a lot of people it's really hard to keep track of, but it seems like 300,000-ish so far. So I wouldn't totally ignore it. I mean that might argue that maybe growth rates, you know are one to two, might be closer to one than two. And I do think. But I do think it's most important just because that's what the Fed obsesses about, versus, like, those people are just going to spend nothing and we're going to go into a tailspin.

Speaker 2:

Yeah, I mean I can't imagine it's not knowing the income levels of these people that it's a huge driver of consumer spending. But I don't know.

Speaker 1:

Yeah, and they get the unemployment insurance and the you know the ones that get bought out, get packages, so but but the federal it'll make them fed nervous Cause. I looked at the employment report and normally federal job growth was slow, like small, like 7,000 a month. But if that drops to negative a hundred or two, that's going to impact the employment report and the bond market will rally. So it's a potential catalyst. I mean, you always, employment report is probably the dirtiest report of all. So I wouldn't like bet, you know, millions of dollars on a weak employment report because there's season, huge seasonal adjustments in january. So be aware, I wouldn't. You know, let's see. I would say, like the next two unemployment reports, you're likely to see some weakness.

Speaker 2:

I saw a post on it showing various commodity prices since Trump came into office and the argument was that you know we're about to see significant cost push inflation because of some of the not just eggs other things that have gone up quite a bit. Any chance that there's some like springboard of inflation that could suddenly just kick in in the next several months, or are we kind of on that disinflation path no matter what?

Speaker 1:

Well, I would urge everybody to like put a yellow sticky on their mirror in their bathroom. That inflation is caused by excessive monetary growth, and if you just stick to that you'll save yourself a lot of agita. If you just stick to that you'll save yourself a lot of agita. The one exception, major exception to that was during the 70s we had a 1,200% increase in the price of oil from $3 to $42 a barrel. But that was when we had wage and price controls, so the market wasn't allowed to operate and US production plunged. And so normally these commodity and other random fluctuations which aren't really inflation but rather random fluctuations they just resolve themselves over time, like a bunch of chickens die and then the weather changes and they stop dying, dying and then the prices go back down.

Speaker 1:

And the commodities I'd focus on, oil is by far the most important and it's actually been very low. What people miss about tariffs is it makes the dollar very strong. That's very deflationary, maybe like gold's been running, but that really doesn't impact inflation. Oil does. Oil's very, very contained, and I would also say that we lowered our target on oil from $10, from $80 to $70, because it's very clear that Trump is going to influence the Saudis to pump more if prices run, particularly if he has sanctions on Iran. So we think the oil prices are capped. So that's bullish for inflation. So point one is just normally focused on my supply, not random factors, but oil matters, and oil is highly contained. It's actually declining slightly year over year.

Speaker 2:

What happens if China suddenly magically re-accelerates? There's been some interesting movement on the China market side, a lot of deep-seeking kind of realization that they're in the AI game too. But is there a chance that China could throw off some of the inflation narrative if they become a bigger driver of commodity?

Speaker 1:

movement. Well, you know one thing we have an almost 100% non-consensus view on China. They saved 45% of their GDP and there's an IMF study across the whole world that shows that every 10% of savings produces 1.5% of growth. So if you use that formula, china would normally grow, you know, at four and a half times one and a half, which is like seven. But you know they're a communist country like destroy a lot of value. But everybody's like oh, china's terrible, it's not growing, it's going into oblivion. The reality is growing around five. It's not great, don't tech stocks? Because of their, you know the government was sort of persecuting them. So the tech stocks all got a hand word until recently. But just because tech stocks are doing well and maybe the consumer consumes a little bit more, it's not going to. In the industrial part of the economy, oil consumption is going to be pretty stable, copper, all those commodities. The Chinese economy has been operating relatively normal, notwithstanding all the commentary to the contrary.

Speaker 2:

So let's go back to this possible growth scare, assuming it persists. Again it could just be like noise. And to your point about seasonality, anyway, latter part of February, it has to be weak, so on par with what we see historically. But again it could just be like noise. And to your point about seasonality, anyway, latter part of February, it has to be weak. So on par with sort of what we see historically. But let's do some severity analysis. So growth slows, disinflation picks up and it's more than just inflation slowing, it's growth slowing.

Speaker 1:

Talk to me how that impacts the preferred marketplace. Yeah, so I mean, there's kind of like, I guess, three, three scenarios. So our scenario is one to two percent growth, which is sort of goldilocks, because that's enough to scare the fed, get them off. This like, oh, trump's an inflation, you know, disaster, because it's really certain we believe he's the opposite, and not from a political standpoint but from just trying to actually analyze economics versus talking points, which almost never happens, by the way. But so, um, we're one to two, I guess. The other scenario is kind of like zero to one, like sort of complete stall and then a deep recession, and so two out of those three scenarios like are preferred and bond funds are spectacular, because, like kind of one to two and zero to one, you're going to get probably get our 375 or even 350 on the 10 year, and that'll probably drive both of those funds higher from a price perspective, like 10 to 15%, and so those are great news, and those are great news.

Speaker 1:

If we have a really deep recession, which I think is almost impossible, but could you know, I mean nothing's impossible Then spreads could widen and we could get a little weakening, but it would be offset by the fact that rates will be way lower. So probably more like stall. So that's what we'd like about higher yielding fixed income securities is they just end up being all weather securities? I mean like, if you look at PFF, it's roughly than 8% annually over six years. Well, I would like challenge you to find a worse six years for fixed income in terms of volatility and outcomes. So as long as you pick good credits and they keep paying, it's an all-weather security. So I'd say two out of the three likely growth scenarios are actually good to great and significant downturns not wonderful, but of course, your stock portfolio is probably going to get way more smashed than preferred in bonds.

Speaker 2:

The preferred space, as I recall, is primarily financials and industrials. Am I right on that?

Speaker 1:

Most funds are. Ours is pretty well diversified because we love REITs. We like old economy assets like the rating agencies don't love. So we like utilities, reits, pipelines, places where you have collateral. We do have a fair amount of financials now because we've added them as they got cheap. If financials are really really strong credit they're fine for preferred. But ours is our funds way more diversified than the index. The index is like up to 65% financials.

Speaker 2:

So talk to me about how analysis on preferred differs from analysis on stocks, as an example, well there.

Speaker 1:

There's a huge advantage to active management because a lot of times, as we know from game stock another situation like the worst stocks become the best. So you and I can agree oh my god, tesla and game stock are overvalued and palantir is overvalued, but they just become more and more overvalued. So momentum works pretty well with equities, but it's terrible for fixed income. So fixed income securities, bonds or preferreds are callable at par. So you have to manage that risk. The risk is also asymmetric. Like heads, you get paid back tails. If there's a credit problem, you lose everything. So you need to monitor credit risk and you have interest rate risk, which of course you don't have with stocks. So all these things need to be actively managed. So that's. The difference is that active management sort of reliably pays, and with equities it can. But sometimes just investing in momentum you know, cap weighted, basically momentum type funds can be better than a active manager.

Speaker 2:

So obviously these are all your babies. Different funds, Um, and BNDS is the newer one. Pffa has been around for a while. If someone were to look at both funds, why choose one over the other? Or are they compliments to each other? How should one think about combining these?

Speaker 1:

Well, bndes is safer. So you know the way the capital structure works is equities are the most junior and then preferreds get paid ahead of the equities and then bonds. So economically, bond BNDS or bond it's a great checker, of course, but are lower risk than preferreds and that's also the way they trade. So they have roughly high yield bonds. Not just our fund, but all high yield bonds are about a third of as volatile as the stock market but half as volatile as preferreds. So BNDFs is ideal if you want a high income with the lowest possible volatility.

Speaker 1:

Preferreds tend to get dislocated so we can add more value as an active measure. So we would guess that you would get better total returns from preferreds, but not necessarily risk adjusted, because they're owned by retail investors. They tend to dump them when anything goes wrong. They get more volatile than they should, whereas institutions don't high yield bonds, so they tend to support the price when they get more volatile than they should, whereas institutions don't high-yield bonds, so they tend to support the price when they get dumped. So BNDS is lower risk. It has no leverage PFFA we're targeting 20% leverage, so it adds a little bit of volatility and risk to it. So just what flavor of risk. Now, pffa is 75% of my IRA, so I consider it to be appropriate for lower-risk investors looking for retirement. But BNDES is even more so because there's no leverage and it's senior to the preferreds.

Speaker 2:

I had written about preferred REITs in the past. I was seeking alpha, and it's an area that not too many people look at at all, and I'm looking at PFFA. On the Q4 fact sheet, 20% is in the real estate side. On that end, are there nuances when it comes to preferreds, like you know? Is it an office necessarily? I mean, what type of real estate preferreds is the focus there?

Speaker 1:

Well, you know, we just we focus on risk return. So we did add a lot of office because everybody was freaking about office. But they failed to distinguish between high-quality office and low-quality office. And they also failed to distinguish between REITs and buildings. So buildings are 70% levered, reits are 40. So I used to be an investment banker and we wouldn't let REITs go public unless they were full cycle. So they, you know, modest investment grade, leverage and then.

Speaker 1:

So what we do is if something looks interesting from a yield perspective, we go in and analyze every single building. A lot of them have no mortgages. So in effect, the preferred is by unlevered building, which is the case with bernardo. This was about three. The preferred was like three times covered with an unmortgaged building. So in effect, kind of we were like second lien debt on the building, not not legally but economically. So that's the type of work we do. We go building by building. I went and visited the buildings or New York city, so it was easy to do. But I mean, of course, the New York city markets where you want to have office, because that's the kind of the capital of the world and people are pretty tough, like Jamie Dimon keeps yelling at everybody at jp morgan, so they kind of make them work. I love, I love that clip by the way.

Speaker 2:

Yeah, right that it's like um, thank you right. It's like I know there's more respect for the guy, but it's like it's so true yeah, now we don't.

Speaker 1:

We have small amount of employees so I don't have to yell at them because they, they just know that they have to go to work. But so we, just we, we, we don't I like the talking heads like, oh my god, real estate's going to zero. We did take it, building by building, preferred by preferred, find the attractive ones. That's worked really well, like we have like a 40 gain and those tornadoes, because everybody's freaking out. But we're, we don't fool. We've got models on every asset and are looking for huge, pretty significant margins of safety.

Speaker 2:

Since you mentioned having big gains in some of these positions, do you have like an explicit target? I mean, the old adage is, you want to obviously let your winners run, and it's not exactly the same as equities, obviously, when it comes to preferrits and bonds. But what makes you get out of a position when it's done very well, or do it all?

Speaker 1:

Well, we do. You know, with equities, you know, like with ICAP, we have relative multiples that are based on GARPY, which means, you know, just basically growth at a reasonable price, correcting for yield, and so we'll definitely, if something hits our target, we'll trim it or sell it all. If it keeps running On the preferred side, it's easier. Clearly, if anything trades above par we're going to likely sell it. You know, with the Vernados there's some lower coupon securities and they're getting we do have like gigantic gains. So to the extent they trade like this is somewhat arbitrary.

Speaker 1:

But you know we have bogeys to deliver good income. So we use seven as kind of our boat, like we want things that yield more than seven. So if Bernado starts yielding less than that, we would start to trim it. But we're extremely patient and trimming, particularly with preferreds, because you benefit from being patient. You know, icap, all those securities trade like absolute water, so there's no benefit from that. But preferreds would just allow the other funds to bid it up. Index funds get imploded, they bid it up arbitrarily. So we're getting close to trimming our brenados.

Speaker 2:

You mentioned ICAP a few times. Let's talk about that fund for a bit. Let me share my screen here. I think, again, the nice thing about what you do is that you're active. You've got various funds, various parts of the marketplace, all largely income focused. Let's talk about ICAP. What's unique about that fund marketplace? All largely income focused. Let's talk about ICAM.

Speaker 1:

What's unique about that fund? Well, what's great about it is it's lower risk securities. If you look at the holdings, you would recognize like 69 out of 70 of them or something like that, because they're just like household names, like average market cap's 200 billion. So these are like really big companies Average market cap's $200 billion so these are like really big companies. And so what's good about it is like you actually could just cherry pick our holdings and create your own fund and so you could say, well, that's an argument for not owning it.

Speaker 1:

But what we do which we think is spectacular, is we write very short-term calls at prices where we want to sell the security. So, to your point, one way to trim is just to blow it out the door. The second is to say, well, this is pretty fully valued, but really fully valued for 5%. So let's keep writing calls 5% higher and if it gets called away, great, and if it doesn't, we make all that money on options. So it's just a very lucrative. We do it extremely actively. We monitor our exposure because we don't want to get capped out like JEPI and some big call writing funds. So we're confident we can add alpha. That's been the case. It's likely to continue to be the case.

Speaker 1:

It kind of makes sense. You can, because it's a lot of work and you have to look at it every you know every trading day. Because it's a lot of work and you have to look at it every you know every trading day. But with these large cap stocks it's very easy because you get weekly options. We don't do this with S cap or small cap fund. We do the index options there because you don't want to cap out your returns on small caps. The other thing is that large caps tend to not move nearly as much as small caps, so they tend to not be bought out that often. You know, for $200 billion is possible but unlikely. When you beat earnings you know everybody's already in it. So there it goes up a little. There's no like short covering rally, irrational short covering rallies, so you rarely get capped out just because you wrote some short term calls. And of course we don't do it around earnings anyway.

Speaker 2:

Yeah, I mean. What I like about strategies like this now is, especially in an expensive market, you want to tilt more towards. You know lower beta, higher income type. You know stalwart type names right, because those will in general not be, as in quote, sexy as the big cap tech names, but also be a lot less vulnerable to a big doubter.

Speaker 1:

Yeah, absolutely so. It's. It's like popular fun, because it's something that you can sleep at night but know that we're adding value to every day and that's might seem psychotic but we enjoy doing it and it's if you do use HI. So, in other words, use judgment. Look at fundamentals, not just like dealt with, like we don't just look at, oh, the volatility is higher than the realized volatility, like sort of don't care. I mean not that we we know what those numbers are, but, like I said, like we wrote a lot of like Southern calls at 90 when I used to meet my investment banking client. Well, you can sell Southern all day long at 90 and that's a good sale. So just have to use your judgment, not because the ball is higher than this or that it's just too high, too expensive. You have a huge gain in any way, so it's fine to sell it and if it expires this week, you just rewrite it the next week. I heard you use that term quite a bit.

Speaker 2:

Yeah, and you talk to other people in Vegas, this HI human intelligence right angle, which is to me a very old school way of thinking about markets, and it's one that you don't hear too often nowadays, this idea that it is about judgment. It's not just a a game of science, right, there's an art to it. Then, um, do you think that's it's a lost art? I mean, in a world where everything's computerized, everybody, just you know, can overlay a technical chart on anything. Um, is there, is there really a lot of alpha from just that doing side of it?

Speaker 1:

absolutely, and we're big critics of people like particularly people go on television like pontificate about like every single stock into the universe, like if, if you're gonna buy your I mean actually it's not quite true like you're buying, like you know chevron or something, but if you're going to apply on stocks or trade your own stocks, you should have a model on it, you should be talking to the company. You should be able to adjust your model when things change, change your target. You know, trim it or add to it based on your target. So I think that people have kind of moved away from that. It's's a huge grind, takes a lot of labor, but the key thing is you will not blow up. If you do that, you'll make good decisions. You'll get out of situations that are unattractive. So that's what we do. I don't think a lot of people do it. I learned it from the first hedge fund. I worked for a great analyst there. So I think it's pretty unusual and gives us a huge advantage. Yeah, no.

Speaker 2:

I think it's. I think the industry needs more of that because as algos keep trading with algos, it creates other distortions and I don't think you can fully automate intuition.

Speaker 1:

Right, and I mean we don't just make it up though. Automates intuition, david Pérez Right, and I mean we don't just make it up though, but so like, if you call a SEP, which people are welcome to do, and say, okay, well, why do you don't call with tax, then we're prepared to say, well, we're carrying estimates 30% above consensus, our target is 750. But what can give you comfort is like, by the way, if it runs to 750, guess what? It won't be our largest position, it'll probably be our smallest because it hit our target. So, just pretty objective, using data to then overlay the options, I think is the best way, not just like use some algo that says, oh, the ball is cheap or expensive to this, and that we'll just blow it out. It says, oh, the ball is cheap or expensive to this, and then we'll just blow it out and like I'll say, like using judgment, like I watched Southern Company for 20, 35 years, I guess, so I just know 90 bucks like got like 22 times earning. That's just an easy sale.

Speaker 2:

Let's talk about AMSA for a bit. We haven't really spent too much time on that in prior podcasts, but the midstream part of the energy space. Somebody was remarking to me that about sort of the idea of narratives versus what ends up happening under Trump's first term. Everyone thought energy would be like among the best performing sector. It's ended up not being the case. I am curious your thoughts on how the Trump administration could impact this part of the marketplace and then, in particular, why should investors consider more midstream versus up and down?

Speaker 1:

well, as I mentioned before, we're not super bullish about oil prices because, I do think to be clear, the president really doesn other than appointing the Fed chair really doesn't affect inflation, except for oil prices too. So, like arguably Biden, it wasn't really effective in restricting production but he was essentially trying to get rid of oil, which would tend to drive the price higher. But the president does have some impact on that and, as I mentioned, this president has a lot of stroke with the Saudis. Saudis have excess capacity. He's laser-focused on keeping oil prices low. So we're not bullish about the commodity but we are bullish about throughput, particularly on the natural gas side. A lot of people don't appreciate that to generate electricity at the margin you have to burn natural gas. So just the bottom line. You can always increment a little bit of wind and solar, but it's very site specific and not material. So that's bullish for throughput and natural gas, which is bullish for all the pipeline companies and unlike exact polar opposite of the Biden administration, which is really tragic because they tried to restrict LNG exports, which is just horrific for everybody because it's not just uneconomic, it's terrible for the environment because you want more natural gas and less coal. So both the export of natural gas and the burning of it in the US, or electricity for AI and know AI and electric vehicles and everything else is a good tailwind. And then also, companies are really solid.

Speaker 1:

Great credits Now. They used to be not solid, they have had modest growth. They have dividend growth, great dividend coverage, great credit ratings, so you're not going to crush it anymore. I mean, AMJ is up like 500% since the pandemic. That was just because everybody irrationally sold it, so you're likely to get low teens, mostly deferred dividends. From a tax perspective it's pretty uncorrelated now to the rest of the market. So it's a good, you know. 5%. Add 3% to 5%. Add to most portfolios who are more conservative and want a little diversification, a little bit of income.

Speaker 2:

Is the? Is the midstream space. When you look at the different companies, do they tend to co-move pretty highly, or are there a lot of idiosyncratic momentum movements that take place?

Speaker 1:

pretty highly, or are there a lot of idiosyncratic momentum movements that take place? They do trade together. So we do write some calls to enhance income, but not a lot, because it's sort of like the opposite of ICAP, where Sundar is doing well and something else is doing badly. If we write too many calls in AMZA, like the whole portfolio, well, we would never do the whole portfolio. You know everything gets called away and there's nothing cheap to recycle into. But there's, there's opportunities at alpha and we have, you know, by doing the same process we do with every other fund, looking at companies that are reasonably priced relative to their growth rate. So I'm looking more for natural gas, as I mentioned, versus oil. So you can add value. But perfectly fine to just like own AMCA, because it's going to be really hard to beat it, picking individual stocks.

Speaker 2:

And the yield on that is pretty, pretty solid and consistent over time.

Speaker 1:

It's likely to continue to grow pretty significantly because our borrowing costs are coming down, the companies are increasing dividends and, of course, you get a 1099, so it cleans up all the tax problems you get by owning K1 reporters.

Speaker 2:

And all the funds are like that. No K1s, correct, yes, yeah, it's interesting because a lot of as you know, I deal with a lot of different issuers and some have to do the K1s and advisors in particular, hate that it's a mess and we do.

Speaker 1:

We pay to clean it up for clients we pay like a gigantic amount for because we have a corporate tax return that files all the K-1s, so FBs are all inclusive, so we pay for the tax filing. Basically.

Speaker 2:

Some of the things I could throw off here. Your thesis around oil, around the economy I mean part of doing any analysis is what if I'm wrong? How does that impact positions, portfolios, even if it's low probability? Talk to me about scenario analysis again. As far as things turn out to be totally different by end of year, how does that impact the positions, the sizing, anything on the funds individually?

Speaker 1:

Well, you know, I don't see a lot of huge risk, the only risk I would see, which I don't think is really possible. But if the Fed was just completely out to lunch for the whole year and we go into recession, I don't think that's going to happen. I don't think that's going to happen. In terms of you know, downside scenarios, I guess we don't. We know Pat's corporate tax decreased and our target's $6,500 on the S&P, so that's not that exciting. That's like 10% from here. It's a normal year, so it's fine. But that our funds would do fine, probably better than tech funds would. So they work in most environments. I don't. I don't really like the conspiracy theory slash like Six Sigma analysis. I don't think it does anybody much good. So you know I could come up with like there's a nuclear war or something in Ukraine, but I don't think that really is helpful.

Speaker 2:

Yeah, and that's. There's a lot of noise around that. For sure, of the various funds, which ones tend to have the most hands on approach? I mean they're all active, but a certain. Is it ICAP, is it BNBS? I mean which one tends to have the most activity?

Speaker 1:

Is it ICAP, is it BMS? Which one does have the most activity? Well, I think ICAP DAG, because we're just writing all these short-term calls, using judgment. There's a lot of activity in PFFA because we sell everything above par, but that's kind of like sort of mechanical right, like kind of obvious. Like if it's called what 25, you sell it at 25 50, so you will see trades go off every day. But it's not really that you know. It's kind of like required. Really. It's really iCap. You know there's like a lot of reported activity because of the options. Scap, a little bit more longer term. We write index calls, but that's less active than writing the individual calls. Amca, pretty long-term oriented. There we own the same companies for 11 years there. Pffr is an index fund, so that barely turns over at all and BNDES is extremely long-term, so that is pretty close to zero turnover?

Speaker 2:

I don't think we've. I've asked this question before. Why is it that PFFR is indexed versus the others that are active?

Speaker 1:

You know, it was just at the time it was launched, in 2017, it was much faster to launch index funds. That's no longer the case. So if we were probably to redo it, it would just be part of PFFA. But we treat all of our funds like our children.

Speaker 2:

So it'll, you know it'll be there and continue to do well, but probably not as well as PFFA. As you look across the invisible landscape, you're going to say this is the most expensive part of the marketplace, which is the most toxic, that you would just not touch until there's some massive dislocation and that generates income. I'm trying to get to the question of what's the most expensive income generating aspect of the marketplace. What would that area be?

Speaker 1:

Well, I was going to say Palantir, tesla, before you finish your sentence and micro strategy, but there's, of course that would have been a better question after last week if I'd said that, yeah, I'd be replaying those clips.

Speaker 1:

Yeah because, like we are GARP Y investors. So like, if I did, I'm not telling you to short Palantir or like panic if you're on it, but it's arguably worth 50 bucks on a GARP basis. So it's a momentum stack for sure on the um. On the yield side I think it's there really isn't much because people are pretty negative on yield. They're all excited about their game stop well, not game stop, but their palantir and they're worried about rates because of, I think, political talk to points. So I don't think there is anything that comes to mind.

Speaker 1:

I mean I don't really love Besser and Gray Bond, but they'll do fine. If we're worried about rates, they'll do fine. I would rather be in high yield than preferreds, but they'll do fine. So I don't really buy the high yield credit spreads or risk because I just don't see any scenarios where we have a significant recession. I mean we don't see any scenarios where we have a significant recession. I mean we don't really have tight spreads in our funds. We look for dislocations but we don't buy that their spreads are going to blow out because of some economic dislocation. But some people are concerned about that.

Speaker 2:

Okay, and obviously you can have dislocations without recessions, but they've crashed, as it happened in bull markets, right? So tell me about that. So, as an active fund manager, you know, let's say, you've got a two, three-week dislocation, not as severe as COVID, but something that's sizable in expansion. What are you doing at that point, I mean? But the problem is, by the time you recognize it, it could already be over, right?

Speaker 1:

Well, yeah, that's important because you know we do have a hedge fund and we kind of know by running that like you can go buy puts and be super clever and think you're like the new Steve Cohen and you're usually lose money doing that. So but on the other hand, we do have a very successful hedge fund and we're really good at calling the market. So we just do the same thing we do at the hedge fund, but like way less so. Like right now, our hedge fund is like 30 exposure and 30 cash and our other funds are just like a little bit below market, so maybe like 95 exposure. You know theoretical exposure to the market so we just dumb it down. Or, you know, just be more conservative because, as you pointed out, you can be wrong as well.

Speaker 1:

Right, so we're getting mostly longer term focus, but try to take advantage of our market insights and we might write more calls. That the market bad, we'll write more calls. If we think it's going to rally hard, hard, we'll write fewer calls. So it's just at the margin and you know you can see it in the returns because we just, you know we beat the index usually pretty significantly, but just by doing really small steps, not doing like. You know, steve cohen like has zero percent exposure and 150 and 75 and that's all within the same day, you know but but how do you manage that like so you've got a team of analysts.

Speaker 2:

are you literally saying that we're gonna do an emergency meeting and talk through the ideas? Or do you manage that so you've got a team of analysts? Are you literally saying that we're going to do an emergency meeting and talk through the ideas, or do you have sort of a playbook when that happens? I mean, I'm just curious about sort of the behind the scenes of that.

Speaker 1:

Well, I mean, it sounds sort of authoritarian, but I've been doing it for 35 years. So it's me. I tell them what's going to happen in the market, and they have learned that it's better to listen to me than their fears and hopes, because we have, like I said, we have simple things. You know, I learned some of this from shorter term traders like Steve Cohen. It's just like what's the catalyst? Like, why do you want to be long now? Okay? Well, maybe you're bulled up by NVIDIA, I don't know. So I'm like neutral.

Speaker 1:

We are bulled up about Friday, that's PCE, about bindi, nvidia, I don't know. So I'm like neutral. We are bulled up about friday, that's pce. I don't know if that's really going to move the market, but, to be fair, that's positive. And so we're just really good at looking at short-term catalysts, looking at if it's earning season. We estimate all the economic data, but at the end of the day, it's me like I'm trading the market all day long. I got a feel for the market Like the market's pretty to use a technical term disgusting right now. It's not horrible, but it's clearly neutral at best. So we just proceed cautiously and you know, and, like you said, don't overtrade, like we don't panic and go. Let's go to all cash Like because you can. You know we don't want to make any significant mistakes.

Speaker 2:

Jay, for those who want to learn more about the funds, where would you point them to? I know you also have a sub-sack, but you're getting some nice traction. But talk to me about where people can learn more.

Speaker 1:

So wwwimprocaptfundscom and you can register for our webinar. You can send direct questions to us. We do love talking to our clients, so feel free to call or email us directly.

Speaker 2:

For those that are listening, I am a big fan of Jay's. I've gotten to know him more over time, as you can tell. Very knowledgeable, and I like listening to guys who have been in the business as long as Jay has, especially relative to these younger kids that have had success post-COVID that don't have human intelligence at all. There's a great quote I'm not young enough to know everything. I feel like a lot of these younger traders definitely fit into that, so it could be here somebody like Jay. Again, folks, this is a sponsored conversation by Infrastructure Capital Advisors. Make sure you check out their funds. We'll be doing more of these. We're also hosting a webinar very soon. If you're on the lead lag report email list, you'll be getting that registration link soon and Jay, as always, I appreciate it. Great Thanks. Thanks, Michael. Thank you, buddy, Cheers.

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Michael A. Gayed, CFA

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