Lead-Lag Live
Welcome to the Lead-Lag Live podcast, where we bring you live unscripted conversations with thought leaders in the world of finance, economics, and investing. Hosted through X Spaces by Michael A. Gayed, CFA, Publisher of The Lead-Lag Report (@leadlagreport), each episode dives deep into the minds of industry experts to discuss current market trends, investment strategies, and the global economic landscape.
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Lead-Lag Live
Market Volatility Decoded with Jay Hatfield
When market volatility erupts, understanding the mechanics behind price movements becomes crucial. In this illuminating conversation with Jay Hatfield of Infrastructure Capital, we dive deep into the surprising dynamics of the recent market sell-off and subsequent recovery following Trump's tariff announcements.
The discussion begins with what Hatfield calls "the small cap tariff problem" – the counterintuitive underperformance of small cap stocks despite their lower exposure to international tariffs. Rather than fundamental concerns, this divergence stems from technical factors: small caps are high beta assets that naturally experience greater volatility during market disruptions. It's a powerful reminder that market commentary often follows price action rather than leads it, creating what Hatfield describes as "momentum market commentary."
Most provocatively, Hatfield challenges the conventional wisdom around tariffs and inflation. Unlike the stagflationary environment of the 1970s when oil prices rose 1200%, today's economic landscape features falling oil prices (down 20% year-to-date) combined with one-time tariff impacts. "Tariffs are one-time price increases, not inflation," Hatfield emphasizes, arguing that the Federal Reserve fundamentally misunderstands this distinction, keeping rates unnecessarily high based on a flawed framework that ignores money supply dynamics.
Looking forward, Hatfield remains constructive on markets with an S&P target range of 5,000 to 6,000 in the near term and 6,600 by year-end. He sees earnings season as a stabilizing force that will replace fear with factual corporate data. For investors navigating this landscape, his Infrastructure Capital ETFs offer different strategies for varying risk appetites – from value-focused small caps (SCAP) to high-yield fixed income (PFFA and BNDS) and covered call strategies (ICAP).
Ready to look beyond the headlines and understand what's really driving markets? This conversation provides the framework you need to separate market noise from investment opportunity during periods of policy uncertainty.
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From an interest rate sensitivity perspective, do you think that the bond market maybe has it wrong in terms of the reaction on tariffs and maybe Trump walking some of these back?
Speaker 2:Well, I think there was a technical issue away from the fundamentals of, about trade unwinds, basis trade unwinds, rather Notwithstanding the Treasury Secretary's assertion. I think that foreigners maybe they didn't sell their treasuries, but they I mean China was not buying treasuries, we're confident of that so they normally buy. So if they stop buying, that impacts the tenure. What I would say is that it's not very dislocated. Now it's recovered. It's at 435. Our target before the Fed figures out they need to lower rates and some members have figured that out, like Waller, but most of them are incompetent, don't understand tariffs at one time, can't forecast inflation.
Speaker 1:Jay's been really on fire in terms of the way he's been seeing a lot of the stuff going on in markets. So I think many of you are going to enjoy his perspective on things and this is a sponsor conversation by Infrastructure Capital, one of my clients and, as I mentioned, jay has been on fire, so I'm looking forward to this back and forth we're going to have here. Some of you may argue that I've been on fire a little bit too, especially last Wednesday. That was a hell of a day on a cruise ship when I said that we're going to see one of the greatest intraday reversals higher in the stock market in history, just as everything was falling apart. So I think Jay and I were aligned on that without having spoken. So, with all that said, my name is Michael Agayat, publisher of the Lead Lag Report.
Speaker 1:Joining me here is Mr Jay Hatfield of Infrastructure Capital. I named this podcast, this conversation, the small cap tariff problem, and I say that because, if anybody hasn't noticed, small caps have gotten destroyed, in this most recent period at least, when you look at passive indices like the Russell 2000, much more so than the large cap averages, which seems a little bit counterintuitive, jay, because you'd think that tariffs would most impact anything that's more focused on global revenue as opposed to more domestic small cap sources of revenue. I want to get your take first of all, in terms of the initial reaction that we saw in that wave, lower when it came to large caps versus small caps. Did it make sense to you?
Speaker 2:It did and you know we were surprised. We call it the chart of death. You know Trump's chart, which was wholly irrational. So not surprised that the market sold off hard. And for that reason no one should be surprised that small caps sold off simply because they're high beta stocks. So by high beta I mean they're more volatile than the stock market as a whole. So you're going to see in a downdraft, you're going to see small caps underperform, the NASDAQ underperform, meme stocks will underperform, bitcoin will underperform.
Speaker 2:So it's normal in a sell-off that the highest correlated stocks sell off, not just according to their correlation, but probably worse, and then the low correlation or low beta stocks actually get some flows or lack of selling. So lower beta outperforms higher beta. So that really explains 99%. And then there's always market commentary, but it's what we call momentum market commentary. So like, if the market's down, everybody lowers their S&P targets. If tech stocks are down and OAI is falling apart, if tech stocks are down, then oh, ai is falling apart. If small caps are down, oh, they have tremendous tariff exposure. But, as you're implying, michael, they actually have way below average tariff exposure. Even the global manufacturers have overseas production that they can move around. So we don't see any material hits to earnings for the small caps.
Speaker 2:And if you had asked me before it happened, you know, if we have a 10% drawdown, what are small caps going to do? I'd say, oh, they'll be down 12 or 13 because they're higher. It just people don't treat them as safe havens. They're higher. It just people don't treat them as safe havens, understandably. Like would you rather be, you know, in a small cap bank or JP Morgan? Probably JP Morgan. So not too surprising what's happened. If you believe, like us, that the current tariff tantrum is over, we're going to get more good news than bad, we're in earnings season, then small caps are a good way to play. Do increase in the market because, just like today, they're up a little bit more than the market. That's likely to continue if we get this stability, increased stability and potential rally. We have a 5,000 to 6,000 range, so really like a 6,000 target. We do think 5,000 is a good, solid support area, even if something incremental happens. So we are constructive. We have a 6,600 target for the S&P at the end of the year.
Speaker 1:How much does sector movement play into this? It seems like we got the news earlier today around NVIDIA and it seems like now there's more focus on tariffs not impacting some of these tech companies and the semis in general. Those are obviously much more large cap than small cap.
Speaker 2:How do you think about sector sort of that's what the other thing that people miss it's not relevant now, but small caps go down. So that's the sector allocation. And even though REITs are supposed to be defensive, they got smacked just like their regular financials underperformed, tech underperformed, but small caps are only about 10% tech, so way lower than the S&P. But the financial and REITs really hammered those indices as well. And also money losing companies, not in our fund but SCAP, but in the IWM. It's a lot of money losing, particularly biotech companies. So those are the highest risk companies in the market as well.
Speaker 1:So they're going to get smacked in a downturn? Yeah, it's interesting that you don't see yields dropping in the same way that equities are rising in this most recent rebound in any sort of very aggressive way. From an interest rate sensitivity perspective, do you think that the bond market maybe has it wrong in terms of the reaction on tariffs and maybe Trump walking some of these back?
Speaker 2:Well, I think there was a technical issue, away from the fundamentals of, about trade unwinds basis trade unwinds, rather, and notwithstanding the Treasury Secretary's assertion, I think that foreigners maybe they didn't sell their treasuries, but they I mean China is not buying treasuries, we're confident of that, so they normally buy. I think that foreigners maybe they didn't sell their treasuries, but they I mean China was not buying treasuries, we're confident of that, so they normally buy. So if they stop buying, that impacts the 10-year. What I would say is that it's not very dislocated. Now it's recovered. I'm at 435. Our target.
Speaker 2:Before the Fed figures out, they need to lower rates and some members have figured that out, like Waller, but most of them are incompetent, don't understand. Tariffs are one time. Can't forecast inflation. We're forecasting PC core prints around zero. The consensus is only 0.1, and that it rolls down to 2.4, consensus 2.5. So if even a 2.5 number occurs, the Fed absolutely should cut. So that will help rates. We have a 3.75 target, but until they figured it out, we have a 4. A quarter. So 435 is only 10 basis points dislocated. Everybody focused on the fact we went from 390 up to like 450 in short order, but 390 was an overreaction to a potential recession. We're at a 1% to 2% growth rate for the US economy, mostly because, basically, the market cut rates for the Fed, so 10 years off 50 base points from its highs. That should stabilize. Housing Tech spending continues to be strong. You should always look at investment if you're trying to predict a cycle. Consumer spending has never created a recession, which is funny because everyone always references consumer spending.
Speaker 2:They just don't understand basic math. It's two-thirds of the total economy, but it's not volatile at all. Just think of your own spending. You're like, oh my gosh, I need to spend less. How much less do you really spend? Probably not a lot. Low-income people have to spend. High income people want to spend. Consumers consume just like woodchucks chuck wood. It just is what they do. They will stop consuming if there's a big investment drawdown and they get laid off. That's it.
Speaker 1:There was this theory going around which maybe I'm too blamed for a little bit, because I've had this argument for a while that in order to cause yields to drop, they have to, in quotes, crash stocks, and it almost looked like what was happening in the initial stages of this. Trump was even posted on truth social a video that made that very argument. You know that it's the brilliant strategy for Trump is to crash stocks so that yields come in quite a bit lower on this refinancing wave. In advance of that, does the Trump administration want lower rates? Ultimately? Because if they are trying to do tariffs here, it doesn't seem like that's the way to do it.
Speaker 2:Well, you know, actually I have a contrarian view on this as well. There's a lot of cross currents now, if you really think about it. So we came in to the Trump administration and I was asked about this on television, possibly by more liberal journalists oh well, trump's going to be way worse for the budget deficit than Biden. And I said well, how is that possible? The Biden administration tried to pass a $6 trillion welfare bill spending bill over 10 years and the Trump administration is cutting expenses on Doge, raising revenue from tariffs.
Speaker 2:We strongly believe, and Waller does as well tariffs are one time, not inflation Not great for consumers, by the way, bad politically but economically not inflation. Inflation is ongoing increases in prices, not one time increases. And when you raise taxes sales type taxes then you reduce consumer spending. That's also deflationary and you pay down debt. So and the Treasury secretary is pretty powerful right now wants to bring the budget deficit down to 3% the Fed is holding rates way too high. So I don't think the strategy is to tank the stock market and get Treasuries lower.
Speaker 2:It's to reduce oil prices and that's, by the way, nobody cares about that. But it's a complete offset to the current 10% tariffs, so we actually have lower headline inflation than without tariffs, at least if oil stays around 60. We see all the dynamics being the opposite of what the pundits thought, which is that most of the Trump policies are pro savings by the federal government well, reduced rates. But the most important variable is the Fed and whether they figure out and agree finally agree with us which is the right way to treat sales taxes. Is this a one time cost? Should not be included in monetary policy. I do understand and I get a lot of blowback that everybody's upset about it because they don't want to pay higher prices, but that doesn't mean the Fed needs to try to offset that.
Speaker 1:Speaking of that oil drop and the point about it being a larger deal maybe than people realize Typically, how do oil prices impact small cap versus large cap outperformance and does weaker oil really tend to benefit small caps more disproportionately?
Speaker 2:Well, the first thing just to note is that it's 6% of CPI. So if oil prices drop 20%, which they have since the beginning of the year, that's a 1.2% decrease. But every company in the United States uses energy about 5% of the average company. So you're going to get another bleed through of 1% to core over long periods of time. And then, in terms of affecting small versus large, it's just the percentage of energy stocks and they're roughly the same between small caps and large caps is quite small, but that those are the stocks, of course, that got hit the hardest. And then you know, like I said, it helps the cost function a little bit because you get. You know, if you have 5% energy and oil comes down, but it's not really material enough to say, oh well, oil lower by small caps. It's more like market higher by small caps than it is oil lower. If the market rower is because oil is going down, which it should I don't think anybody's doing that, but it should do that Then you know small capital benefit.
Speaker 1:One of the things that I think was surprising about the sell-off at least to me, was that credit spreads, while they widened, they didn't really blow out by any means. Certainly, given the magnitude of the S&P's decline, you would have expected yields would have really gone vertical and given the VIX spike, was that surprising to you to see credit spreads be that resilient?
Speaker 2:No, because we don't think that tariffs are that important to the US economy. So, even though fears of recession and strategists, there's one thing to look out for from strategists which is a terrible, terrible thing. It's what we call momentum analysis. So stock market's down, then we're going to go into recession. Stock market's down, as I talked about already, oai is blowing up, but it could be just stock market's down because it's down, and so we think the notion that taxing 13% of the US economy produces a recession is ridiculous. It might trim 30 to 50 base points of growth. We do think the economy is slowing because of the Fed being way too tight. They're about 150 base points over neutral rate. So that's the issue. Nobody agrees with us, but it's important to understand that dynamic so you don't get too negative about tariffs.
Speaker 1:So about S-cap and how it performed. First of all, during the volatility, what was happening internally at infrastructure capital? I saw all kinds of stats around how bid S spreads just blew out. It's like one of the biggest spread differentials we've seen in a while. Just market structure. What was going on internally as the volatility was playing out?
Speaker 2:Well, we were ahead of the curve, because what we focus on is the earning cycle. So we became neutral on the market in mid-February, so we had reduced our exposure to the market in mid-February. So we had reduced our exposure to the market, so our beta or correlation market was way down. We were well positioned, just based on the cyclical nature of the earning season and not earning season. Now, obviously this was a way worse not earning season or non-earning season because of the tariff war, the tweets about the tariff war and ultimately, what we call the chart of death. But so we were pretty well positioned.
Speaker 2:And then we also had anticipated that this week would be at least less volatile, if not up. So we added that back. So that's the way we dealt with it and it's the way we normally deal with things. So if you, we have this call like a month and change after this earnings season, we'll see where we rally to. If we do rally or up, we're going to be incrementally more cautious when we get out of earning season, because then the only catalysts are non-company related most of the time and usually that's negative, it's a negative tweet, it's a natural disaster. Whatever other new warning earnings warning ahead of the earning season. So playing that cyclical dynamic, it makes you pretty easy to call the mark.
Speaker 1:So about any sort of longer term shifts that you might be contemplating. Has any of this resulted in strategically sort of thinking about where to overweight or underweight differently than prior to tariffs?
Speaker 2:Well, certainly we didn't want to, you know, counsel our clients to go down with the ship. So we were cautious last week in terms of recommending, you know, riskier stocks. But now we believe that, like I said, that the tariff news is going to be mostly positive. The economy is going to hang in there, particularly when the Fed figures out that they have to cut rates, because that's really the only issue with the economy right now. Tariffs are immaterial, oil is material and they offset each other. Oil decline, that is. We're not actually changing our recommendations.
Speaker 2:So we still like financials, which are a riskier sector. We still like investment banks. We think they're really resilient. They did well this quarter, which is surprising, mostly on equity trading, but we do think M&A is going to heat up. That again. You know, this idea that there's not going to be any mergers because people are uncertain is, you know, maybe they're uncertain for two weeks while the market's crashing, but then they're more certain when the market's stabilizing. So we don't believe any of that. Mergers take a while to announce IPOs, take a while to get through SEC registration. So we still forecast the second half investment banking boom, which will be good for all the major banks, particularly the pure investment banks.
Speaker 1:I know you're a big fan of selling calls. I'm curious how was that during the volatility the last week and a half, two weeks?
Speaker 2:Well, you know, the strange thing about that is it's best to sell calls when the volatility is low, unless it's just irrationally high. Volatility is low unless it's just irrationally high. But so we actually almost stopped selling calls. Because we did, you know, because you, what you don't want to do is sell a bunch of calls at the bottom and then you get the type of analysis we had on wednesday and then you get run over by them. So we do use hi or human intelligence and actually attenuated and it can be way more profitable to sell because you know you can have them exercise to sell them when volatility is lower. And so we avoided blowing up on call writing during that nine and a half percent rally in the S&P, rally in the S&P. So that's why we don't really believe in these index funds that just always sell calls, because they probably under-participated in that 9.5% rip You've got six different ETFs.
Speaker 1:We touched on S-Cap. We'll touch on Sorry to interrupt.
Speaker 2:Michael. But there's just one other point about that is we only sell calls that are first, very short term and where we have profits. So if the market plunges, we're not, there's not going to be that many stocks where we have profits. So those rules we don't have to be geniuses about calling a market, just rules just say well, why would we want to write a call on that stock? Because we're, you know, underwater on it by like 30 bucks, so why do we want to lock in losses? So using that as a guidepost, which no other index, no index funds use, is a good way to keep yourself out of trouble. Where you don't sell calls exactly the wrong time, sorry to interrupt.
Speaker 1:No, no, no, for sure. No, that's a good clarification. You've got six different ETFs. Were any of them? They're all your baby, I get it right. But in the midst of the volatility, were any of them, in your mind, showing the most opportunity, meaning that there was a larger dislocation in this fund versus that fund, just based on-.
Speaker 2:The. You know we have three fixed income ETFs and three equity income ETFs and so going into the downdraft not just the Liberation Day downdraft but you know the cyclical earnings season downdraft you definitely wanted to be like in PFFA BNDS those are fixed income funds the beta is pretty much is about 0.3 for BNDS 0.5. So you under-participate in the drop by owning those funds. Plus you get great income 8% and 10%, roughly under 10% now because it's right back. So you get great income. So that's a good place to be before. But things you know, really, icap, amza got this and SCAP all were dislocated roughly similar amounts for different reasons.
Speaker 2:Small caps we mentioned. The betas are high In ICAP. We are bullish on investment banks. Everybody was freaking about investment banks in our opinion, so that got hit pretty hard but it's getting that back over the last couple of days. People realize these are pretty resilient companies. And then AMZ probably got hit the hardest because of that downdraft in oil, not as hard as E&P companies, but in the short run pipelines go down, mlps go down, but in the long run, within a band not like negative $37 like during the pandemic, but in kind of a $60 to $80 band, the throughput continues. There continues to be natural gas upside. The price of natural gas doesn't matter. It's always way cheaper in the US, and so the opportunity is still there for all the pipelines, so it's mostly irrational. We get great yields and good growth, so that's probably hit the hardest.
Speaker 1:Let's talk about bonds a little bit further with BNDES. I think a lot of people are still nervous about bonds in general because they go back to that narrative around tariff for inflationary and bonds are not the place to be and equities are where all the action is. Convince them that that's not the case.
Speaker 2:Well, the good thing about higher yielding bonds. So there's like another competing fund, that's BND. We're BNDs. Bnd is what's called an ag fund or aggregate bond market fund. So you get a ton. There's more treasuries and mortgages than anything else. So you get basically just pure interest rate risk.
Speaker 2:So if you're more bearish than we are and say, oh, the 10 year is going to end at four and three quarters five, it's not going to be good for any security except cash. The higher yielding fixed income will outperform the lower yielding because they have less interest rate sensitivity. So within same thing, within a band, they're going to continue to do, be stable or even appreciate if the stock market stabilizes. So that's why we actually favor having more higher yielding fixed income where you get a better blend between some interest rate risk, some stock market risk, if you do Vanguard total bond funds. Another example of the BND type fund there you get all interest rate risk and not a lot of spread or stock market risk. So we'd rather have a mixture. Of course it's good to have a diversified portfolio so you can have some totally low spread kind of treasury equivalents and then something that's a little bit more weighted towards equities exposure small but still weighted that way. Exposure small, but still weighted that way, with better income and then also most likely, better long-term returns.
Speaker 1:Let's talk about macro views beyond tariffs. I mean, obviously all the attention has been around Trump, but not as much attention around Powell, and I saw some headlines I think around was it Besant that was saying they're going to start looking at other, the next Fed governor, or they're going to start interviewing. So it looks like they may want to replace Powell. Let's talk about central bank policy changes and how Trump might impact them.
Speaker 2:Well, you know, we've identified the fact that the Trump administration definitely has the power to remove Powell, not so much for current policy reasons. He can remove them and it gets challenged in court, and he would probably lose if it's just because he's blowing it and not lowering rates which he is blowing or making a mistake, but he can remove him for creating the great inflation of 21. So he can absolutely be removed. I wouldn't do it, though, just gratuitously and appoint another bureaucrat to pursue the same framework, because the Fed's framework is fundamentally flawed and we're seeing that today. You know I said oh well, core inflation is 2.4 likely, or 2.5 maybe if consensus hits, but that's not corrected for the very distorted shelter component. It's two years lag. This is why the Fed missed the inflation. It's why they're missing the deflation.
Speaker 2:So they look at the wrong index, should look at multiple index. Their target's way too specific. It should be two to three. Too specific and too low. It created the great financial crisis which they're in denial about, but absolutely did to have such a low target. And then they also should target growing the money supply within a range Like it should normally grow four to six. It's growing a negative one right now, if you just grow the money supply four to six, everything will be very stable. Probably won't have a cycle. It's when the Fed raises rates. You know the money supply 70% during the pandemic you're going to have an inflation. Then they get way too tight. During the great financial crisis they kept the monetary base, or money supply, m0 flat for three years and so that's terrible policy. They're keeping it negative now terrible policy. So you have to look at the money supply and of course you should look at unemployment. They kind of implicitly do that and say you have like a 4% to 5% target range for unemployment.
Speaker 1:Is there anything on the international front concerning you at all that could impact the US economy, US markets? It seems like we see that international markets obviously are performing this year, but it seems like there's still some geopolitical risks that maybe are being underappreciated.
Speaker 2:Well, it kind of makes sense to us that Europe, particularly, is outperforming. They have a rational central bank. They're going to cut, most likely again this week, as ours should. So they're central banks ahead of cutting, and most investors massively underestimate the power of monetary policy and way overestimate the power of things that are more tangible to them, like you know, the prices of imports or even energy prices, because most people, or almost no one, looks at the money supply, except me and like 50 other people maybe and so everybody underestimates the power of money, the money supply. Europe's ahead of us. They're spending more money on defense, which is re-inflating their economy, and there's a possibility, or even probability, of a peace in Ukraine being reached at some point. So all those are tailwinds, whereas we have a headwind. And then we have erratic tariff policy, no resolution of our tax bill those should have been paired, by the way. So way too fast on the tariffs and then, most importantly though, a incompetent Fed pursuing a fundamentally flawed policy framework.
Speaker 1:I love when Jay's unfiltered folks, as you can tell. Let's talk about earnings season for a bit here. You had started the conversation. You said that people were amazed and confused, that you were talking about how earnings season could be a positive Seems like I'm going to make the assumption a lot of the earnings. There's going to be some conservative wording around policy uncertainty I'm sure almost every company is going to use that term policy uncertainty when it comes to forward guidance, policy uncertainty when it comes to forward guidance. But earnings overall, do you think it's going to matter as much? Or are investors going to say to themselves those were earnings pre-terrorists?
Speaker 2:I think it matters more, because what happens during these periods where there's no earnings is that fears run amok.
Speaker 2:So, oh, there's going to be massive losses in the credit card portfolios of banks and we're going to have a massive recession, and all these things are going to happen, but there's no real data coming out and you get a little bit of economic data.
Speaker 2:Now the companies are reporting and, lo and behold, they're like Bank of America CEOs on TV this morning saying, well, actually, consumer spending there's minimal defaults, economy strong, and to your point, they acknowledge that there's policy risks.
Speaker 2:But I would follow the Bank of America CEO more than Jamie Dimon, not because one's smarter than the other, but Jamie Dodden's always giving out kind of his stress test and that's great if you're running a bank, so he'll sell, rates are going to go to eight and this and that, whereas Moynihan's more balanced and also uses his credit card data to give you some insights. And so he said, yeah, there's policy uncertainty around tariffs, but there's also tax cuts and deregulation, so he presents a balanced view and he does have all that information that Jamie Dimon does and other bank CEOs do. So when you get all the CEOs out at once, like Jamie Dimon might come out, you know, in mid-March, and say oh, the world's coming to an end. Everybody freaks. So Moynihan is not probably going to do that because he's more conservative. So we wait to earnings. So we think, even if the reality is not spectacular, getting the specifics is better than the fears.
Speaker 1:Looking at the infracapfundscom website and I see stag deflation as a word that's used there. Most people don't know about stagflation. They know about inflation deflation. What the hell is stag deflation?
Speaker 2:Well, we try to be not funny but slightly amusing, because finance isn't really funny but slightly amusing. So it's just a way of saying that we think the stagflation call is ridiculous. You really only get stagflation and you only really had it in the seventies when um oil prices went up 1200%. So they went from three to $39 a barrel. It's like our oil going from $60 to something like $720. So almost an unimaginable rise. That's when you get stagflation because it hurts economic growth. We didn't produce much oil back then, either partly because of regulation or mostly because of regulation, but it didn't benefit anybody.
Speaker 2:In the United States, 100% deadweight loss caused inflation to skyrocket. That's the only time you're going to get it. Now we have the opposite. Oil is going way down. That's deflationary. Fed's super tight. That's deflationary. There's this one thing which is tariffs. Everybody's way too focused on it. It is one time and you'll see it in the short run.
Speaker 2:So the Fed said oh, we can't really discern what. You know what it's going to be. Well, you know we forecast you're going to get like a 0.3 increase, maybe in CPI on the high end for two months, so a 0.6 increase, but then the next month you're going to get a 0.2. So it would be 0.5, right? So normal inflation is like roughly 0.2. So you get a couple of 0.5s and then the next month you're going to get a 0.2 or 0.3. And the next month 0.2 or 0.3. So only a blithering idiot couldn't figure out that that was a one-time increase, so the Fed qualifies for that, and so they'll figure that out. And then they'll start to say, well, the run rate inflation is right around two, maybe two, and change way below that if you're for shelter, and they'll cut rates. So this stag inflation notion is ridiculous. We think we're really in a deflation where low oil prices and very tight monetary policy are driving prices lower. They're just not fully reflected in the indices.
Speaker 1:I want to share the screen and talk about again the different funds. Again, folks, for those that are watching, this is a sponsor conversation from Infrastructure Capital. This is Jay Hatfield and I, of course, am Michael Guyad of the Lead Lag Report, so let's show this screen here Again. You mentioned six ETFs, three equity, three on the bond side. Let's talk through each of these. Rather than just reading the description of each, you know sort of the underlying strategies around each of these funds, sort of the underlying strategies around each of these funds.
Speaker 2:Yeah. So SCAP is a company I mean sorry an ETF that's a value-focused ETF. So we avoid all the money-losing companies. We look for GARP we call it GARPY companies. So they're trading at reasonable multiples compared to their growth plus their income. For some stocks you have to look at income. Most of you can ignore it because they're de minimis income and we rate small amount of index calls to add some alpha, add a little bit of income. But we do it in a way that we don't get run over. So we didn't get run over by that 9% rally in the market because we'd written them only on 30% of the portfolio out six weeks. So we didn't get run over by that 9% rally in the market because we'd written them only on 30% of the portfolio out six weeks. So they were so far out of the money it didn't impact that fund. So that fund has done extremely well relative to the index. Typically it's more stable. It's downturn it was roughly the same as the index but in normal markets it's less volatile than small caps. Because of that value bent we do have some preferreds in that fund too. It tends to stabilize the fund.
Speaker 2:Icap is, from a call writing perspective, really spectacular. We're writing those calls that we curate over the next one, two, three weeks, so very short term. So, like in that downturn, most of them have expired. So we didn't get ripped when the market rallied, only at gains where we had gains and where we think the stock's pretty fully valued. So, using a lot of HI, figure out where we should write them. We get a ton of theta. We target 8% theta. That's the decay in a portfolio. So we're trying to get, you know, very strong amount of alpha out of those options. And I think that's important for large cap companies because we do run some preferreds to lowers the volatility. But it's a reasonable criticism to say, well, you know you own all these marquee names or you know some of them are in the Dow. I could just go buy those names and replicate the portfolio and, by the way, you could. You could do it because we report all our positions. You can do it because we report all our positions. But it's a tremendous amount of work to figure out what calls to write, to write the calls to manage the taxes. So it's a good way to outsource, in our opinion, highly effective call writing.
Speaker 2:And then PFFA is, in our flagship funds, outperformed, the index dramatically. Active fixed income. You should be active in fixed income because you have to manage call risk, industry risk, default risk. It's not relevant to equities. And then AMCA we talked a little bit about is our pipeline fund. We do think their pipelines are oversold, just like they were during the pandemic. That fund was up 500% since the pandemic. Of course it did poorly into the pandemic, but that's just the way. Mlps are more volatile than they probably should be, so you can take advantage of that.
Speaker 2:Pffr is a smart beta version of PFFA, really Only in real estate. Good credits has a smart beta component. No leverage PFFA runs very low, 20% leverage. And then BNDES is our high yield fund no leverage. Good yielding bonds that we think have low default risks. So should do well over time, just like PFFA. Lower volatility than PFFA about half, about a third of the market, half of PFFA. So if you're still nervous about the market, don't believe our 6,600 target or even our 6,000 short-term target, then adding to BNDES or PFFA is a good conservative way to get income, put some money to work, but not take as much market risk.
Speaker 1:Which of the various funds do you think is, on a relative basis, the most undervalued or where you think there might be the most upside potential?
Speaker 2:I think it's ICAP. Because of those I mentioned, those large cap financials got smacked. Large cap REITs got smacked for no particular reason, because the fundamentals are good. Amca is similar upside, but you have to get the oil part right. So although they're massively outperforming oil today, but you know if oil goes to 50, you're kind of stuck with that. So those two funds are probably the ones that got hit the hardest and have the most upside. What do you think people are getting?
Speaker 1:most wrong about Trump in this? We talked about policy uncertainty and perception is reality for investors in general, at least in the short term. What are people getting wrong about policy uncertainty and perception is reality for investors in general, at least in the short term. What are people getting wrong about policy uncertainty?
Speaker 2:Well, I think that what's happened is the trade hawks, or even you could say trade nuts, lost power because they blew up the US stock market and bond market for that matter. Us stock market and bond market for that matter, and now Scott Besson and Hassard as well. The Council of Economic Advisors seem to have taken over and they are more pro-growth, more rational, want to improve trade, have some tariff increases, but not have this nutty notion that every country has to have a trade balance. It's just not going to happen. It's impossible, particularly when the US government's running a huge budget deficit, because most people don't appreciate that trade flows have to equal financial flows. So if you're borrowing a ton of money from the rest of the world, you have to have a trade deficit. Otherwise, because people don't just give you things, you have to trade one thing for another. Almost no one understands that. So their notion that we're going to have a trade surplus with everyone is patently ridiculous, particularly in the short run and particularly with the budget deficit. But they've been pushed aside.
Speaker 2:I haven't seen, thank God, navarro on TV for a week or two, which is stabilizing, because he's a destabilizing force and was, by the way, in the first Trump administration as well, and so I think now we could be wrong about that. We don't text with the president or anything, but that's what seems obvious to us now. So everything that was done in the past was really not done by us, and he was almost certainly opposing it. So if that's the case, then we're setting ourselves up for a lot of good news on tariffs, like agreements with Japan and other countries, and so I don't think a lot of people have just have internalized that the trade hawks got pushed out of power, at least for now.
Speaker 1:Yeah, I think that's super interesting, Dave, for those who want to learn more about the funds and get more access to you and your thoughts. I know you have a sub stack, but where would you point people to?
Speaker 2:If you go to InforCap, wwwinforcapfundscom, you can send us direct messages. We do respond most of the time In my case, most of the time. Otherwise, we always respond. We have a monthly webinar, which we've been extraordinarily accurate, including calling this stabilization slash rally and a hundred other things, and also a great opportunity to ask about the funds we get and also you can benefit from other people's questions about the funds. We take all the questions and so those are the ways you can call Craig Starr and we will talk to all any of our. We like talking to our clients, so you can set up a private meeting if that's appropriate.
Speaker 1:By the way, I got to ask have people actually texted you on this? I didn't actually know. This was a thing.
Speaker 2:You actually have the ability for people to text you. Yeah, they haven't any cold call texts, but we're open to that because we can do it in our corporate environment. But I get a lot of cold emails from clients that I don't know. I do get some texts from our existing clients which I respond to, you know, real time. So we do pride ourselves on communicating with our clients. There's no criteria that you have to reach to be in direct communication with us. And just to emphasize that we feel like the questions you know because there's always implicit insight in questions make us smarter. If we don't have the greatest answer to that, then we need to do more research and it's probably going to further our process. We're in continuous improvement mode, so if we're missing something, you know. Like somebody asked me about Japan, I studied Japan. Now I'm smarter about Japan, so we'd love talking to our clients and that's a benefit of our firm versus like a black rock. I would imagine it's harder to get in touch with them.
Speaker 1:Yeah, I'm going to say that's a given. I appreciate the cause to watch this live. Again, this will be an edited podcast under LeadLag Live. This is a sponsored conversation by Infrastructure Capital. Learn more about Infrastructure Capital's funds. Make sure you follow Jay Hatfield and we'll see you all on the next episode. Thank you, jay, appreciate it. Thanks Michael, it was great. Cheers everybody.
