Lead-Lag Live

Balanced or Broken? Jay Hatfield on Rates, Inflation, and Market Risks

• Michael A. Gayed, CFA

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In this episode of Lead-Lag Live, I sit down with Jay Hatfield, CEO of Infrastructure Capital Advisors, to talk about the biggest risks shaping markets right now — from sticky inflation to ballooning government debt.

We dig into why markets may be underestimating the Fed, how high interest costs could push the U.S. closer to a debt crisis, and whether equities can hold up in a higher-for-longer environment.

In this episode:
- Why inflation remains a “tough nut to crack”
- The risk of debt spiraling as Treasury costs climb
- How Fed policy is boxed in by fiscal realities
- The outlook for equities and bonds in 2025
- Where investors should look for stability in uncertain times

Lead-Lag Live brings you inside conversations with top financial minds shaping markets in real time.

Subscribe for more interviews, insights, and raw takes that cut deeper than the headlines.

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Speaker 1:

The current Fed is incompetent. We don't think they're morons, as the president said, but they use Keynesian models. So there's monetarist models and Keynesian models, and the Keynesian models prove to just not work at all. So as long as the Fed cuts and remains dovish in their commentary, then the bond market will be continued, probably to rally.

Speaker 2:

Welcome to Lead Leg Live. I'm your host, melanie Shaper. So we're heading into one of the most historically volatile times of the year for the markets. August and September are seasonally weak months and investors are watching closely for signs of a slowdown, a rate cut or both. Joining me now is someone who always brings the data, jay Hatfield, the CEO and portfolio manager at Inforcap Funds. Jay, it's great to talk with you again.

Speaker 1:

Thanks, melanie, great to be on.

Speaker 2:

So let's jump right into it. You've mentioned the markets tend to weaken this time of year. Why do you think diversification is especially important right now?

Speaker 1:

Well, just to be clear, we're much more neutral than we are negative. So normally we would be negative this time of year and there's a simple dynamic, and I don't know why people don't fully understand this, but you want to be really long the market, or long the market when during running season. So we've been calling for a summer power rally for last two or three months and we've had it, and that was a pretty easy trade, because all you're really betting is that the companies haven't warned and the economy is decent, particularly in tech. So really all you're betting is that the companies are going to do what they always try to do, which is beat slightly, and so that's what happened. We got powered up to these highs. So our target for the year is 6,600. Now, so our target for the year is 6,600. And so that would argue for our target. We don't have mid-year targets, but a mid-year target is 6,300, which means we're pretty extended. So that could lead to the conclusion that you should be negative on the market.

Speaker 1:

But we're more neutral for two reasons. First of all, you do have a Fed rate cut coming in September almost certainly, and that's usually not the case. So September is another desert of earnings where you can have bad news, but we do have. Fed rate cuts are extremely important, notwithstanding other people's commentary to the contrary, or implicit commentary at least. So don't ignore the Fed, never ignore the Fed, never ignore the money supply, unlike our Fed chair to never ignore the money supply. What's happening to the money supply? So?

Speaker 1:

But I'm drawing this distinction between the normal call. It's like if you looked over the last 10 years and asked us we say, oh my God, get out of the way, it's going to be horrible. We see pretty strong support at 6,000, sorry, so just 300 points down. Pretty good resistance here. But I'd say there might be a 50% chance that we power up to our. We just power through this because of tech enthusiasm and we're establishing which is being announced, released as we speak a 7,000 target. That's our upside target and the reason we established that is that that would be a really stretched multiple, like 23 times. But when you have tech booms you can have stretched multiples, palantir being an example trading at a seven peg. So we think even some of these MAG 8 companies like Broadcom, which is close to our target, is going to blow through our target and NVIDIA is going to blow through our target because they're trading at two pegs so we think there's probably a 50% chance of the upside case at 7,000, still have our 6,600 target. So we're bullish but just want to acknowledge that it's a riskier time to invest. So it's not terrible to add less risky investments.

Speaker 1:

We've been recommending preferred stocks. There are flagship funds, pffa, high yield bonds, our fund, there's bnds and on television where we're kind of forced to make individual picks. We've been calling out philip morris and mcdonald's, these super low beta stocks with good yields, because when interest rates come down, yield stocks do tend to do better. So that's our call, not negative but just acknowledging that the risk rewards, like the card count if you play blackjack. It's kind of neutral now and during the summer it was extremely positive and there's a ton of bases in the deck. So you mentioned McDonald's.

Speaker 2:

What are some of the other areas or sectors that are the most interesting or rate sensitive areas Right.

Speaker 1:

So normally health care would be rate sensitive. But we're waiting for that knife to bounce off the floor Because there seems like there's always a new regulatory problem cost reimbursement problem, insurance rate problem, drug blow-up problem, like Lilly today. So that's probably going to be a good value sector. That is normally not now, but normally interest rate sensitive. But we're avoiding healthcare, so we're excluding healthcare from these defensive sectors. But what we do like is utilities.

Speaker 1:

We've been recommending me that's a big holding in our ICAP fund, that's NextEra great utility plus power development which benefits from ai. So really derivatives to ai, not just the ai. I would really call it mang seven, but we include brockham and not tesla and that, but call it mad gate if you want. But not just those stocks, but power companies, pipelines, amza. We have a natural gas bias there. That's because that's used to generate power for AI and export natural gas.

Speaker 1:

So old economy stocks that have leverage to the new economy, because right now it's a tale of two cities you have recession going on in the old economy, clearly, and you have a boom going on in the new economy and they're kind of offsetting and we're at slow economic growth, like one to 2%. So that means right now it's more attractive to be in not just AI but AI derivatives, like we've been recommending Goldman Sachs, which has worked really well because they're going to do AI IPOs and have done them already. But that backlog is likely to build, so that's our core theme. I mean, you're going to hear the AI theme from everyone, but the derivatives are less obvious.

Speaker 2:

Right, so I wanted to talk a little bit about SCAP and ICAP. First of all, SCAP. That ETF focuses on the small cap space. What's your view on the performance of small caps heading into the end of the year?

Speaker 1:

Well, the key driver between old economy and new economy is really interest rates. So if you wanted to predict what's going on with stock market you know whether tech was being rotated into or you know more dividend plays and old economy defensive stocks the only piece of information you really need is our interest rates up or down. Obviously there's some other cases, like if Apple gets relief on tariffs, then that's going to drive tech as well, but just on a day to day basis. So we do think the Fed is going to have to cut the economy slowing because rates are way too high and that will be a positive catalyst for small caps not because small caps borrow too much money and they have the benefit from lower rates and basically, particularly the companies we invest in. We invest in low leverage, high dividend coverage and good growth relative to P-E ratio, so good peg ratio. So with these value type stocks that are trading at reasonable multiples, they tend to outperform when rates are down because they're more likely.

Speaker 1:

Tech is only about 10% of the value part of small caps. So you get utilities, get REITs. Some of them have AI upside but some don't so you get a lot more diversified portfolio of high quality companies. They tend to do better when interest rates are dropping, and interest rates almost certainly are going to drop. You're going to get a new Fed governor. Even the existing Democrats on the Fed are starting to figure out that they're wrong about tariffs, wrong about inflation, and so there's going to be a new Fed chair eventually, so even if the current one isn't fired.

Speaker 1:

So rates are going lower. Absolutely they need to go lower, housing's rolling over, and so it's a good time, we think, to broaden out, and if there is a pullback, it could be well. Like you saw on Friday, that was a high beta stock pullback. So tech did get smashed on Friday when we had weak economic growth, and we do think economics growing or is shrinking, the economy shrinking rather and so that means that when that fear arises, then tech might take a leg down. So we're still bullish on tech, but it's a little bit more problematic. It's had a big run during this fall period, which is really August and September.

Speaker 2:

Yeah, and so another type of, or another sector, preferred stocks. They're often overlooked, but PFFA, your actively managed preferred ETF, has been it's been gaining a lot of attention. Why do you think preferreds are so compelling in this market?

Speaker 1:

Well, they're about 50% correlated with the stock market and 30 to the bond market, and so we are bullish on the stock market, might take a pause during the fall, rather, but rates are likely to go down.

Speaker 1:

So with those two factors in play, then that means preferreds will do well and almost certainly outperform investment grade. Pure investment grade investments like Vanguard Total Bond Fund, or BNDs, is our high yield fund. There's a BND that's also run by Vanguard. That's their ETF equivalent of their total bond fund, so that yields four. Ours yields eight and we think that in the type of market like the BND would do better if the stock market was terrible and we were going into a recession and that's why rates are coming down. But we think, coming out of a Fed tightening cycle where rates are going down and the stock market's doing well, that these riskier elements of fixed income will perform well, and particularly on a risk-adjusted basis, because you're taking half the risk of the market in the case of PFFA and only 30% the risk of the market in BNDS stock market. That is so lower risk way higher income, potentially good total returns.

Speaker 2:

Yeah, so the BNDS ETF, that's exposure to high yield corporate bonds.

Speaker 1:

Correct and with an infrastructure bent. So we'd like real assets, we'd like real collateral. So you'll see pipelines and utilities and other infrastructure slash asset based companies.

Speaker 2:

If the market does start to slow down in September and maybe even into October, and if then concerns ramp up about the potential defaults, how should investors be managing risk while still, I guess, capturing yield?

Speaker 1:

Well, we think you can. The fact that the rates are likely to come down will probably offset those if there is any spread widening, and a lot of times the pullback really is more on the tech side and there's really no tech companies with significant credit outstanding. So we think it will be a good all weather security for August and September and even if it comes in a little bit, getting paid eight, nine percent income, you can just reinvest your dividends and kind of benefit from a little volatility. So the great thing about fixed income is it's pretty easy to dip by because you have a big margin for safety, because you're senior In case of preferreds, you're senior to common. In case of high yield bonds, you're senior to common and preferred and you're likely to get good recoveries even in bankruptcy. So really, the lower the price goes, the more compelling it is. Sometimes that's true for tech stocks and other stocks, but it's almost always true for fixed income.

Speaker 2:

Yeah. So, jay, I mean, before we wrap up, your team publishes a real-time CPI estimate using modern data sources. Can you sort of walk us through how that works and why you believe the Bureau of Labor Statistics needs to modernize its inflation tracking?

Speaker 1:

Right. So it's very timely. And we've been complaining about the shelter component of CPI that the BLS publishes and it's really two years delayed. The scandalous part of it is it's delayed by six months just by design, so they just don't bother to update it more than every six months. So it's kind of like we did this interview and then you didn't bother to release it for six months, so it'd be basically worthless. And then they have some other. They do their same arcane surveys of a limited number of homes and that's very delayed because they use renewing rents. So instead we use this thing. So they're a very 20th century based organization using 20th century methodology from the 70s and 80s.

Speaker 1:

And there's this new development this century that probably a lot of you heard about. It's called the Internet. It's on the internet. You can source data that covers the entire United States. That's what we do with CPI-R. So we utilize Zillow and apartment list. It's basically every apartment and every home in the United States and that comes out every month, not every six months, and then we adjust CPI for that.

Speaker 1:

So if you use that measure, cpi-r, real-time inflations, 1.2% year-over-year and PCE, which has less housing in it, is two, so right at the Fed's target. So if the Fed just got good data, they should be able to adjust it themselves. They could literally just look on our website, but they're not that competent. But the BLS itself is making monetary policy terrible, so that's why I'd like some change at the top. Not for the reason the administration cited, which they thought the numbers are cooked. They're not really cooked In our opinion. They're not cooked, they're just massively delayed and wrong. We do think the labor market's weak not because of the Trump administration's tariffs or economic policy, but overly tight monetary policy. But the ironic thing is that the BLS has really caused or helped the Fed to be behind the curve by publishing this terrible data series using their outdated methodology.

Speaker 2:

So, in terms of the rest of the year, do you see more than one rate cut? I know you think there will for sure be one.

Speaker 1:

We're saying two to three, there should be three. The Fed is the current Fed is incompetent. They use we don't think they're morons, as the president said, but they use Keynesian models. So there's monetarist models and Keynesian models and the Keynesian models prove to just not work at all. During the pandemic they focus on just employment, driving inflation, when it's really almost exclusively the money supply. So money supply is shrinking to 10%. Should be cutting rates or not, but there's going to be. Chris Waller is a leader, a leading candidate to be Fed chair. There's going to be a Republican slash, more monetarist, not Keynesian appointed. There's already two dissenters on the core Fed board of seven, so there's going to be some movement in the Fed governing body Plus.

Speaker 1:

The current members are now faced with this overwhelming data that the economy is slowing. So even they will probably figure it out. So we'll definitely get two or three cuts and some dovish commentary. Because that's important? Because the long rates are driven by the expected terminal rate of Fed funds. So that's why some people said, oh well, the Fed cut rates, but long rates went up. So that's terrible. Well, that doesn't happen in a vacuum. The Fed cut rates. Then some new data came out. They interpreted it very hawkishly inappropriately in our opinion the long the expectations. The terminal rate rose by 40 base points, and it's not surprising. The 10 terminal rate rose by 40 base points, and it's not surprising. The 10-year rose by 40 base points. 10-year trades roughly 100 base points over the terminal Fed funds rate. So as long as the Fed cuts and remains dovish in their commentary, then the bond market will be continue probably to rally and, by the way, that will help stabilize the old economy, which is housing and construction.

Speaker 2:

So another question what type of investors should be looking at your funds? Who might not already know of them, and which funds in particular should they be looking at?

Speaker 1:

We would counsel really all investors to have a significant income component. It can stabilize your portfolio. Significant income component it can stabilize your portfolio. If you do need proceeds to help cover your expenses. It's fantastic to have dividends. And also, as we indicated with these fixed income funds, that on dips you can, instead of having to rebalance where you sell something and buy something, you can take the cash coming off your portfolio and reinvest it. You know, like if you had substantial income, you would have automatically reinvested at the end of April. Well, that would have been a great trade. So we recommend all investors have some component of income.

Speaker 1:

Obviously, if you're more conservative, maybe older and closer to retirement, it's even more important. So then, with regard to all of our funds, we have three fixed income funds, three equity income funds. So if you want to be more conservative PFFA, bndes I already mentioned those great yields, lower volatility If you want longer term, if you still want income but good total returns, then all three of our equity income funds will have no guarantees, but we would estimate have low teams total returns, good dividends, but another 4% or 5% of capital appreciation. So ICAP is pretty conservative. Large cap dividend fund, scap riskier but probably better longer term returns. All these yield over six.

Speaker 1:

And then amca is our pipeline fund. It's pretty low correlation to the market, good yields about eight. Good dividend growth through about five. So all those are good additions. You just have to realize that you know if we're correct and the market's more flat to down, they'll probably be down, whereas the fixed income could be pretty flat or possibly up if it's a modest kind of low volatility decline. So it's important if you're trying to build income, distinguish between equity income and fixed income.

Speaker 2:

And just lastly, jay, the big beautiful bill. We didn't touch on that. I know some of that will take effect at the end of 2025, but some of it not until 2026. How do you see that affecting anything, if at all?

Speaker 1:

Well, the biggest misinformation about the OBBBA is that it was a budget buster, and the reason for that is politics. There's a number of Republicans and, of course, all Democrats who want to criticize the bill, so they use CBO data. Well, cbo lives in this fantasy world where they assume that the 2017 legislation was just going to expire with no change whatsoever, which is not going to happen with the Republicans in charge. But if you look so they had said oh, the deficit is going to go up 2.7 trillion. The reality is there was a minor, basically irrelevant cut relative to current law and if you look even at the CBO data, they were forecasting with, after the OBBA, that the budget deficit declines from 1.9 to1.7 trillion next year, but they ignored tariffs.

Speaker 1:

So we're forecasting $1.3 trillion deficit, and that should be a tailwind for bonds, or in other words, potentially lower rates, and also for economic growth, because it doesn't crowd out or in other words, reduce private investment because the government's borrowing too much, or, in other words, reduce private investment because the government's borrowing too much. So we're actually bullish on the OBBA. It also gives a minor boost to lower income spending, which should help stabilize the economy, because you get the tax cut on tips and overtime and Social Security benefits for lower income recipients. So we think it's a pretty big positive, particularly if you include tariffs, because it lowers the deficits and gives a little bit of economic stimulus particularly to the bottom sort of quartile of consumers.

Speaker 2:

Well, thanks so much for joining me today, Jay. It's always great to talk to you and thank you for everyone for watching. Be sure to like, share and subscribe for more episodes of Lead Like Live. I'm Melanie Schaefer. See you next time.

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Michael A. Gayed, CFA

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