Lead-Lag Live

Energy, Income, and AI: Jay Hatfield on the Fed, Housing, and Where the Real Growth Is Now

• 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 cut through the noise on the Fed, energy markets, and how investors can prepare for the next phase of the cycle.

From the AI-driven power boom to small-cap rotation and bond opportunities, Jay shares why the Fed’s reliance on lagging data could be investors’ biggest advantage — and where long-term value is hiding in plain sight.

In this episode:
– Why the AI build-out could make natural gas the next big winner
– How money supply leads inflation, interest rates, and Fed policy
– The “Hatfield Rule” for predicting recessions through housing data
– Where small-cap and income investors should be allocating now
– Why rotation away from mega-cap tech is already starting to unfold

Lead-Lag Live brings you inside conversations with the financial thinkers who shape markets. Subscribe for interviews that go deeper than the noise.

#LeadLagLive #InfrastructureCapital #Fed #InterestRates #NaturalGas #Energy #Markets #Investing

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SPEAKER_00:

We look at the um we're GARP investors, so we look at the peg ratio or peg Y ratio for companies with significant yield. So that's the P to growth plus yield. And look for undervalued companies on that basis. And they could be tech stocks, they can be utilities. Um, and then uh pick the most attractive based on that criteria.

SPEAKER_01:

I'm your host, Melanie Schaefer. Welcome to Lead Leg Live. Now, for all us market watchers, U.S. stocks are hitting fresh highs again, powered by AI momentum and optimism around upcoming Fed rate cuts. The SP 500 and the NASDAQ have broken out to new records, even as gold surges past 4,000. Traders seem to be riding both ambition and caution. My guest today is Jay Hatfield, CEO of Infrastructure Capital Advisors. Jay leads funds like AMZA, ICAP, PFFA, and BND, and has deep expertise in income, infrastructure, energy, and balancing growth with cash flows. Jay, welcome.

SPEAKER_00:

Thanks, Melanie. It's great to be on.

SPEAKER_01:

So, Jay, let's start uh by talking AI infrastructure, you know, as demand for data centers, power networks, and real-time computing ramps up. How do you see that benefiting MLPs and energy companies? And what what risks are you watching?

SPEAKER_00:

There was a consensus during the Biden administration that the primary beneficiaries of the AI power demand is going to be renewables. And I don't think that was ever realistic, but it isn't, particularly now, because without the subsidies that got pulled um from the OBBA, uh renewables are not going to fill that need. So a lot of people focus on nuclear. That's a long, long, long ways away, probably much longer than investors hope. And so it's really going to have to come from natural gas. Everybody's been focusing on the generators, but nobody seems to care about the uh pipelines that deliver the gas. And so we think that that's a good place to play now, because you get good incomes, really like fixed income as low beta. And then you have this long-term tailwind, even if it doesn't become a momentum stock, like a lot of other stocks, where you do have strong fundamentals from not just electricity generation, but also the export of natural gas to other countries that need to build uh displace coal and build more generation for AI and other electricity demands, including electric cars. So a really good long-term growth story. Right now, nobody cares, but sometimes it's best to be in sectors where nobody cares because your long-term, it makes your, if you particularly reinvest dividends, makes your long-term returns way higher. Because you benefit from the earnings growth without having to pay a high multiple. So it's not that fun while it's happening, but um it can be pretty lucrative if you're a longer-term investor.

SPEAKER_01:

Yeah, J. And also, you know, in terms of the markets, volatility has been high and yields are shifting. How do you view income investments right now, specifically if you can talk about PFFA and BNDS and how those play into the toolbox during these swings?

SPEAKER_00:

Well, we've been correctly bullish about interest rates for really just one simple reason, which I recommend all investors look at very, very closely as their primary indicator of not just inflation, interest rates, but also the economy. So we look at the money supply, we look at N zero. And if you do that, then you're always gonna be ahead of the curve, unlike the Fed, who doesn't look at it, they're always behind the curve. So we correctly predicted the inflation, um, great inflation of 21, the Fed tightening of 22, and the Fed loosening of this year. And the reason we felt like we were gonna have a cutting cycle start again is that housing, and we have data on our website where you can see the details here. Investments are key to the business cycle. Housing and construction investment are in recession, so negative year over year. Now, thankfully, that's offset by IP and equipment, which are tech driven, being positive. And so overall, we just have sluggish economic growth. But we thought that that would impact the employment market. It did finally, the BLS took a while to figure that out. And now the Fed's on a cutting cycle, which is great. And the government shutdowns almost a positive because then we don't get other data that might derail that cutting. And that means the terminal rates in the SCP, even, is 310. So that's where Fed funds would bottom out. 10 years normally trades about 100 over the terminal rate, or if it's, you know, if we already get there, the Fed funds rate at the time. And so that's what you've seen is the 10 years pretty anchored around 410. And that's low enough to really continue to propel not so much investment grade bonds because they just trade with treasuries, but high-yield bonds. So like BNDS is our high yield bond fund and PFFA. So higher risk bonds, they do well when the stock market does well, obviously, stock markets booming, and when rates are either contained or dropping. So that's why you've seen BNDS and PFFA um rally during this once the Fed acknowledged that there's a problem in the labor market and they need to cut.

SPEAKER_01:

Yeah. So speaking about uh Fed rate cuts, in the rate cut environment, small cap uh value starts to look interesting. Why do you prefer active management and value filters? And how do you uh stay away from companies that are just losing money?

SPEAKER_00:

Well, small camp, there's a misunderstanding about small camps that's perpetuated by uh pundits on television, et cetera, that they are over-levered companies with too much floating rate debt, which is not materially correct. In other words, they're about to have normal leverage and they do swap a lot of their borrowings. So uh they're not really materially impacted by lower rates. But what they are, what's true of the small cap universe is there's much less tech focused, just because obviously you don't get the mag 8 and small cap fund. If you do, then it's not a very good small cap fund. And so you're gonna end up with more like 10% tech. And so it's gonna lag when tech is booming. But what's happening now, I mean, tech is still booming, but you're getting rotation into interest rate sensitive utilities, partly because of the power element and AI, but into really almost every stock is rallying at some level. And when that happens, small caps start to outperform. And we do think that it's not just with small caps, but in general, investors should avoid money-losing companies. If you're a venture capitalist, that's great. Sit on the board, you know, nurture these companies, but you can get wiped out. You see that a lot in biotechs where they miss their their drug uh you know, benchmark, go down 80% in a day. So we prefer profitable companies trading at reasonable multiples, and that's served you know, SCAP. Well, it's it's beating the indices and had less volatility because profitable companies, you know, grow in the long run because they're retaining earnings. Unprofitable companies, some make it, some get wiped out, a lot of them have to issue equity, and that dilutes the current shareholders. So we think that's a better strategy. And small caps are pretty risky anyway, and that's why people avoid them during Fed tightening cycles and get into them now. But they're pretty risky, or they're riskier at least than large cap stocks. And so why not be conservative? We also um only invest in dividend stocks, and that's why one of the reasons why we have 7% yield. We do write some small amount of index calls, not too much. So we participate in rallies. So we do think that with small caps, you definitely need uh active management. We have a large cap fund, ICAP. There, you know, in terms of the stockpits, you could sort of just copy ours, but we write very short-term, labor-intensive calls that add a lot of alpha. You can do that yourself, but if you have a day job, that's hard. So on the large cap side, stock picking is not as critical, but writing calls and optimizing the portfolio can add a lot of value. Small caps when stay out of trouble, not blow up on money-losing companies.

SPEAKER_01:

Yeah, I wanted to ask you about ICAP. What what role do large cap dividend names like the ones in your ICAP ETF play? How do they play during volatile periods or when rates are falling? And what traits do you look for uh specifically in those picks?

SPEAKER_00:

So we use the same methodology with all of our funds, which is we look at the um we're GARP investors, so we look at the peg ratio or peg Y ratio for companies with significant yield. So that's the PE to growth plus yield, and look for undervalued companies on a basis. And they could be tech stocks, it can be utilities, um, and then uh pick the most attractive based on that criteria. And with a income screen, so we want to ICAP yields over 8%, and a lot almost two, three-quarters of that income comes from SEC yield or cash yield. So we want substantial dividend payers. We do have ATT, Philip Morris. Um, we have some that are a little less dividends, but really good for writing call options, because that provides both alpha and some income as well. So that's what we think is key to add value on the large cap side. Certainly stock picking, valuation, uh trimming when companies run up to their fair value, that's important. But you know, this is a momentum market. So sometimes trimming, you know, isn't the optimal thing? Just keep holding on to your NVIDIA or what have you. But writing these very short-term calls that don't cap your upside is a very powerful way to add alpha.

SPEAKER_01:

Yeah, I wanted to ask you about that next. So looking ahead through the rest of uh this year and in to 2026, what is your economic market outlook in in general, with growth trends, inflation rates, et cetera, across other people?

SPEAKER_00:

So just we go back to our core. So we'd like to give the facts. So we're not like billionaire pundits telling you to get out of the market because they're nervous. So give you the facts, and then you can make your own projections. So always look at the money supply, as we mentioned. But the key what the money supply affects is interest rates and interest rates affect primarily housing. Housing's caused 12 out of the last 13 recessions, not the tech bust of 21 recession, but every other one. And so we were headed for a recession. Uh, we have something called the Hapfield rule, which is when housing starts to go below 1.1 million. We have a recession. We were at 1.3, but dropping. But now the 30-year uh mortgage rate has gone from well over seven to about 630. That's an attractive rate. That should allow the housing sector to recover and construction as well, not just housing, but commercial construction. And then add that to the AI boom. So we're projecting next year 3% growth. And as long as the Fed stays on their current path of cutting rates, the the tenure will be will be conducive to that recovery. And that'll provide a tailwind for earnings and support our 7,700 year-end target for next year, 26. We have a 7,000 target this year. So we're bullish on the economy because of the Fed rate cuts. And the budget deficit's likely to get better next year as well. So that'll be a tailwind for rates to go lower. So we're quite bullish on not just stocks, but also, as we were talking before, higher risk fixed income because higher risk fixed income benefits from coming out of the cycle more so than uh fixed pure uh investment grade fixed income, with which has about half the yield of high yield bonds.

SPEAKER_01:

Very, I mean, with all the things that you've spoken about with all these angles, to mention just a few infrastructure, uh, energy income, small caps, large caps. What how can you what would you say to investors who are looking for uh a message on how to balance allocation?

SPEAKER_00:

Well, most investors have a ton of tech. Uh a lot of of uh investors have individual tech stocks because that's what gets discussed, and they know because they you know obviously have an Apple iPhone and use all these technologies. And even if you just have SP funds, you get 40%. So it's great to be in tech, but it's also good to have other funds, other sectors that do well when tech isn't doing as well because there are pretty severe downterms sometimes. Hasn't happened in a while. But and so that's where having some of these other asset classes, ICAP, um, SCAP, AMZA is very defensive. So uh some people have been frustrated with the returns, but in a really up market, may not might lag, you still get your 7%. So it's more like fixed income than um than equity type returns. But we do think with small caps, large caps, you can get the low teams returns that will be competitive with the SP. If tech's booming, maybe not quite on top of it, but at least with the equal weighted SP, and you get diversity and you get income. And the income can be very powerful. I have all bar ETS in my IRA. Every month I get all the income in. I buy more securities, I get more income. So it's a nice um sort of uh positive upward cycle where income begets more income, more securities, and uh more returns.

SPEAKER_01:

To wrap up, for the viewers wanting to dive deeper into your research, your funds, and uh to connect with your team, where's the best place uh for them to go?

SPEAKER_00:

So to infrachefunds.com is our website. You can sign up for a monthly webinar. Uh and also are we periodically send out this very proprietary and historically accurate economic research, which is critical. You need to get the economics right to get the allocations to your portfolio correct. Uh, and like I said, we give you the data so you can come to your own conclusions versus just throwing out opinions. Um, so we think that's a very valuable service, and we don't charge for it. It's a service to our uh ETF clients. But you can sign up and we don't charge you for that. So it's a good good opportunity to get proprietary economic research.

SPEAKER_01:

Fantastic. Well, Jay, I I thanks so much for joining me, and thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Lee Plague Live. See you next time.

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Michael A. Gayed, CFA

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