Lead-Lag Live

The Fed Got It Right (for the Wrong Reasons): Jay Hatfield on Rate Cuts, AI, and the Risk of a Boom

• 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 discuss why he believes the Fed’s latest dovish pivot was inevitable — and what it means for investors heading into 2025.

From housing to money supply and the AI-driven growth cycle, Hatfield breaks down the data points that actually matter — and why he sees zero risk of recession, but a real chance of an economic boom.

In this episode:
– Why the Fed’s “weak labor market” narrative hides a deeper policy flaw
– How housing and money supply remain the only leading indicators that count
– Why the risk of a boom is higher than the risk of a bust
– How AI momentum could supercharge growth in 2025
– Where Jay’s 7,700 S&P target comes from — and why it’s not irrational

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

#LeadLagLive #JayHatfield #Fed #InterestRates #HousingMarket #AI #Economy #Investing #Markets

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SPEAKER_01:

Everyone gets too excited about, you know, particularly billionaires and their opinions, we should ask, okay, well, that's an interesting opinion, but what are your facts? So in this case, the facts are that next year's earnings. So when you're coming up with a target for the end of this year, you look at the following year, we're carrying about 305 for the SP. The reason for the upgrade is we think with lower rates, you can justify and higher growth from AI. You can justify a 23 multiple, which is historically high, but it's important to keep in mind we had a huge corporate tax cut in 2017. So you should only look really since then.

SPEAKER_00:

Now, U.S. stocks are stabilizing after last Friday's big sell-off. We're trading near all-time highs, but that move needs digestion. Meanwhile, gold continues to push into record territory, a vivid signal that risk and refuge are dancing together in this market. My guest today is Jay Hatfield, the CEO of Infrastructure Capital Advisors, a guy I know you trust when it comes to navigating income, credit, AI, and macro cycles. Jay's recently adjusted his SP target higher based on conviction in the AI cycle and his read on where the Fed is going. Let's stay in deeper. And Jay, thank you so much for coming back.

SPEAKER_01:

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

SPEAKER_00:

So first up, the the the Fed. They've taken on a more dovish tone lately. What stood out to you in recent commentary and what does that signal for markets and for rate cuts?

SPEAKER_01:

Well, thankfully, the Fed has reacted exactly as we've been projecting really the whole year. And that is that keep in mind that the majority of the core Federal Reserve Board, so there's seven members, right now, four are Democrats, which are primarily follow Keynesianism. So they're labor market focused. So we had expected, notwithstanding the fact that they're pretty hawkish on inflation and super negative about tariffs, which we think is wrong. But we did think that they would capitulate when they saw this slowness in the labor market. Finally, the BLS got around to figuring that out. And so uh it's it's really bullish. In fact, the Fed chair mentioned continued weakness in the labor market. So that's the core that's going to hold this Fed together, where the Democrats and Republicans can agree to cut, is when there's a weak labor market. So that's really what to focus on. And that's really the key risk for this market is the Fed pauses, long-term rates go up, and the housing market goes into a full-blown recession versus just slowing down.

SPEAKER_00:

Yeah. So I mean, you've been quite critical of a Fed policy in the past. Do you believe that we're now seeing that the central bank catching up, or is it still behind the curve with inflation money supply macro risks?

SPEAKER_01:

Well, they have three fundamental flaws. Their target rate is completely arbitrary and too low. Should be 2% to 3%. 2% inflation is super terrible for the middle class. Um, and it's impossible to land the um 747 on the aircraft carrier. Should have a wider range because otherwise you're going to just overshoot on both sides. That's the the one of the biggest flaws. The second is they use uh the BLS's numbers for inflation, which are even worse than their employment numbers. They're delayed by two years. So that's why the Fed's always behind the curve. And then thirdly, they're terrible at forecasting because they don't use the money supply and they don't look carefully enough at the housing sector. Those are the two leading indicators of the economy. So we still think the Fed is fundamentally flawed, needs to be reformed. We're just lucky that we have this weak labor market, which is getting them to do the right thing for really the wrong reasons.

SPEAKER_00:

Yeah. So uh coming back to the to the stock market, you've raised your SP 500 target from 6,600 to 7,000, citing the AI boom and better visibility uh on rates. Can you walk us through that and what gives you the confidence?

SPEAKER_01:

Absolutely. And I would just reiterate what I always say is focus on the facts and not the opinions. Everyone gets too excited about, you know, particularly billionaires and their opinions. We should ask, okay, well, that's an interesting opinion, but what are your facts? So in this case, the facts are that next year's earnings. So when you're coming up with a target for the end of this year, you look at the following year, um, is we're carrying about 305 for the SP. And the reason for the upgrade is we think with lower rates, you can justify and higher growth from AI, you can justify a 23 multiple, which is historically high, but it's important to keep in mind we had a huge um corporate tax cut in 2017. So you should only look really since then. And there's a lot of distortion because of the pandemic. So we do think with low corporate taxes, low rates, a more rational Fed and AI, the market can support this 23 multiple. Uh, and we're just projecting for next year, the end of next year, a 7,700 target, but that's all from earnings growth. So we're not expecting an ear a multiple expansion. But the real point about bubbles is that it's great if we're in the early phase of a bubble. So probably the risk of our to our target is more higher than lower. So maybe we end the year 25 times. We can't come up with a DCF to justify that. But that's kind of the upside of being in this potential bubble market is you get this overvaluation, and that can be fantastic if you're in the market.

SPEAKER_00:

Yeah, so Jay, on uh on small caps in a rate cut environment, you lean towards value strategies. What's fueling your thesis on small caps and how do you uh steer away from money losers?

SPEAKER_01:

So actually, right now you might want to be in the money or losers because you're playing. If you want to look for bubble right now, it's in these money losing companies. So if you've been in those, God bless you. But we think it's better to be in GARP comp what we call GARP type companies. So you get growth at a reasonable price. It can be a pretty high multiple, but you should better have growth to justify that. The market peg, what's called PEG ratio PE to growth is about two times. So we're looking for companies trading below two times. And that way you stay up away from blowups. Like everybody had moved into Kava, which is you know small cap stock. It's trading at 110 times earnings. They stumbled and they went down 35%. So we want to avoid blowups. Um, we have less volatile stocks. So we're more in the value/slash GARP segment of small caps. We think there's enough risk with small caps already. So it's better to be, and also companies that pay a dividend, our small cap fund, Nest Cap, pays a substantial dividend over 6%. And so we'd like dividend-paying companies. We have some preferred stocks as well that enhance dividend. We do write a small amount of call options. So if you're going to play small caps, we think it's good to be conservative, get some income, give money-making companies trading at reasonable multiples relative to their growth rate.

SPEAKER_00:

Yeah. And I mean, in the income space with preferred stocks that you just mentioned and calibable bonds, how do money managers identify opportunities to harvest these gains? Perhaps buying calls near part, as you mentioned. And how do they tilt a portfolio intelligently as rates trend downwards?

SPEAKER_01:

So what we do constantly model or monitor rather for all the companies in all of our portfolios, ICAP, SCAP, AMZA, on the equity side, is that peg ratio. And we also include yield because we have a lot of dividend paying stocks. And we do think that's also a good quality screen is have a dividend-paying company. So almost all of our funds are almost exclusively dividend-paying companies. But so include the yield because that's part of the growth. Um, so reasonable uh peg-wide ratio, so PE to growth plus yield. And though you can use it to buy stocks that are cheap, but also when these companies get close to a market peg-wide ratio, then we will trim them andor sell the entire position. So we use it both as a buy signal and a sell signal. And again, when you trim these winners, like if you we're not in them, but if you're in some money-losing company that's up 100%, maybe you don't sell the whole thing, but you better trim it. You should definitely trim it. So we just do that with lower risk companies. But by doing that, you reduce your risk because you're in fewer companies that are fully valued and more companies that are undervalued. So even if they miss expectations, your loss, potential loss is way lower.

SPEAKER_00:

Okay, and I I mean credit markets have been rattled by bankruptcies at tripolar, for example. You've called the panic overdone. Where are you seeing mispricing or opportunity in credit right now?

SPEAKER_01:

Well, certainly, you know, in two of our funds, PFFA and BNDS, they are so far away from auto uh secured asset-based lending, it's not even can't even describe it. So nothing to do with that whatsoever. But yet those um stocks and bond and BNDS is obviously a bond fund, have weakened up a little. They haven't really collapsed. But so we think there that's a good buying opportunity because we think it's a total panic. And keep in mind Jamie Diamond called it cockroaches, but he's always way too negative. He's running a big and big the biggest bank in the United States. So he has to be, it's basically piloting an aircraft carrier. So he has to assume there's risk around every corner because he can't be nimble. But if you really analyze it, it's a pretty niche market. These are really low quality companies. There's no reason to believe there's systemic fraud in the auto finance market. So KKR is the easiest way to play that. Stock's way off. It's only 10% in asset-based lending. It's other people's money. So if there's losses, it's not theirs. Of course, they don't want to lose other people's money, but it's not direct loss. It's not like a bank that lent the money. And we think they have a very high-quality portfolio with great counterparties, not these super low-quality roll-ups type companies, you know, doing aggressive lending, like subprime auto lending. So tend to be much higher quality companies that are their counterparties that are they're they're lending money to them and their receivables. So we don't think there's going to be any losses. If they were, they wouldn't be material. If and also if they're losses, it wouldn't impact their net capital. So great buying opportunity of a fantastic company, probably the best brand in the world for financial services is KKR.

SPEAKER_00:

Jake, KKR is held by iCAP. Can you walk us through some of the holdings and talk a bit about those funds?

SPEAKER_01:

Yes, so ICAP's our large cap dividend fund. Um, so every company pays substantial dividends. Um, but we when we do see these opportunities with super high quality companies like KKR, we will include them in ICAP. And the great thing about ICAP as well is we can, we're not going to do it right now at these levels, but if it rallies, we can write short-term covered calls, great strategy, can keep your exposure to the market and realize gains on positions that have appreciated and are close to target. So KKR is a major holding of both ICAP and also our macro edge fund.

SPEAKER_00:

Okay. And I again, I we we touched on it at the beginning of the interview. I I want to pull back again to macro. It's as you've mentioned, slowing global growth tariffs and what your thoughts are on that. Meet jobs political risk. Where do you see recession risks heading into 2026?

SPEAKER_01:

Well, so we don't do probabilities, we do predictions. So our recession risk, I mean, de facto, obviously there's always some probability, but is zero. But what that does assume, so it's good to do conditionalities, not probabilities. That assumes the Fed does cut rates so that they don't get cold feed. You know, maybe the labor market strengthens up a little bit, but they keep cutting down to the neutral rate, which is somewhere between 275 and three. And then the housing market will stabilize and probably start to expand. Because keep in mind, housing'cause caused 12 out of the 13 post-World War II recessions. And so that's the key indicator. The Fed tends to ignore it. But and that was weakening, it was almost to our level of indicating recession, 1.1 million, we were 1.3 million, and the trend was down. It should improve, at least bottom out, but probably improve with rates in the low sixes. But that rate is 100% dependent on the market's current assumption that the Fed's going to cut rates down below 3% next year. The 10-year trade is 100 base points almost exactly over the terminal rate or the that final rate that the Fed's going to cut to. So that's the risk. But if that doesn't happen, we see absolutely no recession. In fact, we would it'd be better to talk about the risk of a boom. So we see a high risk of a boom. So boom being 3% to 4% growth, you know, with AI continuing. But now with tailwinds, is housing and construction start to positively contribute, employment picks up, cement sentiment picks up. So we think we're headed into a Goldilocks market where you have lower rates and good economic growth and good earnings growth. And that's really reflecting the market. You can see that even a trade war can't really dull it, derail this market. It is making it more volatile. You know, we were up uh, you know, 35 points higher. We're lower by 20 points. The market is gyrating around more than it usually would during rain season. So volatility is up, but we don't think it's significant risk. We think trade war is going to be averted eventually. It's going to be more negotiate public negotiation, which will scare people. But we think investors should stay invested and try to look through the trade war uh conversation and focus on the Fed and this AI momentum.

SPEAKER_00:

You offer amazing thoughts all the time. You pu you publish a lot of information. Where can our listeners go to follow more of your research and connect with your team?

SPEAKER_01:

Uh so at infraCafunds.com. And I would look at the data because the reason we've had good calls is we're looking at this great data. So look at the housing data, very proprietary. Look at the money supply. We have that on our website. You can see this historical data about recessions being caused by investment, uh, not consumption. So you can really make your own forecasts if you just look at the data that we provide. So that's what you want. You don't want to just say, oh, Jamie Diamond told me to sell all my BDCs and you sell them, and then it turns out they didn't really have any problems. So, uh but if there's data he can provide, say, well, actually, you know, we looked in our portfolio and there's 35 other companies we're nervous about. Well, that's interesting. But he didn't say that. It just said there was going to be more cockroaches. So look to the data and not the opinions.

SPEAKER_00:

I always appreciate your time. Thank you so much for joining me. Thanks, Bonnie. It's great. Appreciate the questions. Thanks to everyone for watching. Be sure to like, share, and subscribe for more episodes of Beat Live Live.

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Michael A. Gayed, CFA

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