Lead-Lag Live

Fed vs Reality: Jay Hatfield on Outdated Data, Rate Cuts, and Where to Invest Now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 unpack why the Fed keeps getting it wrong—and how investors can actually benefit from the new rate-cutting cycle.

From outdated shelter calculations to overlooked leading indicators, Jay explains why monetary policy needs modernization and where the next opportunities lie as markets adjust.

In this episode:
– Why the Fed’s reliance on lagging shelter data distorts inflation
– How the monetary base drives every economic
– Why small caps and financials stand to outperform in a lower-rate
– The case for preferred, high-yield bonds, and MLPs as overlooked
– How AI-driven energy demand is creating a hidden natural gas

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 #SmallCaps #Preferreds #MLPs #AI

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SPEAKER_01:

It's been a very simple train trade, rather, to not be in small caps. So, you know, if you're worried about a recession, you worry about higher rates, you're worried about the Fed international. Small caps are fundamentally uh riskier companies. They usually have a little bit lower credit rating, I'm your host, Melanie Schaefer.

SPEAKER_00:

Welcome to Lead Lag Live. Now, the Federal Reserve announced on September 17th that it's lowering its benchmark rate by a quarter point, a move that could finally bring some relief from the steep borrowing costs that have been pressing on consumers. My guest today, Jay Hatfield, CEO of Infrastructure Capital Advisors, has been calling for this kind of cut. And not just quietly. He was recently quoted by President Donald Trump on Truth Social for his sharp critique of the Fed's timing and its reliance on outdated data, arguing that monetary policy needs to be modernized. Jay, thank you so much for joining me today. Thanks, Melanie. It's great to be on. So let me I just want to start things right there. You've been vocal about the Fed's missteps. Why did you make those comments and where do you think the Fed has gone wrong with its approach?

SPEAKER_01:

This isn't the new sort of politically motivated view. We've we've had this view um very stridently since the Fed raised the money supply by 70% during the pandemic. And then thought they could get away with that, and so called the inflation that was brewing uh transitory. And we thought that was patently ridiculous. While they were saying it was transitory, PPI was running about 12% year over year. The housing sector prices have gone up 20% uh year over year, not just like one month, but over an entire year. That's a obviously a predictor of rents. And that gets to the one of the three fundamental problems of this Fed is that they use the uh BLS's calculation of shelter, which is purposely delayed six months, but really delayed more like two years. They use their 1970s style surveys and the mail and on the phone, and they do renewing leases. They purposely delayed six months, which is just inexplicable. And one reason maybe the BLS had got fired. But so they've they were relying on that data, but if they looked at leading indicators, either market rents were also starting to rise rapidly, not their two-year delayed index, and also housing prices, they would have recognized that. And now we're on the flip side of that where housing's coming way down, hasn't showed up in the index. Um, so that was that's one of their three fundamental flaws. Uh, we did expect, though, for them to cut, and that is they're mostly labor economists. And so they really are focused on the labor market, and we did think it was going to weaken. And in fact, we had the opposite reaction that the president did to the BLS failure, is that we've said, well, finally they're figuring out that the labor market is weakening.

SPEAKER_00:

Yeah. And so to just carry on from that, why do you why do you regard the monetary base as a critical leading indicator? And how does that inform or how will it inform your forward views on these?

SPEAKER_01:

Well, most people tend to ignore it, which is a terrible idea. Specifically, the Fed causes all economic cycles. They've caused 13 out of 13 post-World War II recessions. I'm accepting the pandemic as the uh um caused by the federal government, so that's not really relevant. So 13 out of 13 recessions caused by a tightening of monetary policy. And 12 out of 13 of those recessions were precipitated by decline in housing. Another exception that proves the rule is that um in 2001, there was actually rates started to drop because of retirement boom. Housing did okay, but tech actually absolutely crashed. It's kind of the reverse of what's going on today. So if you want to call the economic cycle, first you look at the Fed. The Fed only controls the monetary base, so it should focus on that. That's if they increase it too fast, it'll cause inflation. Right now it's flat, so it could cause a recession. The only reason we're not in recession, two of the four major categories of investment are in recession, so construction and housing, but the tech related are very strong. So IP and equipment. So that's why we have slow growth, but no recession. But now it's great that the Fed's cutting rates. We're projecting 3% growth next year as mortgage rates can come down. They've already come down. And um, the housing market's starting to recover. We had strong new home sales, so possibly in anticipation of lower mortgage rates. So we're very bullish about the market because of the Fed. We have a 7,000 target this year and a 7,700 target for the end of uh 26.

SPEAKER_00:

So, yeah, given that context, then how should how should investors position their portfolios to benefit in this sort of environment?

SPEAKER_01:

Well, we think that definitely it's better to be with regard to fixed income. You know, I think everybody should have at least some fixed income in their portfolio. But you don't need to have like the most conservative fixed income. You can have high yield bonds and preferred, you know, our funds are BNDS, is our high yield bond fund, PFFF, PFFA, sorry, is our flagship, preferred stock fund, both yield well over eight, eight, and nine, basically BNDS eight, PFFA nine. So there you get equity like returns, but you do uh get paid first. So you get the benefits of fixed income, lower volatility in the stock market. So as rates come down, you get kind of a double pop. You should get uh, you know, the spreads will tighten because the stock market is doing pretty well. And of course, the treasury's rallying. So those two factors aid in on the fixed income side. Um, so we do think that those are timely and they have been doing really well since the Fed, really since Powell signaled that they were going to cut.

SPEAKER_00:

And so to follow up from that, Jay, what strategies or tilts are you favoring?

SPEAKER_01:

So, in terms of equities and sectors, we do think small caps will do well. They haven't done well at all. And they, in fact, they we had predicted that when the Fed started cutting rates, they would do well. So they're typically outperforming in most on most days because people are anticipating those rate cuts. Um, higher risk um securities like financials. So if you look at ICAPs, our large cap um dividend fund, we have a lot of financials there. We do have a little bit of tech, nowhere near as much, about 10% tech. Um, so there's some great companies there, um, industrials. So we'd be a little more out on the risk curve, not in drugs, not in consumer staples. Uh so if if we're right about the market being bull market, you want to be in higher risk securities. SCAP is our small cap uh dividend fund that's like I said has been performing well in this type of market.

SPEAKER_00:

Yeah, and Jay, on the fixed income side, where do you see the 10-year treasury trading over the next uh 12 to 24 months and how will that impact fixed income allocations?

SPEAKER_01:

Well, we've been um bullish on bonds and correct. I would guess I'd say as usual. Uh we've been had really accurate forecasting since the pandemic, uh, again, because we've looked at the money supply. So we've been forecasting 375, sorry, 350 to 4 on the 10 year. And a lot of times we are forecasting that when the 10 year was at 480 as well. So um now we're about 410. Uh basically the tenure is going to trade about 100 base points over, 1% over the expected terminal rate of Fed funds right now. The last SCP, the terminal rate was about 310. That's exactly where Fed fund features are. So to get below four, and we think that'll probably happen. We need to have a little bit more dovish Fed. We do think the labor market's going to continue to weaken. We think inflation is attenuating, even though it doesn't necessarily always show up in the data. Tariffs haven't been that significant, but they are one time. So we think the Fed will become incrementally dovish. That terminal rate will go below four, and the treasury will go below four. And as I mentioned, that's really a tailwind for all securities. We have a 23 multiple both this year and next year on our target. It's implicit in our target. So, in other words, our target this year is 305 times 23. That gives you 7,000. Next year it's 355 uh times 23. But to justify a 23 multiple, you really need to be have rates at 4% or area of 4% or lower. Uh, because multiple, every 25 base points of uh yield on the 10-year is theoretically equal to one SP multiple. So our bullish target is based on lower rates. Um, we're in the rate zip code, but it would be more attractive if we did get below four to support that 23 multiple. The other element is, of course, you've seen it um in recent earnings report from Oracle, Broadcom, very strong momentum in um AI. So a higher growth rate is likely, and that also supports a higher multiple. But rates are a key tailwind. It's really markets taking off even in September, which it normally does terribly in September. And that's really because of this expectations of Fed rate hikes or cuts, rather. And that means the cycle's over, and that means that the risk of recession is dropping to close to zero.

SPEAKER_00:

Yeah, and you mentioned AI. That's sort of what I wanted to get into next, with AI data centers and cloud growth driving uh demand for energy and infrastructure. Where do you see opportunity for the energy companies? And do you believe MLPs are set to benefit?

SPEAKER_01:

Definitely. The I think some of the derivative plays, just some of the power companies are pretty uh fairly valued or even overvalued, few utilities. But nobody's really thought about um MLPs as a beneficiary of AI. But the companies, particularly the ones that we have invested in AMZA, are natural gas focused. And there's two growth stories for natural gas. One is if you're gonna produce substantially more electricity, you need natural gas. We're gonna have something, some growth in renewables, but you're gonna need natural gas. Nuclear is too far away right now. So that's a big growth area. And these big pipeline companies like Williams, KMI, UPD, energy transfer have big natural gas pipelines. They're shipping that gas to power plants to be converted into electricity. They're also shipping that gas to the Gulf, which is then being exported overseas. And then those countries are using that natural gas to burn for their own electricity needs. They don't have as many data centers, but they do have some. So there's a huge growth story there. Hasn't become overvalued. Still, you can get 7% yield, seven, eight yields in the same yields right around eight right now. So you can get attractive yields, good growth prospects, but it's not overdone like some AI stocks are arguably way overvalued, but MLPs are not. We like LNG. Um, it's a um export, they export Shaneer, they export natural gas. Um, they have uh two great facilities that they're expanding. So we like Shaneer. Um in our large cap dividend fund, we do like Marvell. They're doing well today. It's one of our bigger holdings. They're we think really under, unlike a lot of AS stocks that are fully or even overvalued. We think Marvell's undervalued. So that's been a big contributor in ICAP. We've had Goldman Sachs, we've been recommending that since it was at 500. It's now eight out of 800, it's getting a little bit closer to fair value, maybe an 850 target on it, but benefiting from the AI boom uh uh through IPOs and also increase in merger activity, which is coming from deregulation of the merger market. Uh, we also like Morgan Stanley. So there's a lot of good, um, these are all higher uh beta picks, except for LNG. So we do think it's okay to be out the on the risk curve for these companies that are indirectly benefiting from AI.

SPEAKER_00:

And uh uh Jay, zooming out a little bit, uh you just updated your S P 500 targets for 2026. What analysis led you to that adjustment and what's your roadmap for getting there?

SPEAKER_01:

Well, we try to keep it pretty simple. If you follow Southside research, so these are the big investment banks, they're very skittish. A lot of them lowered their target when the tariff tantrum happened. We thought the tariff reaction was over blonde, and we were correct. So we kept our 6,600 target um all throughout that decline. So that was the right positioning because it was a huge buying opportunity. And then we recently, just in the last two weeks, upgraded it. And it's really, for the reasons we described, lower rates. So we finally actually got lower rates versus us just projecting lower rates. And the AI boom got further, had further evidence presented, particularly by Oracle. There's been a lot of criticism of AI that it's, oh, it's just, you know, checking to see how your barbecue can be fixed, you know, talking to Chat GPT. But what Oracle demonstrates is that major corporations need to use AI on their own data. So they're not going to just use Chat GPT, they're gonna form their own LLM on their own data because they don't want to share their data, and that's going to inform the decisions about all aspects of their business on the customer side, on the manufacturing side, logistics, even HR. So there's a huge growth opportunity, and the whole notion it's not going to be the ROIs are not going to be good is not seems ridiculous. Companies can clearly optimize their operations using uh AI models on their own data. So we think that's been underappreciated. Oracle started to highlight that. And so further momentum on AI caused us to raise our target. And to be fair, we actually had indicated for most of the year that the risk was to the upside on our 6,600 target because of AI.

SPEAKER_00:

Yeah, and I uh so I want to cover it just a little bit and ask you about a recent milestone. Uh, you launched the first Active Preferred UCIT ETF. Can you walk us through the significance of that launch and what it means for investors seeking income in today's uh market?

SPEAKER_01:

Well, so the um European markets behind the US market. So it's really an unlevered version of PFSA, which is gonna really not just the top performing preferred stock ETF, or let's call it a top performing, but also one of the top, if not the top, performing fixed income ETFs. So it's really meant for European investors to access that great asset class where we have expertise in managing it, getting good yields, like around 8%. Uh and so it's uh an opportunity for European investors who want to use securities listed on their home exchanges to access uh the preferred stock asset class in an active form, which they uh don't have any active funds, actually, surprisingly, in Europe.

SPEAKER_00:

Can you walk us through? I mean, with the the portfolio of ETFs uh that it has is is vast and covers so many areas. How do you see each of them playing out? Where do you think the best opportunities are for investors, right?

SPEAKER_01:

Well, the first distinction that we always emphasize is fixed income versus equity income. So like sometimes people will write something online about PFFA and say, well, it hasn't kept up with the S P 500. Well, it's done quite well, actually, but not as well as that. But it's fixed income. So you get paid first. So it's lower risk than the market as a whole, about 0.5 beta, so 50% is risky. Uh, but you're gonna get lower returns. Um, so but if you want stable income and less volatility, maybe are drawing some out some capital out of your uh retirement accounts or your savings accounts or your securities accounts. And so you want some income, the cushion of downturns, it's great to have fixed income. And as I mentioned before, particularly higher yielding fixed income because you get good total long-term returns and good current equity really uh sorry income. And so that helps pay expenses. So BNDS, PFFA are two of our fixed income funds. PFFR's a we preferred index funds. So we have three, uh, well, now four. We have the European UCIS, but for US investors, three. So but four fixed income ETFs, and then we have three income, equity income ETFs. So they're gonna be more volatile, closer to the uh market as a whole. So ICAP's our large cap dividend fund, SCAP's our small cap dividend fund, and AMCA is obviously energy related, and is a good diversifier. Like today, actually, the market's pretty weak. Um and um MLPs and energy are all up. So it's a good uh way to balance out your portfolio, get really good income, not add a lot of beta, and not have a lot of interest rate risk.

SPEAKER_00:

I wanted to ask you about uh small cap, small caps and ask cap in particular. Where are we in this cycle? I mean, we usually see from the large caps going down to mid caps to small caps. That hasn't fully happened. With the rate cuts going where you think they're going to go in the economy, um, you trucking higher, where do we're where will small caps fall into the story?

SPEAKER_01:

Well, we did think we're in early, the early days of that rally. It's been a very simple train trade, rather, to not be in small caps. So, you know, if you're worried about a recession, you're worried about higher rates, you're worried about the Fed, international. Small caps are fundamentally uh riskier companies. They usually have a little bit lower credit rating, and there's safety in having these very large companies. Um so people have used large cap, particularly large cap tech as a safe haven. And they were the hedge funds are probably shorting the small cap index. Now we think it's going to be a more balanced rally. Not that tech won't outperform because it's far riskier than the rest of the market, but you have to risk adjust it. So if small caps are up, you know, 20% a year and tech's up 23%, will you actually outperform the small caps because tech stocks have market sensitivity or beta of about 1.5 or two. So they're 50 to 100% more risky than markets. Small caps are right on top of the market. So if we get returns that are close to tech, and now we've got a lot of tech returns already, not small cap. So we think that rotation will continue. Small caps will work, not just the end of this year, but next year as we finish the reef cutting cycle. So we do think they're timely. We've been saying that they would be timing timely when we got visibility in the Fed. And that's exactly what happened. We got that visibility early this month, really late last month when Powell did his Jackson Hole speech. That's really the moment that small caps started to outperform. We think that'll continue. They are really, really undervalued. So we think that'll continue, you know, up and down, obviously, throughout uh next year and so into the end of 26.

SPEAKER_00:

Do you have any stop picks in the small caps race or what are you liking?

SPEAKER_01:

We have a total non-consensus pick. That is a much hated uh net lease rate. Used to be externally managed, it's not good because you have misaligned interests, now it's internally managed, used to be over levered, now it's not, got upgraded to investment grade. Still have that overhang of all those bad years. So we have an 11 target, it's trading in the low eights, and you do get paid to weigh as yielding about 9%.

SPEAKER_00:

Well, Dave, thanks so much for joining me again, and thanks to everyone for listening. I'm Melanie Schaefer. See you next time on Lead Like Live.

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Michael A. Gayed, CFA

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