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The Fed Is Wrong. Stocks Can Still Win · Views from 6,230

• 0:11
  Ryan Nauman Host Views from 6,230: Welcome everyone to the Views from 6,230 podcast.
• 0:16
  Ryan Nauman Host Views from 6,230: I am your host, Ryan Nauman.
• 0:18
  Ryan Nauman Host Views from 6,230: The Federal Reserve, treasury yields, oil prices, and tightening financial conditions are creating a complicated backdrop for investors.
• 0:27
  Ryan Nauman Host Views from 6,230: While signs of stress are emerging in housing and credit markets, the outlook for equities may be more constructive, assuming inflation continues to moderate and long-term interest rates begin to stabilize.
• 0:44
  Ryan Nauman Host Views from 6,230: joining me today to discuss these competing forces is Jay Hatfield, founder, CEO, and portfolio manager at Infrastructure Capital Advisors.
• 0:56
  Ryan Nauman Host Views from 6,230: We'll examine why Jay believes the Fed has become too hawkish, what could cause something to the, to break in the economy, and how he can remain bullish on stocks despite those risks.
• 1:11
  Ryan Nauman Host Views from 6,230: We'll also explore valuation discipline where he currently sees opportunity in technology and financials.
• 1:19
  Ryan Nauman Host Views from 6,230: All right, enough from me.
• 1:21
  Ryan Nauman Host Views from 6,230: I've already talked enough.
• 1:23
  Ryan Nauman Host Views from 6,230: Let's go ahead and bring on the star of the show.
• 1:26
  Ryan Nauman Host Views from 6,230: Jay, thank you so much for coming on the show.
• 1:29
  Ryan Nauman Host Views from 6,230: It's an honor to have you on.
• 1:30
  Ryan Nauman Host Views from 6,230: You were on about a year ago or so, and it was a fantastic conversation.
• 1:36
  Ryan Nauman Host Views from 6,230: Glad I didn't scare you away and you wanted to come back on a second time.
• 1:40
  Ryan Nauman Host Views from 6,230: But can you please tell us more about yourself and Infrastructure Capital Advisors?
• 1:46
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: Thanks, Ryan.
• 1:47
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: It's great to be back.
• 1:49
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: I've been on Wall Street for almost 40 years, started out as an investment banker, CPA, MBA from Wharton, and have been running our money management company for now about 18 years.
• 2:03
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: We have eight income ETFs, four on the equity side, four on the fixed income side, and we do think it's an effective strategy to have a substantial amount of income in your portfolios.
• 2:15
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: And to outperform, it's important not just to have income, but also have good total return.
• 2:22
  Jay D. Hatfield Founder, CEO & Portfolio Manager Infrastructure Capital Advisors: So that's what our f- our firm was founded on and we think that, like I said, it's a good addition to most portfolios
• 2:31
  Ryan: I think that's very important.
• 2:32
  Ryan: Like you said, Jay, yes, you can have income, but you can't ignore appreciation in the total return, right?
• 2:39
  Ryan: Because especially when markets keep ripping higher, you don't wanna leave that opportunity cost on the sideline.
• 2:47
  Ryan: You're Correct.
• 2:48
  Ryan: All right.
• 2:49
  Ryan: Jay, let's just start at the top.
• 2:51
  Ryan: it's the elephant in the room.
• 2:53
  Ryan: Start with the Fed.
• 2:54
  Ryan: You've described the Fed's latest interest rate increase as irrational.
• 3:01
  Ryan: What did the Fed get wrong, and which inflation or economic indicators most strongly support your argument that it should have held rates or maybe even cut rates?
• 3:14
  Jay D. Hatfield: Absolutely.
• 3:14
  Jay D. Hatfield: We opposed the appointment of Kevin Warsh.
• 3:17
  Jay D. Hatfield: He was the most hawkish Fed member ever, and you didn't have to do a lot of research to figure that out.
• 3:23
  Jay D. Hatfield: You could just read Wikipedia.
• 3:25
  Jay D. Hatfield: So we have no idea why the president nominated him, other than he does have a lot of political power.
• 3:33
  Jay D. Hatfield: Based here in New York.
• 3:35
  Jay D. Hatfield: But so not surprisingly, the Fed started out very hawkish.
• 3:39
  Jay D. Hatfield: The reason it's a mistake is that the Fed should focus on core.
• 3:45
  Jay D. Hatfield: That's why-- core inflation, and that's why they calculate it.
• 3:49
  Jay D. Hatfield: They obviously have no control over energy prices.
• 3:54
  Jay D. Hatfield: They have absolute control over the housing market.
• 3:58
  Jay D. Hatfield: So if you were to give a good framework to the Fed, they're fatally flawed.
• 4:03
  Jay D. Hatfield: They have a terrible framework.
• 4:04
  Jay D. Hatfield: They have three huge problems.
• 4:07
  Jay D. Hatfield: But the, the-- one of the biggest problems is that they don't calculate inflation properly, so they've for no reason picked PCE core as their preferred gauge.
• 4:21
  Jay D. Hatfield: That used to be a pretty interesting way to cheat on the 2% target, because PCE was typically forty base points below CPI, but it's made up consumption and made up prices.
• 4:35
  Jay D. Hatfield: And so now the BEA calculates it.
• 4:37
  Jay D. Hatfield: They're the ones who...
• 4:38
  Jay D. Hatfield: They only use it to estimate GDP, which is a pretty dirty estimate too.
• 4:44
  Jay D. Hatfield: And they're the only ones in the world that use it.
• 4:46
  Jay D. Hatfield: Nobody else does.
• 4:47
  Jay D. Hatfield: Nobody uses it for private contracts.
• 4:50
  Jay D. Hatfield: Only the Fed and the BEA use it.
• 4:53
  Jay D. Hatfield: So obviously, Social Security doesn't use it.
• 4:56
  Jay D. Hatfield: Treasury inflation bonds don't use it.
• 5:00
  Jay D. Hatfield: No private con-contract, because it's made up.
• 5:02
  Jay D. Hatfield: Nobody wants a made up index.
• 5:04
  Jay D. Hatfield: CPI is better because it's mostly not made up except for shelter, and so shelter is made up.
• 5:11
  Jay D. Hatfield: They'd set something called owners equivalent rent.
• 5:14
  Jay D. Hatfield: Instead of using the internet, they do a survey, and they only update it every six months, which is insane.
• 5:20
  Jay D. Hatfield: It's like you delayed all of the release of your podcast six months.
• 5:24
  Jay D. Hatfield: Like how popular would that be?
• 5:26
  Jay D. Hatfield: So it's just a misexecution.
• 5:29
  Jay D. Hatfield: So if you-- even if you take, took the reported CPI numbers when the Fed raised rates, it got a little bit worse in the last month for same dumb reason, 'cause of shelter.
• 5:40
  Jay D. Hatfield: But it was two point four percent core, down from two point nine in just four months, annualized one point eight.
• 5:49
  Jay D. Hatfield: And so that was the data that-- So that's consistent with a 2% target 'cause PC-- CPI runs two-- 40 base points higher than PCE.
• 5:59
  Jay D. Hatfield: So they should have, if anything, cut the...
• 6:02
  Jay D. Hatfield: So the way to run the Fed is you look at core, you make whatever adjustments you need to because it's just produced by bureaucrats.
• 6:10
  Jay D. Hatfield: It's not like God spoke.
• 6:12
  Jay D. Hatfield: We adjust shelter to core market prices, then CPI would be at 1.4%.
• 6:19
  Jay D. Hatfield: You should take out airline fares if you're looking at core because they're solely driven by energy prices.
• 6:26
  Jay D. Hatfield: And so then even if you just did that, you'd get to 2.1.
• 6:29
  Jay D. Hatfield: So all the data supports a cut.
• 6:32
  Jay D. Hatfield: But the most important thing is what the Fed impacts is the housing sector.
• 6:37
  Jay D. Hatfield: So I always like to look back to when we really started to get public with our views, which was the first quarter of '21.
• 6:45
  Jay D. Hatfield: I was trained by a monetarist at Davis 48 short years ago, and UC Davis, and they and Milton Friedman, who's behind me on my shelf, so I'm promoting our ETFs.
• 6:59
  Jay D. Hatfield: We promote Milton Friedman.
• 7:01
  Jay D. Hatfield: But said that inflation only comes from excessive monetary growth.
• 7:05
  Jay D. Hatfield: So the money supply grew 70%.
• 7:07
  Jay D. Hatfield: We use M0 'cause it doesn't get distorted.
• 7:10
  Jay D. Hatfield: And-- But most importantly, the housing sector prices were up 20% year over year, and market rents were up 7.
• 7:19
  Jay D. Hatfield: But of course, the Fed's poor calculation of shelter didn't show a lot of inflation, although it quickly did start to show it.
• 7:26
  Jay D. Hatfield: So anyone with any sense at all, with a h- at least a high school economics degree would've said, "Oh, we increased the money supply 70%."
• 7:38
  Jay D. Hatfield: Housing's up 20% year over year.
• 7:40
  Jay D. Hatfield: We affect housing.
• 7:41
  Jay D. Hatfield: That's how we...
• 7:42
  Jay D. Hatfield: And other interest rate sensitive.
• 7:44
  Jay D. Hatfield: So we clearly caused all this problems.
• 7:46
  Jay D. Hatfield: Has nothing to do with supply shocks, 'cause housing is a stock mostly.
• 7:51
  Jay D. Hatfield: So in other words, there's 110 million homes, and then a few million get produced every year.
• 7:56
  Jay D. Hatfield: So it's not about the production of them.
• 7:59
  Jay D. Hatfield: So I br- go into all that because now we have the polar opposite.
• 8:03
  Jay D. Hatfield: So then they chose not to hike and now we have the polar opposite situation.
• 8:08
  Jay D. Hatfield: The money supply's shrinking.
• 8:10
  Jay D. Hatfield: Core CPI is arguably way below two.
• 8:15
  Jay D. Hatfield: The housing sector's in recession, so year-over-year negative investment, and market rents are zero.
• 8:22
  Jay D. Hatfield: So why would you increase rates?
• 8:24
  Jay D. Hatfield: You're causing a recession in that sector.
• 8:27
  Jay D. Hatfield: In normal markets, we would be in recession, but for spending on AI.
• 8:33
  Jay D. Hatfield: So again, a totally wrong Fed, wrong target, 2% way too low.
• 8:40
  Jay D. Hatfield: But even using their target, if they just had the proper index adjustment, although even CPI core as reported could have been used as justification to cut.
• 8:52
  Jay D. Hatfield: And then they're terrible forecasters.
• 8:54
  Jay D. Hatfield: They said that financial conditions were loose, but look at the 30-year mortgage.
• 8:59
  Jay D. Hatfield: It hit 770.
• 9:01
  Jay D. Hatfield: It's not loose.
• 9:02
  Jay D. Hatfield: Look at the equal-weight S&P, down 5 to 10%.
• 9:04
  Jay D. Hatfield: Look at high yield.
• 9:06
  Jay D. Hatfield: The other thing they need to do is when they raise rates, they need to forecast what it's going to do to f- to financial conditions.
• 9:13
  Jay D. Hatfield: So they closed the high-yield market.
• 9:15
  Jay D. Hatfield: So this is a massively incompetent Fed, and b- but for AI would be pushing us into a recession
• 9:25
  Ryan: Yeah, I'm glad you brought up housing too, and we're gonna, we're gonna talk more on housing shortly, Jay, but that was fantastic.
• 9:32
  Ryan: It just...
• 9:33
  Ryan: Out here, you mentioned Davis, UC Davis.
• 9:36
  Ryan: Not far from there, Lake Tahoe, where we're at, the housing market is just so much imbalance there, and it's amazing when, unless you have a bunch of cash, affordability of a house i- unless you make a lot of
• 9:51
  Ryan: money, because all of a sudden the 7% mortgage rate makes a $500,000 house for many people unachievable, That mor- it, it jacks up the mortgage rate, or the, your mortgages.
• 10:04
  Ryan: Agree with you on the housing market.
• 10:06
  Ryan: Something's gotta give there.
• 10:08
  Ryan: And then on the credit side too, and recently, earlier this year, maybe credit spreads were pretty normal long-term averages, but in recently, in the past two, three months, especially those lower rungs of credit credibility it spiked those spreads.
• 10:26
  Ryan: We're gonna cover a
• 10:27
  Jay D. Hatfield: That gets back to forecasting.
• 10:29
  Jay D. Hatfield: When any time the Fed raises rates, investors, particularly retail investors, get in the mind, okay, rates are going higher, and it's a tightening cycle, and they have not really pushed back against that, even though the dot plot only
• 10:41
  Jay D. Hatfield: says one.
• 10:42
  Jay D. Hatfield: We are predicting only one increase.
• 10:44
  Jay D. Hatfield: But they-- everybody thinks cycle, oh, get out of the market, sell, definitely sell your credit.
• 10:50
  Jay D. Hatfield: So they have to start to forecast what the impact is gonna be of their increases, and they should've been able to figure out that would've tightened the high-yield bond market.
• 11:02
  Jay D. Hatfield: And their notion that the financial conditions were loose was ridiculous.
• 11:07
  Jay D. Hatfield: Just because three stocks, and it really is close to three or four stocks, it's really, the, some of the Mag Apes, Nvidia, Meta, that have really driven the stock market.
• 11:19
  Jay D. Hatfield: So unless you happen to own those stocks and are gonna pay cash for your home, then it's gonna be a disaster for housing.
• 11:25
  Jay D. Hatfield: And what's great about talking to people like you, and I love Tahoe.
• 11:28
  Jay D. Hatfield: I grew up going to Tahoe, so great to see that map.
• 11:31
  Jay D. Hatfield: May- I might replace Milton Friedman with a map of Tahoe.
• 11:34
  Jay D. Hatfield: I went to Donnor-- Yeah I went to Donner Lake, but it was very close to Tahoe.
• 11:39
  Jay D. Hatfield: And but so when you talk to real people outside of a few urban areas like ours here in New York City, my hometown, San Francisco area, Palo Alto really, and Miami, everybody's saying the housing market's grinding to a
• 11:55
  Jay D. Hatfield: halt.
• 11:56
  Jay D. Hatfield: No activity, no sales.
• 11:58
  Jay D. Hatfield: Prices would drop more if there were actual transactions.
• 12:03
  Jay D. Hatfield: So just a unmitigated disaster.
• 12:05
  Jay D. Hatfield: I'm hopeful that this wasteful Federal Reserve system, where they have 12 different offices, gets them some of this data to, so they realize that the housing sector is really hurting, and th- they're the ones causing it
• 12:19
  Ryan: Yeah, exactly.
• 12:20
  Ryan: You mentioned your base case is the Fed raises rates one more time, and the 10-year Treasury stabilizes near 5%.
• 12:32
  Ryan: So what relationship do you see between the terminal funds federal funds rate and the 10-year yield and what would cause that forecast to change?
• 12:43
  Jay D. Hatfield: This is probably the most important point of this podcast, and that because everybody seems to not understand this.
• 12:51
  Jay D. Hatfield: But if you look and you can get this data on our website, infracapfunds.com, the 10-year trades reliably 100, almost exactly 100 over Fed funds, or if there's a lot of movement in Fed funds, terminal Fed funds.
• 13:10
  Jay D. Hatfield: And so nor- so normally Fed funds about 75 basis points over inflation.
• 13:16
  Jay D. Hatfield: So say 275, 3.
• 13:18
  Jay D. Hatfield: 10-year's normally 100 over that, about four.
• 13:21
  Jay D. Hatfield: But When war took over and the Fed got super hawkish, the Fed funds futures re-reversed.
• 13:29
  Jay D. Hatfield: They were showing two to three cuts.
• 13:32
  Jay D. Hatfield: Now they're show-showing four increases, so that's 175 base points.
• 13:37
  Jay D. Hatfield: 10-years traded off as much as 125.
• 13:41
  Jay D. Hatfield: So what's interesting is Fed Fund futures are not as that accurate a predictor of actual Fed funds, so don't get too excited about these probabilities.
• 13:51
  Jay D. Hatfield: You may have noticed oh, there's a 100% probability of an October rate increase.
• 13:57
  Jay D. Hatfield: Then the Fed chair, Williams, says...
• 13:59
  Jay D. Hatfield: of the New York Fed, says we probably don't need one in October."
• 14:03
  Jay D. Hatfield: Then it becomes zero or 10 now or whatever it is.
• 14:05
  Jay D. Hatfield: So don't get too worked up about those.
• 14:08
  Jay D. Hatfield: But the 10-year is really signaling o-only one more increase.
• 14:14
  Jay D. Hatfield: The 10-year is a more liquid market, global.
• 14:18
  Jay D. Hatfield: And the other thing about our call is just if you don't understand what irrational people are gonna do, ask them, right?
• 14:28
  Jay D. Hatfield: So they're saying one more increase in their dot plot.
• 14:32
  Jay D. Hatfield: Not to all of them.
• 14:33
  Jay D. Hatfield: I don't think there was even many that had more than one, and Williams is implying one more.
• 14:39
  Jay D. Hatfield: So let's not ignore what they're saying.
• 14:42
  Jay D. Hatfield: I n- I normally try to, but they're the ones in charge.
• 14:46
  Jay D. Hatfield: And so I don't know why Fed Fund futures...
• 14:49
  Jay D. Hatfield: It has come off, to be fair.
• 14:51
  Jay D. Hatfield: Had three increases, that would be a disaster.
• 14:54
  Jay D. Hatfield: That would potentially cause a recession, maybe just slow growth, further shut down the high yield market, further a deeper recession in the housing market.
• 15:06
  Jay D. Hatfield: So I think they're dumb, but not stupid.
• 15:09
  Jay D. Hatfield: They'll start to see these cracks they're producing.
• 15:12
  Jay D. Hatfield: Would be nice if oil would come down.
• 15:14
  Jay D. Hatfield: It's not, 'cause that would take the wind out of their sails because core is very well-behaved, which they want to ignore for some reason, and of course, headline's the problem.
• 15:24
  Jay D. Hatfield: So if we could just get oil down to 80, which is in the middle, like the bottom of our range, whereas now it's at the top, with the strait closed, then, you'd see a couple months where airline fares
• 15:35
  Jay D. Hatfield: might be negative instead of being...
• 15:38
  Jay D. Hatfield: airline fares are up 25% year over year, and that goes into core, and other things do seep into core.
• 15:45
  Jay D. Hatfield: So we...
• 15:46
  Jay D. Hatfield: It would be nice to get the relief from oil because I'm not sure the Fed is gonna reform itself anytime soon.
• 15:53
  Ryan: Yeah.
• 15:53
  Ryan: Yeah, I agree.
• 15:54
  Ryan: And Jay, I'm so glad you brought up oil.
• 15:57
  Ryan: It's a fantastic...
• 15:58
  Ryan: Because it's on the top of mind of everything, like you said, inflation a- and interest rate outlook.
• 16:05
  Ryan: Oil is important variable in your interest rate outlook.
• 16:09
  Ryan: How are you thinking about the different scenarios for oil prices?
• 16:12
  Ryan: You say your lower end is around $80 a barrel, and at what point would falling energy prices eliminate the need for another Fed increase?
• 16:23
  Jay D. Hatfield: So it's all dependent on the Strait, obviously.
• 16:27
  Jay D. Hatfield: We were correct.
• 16:29
  Jay D. Hatfield: We had a view that once the Strait...
• 16:31
  Jay D. Hatfield: A lot of forecasters that are-- show up on television, which I would n-ignore them mostly, unless we're on television were saying, "Oh, higher for longer."
• 16:41
  Jay D. Hatfield: But we were the opposite.
• 16:43
  Jay D. Hatfield: We're like, "Lower, faster."
• 16:45
  Jay D. Hatfield: And the reason for that is these countries in the Middle East, they need to produce full out and get all that cash in.
• 16:51
  Jay D. Hatfield: They're hurting.
• 16:53
  Jay D. Hatfield: And we saw that for five days, where oil briefly dipped below $70, headed to 50 probably, 'cause of an overshoot, 60 is probably equilibrium.
• 17:04
  Jay D. Hatfield: And so it's all about the Strait.
• 17:07
  Jay D. Hatfield: The problem is, we were forecasting the Strait would open because the US would do it forcibly, but we have realized that we have no idea what the ins- administration's doing.
• 17:18
  Jay D. Hatfield: One can argue they don't either, but I won't get political about it.
• 17:21
  Jay D. Hatfield: But I certainly don't understand.
• 17:23
  Jay D. Hatfield: So I understand okay, we're halting until the midterms are over.
• 17:28
  Jay D. Hatfield: Why are the midterms driving when we're gonna attack Iran?
• 17:31
  Jay D. Hatfield: That doesn't make any sense.
• 17:33
  Jay D. Hatfield: I would think it'd actually be the reverse.
• 17:35
  Jay D. Hatfield: We'll attack them as soon as possible to get the Strait open so the midterms are not a disaster.
• 17:39
  Jay D. Hatfield: So I don't understand at all, if somebody can explain it to me.
• 17:44
  Jay D. Hatfield: So we're assuming it stays closed, and we have 80 to $100 barrel oil.
• 17:51
  Jay D. Hatfield: But do keep in mind that, th-these things do anniversary away, even though they're painful.
• 17:57
  Jay D. Hatfield: And so with the Strait remains closed, there's about 6 million barrels shortfall that implies $90 oil.
• 18:03
  Jay D. Hatfield: In a year, there'd be no inflation from that.
• 18:06
  Jay D. Hatfield: It's just we'd have a higher level of prices.
• 18:09
  Jay D. Hatfield: So that should keep the Fed on hold eventually, stabilize rates around five.
• 18:16
  Jay D. Hatfield: That's consistent with the 19 multiple.
• 18:18
  Jay D. Hatfield: I'm not gonna come out with a target yet, but there's tremendous earnings growth built in to next year's, I'm sorry, '28's earnings, 'cause t- our 8,000 target is on '27 earnings.
• 18:32
  Jay D. Hatfield: So you can easily get over 9,000.
• 18:34
  Jay D. Hatfield: So that's with the Strait closed.
• 18:37
  Jay D. Hatfield: So just think what would it be like if oil's at 60, rates are 450, not five, maybe even four, Fed's totally on hold, if not cutting.
• 18:48
  Jay D. Hatfield: So there's tremendous upside to an opening of the Strait.
• 18:53
  Jay D. Hatfield: And even if we don't get it, we'll probably gradually get lower oil prices as we arbitrage around it, US produces more, et cetera.
• 19:03
  Jay D. Hatfield: So I would say oil, on net, is a potential future positive, and it shouldn't get a whole lot worse than 100.
• 19:11
  Jay D. Hatfield: You're seeing oil kind of fade around this 100 level.
• 19:15
  Jay D. Hatfield: That's capitalizing in quite a bit of restriction in the Strait of Hormuz, and there is oil moving through the strait and through the Yanbu pipeline and other routes.
• 19:25
  Jay D. Hatfield: Of course, the Houthis are attacking Saudis, so it's keeping it elevated.
• 19:29
  Jay D. Hatfield: So it's super dicey, but just look at how remarkably stable the mark- the market is.
• 19:35
  Jay D. Hatfield: We started the year at 8,000 target, but we didn't forecast a war and $100 oil, so how-- look how resilient it is.
• 19:43
  Jay D. Hatfield: A- and it never goes down fully.
• 19:45
  Jay D. Hatfield: It's always ro- rotating.
• 19:46
  Jay D. Hatfield: Like today, it's all about tech.
• 19:48
  Jay D. Hatfield: The last week or two, it's been all about not tech.
• 19:52
  Jay D. Hatfield: So it's a pretty extremely resilient market because of earnings
• 19:59
  Ryan: You're exactly right, Jay.
• 20:00
  Ryan: And I think it, I feel as if we're, it's been that way, markets have been very resilient over the past couple years.
• 20:07
  Ryan: There's been a lot of headline risk and just risks out there in general, yet markets, equities continue to rip higher for what- like you said, earnings.
• 20:19
  Ryan: Earnings continue to increase, whether that's due to AI or just consumer spending, but it's continuing to rip higher.
• 20:29
  Ryan: And, you mentioned $60 oil.
• 20:31
  Ryan: Do you feel, you kinda mentioned that's the equilibrium.
• 20:34
  Ryan: Do you feel that's kinda the sweet spot for both producers, consumers, emerging markets?
• 20:41
  Ryan: $60 oil is where, hopefully it will settle in at
• 20:48
  Jay D. Hatfield: Definitely.
• 20:48
  Jay D. Hatfield: That's equilibrium with OPEC operating around 30 million barrels a day.
• 20:54
  Jay D. Hatfield: We think they would temporarily go to 33, 34 if the strait reopened to rebuild their stocks and their coffers.
• 21:01
  Jay D. Hatfield: But every-- We use a great rule of thumb.
• 21:05
  Jay D. Hatfield: Every million barrels is about $5 to make supply and demand balance.
• 21:12
  Jay D. Hatfield: 'Cause a lot of forecasters say, "Oh my God, the strait's closed, so oil's gonna go to infinity."
• 21:18
  Jay D. Hatfield: But they forget there's gonna be conservation, other countries will produce more.
• 21:22
  Jay D. Hatfield: So they ignore what's called the elasticities.
• 21:24
  Jay D. Hatfield: It's just a fancy way of saying adjustment.
• 21:28
  Jay D. Hatfield: And that was roughly the balance, is around 60 before the strait closed, and would require OPEC to not go flat out to stay above fif- not to go to 50.
• 21:39
  Jay D. Hatfield: But that would be, just a wonderful scenario.
• 21:43
  Jay D. Hatfield: Would be pretty easy to get above 9,000 next year.
• 21:46
  Jay D. Hatfield: So that's upside, but we can still do what we're doing now, this churning and burning and gradually going higher.
• 21:53
  Jay D. Hatfield: And I would just make a couple quick points about earnings, 'cause it's so critical.
• 21:57
  Jay D. Hatfield: So the reason that our target worked basically worked, we started 8,000, we're...
• 22:02
  Jay D. Hatfield: We'll see where we exactly end up.
• 22:03
  Jay D. Hatfield: It depends if oil goes higher or lower.
• 22:06
  Jay D. Hatfield: But was not because we predict a war, but because earnings estimates rose from three 50 when we set our target.
• 22:15
  Jay D. Hatfield: They're now...
• 22:15
  Jay D. Hatfield: You kinda have to look every day, 'cause they're going up.
• 22:18
  Jay D. Hatfield: At four twen- They're at least four 25.
• 22:21
  Jay D. Hatfield: And so the the multiple came down four points, which is about 20%, and earnings estimates went up 20, so it's better to be, lucky than smart.
• 22:34
  Jay D. Hatfield: So that's why the market's so resilient.
• 22:36
  Jay D. Hatfield: And a lot of people are saying, "Oh, this is just late '99, the internet boom."
• 22:42
  Jay D. Hatfield: But I'd say the opposite.
• 22:44
  Jay D. Hatfield: It's actually the opposite of it, 'cause we had really very little earnings coming out of the internet boom, a lot of stupid companies, if people are older.
• 22:52
  Jay D. Hatfield: And then I make one other critical point about earnings, probably the second most important point of the podcast, which is stay in the market, because earnings growth does not come magically.
• 23:06
  Jay D. Hatfield: It comes from companies retaining earnings and investing them prudently, usually about 15%.
• 23:13
  Jay D. Hatfield: The average S&P company retains about 70% of their earnings.
• 23:17
  Jay D. Hatfield: The rest are dividends, so that's good.
• 23:19
  Jay D. Hatfield: And then you get about 10% earnings growth.
• 23:22
  Jay D. Hatfield: So don't let these forecasters pundits get you out of the market 'cause AI is gonna blow up or Trump's president or whatever fearmongering they're doing.
• 23:35
  Jay D. Hatfield: 'Cause the power compounding is huge.
• 23:37
  Jay D. Hatfield: I just calculated the return on my IRA, it's 4,000%, which sounds like I'm bragging, but then I calculated the IRR and said, "Oh, it's 9.66."
• 23:48
  Jay D. Hatfield: So I've slightly underperformed the market.
• 23:50
  Jay D. Hatfield: So all I did I'm just older, so after 40 years, that's what the number is.
• 23:55
  Jay D. Hatfield: And all these Trump accounts, 538 accounts that are getting contributions from Dell and others, those are not gonna be up 4,000, they're gonna be up 10,000% 'cause you're starting when you're zero or super young.
• 24:10
  Jay D. Hatfield: So that's phenomenal for the country.
• 24:11
  Jay D. Hatfield: Should help stave off socialism.
• 24:14
  Jay D. Hatfield: So don't ignore this power compounding and just staying invested in high-quality stocks that are profitable, retaining earnings and investing.
• 24:23
  Ryan: Yeah, Jay, I think that's so important, and the power of compounding, it's the eighth wonder of the world, right?
• 24:29
  Ryan: And it is so important.
• 24:31
  Ryan: You have time on...
• 24:33
  Ryan: Time is also very important, but compounding interest is, stay in the market and let your money work for you, right?
• 24:41
  Ryan: And I
• 24:41
  Jay D. Hatfield: Absolutely.
• 24:42
  Jay D. Hatfield: Most people don't seem to focus on that, that it's not a miracle and the stock market's not gambling
• 24:48
  Ryan: Yeah, exactly.
• 24:49
  Ryan: Exactly.
• 24:50
  Ryan: You warned that when central banks raise rates too aggressively, something eventually breaks.
• 24:57
  Ryan: And what is it?
• 24:58
  Ryan: Central banks typically cause most recessions, if not all recessions.
• 25:03
  Ryan: Where are you seeing the clearest signs of stress today?
• 25:06
  Ryan: You mentioned housing, you mentioned high-yield credit.
• 25:09
  Ryan: Is it corporate finance or is it somewhere else that you're really seeing stress today that the Fed is it?
• 25:19
  Jay D. Hatfield: Well, the Fed has caused all 12 of post-World War II recessions.
• 25:23
  Jay D. Hatfield: A lot of people don't seem to fully acknowledge that or focus on that fact, but it's absolutely clear.
• 25:28
  Jay D. Hatfield: Never had a recession without a tightening cycle.
• 25:32
  Jay D. Hatfield: We actually don't-- like actually auto, you wouldn't think that auto sales would be very weak.
• 25:38
  Jay D. Hatfield: They're holding up quite well.
• 25:40
  Jay D. Hatfield: So we do...
• 25:42
  Jay D. Hatfield: This AI situation is very unique, and only can the US get away with this bad policy.
• 25:48
  Jay D. Hatfield: Where you are seeing breakage is in France.
• 25:53
  Jay D. Hatfield: So there you have a terrible situation because you've got a central bank that is not just in one country, they're in the entire Eurozone, which is pretty diverse.
• 26:05
  Jay D. Hatfield: France is growing at a half percent.
• 26:08
  Jay D. Hatfield: Germany is more like two.
• 26:10
  Jay D. Hatfield: And so the central bank ha-has the same totally made-up, way too low 2% target, and they're a single mandate bank, so they've increased rates two times already.
• 26:24
  Jay D. Hatfield: France just cannot afford that.
• 26:26
  Jay D. Hatfield: They are already growing at a half percent.
• 26:29
  Jay D. Hatfield: It's more if you-- historically, countries grow on a real basis to much higher real growth and much higher nominally, of course, when inflation's 3% to 4%, not 2%.
• 26:43
  Jay D. Hatfield: So France needs to reflate their economy, grow nominal GDP at, 5% to 6%, try to control their debt to GDP, benefit directly from the growth of the money supply, because that helps the central bank.
• 27:00
  Jay D. Hatfield: It helps the treasury.
• 27:01
  Jay D. Hatfield: So they need to Frexit.
• 27:03
  Jay D. Hatfield: It's not like we're predicting they should Frexit.
• 27:06
  Jay D. Hatfield: They need to Frexit.
• 27:07
  Jay D. Hatfield: Those people do not...
• 27:09
  Jay D. Hatfield: They love socialism.
• 27:11
  Jay D. Hatfield: They're running out of other people's money, as Margaret Thatcher said.
• 27:15
  Jay D. Hatfield: So they need to have loose monetary policy to have higher economic growth.
• 27:20
  Jay D. Hatfield: And Europe is an unmitigated disaster.
• 27:23
  Jay D. Hatfield: Part of it is because they don't have the innovation and too much regulation, but part of it is they have this single mandate, hawkish central bank that keeps growth too low, and that might work for Germany, but it
• 27:35
  Jay D. Hatfield: doesn't work for France because they want to have high government spending and great benefits for students and government workers and retirees, and have early retirement ages.
• 27:49
  Jay D. Hatfield: So God bless them.
• 27:50
  Jay D. Hatfield: If you want that, you need to have better economic growth.
• 27:52
  Jay D. Hatfield: You have need to have a looser monetary policy.
• 27:55
  Jay D. Hatfield: So they definitely should Frexit.
• 27:57
  Jay D. Hatfield: Hopefully, that becomes an issue in the election.
• 28:00
  Ryan: Jay, I'm so glad you brought this up because as we're recording this the week, just a few days before, chaos, turmoil really hate to say the word blew up, but blew up in France this past week, and so
• 28:13
  Ryan: very timely there.
• 28:14
  Ryan: So does a Frexit mean then really for US investors?
• 28:20
  Ryan: Is it...
• 28:21
  Ryan: What do you think some of the risks and opportunities are there?
• 28:25
  Ryan: We all remember Brexit.
• 28:28
  Ryan: I, to be honest with you, I don't even know where Brexit is at this point in time.
• 28:32
  Ryan: What happened there?
• 28:33
  Ryan: There's so much chaos there.
• 28:35
  Ryan: But what would this mean for US-based investors?
• 28:40
  Jay D. Hatfield: Thankfully not a lot.
• 28:42
  Jay D. Hatfield: We don't really rely on Europe for growth.
• 28:44
  Jay D. Hatfield: We're mostly importing from them.
• 28:46
  Jay D. Hatfield: If you remember Brexit, I happened to be in Hawaii, and And I had some hedges on, so I had to wake up at 3:00 in the morning and take them off.
• 28:55
  Jay D. Hatfield: Because it just really didn't matter that much, so the market kind of cracked.
• 28:59
  Jay D. Hatfield: Wasn't that big a deal a couple hundred.
• 29:01
  Jay D. Hatfield: One, did-- Forgot exactly, but 100 to 200 S&P points.
• 29:04
  Jay D. Hatfield: Those mattered more.
• 29:05
  Jay D. Hatfield: The S&P was down.
• 29:07
  Jay D. Hatfield: But so it was just a blip.
• 29:09
  Jay D. Hatfield: Everybody panicked and then everything went back to normal.
• 29:12
  Jay D. Hatfield: And I think it would be fantastic for Europe in the long run to get, reflate their economies.
• 29:20
  Jay D. Hatfield: Hopefully other countries for, exit the, the Eurozone because it's run by this draconian, irrational central bank just like ours.
• 29:29
  Jay D. Hatfield: We can't, FedEx exit, exit our Fed.
• 29:34
  Jay D. Hatfield: So we don't have-- 'cause, we don't have the Eurozone, But believe me, if we could, I would vote for that.
• 29:39
  Jay D. Hatfield: But they, all these countries can opt out of it, so they should.
• 29:43
  Jay D. Hatfield: It's just a horrible system.
• 29:45
  Jay D. Hatfield: Way too tight.
• 29:46
  Jay D. Hatfield: Not appropriate for a lot of the countries.
• 29:49
  Jay D. Hatfield: And so I think it would be very-- I look-- view it as upside.
• 29:51
  Jay D. Hatfield: It wouldn't affect the US 'cause we're a juggernaut.
• 29:53
  Jay D. Hatfield: If you ever travel in Europe, you'll quickly learn that we drive the whole world.
• 29:59
  Jay D. Hatfield: You think you can trade really badly.
• 30:01
  Jay D. Hatfield: You wake up in the morning on European time, you're like, "Oh my gosh, all the, futures are down in all the markets.
• 30:07
  Jay D. Hatfield: It's terrible."
• 30:09
  Jay D. Hatfield: And then bang, the US market starts to trade, our futures rally, and then the, all the European markets rally.
• 30:17
  Jay D. Hatfield: So it's really just the US because we have all the technology, we have all the universities.
• 30:22
  Jay D. Hatfield: We have really well endowed, most of them were in SpaceX, endowed universities with more money than most governments.
• 30:30
  Jay D. Hatfield: We have retirement funds.
• 30:31
  Jay D. Hatfield: They don't usually save for retirement.
• 30:34
  Jay D. Hatfield: So the rest of the world's just a, a disaster.
• 30:37
  Jay D. Hatfield: And so if...
• 30:39
  Jay D. Hatfield: And it'd be better if France got out of the...
• 30:41
  Jay D. Hatfield: See, my-- It's actually hurting us a little bit 'cause rates were rallying earlier last night, and then when France opened, started, the Frexit fears started to percolate.
• 30:52
  Jay D. Hatfield: So it's elevating our interest rates a little bit.
• 30:54
  Jay D. Hatfield: So it's a little bit of an overhang now.
• 30:56
  Jay D. Hatfield: But if we just got it over with, they take back control of their monetary policy, grow faster, grow out of their debt.
• 31:05
  Jay D. Hatfield: In the long run, everybody would be better off.
• 31:08
  Ryan: Yeah.
• 31:09
  Ryan: So thank you for providing such great insight there because it is very important and very topical in what's going on.
• 31:15
  Ryan: Real quickly, let's go back to housing.
• 31:18
  Ryan: It's so important because it, for most of us, it's our biggest asset that we own is our house.
• 31:25
  Ryan: expect a US housing downturn to deepen in 2027.
• 31:30
  Ryan: What is driving that forecasting?
• 31:32
  Ryan: Could just basically lower mortgage rates meaningfully change that trajectory that you're forecasting?
• 31:39
  Jay D. Hatfield: 100%.
• 31:40
  Jay D. Hatfield: Everyone tries to come up with too many reasons for, markets to change.
• 31:47
  Jay D. Hatfield: Like we were talking about with interest rates, right?
• 31:49
  Jay D. Hatfield: Oh, interest rates are high.
• 31:49
  Jay D. Hatfield: It's because of hyperscaler spending and the federal budget deficit.
• 31:53
  Jay D. Hatfield: But none of that changed since the war started.
• 31:57
  Jay D. Hatfield: We were at 4% two weeks before the war.
• 32:00
  Jay D. Hatfield: The war happened, oil price shot up, Fed got hawkish, hyperscaler spending was the same.
• 32:06
  Jay D. Hatfield: So same thing with housing, you can come up with 50 reasons why there's no immigrants or whatever, but it's all about rates.
• 32:12
  Jay D. Hatfield: Rates 100% control it.
• 32:14
  Jay D. Hatfield: And when I say we're already in a recession, we're just using a simple definition.
• 32:19
  Jay D. Hatfield: We don't like to come up with things that aren't data-driven.
• 32:22
  Jay D. Hatfield: Investment in housing year over year is negative, and the best thing to look at...
• 32:27
  Jay D. Hatfield: We have a recession rule.
• 32:30
  Jay D. Hatfield: There's something called the Sahm Rule that says that when unemployment rises rapidly, you have a recession.
• 32:36
  Jay D. Hatfield: We have something called the Hatfield Rule.
• 32:39
  Jay D. Hatfield: You can make up your own rule, by the way.
• 32:40
  Jay D. Hatfield: The US is a free country.
• 32:42
  Jay D. Hatfield: So the Hatfield Rule is when you go below 1.1 million housing starts.
• 32:46
  Jay D. Hatfield: If you look historically, 11 out of 12 post-World War II recessions were started by housing recessions.
• 32:54
  Jay D. Hatfield: Wasn't true in 2001.
• 32:56
  Jay D. Hatfield: That was a tech bust.
• 32:59
  Jay D. Hatfield: But I bring that up because now we have the reverse.
• 33:02
  Jay D. Hatfield: We're at about 1.3 million starts, so very low.
• 33:07
  Jay D. Hatfield: Likely to drop below 1.1 because those 1.3 were predicated on mortgage rates that are about 75 basis points lower than they are now, although they've come off their highs, to be fair.
• 33:20
  Jay D. Hatfield: The good news and why we probably won't have a recession, definitely not a deep recession, is the housing market's become less cyclical, which makes the US economy less cyclical.
• 33:31
  Jay D. Hatfield: So when I was a kid, I remember everybody was running around, Sam Scobaria, and like speculating on housing, and I was thinking...
• 33:38
  Jay D. Hatfield: Even back then, I didn't really fully understand economics.
• 33:41
  Jay D. Hatfield: It's like, "Oh, this probably can't last."
• 33:43
  Jay D. Hatfield: It didn't.
• 33:44
  Jay D. Hatfield: But we built 2.5 million homes in the late '70s.
• 33:49
  Jay D. Hatfield: We were also up to 2.5 million in the late 2000s, right before the great financial crisis.
• 33:57
  Jay D. Hatfield: And That used to be the peak.
• 34:01
  Jay D. Hatfield: And keep in mind, of course, the, the population's way higher.
• 34:04
  Jay D. Hatfield: In this cycle, we never got over 1.7 million.
• 34:08
  Jay D. Hatfield: And you might say I don't care."
• 34:09
  Jay D. Hatfield: You should care because that drop from 1.5 to 1.3 is relatively small.
• 34:16
  Jay D. Hatfield: And my father used to build homes, and of course, if you're not building homes, you don't keep any of your employees.
• 34:22
  Jay D. Hatfield: You fire all the construction workers.
• 34:24
  Jay D. Hatfield: So it's extremely cyclical for employment.
• 34:27
  Jay D. Hatfield: So if we don't get to 2.5 million, and then we go to 1.3, 1.1, it's less of a shock to the economy.
• 34:36
  Jay D. Hatfield: So that's why even though housing will be in a recession, we think we'll have slow growth.
• 34:43
  Jay D. Hatfield: Even the Fed will figure it out despite being incompetent, because we'll probably have a very sluggish employment market.
• 34:49
  Jay D. Hatfield: It's already pretty sluggish.
• 34:50
  Jay D. Hatfield: 50,000 jobs a month is not very robust.
• 34:55
  Jay D. Hatfield: So we'll show up.
• 34:57
  Jay D. Hatfield: So we do think that the time is our friend.
• 35:00
  Jay D. Hatfield: Fed will probably increase in December because there's not that much time to see pretty moderate core inflation.
• 35:07
  Jay D. Hatfield: Probably won't get a break in oil yet.
• 35:10
  Jay D. Hatfield: But then when we get into the following year, housing will continue to weaken, labor market will continue to weaken.
• 35:16
  Jay D. Hatfield: Hopefully, oil comes down.
• 35:18
  Jay D. Hatfield: So we think time is our friend.
• 35:20
  Jay D. Hatfield: That's why we believe the Fed when they say just one more increase.
• 35:25
  Jay D. Hatfield: But the data is what we're basing our call on, not so much a rational Fed
• 35:31
  Ryan: Yeah.
• 35:31
  Ryan: Data is so important now.
• 35:32
  Ryan: I love that you guys are data-driven in everything you do.
• 35:35
  Ryan: It's fantastic.
• 35:36
  Ryan: And regarding a signal, a recession signal, as you were talking, you brought that up.
• 35:41
  Ryan: Maybe I need to create a signal, a recession signal based on the amount of traffic coming up to Tahoe or the lift lines at the, the ski resorts.
• 35:50
  Ryan: They shrink, all right, we're gonna be in a recession, or the traffic is reduced.
• 35:55
  Ryan: There we go
• 35:56
  Jay D. Hatfield: Well, it does take that actually is not a bad indicator 'cause I remember, again, in the early 2000s, the that was a solely a tech-driven recession, and believe me, in my hometown in Palo Alto and San Francisco, you
• 36:11
  Jay D. Hatfield: could hear a pin drop on 101.
• 36:13
  Jay D. Hatfield: Like it was-- there was no traffic whatsoever.
• 36:16
  Jay D. Hatfield: So you can use that to some degree, and particularly in that area, 'cause employment is what drives consumption.
• 36:23
  Jay D. Hatfield: In other words, most of the time, consumers consume.
• 36:27
  Jay D. Hatfield: Low-income consumers have to survive.
• 36:30
  Jay D. Hatfield: Higher income consu-consumers, are gonna go to Tahoe, are gonna do luxury vacations.
• 36:36
  Jay D. Hatfield: The only thing that will really cause a consumer to slow down, they don't even go negative on average, is if they're unemployed.
• 36:43
  Jay D. Hatfield: So then you really do cut back.
• 36:45
  Jay D. Hatfield: But even then, if you look, the average recession, the change in consumption is just zero.
• 36:51
  Jay D. Hatfield: So it's all driven by investment.
• 36:54
  Jay D. Hatfield: So that's why you have to be laser-focused on tech spending.
• 36:58
  Jay D. Hatfield: Now, I don't think that this blip up and down in the high-yield market is gonna interrupt tech spending.
• 37:05
  Jay D. Hatfield: A lot of those companies are investment grade.
• 37:08
  Jay D. Hatfield: There's a lot, like CoreWeave, for instance, has investment grade counterparties.
• 37:13
  Jay D. Hatfield: They can do project financing.
• 37:15
  Jay D. Hatfield: So people probably got too negative about that.
• 37:17
  Jay D. Hatfield: But the Fed should not ignore it.
• 37:20
  Jay D. Hatfield: They are causing difficulties in the high-yield financing market, and that at the margin does slow down investment, slows down economic growth.
• 37:29
  Jay D. Hatfield: So what goes around comes around.
• 37:31
  Jay D. Hatfield: They can't just raise rates and have no implication to the economy
• 37:35
  Ryan: Yeah, exactly.
• 37:36
  Ryan: And bringing back memories here about the .com bubble.
• 37:39
  Ryan: I was in Seattle at that time.
• 37:42
  Ryan: Speak of just eerie, not much going on in downtown Seattle during that time.
• 37:47
  Ryan: It was a interesting time, Jay.
• 37:50
  Jay D. Hatfield: Yeah, West Coast got hammered pretty hard,
• 37:53
  Ryan: Yes
• 37:56
  Jay D. Hatfield: It was just software engineers and some laptops, so it wasn't a big disruption, and
• 38:02
  Ryan: And,
• 38:02
  Jay D. Hatfield: these are all pretty well-educated people, can figure out other jobs, do startups, and then you get Google and all these other companies.
• 38:09
  Jay D. Hatfield: So Silicon Valley and the West Coast is a very dynamic economy and can come back from disruptions
• 38:16
  Ryan: Yep, you're exactly right.
• 38:17
  Ryan: So let's go back real quickly to your equity call of 8,000 the 8,000 year-end target for S&P 500.
• 38:25
  Ryan: interesting because during this conversation you have concerns about rates, parts of the economy, housing, credit, but you remain bullish on equities based on your call.
• 38:38
  Ryan: How do you reconcile that optimism on equities with tighter financial conditions, and what assumptions have to hold for that target to be reached?
• 38:48
  Jay D. Hatfield: That's a great question because another thing I don't like about a lot of forecasters is they say rates don't matter unless they go to 550."
• 38:56
  Jay D. Hatfield: Like they have some threshold number beyond which it's unmitigated disaster, which is not the, the way that good models work.
• 39:06
  Jay D. Hatfield: So we use discounted cash flow, which by the way you should use in all of your investing.
• 39:11
  Jay D. Hatfield: Whether you buy a house or you're investing in a startup DCF.
• 39:16
  Jay D. Hatfield: It's what we did w- when I was an investment banker at Morgan Stanley.
• 39:19
  Jay D. Hatfield: And so if you do a DCF to come up with your multiple, 'cause multiples and discounted cash flow are the same thing, you'll see every 25 basis points increase in a 10 year reduces the multiple by one time
• 39:33
  Jay D. Hatfield: So the reason that we're still bullish is, as I was implying before, simply because estimates have gone up so much that our four multiple contraction in the multiple still gets us to the same level.
• 39:52
  Jay D. Hatfield: If-- So if not to see if I can do the math in my head, but...
• 39:57
  Jay D. Hatfield: they basically-- So we've had s-seventy-five dollar increase in estimates times twenty, so that's seven or eight hundred S&P points.
• 40:09
  Jay D. Hatfield: So they-- That's why we haven't lowered our target to seventy-two hundred or seven thousand, because the estimates keep going up and, market's not trading great.
• 40:22
  Jay D. Hatfield: We're about to get into the heart of earnings, so we could easily get a two hundred point rally and get to our eight thousand target in a hurry or grind higher in December.
• 40:31
  Jay D. Hatfield: But let's say we down, we stall out here.
• 40:33
  Jay D. Hatfield: We're just storing up the P&L for next year because the estimates are going up another fourteen percent.
• 40:40
  Jay D. Hatfield: I think at a twenty multiple, we could easily get well above nine thousand.
• 40:46
  Jay D. Hatfield: So this earnings juggernaut's not likely to stop because of AI investment, because of productivity, because they just-- we normally have ten percent earnings growth anyway.
• 40:57
  Jay D. Hatfield: We're just getting like thirteen, fourteen.
• 41:00
  Jay D. Hatfield: So it wouldn't be, so like I actually look at it sort of the reverse.
• 41:05
  Jay D. Hatfield: The economic backdrop is pretty horrible.
• 41:09
  Jay D. Hatfield: Hundred dollar oil, super high rates.
• 41:12
  Jay D. Hatfield: Like we have the highest rates since we've had since two thousand, since we're talking about two thousand.
• 41:16
  Jay D. Hatfield: Very hawkish Fed.
• 41:17
  Jay D. Hatfield: So normally I'd be terrible.
• 41:19
  Jay D. Hatfield: But if we just get oil to break, somehow get those straight open, get rates down to more normal, four to four and a half, we could be at ninety-five hundred next year.
• 41:31
  Jay D. Hatfield: So we're in a strange situation where we've withstood the worst, still, having a pretty good year and then setting up for a good year next year.
• 41:41
  Jay D. Hatfield: But maybe even better if we get some relief in the Middle East and oil and then from the Fed.
• 41:49
  Ryan: Yeah, you're exactly right.
• 41:50
  Ryan: And it goes back to what you just said at the beginning about markets are resilient, that shows right there.
• 41:55
  Ryan: And like you said it's, though opening up the strait and all the geopolitical issues there it sounds easier than what it is, I think.
• 42:05
  Ryan: But it's not gonna take a whole lot to get a boost to bring oil down, get a boost there for equities to rip higher than what we've already seen.
• 42:15
  Jay D. Hatfield: And I would say time is our friend because this adjustment process will continue.
• 42:22
  Jay D. Hatfield: There's another pipeline coming online next year going to the west out of the Strait.
• 42:30
  Jay D. Hatfield: There could be some resolution with the Houthis.
• 42:34
  Jay D. Hatfield: We'll see if we strike again.
• 42:37
  Jay D. Hatfield: The Iranians have almost 100% inflation, so they're testing out Milton Friedman's theory, and it's working pretty well 'cause, they're printing money to pay their employees, government employees.
• 42:51
  Jay D. Hatfield: It's 'cause they have no money 'cause they're not getting any oil imports.
• 42:54
  Jay D. Hatfield: So I've kinda given up predicting when the strait reopens, but you would think at some point there would be relief either through arbitrage around the strait, some re- more incremental reopening.
• 43:08
  Jay D. Hatfield: It's in everyone's best interest to open it up, so that's w- more upside than downside.
• 43:16
  Jay D. Hatfield: W- we're fine.
• 43:17
  Jay D. Hatfield: We've kinda proven already we're okay.
• 43:20
  Jay D. Hatfield: It's not great.
• 43:20
  Jay D. Hatfield: I'm actually looking at my screen right now.
• 43:22
  Jay D. Hatfield: It's mostly red, because tech stocks are what's doing, keeping the market up today.
• 43:26
  Jay D. Hatfield: But, so it's kinda been adult swim, but still fine if you're just a broad-based investor to be in the market and deal with the rotation.
• 43:37
  Jay D. Hatfield: So we're pretty bullish about the market this year, although 8,000's not that big a deal from 7,800.
• 43:46
  Jay D. Hatfield: But next year in particular, we get time to resolve this Middle East war, and maybe the war in Ukraine too
• 43:55
  Ryan: You talk, one of my favorite things about your notes they sent over is the dogs of the DAC.
• 44:01
  Ryan: I love it.
• 44:02
  Ryan: Companies whose valuations may not be supported by their growth.
• 44:06
  Ryan: do you use PEG or price to earnings to...
• 44:10
  Ryan: Or your price earnings to growth ratios and other measures to distinguish reasonably valued growth companies from expensive companies benefiting from index momentum?
• 44:22
  Ryan: We see it all over the place, especially like you've talked about in the tech space.
• 44:27
  Ryan: How do you separate those two?
• 44:29
  Jay D. Hatfield: Yeah, they're critical, top five points.
• 44:32
  Jay D. Hatfield: The first thing that's interesting is that the dogs of the DAC, it seems almost like a secret, and it's almost embarrassing to admit, when we really started preparing to launch QVAL as our ETF that uses the Nasdaq, that
• 44:47
  Jay D. Hatfield: we sort- sorted by peg ratio, so P to growth, which by the way, is a short-handed discounted cash flow.
• 44:55
  Jay D. Hatfield: When you're an investment banker or just an investor, you forecast for five years and then use the perpetual growth formula, one over R minus G, to estimate the terminal value.
• 45:08
  Jay D. Hatfield: That's just the PE ratio.
• 45:10
  Jay D. Hatfield: The, the reverse of that's a PE ratio.
• 45:11
  Jay D. Hatfield: So when you use a PE ratio here and you compare it to its growth, you're really approximating a DCF.
• 45:21
  Jay D. Hatfield: So it's a phenomenal shorthand, and then of course, other investors use it.
• 45:25
  Jay D. Hatfield: But what's interesting about the Nasdaq is that advertising says, "Oh, these are the best companies, the best growth companies in the United States."
• 45:34
  Jay D. Hatfield: It's-- they're not.
• 45:35
  Jay D. Hatfield: They're just the largest ones listed on Nasdaq.
• 45:37
  Jay D. Hatfield: So you get Kraft Heinz, you get Mondelez, you get Comcast and Charter, you get an overvalued Walmart.
• 45:46
  Jay D. Hatfield: It came down 30 points, so now it's closer to the fair value in our models.
• 45:51
  Jay D. Hatfield: And then you get a bunch of overvalued companies.
• 45:53
  Jay D. Hatfield: So we curate down to about 55 companies in QVAL, and then we write cover calls, but only on individual stocks, which is great for two reasons.
• 46:03
  Jay D. Hatfield: One, get higher volatilities, 'cause individual stocks have higher volatilities than the index, and you can make profits and add alpha by writing those calls.
• 46:15
  Jay D. Hatfield: So if you're gonna write your own calls, do it on individual stocks, not the index.
• 46:20
  Jay D. Hatfield: 'Cause the index is running, what do you do?
• 46:23
  Jay D. Hatfield: Just buy it all back and take a loss?
• 46:25
  Jay D. Hatfield: No, but if...
• 46:26
  Jay D. Hatfield: That's terrible.
• 46:26
  Jay D. Hatfield: We like Marvell.
• 46:28
  Jay D. Hatfield: If you write a Marvell 350 call and you bought it today at 240, and you can write those calls 'cause their vols are huge, it's a high-class problem.
• 46:36
  Jay D. Hatfield: If it goes to 340 and say buy back the call," that's not fun, but maybe I'll let it get called away and see if it comes back down.
• 46:43
  Jay D. Hatfield: You can manage that position because it's the under-- you're looking at the underlying stock, not the whole index.
• 46:49
  Jay D. Hatfield: And indices rise over time, so if you write index calls, you're just gonna lose money.
• 46:53
  Jay D. Hatfield: But peg, to stay out of trouble, don't overpay for stocks.
• 46:59
  Jay D. Hatfield: Like Tesla at 430 was a PE peg ratio of six.
• 47:05
  Jay D. Hatfield: And by the way, Tesla's being held up because everybody thinks SpaceX is gonna buy it.
• 47:08
  Jay D. Hatfield: But, you can really blow up If you overpay for companies, if you buy companies trading at reasonable multiples based on their growth rate that are profitable, so you don't need to necessarily be in the hottest quantum computing stock,
• 47:25
  Jay D. Hatfield: then you're gonna benefit from that compounding of retained earnings.
• 47:30
  Jay D. Hatfield: And in the long run, even if you don't buy it perfectly, you're gonna do great over 10, 20, 30 years.
• 47:37
  Jay D. Hatfield: And so-- But stay out of trouble, 'cause really that's kinda 99% of investing.
• 47:43
  Jay D. Hatfield: Like I said, you would've thought I did make some brilliant moves, but I had some fixed income, some more conservative things.
• 47:49
  Jay D. Hatfield: At the end of the day, it was like the gambler, he broke even.
• 47:52
  Jay D. Hatfield: But also avoided blowing up on some, stupid startup or over...
• 47:57
  Jay D. Hatfield: I didn't buy a bunch of dotcom companies in 2001 trading at, a thousand times earnings or more.
• 48:05
  Jay D. Hatfield: So just stay out of trouble, get your 10 to 15% compounded, and you're gonna be super comfortable in the long run
• 48:14
  Ryan: Yeah, Jay, that's fanta- great way of, kinda tying this conversation up.
• 48:20
  Ryan: It's been a fantastic conversation.
• 48:22
  Ryan: And like you said, just y- jump all in on meme stocks or the fear of missing out.
• 48:29
  Ryan: Focus on, high quality companies, earnings, because like you said, going back to the beginning, compounding is very important, and you can benefit greatly from compounding over time.
• 48:43
  Ryan: Fantastic way of ending this amazing conversation.
• 48:46
  Ryan: You brought such great insight.
• 48:48
  Ryan: It's always an honor to have you on.
• 48:49
  Ryan: I love our conversations, Jay.
• 48:51
  Ryan: They're great.
• 48:51
  Ryan: Where can our audience get more information about Infrastructure Capital Advisors?
• 48:58
  Jay D. Hatfield: Infracapfunds.com with an S, and you can access all the data about our ETFs, but also I'm super proud of our proprietary macro data.
• 49:10
  Jay D. Hatfield: And I would do your own macro research.
• 49:12
  Jay D. Hatfield: Don't listen to the pundits.
• 49:14
  Jay D. Hatfield: If you do listen to them, ask for their data, not their f- their opinions.
• 49:19
  Jay D. Hatfield: And because that's critical to constructing a good portfolio is having a good handle on what's going on with the macro
• 49:25
  Ryan: You're exactly right.
• 49:27
  Ryan: Awesome.
• 49:27
  Ryan: Thank you so much, Jay.
• 49:29
  Ryan: And thank you everyone for listening to this episode of Views from 6230.
• 49:34
  Ryan: You can watch all of our other episodes on the Views from 6230 YouTube channel and Spotify.
• 49:40
  Ryan: Please be sure to like and subscribe to those channels and give us a follow on LinkedIn.
• 49:44
  Ryan: Thank you very much and have a great rest of your week
• 49:48
  Jay D. Hatfield: Thanks, Ryan