[00:04] joining us. And today, we're talking to Jan Salaj, who is Reflexivity CEO and co-founder, and Jay Hatfield, who's the CEO and CIO of Infrastructure Capital
[00:17] joining us, and welcome to the conversation. There's so much to talk about, but we're going to start right away with what's happening to the price of oil now that we've got this at least a 60-day ceasefire deal. We've seen oil
[00:31] come down 27% in the last 2 weeks, trading now at about 70 bucks. So, talk to me in terms of, you know, where you see the next opportunity with oil coming situation? What do you see as happening in the markets? Talk to me a little bit.
[00:45] >> Well, for us, I think the probably the purest expression of this oil premium coming out of the market have been airlines. That's been probably the main >> Right. >> So, that's been, I would say, what we've
[00:58] emphasized the longest. Um I think what you're going to see second will probably be Currently, the way markets are trading the Fed is primarily Right, you can see that the leadership is very reluctant to really hike.
[01:13] uncomfortable position. We've gone from in March two cuts being priced in to now of the banks, I think it's Bank of America, has got two hikes priced in. >> Yes. >> So, I think that's going to be another
[01:28] follow. Obviously, we got the dot plot that was pretty clear about there being >> Right. >> Um with the Fed chair notably abstaining >> Right. >> view on that and being very careful
[01:42] during >> But, I think also, if you if you think back in history, a Fed chair when it they're first appointed almost always >> Right. >> So, you try to just not make any obvious
[01:55] challenged because I don't see how he's going to I don't see how he can justify cutting rates in this environment. Someone in the White House in DC is not that's a whole 'nother conversation. [laughter]
[02:10] oil for the last $15 for a specific reason. We expect OPEC to >> Yeah. >> which is about 32 million barrels. We'll have a 4 million barrel surplus, and that'll quickly run down the surplus.
[02:25] below 60. >> Really? >> And for that reason, we think that the chances of the Fed >> Right. >> And we're going to have two huge
[02:39] negative headline prints in CPI over the next 2 months, over. >> And we're also bullish about core. Airline fares is in core. There's other bleed through to core, and
[02:52] off, and shelter eventually, even if the Fed doesn't which is fraudulent. >> Right. >> So, it's like we were talking about the markets here 6 months ago, which nobody
[03:08] >> And so, even if they don't fix that, it's going to roll down. So, we have three cuts in our forecast. We're optimistic about rates, and we have a target on the S&P, which does require lower rates.
[03:21] >> Really? [clears throat] >> Mhm. would require a couple of rate cuts. >> Mhm. >> Unless you see this sudden CPI and PPI
[03:34] >> oil >> Well, that's our forecast. We're not >> Right. >> He's going to lose that vote. He's 9-3 >> doves [clears throat] versus um hawks. So, we're not That's
[03:47] >> because he We were surprised Trump nominated him. He's obviously a hawk, >> He's made it very clear he is. >> Yeah, right. He's very politically >> Right. >> But that we believe the data, we're
[04:02] forecasting the data will justify two cuts. Not this year, but over the next >> Okay, so 12 So within the next 12 months, not in the next six. >> Yeah. Look, I just want to say one thing cuz you brought about airline fares,
[04:15] [clears throat] Is that I just I was on vacation, I had First of all, the plane was completely sold out. I got I was in I was in France. Americans everywhere. People are traveling. Everywhere you went, it was
[04:30] crowded, there was tourists, plenty of Americans everywhere I went. Um and so thought there would have been maybe a little bit of a a little bit of a pullback, but I didn't see any pullback at all in terms of, you know, in terms
[04:42] going abroad. that currently or the risk premium, if you geopolitical uncertainty, people are more reluctant to travel. If that comes
[04:55] >> Right. Right, that comes off. But that just came off, right? I mean, these buy them three, four months ago. >> Yeah, so I'm saying it's going to get And it's And if the price of oil comes down and ticket prices actually come
[05:07] that'll only fuel that that whole conversation. Um All right, so let's talk about Warsh's reforming the 2% rule versus these rate cut headwinds, right? New new Fed chair
[05:20] Kevin Warsh just held rates steady at last week's meeting at 3 and 1/2 375, which I think is, by the way, kind of well within the normal range, right? Um but he's stripping out the forward guidance, which I actually think is kind
[05:32] complete rethink of how the Fed is communicating to the markets. Um and I came into this business 1980, Greenspan was the Fed chair, and Greenspan didn't say anything. He came out, here's what we decided, he went back in. He didn't
[05:47] Xanax, he didn't say to me ask me any question you want, come lie down on the couch, none of that. And if that's what we're going back to, I think it's less chaotic for the markets.
[06:01] >> Absolutely. The only issue we have with it is the dot plot is a fantastic >> So, if they think there's increases, there's almost certainly going to be >> But, [clears throat] it is ridiculous cuz you have like 19 now, 18
[06:16] >> Right. >> with a better economic model. >> Don't use Keynesian models, they don't work. Look at the money supply, look at oil prices, forecast inflation. And then it's okay, like it would be
[06:30] reasonable to cut now after the oil comes through because PC is absolutely forecast. It's already below two if you correctly calculate it. cuz I tomorrow is expected to be hotter than last month, but then
[06:46] going to be even hotter than the expectation tomorrow on both top line in the core. And so, I wonder if that means people are going to sit back and say, "Okay, let's wait a minute because oil now is down 27% in the last 2 weeks."
[07:00] So, the CPI next month and the PPI next month and next month's PC should really reflect that cuz this one it's too soon for it to be reflected in this report. >> It should be relatively irrelevant. You can calculate
[07:14] PC from CPI and PPI. >> So, [clears throat] any there might be some rounding difference where it's 0.4, but it's really 0.35, but it should be a muted reaction because it's irrelevant
[07:27] given the 30% drop in oil prices. >> Well, you know, it might be a muted the problem is you have all these algorithms, all these smart logic the headlines and they look for positive or negative words and then they react as
[07:41] a result, right? Um and that's the part you can't control. being in line is very high because it's easy to calculate. >> Well, I want to go back to a point you were making before, which is that okay,
[07:54] are we going back to the Greenspan era where we don't telegraph so many things environment like this where there's uncertainty over energy prices, right? Because also, yes, currently we seem like we have a deal.
[08:06] We've also been dealing with a situation administration that could renege on that >> Right. >> So, the Strait of Hormuz is open today, >> Right. >> The
[08:20] >> At the moment it's open. Seems like it. >> And there's 19 million barrels of oil >> Right. So, then you have the waiver, exactly. Now, the other thing to then think about also is that I think there is genuine uncertainty in terms of over
[08:33] the medium term what the impact from AI is going to be. Not just as it affects jobs and productivity, but also there's a huge capex cycle that's currently going on that is actually powering the economy. That is actual money going in.
[08:46] >> So, being I the issue that I think the Fed has faced before with forward guidance is that they felt locked into it. Yeah. It's like if I don't do what I guided, right? I was wrong.
[08:59] >> And so, removing that I think is giving them that degree of flexibility that you them that degree of flexibility that you had in the '90s that they probably >> And that's exactly what Greenspan did. Greenspan never guided forward, right?
[09:13] out." >> And they didn't have this completely >> Right. >> He would cut rates over the weekend if the stock market was weak. And that was a real Fed chair. He did a fantastic
[09:27] job. We need to go back to that where the Fed uses judgment, they look at the Fed uses judgment, they look at markets. This Fed would never Like if them market crashed 30%, They wouldn't do anything. They would say, "Oh, well,
[09:39] inflation's above target." They have no ability to forecast. They don't read the wasn't a Fed. >> The JJ Fed or the Kevin Warsh Fed? >> Well, I don't I think Kevin Warsh is stuck with the old Fed basically because
[09:52] there's nine members that are the old school Keynesians. Right. And they believe in in the inflation expectations being a critical driver of inflation. We totally doubt. So, when you're stuck with that inflate the expectations
[10:06] theory, then you have no flexibility. Oh, we're going to lose credibility. We can't cut rates even though the market's down 30%. And they just do nothing and just look at the market and sometimes the the economy melt down like they did
[10:19] in the end of 2018 when they were raised rates way too many times. So, we need a more market responsive, less rules-based. Unfortunately, Greenspan kind of ushered in this rules-based and it's been a
[10:33] disaster ever since we had 2% target. >> Yeah. Well, then I think the the great Bernanke come out and then everything was that's this whole generation of investors and people in this business out there that have grown up with that
[10:45] hand-holding, right? Where the Fed came out, sit down, let's talk about it, ask me all these questions, let me give you I think and I think I understand during the crisis maybe that was okay, but then they just kept it going, which I think
[10:58] at times. Right? All right, so let's talk about which I think is which I think is great. I'd love to see S&P 9,000. Um but we've got this eight this AI cliff, right? Market valuations are being entirely
[11:14] Uh uh but the sustainability of that growth is kind of where there's some question, right? Are we ahead of ourselves? Is the trade too stretched? Look at how quick the market, you know, sold off yesterday
[11:28] South Korea and oh, that market's up 95% year to date, which is unsustainable anyway. I'm surprised the market only >> Mhm. >> But, talk to me about how we get the S&P
[11:41] 9000 when we have this this this mismatch market. >> Well, this is not a target like the internet targets in the end of the '90s. So, it's not just AOL's 3000 or 5000 or
[11:57] So, simply we start the year 23 times uh 27 earnings. That's the year-end target for this year. aggressive though, isn't >> bit. 23 requires low rates.
[12:10] >> But, I would point out a lot of people use 18 as a historical multiple. That's before the corporate tax cut. So, the corporate tax We dropped it 35% So, the corporate tax We dropped it 35% to 35 to 21. Huge drop. That raises the
[12:24] >> So, >> So, 23 is only one point above normal. >> you think is is really the kind of >> sustainable sustainable rate. And that's >> Okay. That's interesting. I didn't realize that.
[12:37] >> And then the move from eight to nine is simply marking to market the 27 earned consensus S&P earnings estimates. So, it's simply just using our same methodology,
[12:49] not some bullish move. You just have to reflect it. And by the way, if it comes down, we would lower it. But, it's been moving up almost every day. Yeah, you Bloomberg terminal, you can look that up.
[13:01] more to the upside cuz those earnings are going to continue to rise when we report earnings in July. >> So, so S&P 9000 is almost a 20% climb >> Right. >> Well, think about what we've gone
[13:16] >> Right. >> We're not even off significantly. >> Yep. >> So, I would argue okay we're going to have a major war oil's going to go over 100
[13:31] oil's going to go over 100 and we're in June where is the S&P? Um now 6,500 7,000 something like that. So get the mar- if you're a market whisperer you'd say wow if we're 7,400 with all this brain damage just imagine
[13:45] when we get into July we normally have a power rally should get up to 8,000. going to have kind of that or maybe not maybe you don't think the midterm elections is going to be an issue for the market.
[13:58] the Democrats are going to wipe out the Republicans but >> Uh if the Senate's going to be kind of 50 like literally 50/50 right 50 maybe 51 most likely but [clears throat] so
[14:12] What we really don't want is a sweep of the Democratic socialists and an Corporate tax rates drive global economic growth and stock prices that's
[14:24] issue. So I don't know why the market would sell off now just because the Senate maybe goes Democratic. Senate if it remains split
[14:38] >> Mhm. >> But if they take both houses still veto anything that comes to his desk but um in the market. >> I think so long as and I think this is
[14:53] what Trey was saying before as well as so long as you don't have the Fed beginning a hiking cycle I don't think the market just collapses on its own weight. It just doesn't seem to we've run at Preff Equity we've run a
[15:07] ton of analysis on this and you always find that it's withdrawal of liquidity talk about valuations and I think valuations are important cuz it tells you how much the market can go up and down but it tells you how far you are
[15:21] from some kind of norm. But ultimately, directionally, it's definitely impacted or going out. If we haven't reached a point where they start withdrawing liquidity, and this is I think the critical moment now where
[15:34] they're making that decision, energy plays into it. You fall back exactly on the point that Jay had made, which is if you told me at the go through all of this period, where the S&P would be, it's done better than
[15:47] >> Yeah. No, definitely. I I'm I'm I'm pleased with what the market everything we've thrown at it. Right. said. If you want to call the market
[16:00] >> Yeah. >> M0 is what we recommend. The Fed, then as [clears throat] long as you get the Fed cycle right, you'll get every cycle right. So, we got bullish when the Fed intervened in 20 after the pandemic
[16:16] >> We got bearish when they overheated the economy. Money supply is growing 70, they're going to tighten. And then we got bullish after this the >> Well, so do you think that Kevin Warsh is going to shrink the balance sheet,
[16:31] mean, he certainly wants to. >> That's an issue almost no one >> Right. >> First of all, the balance sheet is large only because the Fed's paying interest on reserves.
[16:44] >> They used to [clears throat] be 8 billion of reserves, it is now 3.2 billion. So, the balance sheet is fine given that they haven't done anything crazy. They did during the pandemic, they haven't
[16:56] done anything crazy, they shrank it back down. So, if Warsh wants to shrink it, Radically increase interest rates, which he's not >> Or stop paying interest on reserves, which we're not in favor of, but that's
[17:10] >> He could, it would be extremely politically unpopular. It would also be less profitable cuz if the Fed cuts rates, then they can make a spread on >> Right. >> So, I don't know why he's so focused on
[17:23] that. They're not doing anything nutty. They were during the pandemic, but then they shrank it down. So, most people don't understand that you can't to to reduce rates, you have to increase the size of the you have to increase the
[17:36] >> Right. >> I don't know why people don't understand it. It just it's just pure accounting. I've studied it. I always studied college. So, I've been looking at it for 47 years. So, it's pretty easy to
[17:49] interpret. But for some reason, even people who should understand it don't. And so, it's they're not independent variables. The Fed wants to shrink the balance sheet, they've got to tighten policy or get rid of interest on
[18:01] unpopular with the banking system. >> I would just add one point to this, which is that when you're not ready to do something, you set up a task force. >> So, I don't think that we're anywhere near starting that process.
[18:14] >> Well, I thought I thought part of the conversation was in order for him to cut sheet at the same time cuz one would offset the other. Is that right? >> Yeah, but you just can't do that. That's not the way it works. You to to lower
[18:26] >> you have [clears throat] to increase the size of the monetary base, which means you have to buy more assets and increase it. That's And by the way, during the pandemic, if you don't believe that, they actually had to keep rates below
[18:38] above zero. Yeah. They had to go in and do reverse repo of 3.5 trillion. So, a lot of even people who should know this, the Fed has to constantly intervene to they're going to lower it, they have to intervene by injecting more liquidity,
[18:54] >> Right. >> So, you can't do they're not independent such. They're like, "Oh, well, they're actually they're lowering rates, but it's offset by the balance sheet." It's not true. You The balance sheet is 100%
[19:07] correlated with the Fed funds. And sometimes they do short-term borrowings sheet's 100% correlated. >> So, where do you think 10-year goes by the end of the year? >> 3.75 or below 4.
[19:21] >> Really? It's 3.5 right now. >> A 100 over the terminal Fed funds rate. So, we would have to be pricing in three
[19:33] them, but everybody would have to completely reverse in the Fed funds market. But, I would point out Fed funds is not a very there's pretty There's not very many people trade it. The 10-year is a liquid
[19:46] >> It's barely budged during the war. >> Right. I know. It's been It's stayed >> It's trading at 50 over. Normally trades 100 over Fed funds. So, I would look have have rate cuts or not, if you don't
[20:01] believe our forecasts. The 10-year is saying, "We don't need rate cuts." It's down today. The The yield is down today. But, to get it much below four, we'd have to take out those two increases they're priced in and get three cuts
[20:15] drift below four. >> I mean, it has been interesting that since you had the Fed meeting, the you've seen airlines going higher, which was driven also by the oil price. And then, too, home builders have been doing
[20:28] >> Home builders have been doing well. >> And so, that is going to be directly a >> But, it's interesting that home builders are doing well when mortgage rates are now back at 6.6 and 1/2%, aren't they? 30-year mortgage rates.
[20:40] just discussing, I think the expectation is that if the 10-year is here or lower, right, and the economy stays in pretty good shape, which it will unless you start hiking rates, then that's
[20:53] >> Yeah, I agree 100%. It's all anticipatory. The actual earnings are pretty bad. We're long home builders. It's a great trade today. >> Yeah. would >> to that those type of indicators versus
[21:07] this illiquid fed funds market. >> sector the real estate was up 1 and 1/2% >> You know, I mean there were there were there were seven sectors that ended yesterday in the green versus four that, you know, I mean it was all the tech
[21:20] names are getting taken to the woodshed, but the the the rest of the market was did fairly well considering, you know, everyone was screaming and yelling and "Oh, let's slow down a little bit." >> And that's also generally a good thing
[21:32] market goes higher, you want the breadth to increase. >> There's no way we're getting 9,000 just on tech. It's not >> No, no, it can't No, no, it absolutely can't happen, but that being said, would
[21:44] you still at these levels, would you still be adding to tech or would you be adding to some of the other sectors? think that this is what currently the bet is, right? If you think that this
[21:56] was up until this point uncertainty about the direction of rates and then uncertainty about the direction of oil and we're resolving both or we'll be resolving both, it the opportunity is outside of tech cuz there's nothing
[22:08] that has brought any new information about where the AI is going or where >> So, where's the opportunity you know, and like what sectors would you look at? >> Well, I would just again, broadly things that are related to immediate
[22:20] developments are and I'm just repeating myself, home builders, airlines and so premium, you're also bringing rates down and so on. So, that's where you want to be now. I think in the sort of 3 to 6-month horizon, you're
[22:33] of the small caps and mid caps and so on lower, >> Right. well. >> Right, but small caps are already doing
[22:45] >> Yeah, I think everything is doing well generally, right? Like there's you're starting to see it's not as we were just saying, despite the fact that we've had all a geopolitical conflict, the fact that we've had energy prices
[22:57] extremely extremely high, things have held in incredibly well. And if now the market can convince itself that actually the hikes are probably an overreaction and that at a minimum we're going to be staying where
[23:11] we are and possibly going lower then you will see that next leg up. there has to be a broader change of heart because like I said the market at the moment is pricing in a hike before the end of the year. So there's going to
[23:25] see next month's CPI and PPI and PCE if we start to see you know the price of oil has really impacted that then maybe that gentlemen we've run out of time but I want to revisit this in four or five
[23:38] months to see where we are. I'd love to get you by the end of the year to see if we're in fact at as the P9000 which would be tremendous if we were. joining us until the next time take good care.