How the Fed will battle inflation with Warsh at the helm

[00:00:00] Speaker 1: All right, folks, you've heard this a million times, right? Inflation's got to be at 2% or lower. It's got to get there. Now, everyone has heard the line, but where did it come from, right? I mean, is it based on some kind of central bank formula that stood the test of time? Or was it an off-the-cuff remark by a former New Zealand Fed finance minister during a radio interview? Listen, here's the thing. The Federal Reserve actually adopted it in 2012, so it hasn't been around forever, folks. And they say there's internal debate about it. I don't think there's internal debate about it. I've never heard it. Everyone just takes it as a law that it has to be this. My next guest says, though, that things probably will change under Kevin Warsh. I'm going to bring it down to Jay Hatfield, CEO of Infrastructure Capital Management. Jay, let's talk about some of the reforms, because you think there'll be major reforms with Warsh, and so do I. I'm so excited, so excited. Between Warsh, Maren, Besson, Trump, I just think we can do some amazing things for Main Street in the next three years. But let's talk about the reforms that you're looking at, improved forecasting. [00:00:59] Jay Hatfield: Yeah, the most critical thing there is nine out of the 12 current governors believe a strong economy produces inflation. [00:01:09] Speaker 1: Hence the strong Friday's jobs report, the market goes down because the Fed is not going to be accommodative. [00:01:15] Jay Hatfield: Well, what they're missing is as long as there's not excessive money supply growth, like in the late 90s, then that's not inflationary. Actually, it's minorly deflationary because you're changing the ratio of real economic growth to the money supply. So Warsh is much more of a monetarist, a supply-sider, and he's going to argue strongly, and he'll be able to stave off the cuts that the market is currently forecasting. The hikes. Yeah, the hikes, sorry. Okay. Yeah, I'm sorry, hikes. [00:01:42] Speaker 1: Yeah, inflation indices, adjustments. So he has a different framework for how he sees inflation. [00:01:49] Jay Hatfield: Yeah, we have our own. If you just eliminate imputed prices, like financial services is supposed to be up like 7%, which we all know is not. And shelter, you can get to two. He does things like the trim mean. But you definitely need to analyze it. The stated numbers are hardly distorted. They're about as accurate as the employment numbers. [00:02:09] Speaker 1: The trim mean is maybe 2.6 right now, whereas the inflation number that Powell and Company uses is like over 3, 3.2. Modifying your inflation target. What should it be? [00:02:20] Jay Hatfield: Well, if you look at the data, we have this on our website, the economy is most, grows the best, is best for everyone when inflation is 3% to 4%. Right. Two, as you indicated, they completely made that up. There are academic papers arguing for higher targets. I don't think that's going to be his first act, but I think he's going to be more flexible in implementing that 2% target. [00:02:43] Speaker 1: I just, you know, listen, I hope it happens. Particularly this notion that Main Street should be punished for getting a raise, for getting a job. It's just nuts. But he does walk into a very hawkish Fed, right? Particularly if you look at the minutes, they've been extraordinarily hawkish. And also the market is anticipating two rate hikes for this year. And so he's got to push back against this. How does he do it initially? [00:03:06] Jay Hatfield: Well, I think it's going to be what we just discussed. They're going to discuss what the real framework is for inflation. [00:03:11] Speaker 1: Because it feels like there's three of, maybe three of these FOMC members who are entrenched. Like, I don't know that they will budge. They've given interviews. Last week, I think at least two Fed folks went out there and said, we're ready to hike. He's got some serious work to do day one. [00:03:25] Jay Hatfield: There's no doubt about that. It's almost never the case that you would have a rate increase with the Fed chair dissenting. But he does have a lot of work. He needs to get the committee, at least some of the committee on board for that. But Powell is actually pretty, he's not really a strict Keynesian. He's an attorney. So I think he can get some of these members to come over to his side. [00:03:45] Speaker 1: Warsh. So S&P 500, you get a Fed chair in there, whether it's the first month, the three months, six months, first month, everything folks on this chart to that direction is negative. Nothing on this side. Nothing positive. I'm nervous. Listen, the market wants an accommodative Fed. We know Warsh would like to be an accommodative Fed. But that means maybe there's going to be a little bit of volatility when he starts. [00:04:11] Jay Hatfield: No doubt. But I do think you need to look at every situation. So I would blame the stock market decline on Powell. He was part of the 2% nut cases that raised rates five or six times in 2018. Greenspan just got super unlucky. It was right after the 87 crash. So you have to take it case by case. And so it's not necessarily applicable. [00:04:36] Speaker 1: Let's talk about the market, man, because you have been absolutely on fire. QVOL is your ETF. You know, just Marvell, you know, Jensen says it's going to be a trillion-dollar company. It goes crazy. Then it has the biggest, folks, Marvell had the biggest one-day decline for a semiconductor stock in years. In years, 17% on Friday, it was still the number two stock of the week. And it's up again today. Micron's up again. This just sort of speaks to the story, right? I mean, it's not going to go away. [00:05:08] Jay Hatfield: Well, you know, the most critical thing that almost no one realizes, so these are pretty much, except for Marvell, that's a big overweight, the biggest companies in the QQQs. But what you don't see is what we eliminated. We eliminated what we call the dogs of the DAC or the NASDAQ. So we don't, most people don't know this, but don't have Kraft Heinz, we don't have Mondelez, we don't have two cable companies, the two biggest cable companies, and we don't have overvalued Walmart and Costco. That allows you to have higher concentrations in these fantastic companies. And so we expect that that curation, when we have 55 companies, will allow us to outperform the Qs. [00:05:46] Speaker 1: Right. But the story, though, in terms of what's driving the performance for these companies, I believe it's still early stages, but every time we get a big sell-off, all the headlines say, okay, there's cracks in the AI story, it's over, they've spent too much. Whatever it might be, there's a real issue, a real urgency that's played taps over this, and I think it's far too soon. [00:06:07] Jay Hatfield: Absolutely, and as you know, we're always looking at peg ratios. All these companies have very, very reasonable peg ratios. When we first recommended Marvell on this show, it was at a half peg, now it's getting close to a market peg. Right. These are not overvalued companies, these are fantastic. Broadcom blew up when they reported earnings, we still see 50% upside, we're not adding to it right now, writing calls. But Marvell had the same thing that happened to it, they reported a conservative guidance, went way down, and now they were up 300% from that low level. [00:06:38] Speaker 1: Good stuff, Jay. Stay the course, my man, stay the course. Thanks, Charles. All right, folks.