Could the Fed be 'the real issue' for the economy amid tariffs?
President Trump has characterized trade negotiations with Chinese officials as being "not easy" as the two countries renew negotiations following a phone call between Trump and China's President Xi Jinping last week.
Infrastructure Capital Advisors CEO and CIO Jay Hatfield comes on to talk about the impacts of tariffs on markets (^DJI, ^IXIC, ^GSPC) as the Federal Reserve contributes additional economic pressures.
To watch more expert insights and analysis on the latest market action, check out more Catalysts here.
Well, tech stocks leading the market rally once again, as the possibility of easing trade tensions lifts investor sentiment. President Trump saying China is quote, "not easy," as talks are set to resume today. Would a rift in the fragile US-China relationship derail the rally? Joining me now, we've got J. Hatfield, Infrastructure Capital Advisors CEO and chief investment officer. J, it's always great to speak with you. Talk to me about how you are viewing or potentially pricing a risk of these trade talks getting derailed.
Thanks, Mandy. It's great to be on. Well, we have a completely non-consensus call that the, uh, all the trade talks, obviously China's the most important, but as a whole, are not that critical to the US economy. It's about 10% of the US economy. Um, the effective rates gonna be somewhere, probably between 10 and 15. That's less than a half percent of GDP. And meanwhile, energy prices, they were down 20, they're down about 15. That's a much more important driver of inflation. So, we're bullish. Inflation is going to come down, even tomorrow. We're forecasting below consensus. And so, we think that, although it's been the key driver this quarter, uh, earnings are going to be more important next quarter. So we're projecting a summer power rally.
So, talk to me about the biggest risk to your outlook then. Is it that tariffs have a bigger impact than anticipated? Is it corporations holding off on hiring CapEx, and that leading to a slowdown? Like, where would you see the risks to that outlook?
Well, everybody's focused on tariffs and how that's slowing the economy, but nobody's focused on the fact that the Fed has ultra-tight monetary policy. They're actually shrinking the money supply, which is very dangerous. They did that before the great financial crisis. Um, normally it grows at 5, it's shrinking at 1. So the real issue, so I agree with the president, which I don't always agree with him, but that the real issue is the Fed. They're slowing the housing market. It hasn't crashed because there's a shortage of housing. So I'd see the key risk is the Fed remains on hold because they're incapable of forecasting inflation, focused way too much on the expectations theory of inflation, which has been discredited, and failed to realize that tariffs even are a one-time cost. Should be analyzed as sales tax and ignored for inflation purposes. So, the three top risks to the market are the Fed, the Fed, and the Fed.
So, it's it's a great overview, J, because you see the power rally coming, but the Fed could potentially derail it in your view. How should investors be positioned then to benefit from that, while also staying diversified to prevent against any, uh, potential downside risk?
Well, our scenario is, so we're bullish about bonds and stocks. Our scenario assumes that the labor market continues to slow, and even though this Fed has zero ability to forecast inflation, they are obsessed with the labor market. They're almost all Keynesians, so they're all believe the labor market drives everything. We strongly disagree with that, but that's what they believe. So, we think this deceleration will continue. Inflation will continue to be, really low if you correct for shelter and that they will cut. So, we you know, we don't give like probabilities of this and that, and probability that an asteroid will destroy South America. We have a base case, we're going to stick to the base case. So we think that, uh, the number of cuts will be two to three, rates will come down, and we will get to the 6,600, which is 22 times next year's earnings.
So what's the best way to benefit from that then, J?
Well, we, um, are, uh, are recommending stocks that tend to be higher on the risk spectrum. So, financials, so like Goldman Sachs, Morgan Stanley, we think the private equity firms like KKR are a great way to play it. Uh, REITs, so uh, and industrials. So be on the risk side, don't be in McDonald's and Philip Morris, and Coke, because you're worried about a recession. We don't think there's going to be a recession, think rates are coming down. So we'd be aggressive on the picks and and go into companies that benefit from a booming stock market, or at least a increase in stock market, likely investment banks.
J, always great to get your thoughts. Thanks so much.
Thanks, Mandy.
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