What if the bond market’s “higher for longer” narrative is built on a faulty inflation signal? That was the core tension in my recent Lead-Lag Live conversation with Jay Hatfield of Infrastructure Capital — and it frames a potentially powerful regime shift for both small caps and income strategies.
Hatfield’s view is unambiguous: three rate cuts this year, growth holding near 3%, and small caps finally reclaiming leadership.
If he’s right, asset allocation decisions made today will look very different by year-end.
The Inflation Mirage — and Why Three Cuts Matter
Hatfield’s bullishness hinges on one variable: inflation measurement. He argues that shelter inflation remains materially overstated due to lagged calculations and renewal rent data. Strip that distortion out, and core inflation is already near 2% by his models.
More importantly, money supply growth is negative year-over-year — a deeply deflationary signal historically.
That combination leads him to expect three rate cuts this year, versus a market currently pricing in materially less easing.
This isn’t just a Fed call. It’s a regime call.
Because if terminal rate expectations fall toward the low-3% range, the 10-year yield should follow — Hatfield highlights how closely Treasuries track expected Fed policy.
Lower long rates mean tighter mortgage spreads, improved housing affordability, and stabilization in investment spending — the real recession trigger historically.
And that leads directly to equities.
Small Caps: From Dead Money to Risk-On Signal
For years, small caps have underperformed large-cap growth. The Russell 2000-to-S&P 500 ratio compressed to extreme lows in 2023 before bottoming late last year.
Hatfield’s argument is simple and historically grounded:
Fed tightening cycles crush small caps.
Fed easing cycles revive them.
Valuations now favor small caps dramatically.
He points to depressed PEG ratios relative to large caps, arguing that underperformance has created an asymmetric opportunity.
Importantly, he favors profitable small caps over passive exposure. Roughly 40% of the Russell 2000 remains unprofitable, which dilutes the earnings compounding mechanism that makes small caps powerful over time.
In his framework, owning profitable dividend-paying small caps during an easing cycle is not speculation — it’s cyclical positioning aligned with monetary dynamics.
That’s a subtle but critical distinction.
Income Without Illusion: Public Credit vs. Private Hype
On the fixed income side, the conversation turned to private credit — an area that’s quietly showing stress. Recent markdowns in private vehicles have reignited concerns about opacity and leverage.
Hatfield’s view: public high yield and preferreds offer superior transparency, liquidity, and historically lower default risk.
He cited preferred securities with roughly 9% yields and public high yield strategies in the ~8% range, combined with materially lower volatility than equities.
Key nuance: these are not recession hedges. They carry equity beta (roughly 0.3–0.5 by his estimate).
But in a soft-landing or easing environment, spreads compress and income compounds.
That is a very different setup than chasing private credit at premium valuations with limited liquidity.
Covered Calls Done Right — or Not at All
We also discussed income generation through options.
Hatfield has strong views here: writing calls indiscriminately caps upside and structurally underperforms.
Instead, he advocates selective, short-duration call writing on individual securities near target prices — allowing capital recycling into undervalued names when positions are called away.
The difference between active call overlay and systematic index call writing is not trivial — it’s often the difference between participating in bull markets and missing them.
In a regime shift year, that matters.
Key Takeaways
Hatfield expects three Fed rate cuts this year, driven by contained inflation and negative money supply growth.
Treasury yields are tightly linked to expected terminal Fed policy — not deficit narratives.
Small caps are historically positioned to outperform during easing cycles, particularly profitable dividend-paying names.
Public high yield and preferred securities offer attractive yields with lower volatility than equities, and more transparency than private credit.
Covered call strategies require active management to avoid structural underperformance.
Housing and investment spending — not consumer weakness — determine recession risk.
Why This Matters Now
Markets remain fixated on geopolitical noise, private credit headlines, and “higher for longer” narratives.
The more important question is whether inflation data is structurally overstated and whether easing has already begun beneath the surface.
If rates fall, housing stabilizes, and investment spending turns positive, small caps and income strategies could move from afterthought to leadership.
That’s not a tactical trade. That’s a regime rotation.
Watch or listen to the full Lead-Lag Live episode for the complete discussion — especially if you’re recalibrating allocations for the second half of the year.
DISCLAIMER – PLEASE READ: This is a sponsored episode for which Lead-Lag Publishing, LLC has been paid a fee. Lead-Lag Publishing, LLC does not guarantee the accuracy or completeness of the information provided in the episode or make any representation as to its quality. All statements and expressions provided in this episode are the sole opinion of Infrastructure Capital Advisors and Lead-Lag Publishing, LLC expressly disclaims any responsibility for action taken in connection with the information provided in the discussion. The content in this program is for informational purposes only. You should not construe any information or other material as investment, financial, tax, or other advice. The views expressed by the participants are solely their own. A participant may have taken or recommended any investment position discussed, but may close such position or alter its recommendation at any time without notice. Nothing contained in this program constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instruments in any jurisdiction. Please consult your own investment or financial advisor for advice related to all investment decisions.
