'We think $70 is a reasonable target for oil after the Strait opens': Hatfield

Key Concepts

• Geopolitical Risk Premium: The portion of asset pricing attributed to potential conflict or instability.
• Owner’s Equivalent Rent (OER): A methodology used by the Bureau of Labor Statistics (BLS) to estimate housing inflation, which Hatfield argues is an inaccurate "imputed" price.
• Private Credit Valuation: The discrepancy between "marked-at-par" private credit assets and the discounted market pricing of publicly traded Business Development Companies (BDCs).
• Market-Based PCE: A measure of inflation that excludes imputed costs, which Hatfield argues is currently at the Fed’s 2% target.
• Data Dependency: The Fed’s practice of making policy decisions based on historical data, which Hatfield characterizes as "driving using the rearview mirror."

1. Market Outlook and Geopolitical Strategy

Jay Hatfield, CEO of Infrastructure Capital Advisors, argues that the blockade of Iranian ports in the Persian Gulf is a "net positive" for markets. Rather than escalating to the destruction of Iranian energy infrastructure, he suggests the blockade forces parties back to the negotiating table or encourages a multilateral effort to reopen the strait via force.

• North American Resilience: Hatfield contends that the global energy shock is manageable for North America. Because the U.S. and Canada possess abundant, low-cost natural gas, these companies gain a competitive advantage, insulating the North American economy from the worst impacts felt in Europe and Asia.
• Oil Price Forecast: Hatfield projects oil will settle at a "fair value" of $70 per barrel once the strait reopens. This target accounts for two factors: the significant depletion of global inventories and a lingering geopolitical risk premium.

2. Earnings Season and Equity Strategy

Hatfield maintains a bullish outlook on the stock market, citing the cyclical nature of investor sentiment: "Greed comes during earning season, fear after earning season."

• Banking Sector: He expresses optimism regarding street banks (e.g., Bank of America, Citizens Financial) as a positive catalyst for the market.
• Valuation Discrepancies: He highlights a significant overreaction in the public markets regarding alternative asset managers and BDCs. Stocks like KKR have dropped 30–40%, which he views as irrational given KKR’s diversified business model (insurance, private equity, and limited exposure to private credit).

3. The Private Credit "Crisis"

Hatfield addresses concerns regarding losses in private credit by applying a "worst-case scenario" framework, estimating total losses at 10% (a 5% net impact).

• Methodology: He argues that investors are rationally moving capital out of private credit because those assets are "marked at par," which may not reflect current market realities.
• Arbitrage Opportunity: He notes that investors are selling private credit to buy BDCs that are trading at 30–40% discounts to their net asset value (NAV), effectively capitalizing on the market's overreaction to potential credit defaults.

4. Critique of Federal Reserve Policy

Hatfield presents a sharp critique of the Federal Reserve’s inflation measurement and policy framework.

• Imputed Prices: He argues that the BLS uses "made-up" prices for shelter (Owner’s Equivalent Rent) and financial services. He claims that if these imputed costs are removed, the Core PCE (Personal Consumption Expenditures) is already at the Fed’s 2% target.
• Policy Recommendation: Hatfield advocates for the Fed to move away from being "data dependent"—which he describes as "driving using the rearview mirror"—and instead adopt a forecasting model. He suggests the Fed should cut rates three times in the second half of the year as the current oil shock subsides and inflation data aligns with market-based PCE.

5. Notable Quotes

• "Greed comes during earning season, fear after earning season."
• "Data dependent means you're driving using the rearview mirror. That's why we have an incompetent Fed right now."
• "[Private credit is] marked at par, which might not even be accurate. So, why not take your money out of private credit that's marked at par and buy BDCs that are down 30%?"

Synthesis and Conclusion

The main takeaway from Hatfield’s analysis is that market volatility is driven by an overreaction to geopolitical events and a misunderstanding of inflation data. By distinguishing between "imputed" inflation and "market-based" inflation, he argues that the economy is stronger than the Fed’s current data suggests. He advises investors to look past the fear surrounding private credit and focus on the value present in oversold, diversified financial institutions like KKR, while anticipating a stabilization in energy prices once the Persian Gulf situation is resolved.