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Inflation is a ‘great threat’ to the economic recovery: Brigg Macadam founding partner

Greg Swenson, Brigg Macadam founding partner, joins Yahoo Finance to discuss the concerns on rising inflation, financials, and the tech sector.

Video transcript

ALEXIS CHRISTOFOROUS: Let's stick with the markets now and bring in Greg Swenson, founding partner at Brigg Macadam. Greg, good to see you. And I want to begin with inflation. You just heard what Brian had to say.

How much of a concern is rising inflation to you? How much of a threat do you think it is for the economic recovery?

GREG SWENSON: Yeah, I think it's a great threat. And, look, I understand-- and Brian made some great comments-- but I understand a lot of this is temporary due to the low base effect from the actual numbers last year being quite low during the first months of the pandemic, as well as the bottleneck issue. So I get that.

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But I'm actually concerned with the longer term inflation. If you just look at any kind of historical basis between money supply and inflation, with M2 up over 26% from last year, that just has to be inflationary. It's somewhat unpredictable.

I'm also worried about the fact that, yes, while considering these factors like the bottleneck and the low basis, the economists, the consensus was still much lower for not only for June, but for year-over-year. So it came in at basically two times the consensus estimates. And that should be troubling. So it's somewhat hard to predict, but it's definitely there.

ALEXIS CHRISTOFOROUS: So are you making any changes to the portfolio if you do believe that inflation is, indeed, going to be a sizable risk for the market in the months ahead?

GREG SWENSON: Yeah, I think, you know, you have to have some hedges in place, whether it's traditional hedges like gold or something like digital gold in the form of Bitcoin as part of your portfolio as a hedge, but also take advantage of these sectors that can rally and take advantage of the recovery, which is great in the near-term, but also has the ability to raise prices and take advantage of higher interest rates-- so obviously, banks and other financials as well as commodity players, whether it's energy, or mining, BHP, BP-- something that you know that they can raise prices.

I like ADM for that reason too, the ability to take advantage of higher food prices. So, look, I think, you know, it's not an all-out panic because I think there are some good points to argue that a lot of the high numbers right now are temporary, and they will come down when the bottlenecks end and when the basis corrects.

But I think if you look at some of the long-term negative consequences of this reckless spending going on, you know, inflation is just one of them. It could have problems with servicing the debt if interest rates go up. Or if they don't go up, then the Fed will continue to proceed with zero rates and quantitative easing, which leaves them no dry powder for the next crisis. Or we could have a repeat of the 2009 to 2016 scenario, where financial assets experience inflation, even though there's not consumer price inflation.

So you do have property, and stocks, and bonds going higher. But the real economy ultimately doesn't benefit from that fiscal and monetary expansionary policy.

ALEXIS CHRISTOFOROUS: What about the energy sector? Will that be benefiting from higher inflation? And where do you see some opportunities there?

GREG SWENSON: Yeah, I mean, of course, I like BP because of the yields. You can get, you know, well over 4% dividend yields, and I think that's great. I think they also have very much a global platform. And we're seeing in the US with the regulatory burden coming from the Biden administration, I'm a little worried about the energy sector. One minute, we had energy independence, and significantly lower fuel prices.

And now we have energy prices up 1.5% in the numbers yesterday. That's troublesome. But if you can take advantage of it with a global producer like BP or other companies like it-- Exxon, Chevron-- you know, they're going to continue to pump oil in spite of the transition to renewables. And I think that you'll see that in oil prices. And I think that, you know, you can take advantage of whether it's inflation or just the cyclical nature of the rebound.

ALEXIS CHRISTOFOROUS: I want to move to our earnings for a moment, because we're hearing from the big banks this week. So far, it's been a mixed picture. Today, Bank of America's earnings came in mixed, revenue got squeezed, but we got better than expected results from Wells Fargo, which was refreshing-- that bank usually not known for doing that. Also, Citigroup was able to beat. But what do you-- what's your outlook on the financials going forward? And who do you like right now?

GREG SWENSON: Yeah, I mean, I like everyone on your list there. Look, all of that-- all of those names are going to experience, you know, better earnings with higher interest rates and, in the near-term, taking advantage of the economic rebound. So I think they're all very well positioned.

And in fact, if anything, there's a buying opportunity here with some of these names being down today. So I like the big names. I like some of the global names as well-- if you look at here in the UK, HSBC and Barclays, that also will experience the rebound trade here in Europe. And remember that the European indices are more weighted to cyclicals than the indices in the US because there's less of a tech component. So I think the European banks are very well-positioned also.

ALEXIS CHRISTOFOROUS: OK, so now we're going to be diving into earnings season more in the coming days-- any particular sectors that you're looking to do quite well? And are you buying up any particular companies in advance of those earnings?

GREG SWENSON: Yeah, no, I do like BHP. I think they're well-positioned in their assets, as well as they always pay dividends, they always increase the yield. I mentioned BP and Exxon, again, because of dividends and exposure to commodities. And then I like the food sector. I also like real assets.

If you have the ability to invest in them, whether it's through alternative investment platforms like private equity, but real assets that are inflation protected, especially infrastructure, critical infrastructure-- we see a lot of business in Africa where there's a huge demand for infrastructure. They can take a hundred billion a year in critical infrastructure investment.

So you know, I think there are ways to take advantage both of the recovery and the growth in global economies, as well as hedge against future inflation or sort of the unknown consequences of this spending, the stimulus to the demand side, yet with relative hostility to the supply side whether it's through overregulation or anticipation of these tax increases. So I think a lot of eyes are going to be on Washington.

In the meantime, I guess you can hope for gridlock-- one of the earlier guests was talking about that-- some of this spending, there might be pushback against it. But I think that the uncertainty that it creates is hurting the supply side while overstimulating the demand side. So you can take advantage of that in certain sectors in the near-term, as well as hedge against inflation in the long-term.

ALEXIS CHRISTOFOROUS: And one sector I haven't heard you talk about, Greg, is big tech. We talked a lot about the rotation out of high growth and a lot of those big tech names into cyclicals. That seems to have changed recently. But what's your take on big tech right now? And how might those tax hikes affect that sector?

GREG SWENSON: Yeah, look, I think this global minimum tax is going to be an issue for some of the big tech. You've got some pushback from both sides of the aisle on big tech. And I would be worried about that. I'm not suggesting sell it all, but I think that the rotation out of tech into cyclicals will continue.

And I think if there's some major corrections in the market share, you can always add to the core names in tech. But right now, I wouldn't be overweight in tech. I would still take advantage of the cyclical trade, and then think about long-term inflation. So long duration assets like tech, I think you know you want to be either market-weighted or underweighted.

ALEXIS CHRISTOFOROUS: All right, we're going to have to leave it there. Greg Swenson, Founding Partner at Brigg Macadam, thanks so much.