Inflation: ‘Hedges are getting to be expensive,’ strategist says

Greg Swenson, founding partner of Brigg Macadam, joins Yahoo Finance Live to give his forecast for inflation over the next six months and explain how investors can hedge against it.

Video Transcript

ADAM SHAPIRO: Less than an hour and a half in the trading session, and the indices are essentially flat. The NASDAQ is flat, but the other two, S&P 500 and DOW have gone negative. We want to talk about what's going on. Earlier, we were talking with Mark Zandi, the economist from Moody's Analytics about inflation. He's not worried, he thinks that it's going to be tempered.

But our next guest, Greg Swenson who is a founding partner at Brigg Macadam says investors should be very careful when it comes to inflation. And simply put, you've said that the monetary and fiscal spending that created the predicament we're in is going to continue to play out. Help us understand the next six months of what you see coming inflation-wise because a lot of investors make their decision based on that.

GREG SWENSON: Sure, Adam. It's a great question, and it's tricky. And I'm just amazed at some of these, you know, the folks that are arguing that it was transitory and under control, you know, are sticking with that story when even the Fed and the administration has started to pay attention to inflation. It's much more persistent than they predicted, and the numbers are higher than they predicted. So it's amazing to stick with that story.

I think you know you can see things actually get worse because of some of the policies that are either being put in place or could be put in place with the Build Back Better plan. And look, I would agree that some of the inflation is coming from the supply chain issues. That's understandable, but they're not all coming from the supply chain issues, number one.

This is a monetary problem. You've had massive increases in money supply, $6 trillion helicoptered in to the American people. The threat of another $4 trillion. Even if that number comes in lower, it's still going to be way too much monetary stimulus and fiscal stimulus. And then you have the bad timing with all these new government regulations that are really going to constrain the supply side.

So if you believe that it's transitory because of the supply chain issues, well, then why would you create such hostility to the supply side, to the job creators, to the companies that are moving goods around? You know, you've seen it already with shutting down the pipelines, you've seen it with vax mandates, you know, given the challenges in hiring people and the shortage in labor. So why would you layer on more mandates and more regulations?

And then baked into the Build Back Better plan, you've got more hostility to job creators. You know, you've got this methane fee which is going to increase fuel prices 17%. That's not including the prices that are already in place with inflation. You saw some numbers come out today that are pretty alarming. And then you could see more OSHA, the Occupational Safety and Health Administration, you could see more regulations from them, fines go from 13k to 70k in the BBB plan. That's really going to hurt small businesses.

ADAM SHAPIRO: Oh, yeah, we hear you, we see it.

GREG SWENSON: Sure. Yeah, so I just-- you know, I don't see how they can argue, you know, that it's going to be remedied by figuring out the supply chain challenges when in fact, they're laying on more tax and regulatory burden on that very supply chain. So you know, energy is up 30%, food's up 4.8%. You'll see food go higher because natural gas prices will be reflected in food because of the fertilizer and other supply chain issues. So that's--

ADAM SHAPIRO: Take a second, I think Karina has got a question for you. So let's let get in on this.

- Greg, I just want to jump in real quick and ask you, given that you do see inflation staying around for a while, it's not going anywhere, how does one then recalibrate their portfolio? Where should they be looking because even hedging is getting expensive, right? So where can we hedge more economically? What sectors do you like?

GREG SWENSON: It's a great question, Karina. Look, I still would-- hedges are getting to be expensive so maybe it's better to buy into sectors that are still undervalued that can take advantage of either steeper yield curve, higher interest rates, as well as higher energy and other commodity costs. So it's not very exciting, you know, to buy BP because it's got a great dividend yield, Goldman, B of A, UBS, all these financial institutions that will do well with inflation, with higher rates, with steeper yield curve.

So you know, that's the straightforward way to do it is buy cyclicals that do well in inflationary environments. There's still some sectors that are undervalued. I think European equities are weighted much, much more toward those sectors like energy and financials, the so-called cyclicals. So you know, you'll see some convergence. You know, the European equities have underperformed the US, and you're going to see the really damaging inflation in the US because of these policies that we could see from BBB.

Also, I think alternatives. You know, you have to own some gold or Bitcoin as an inflation hedge. And then if possible, investing in private capital, staying away from long duration assets, surely stay away from any kind of fixed income instruments, and also long duration equities like tech. And you saw tech getting beat up because of inflation, because of higher interest rates earlier this week.

So if you can invest in private capital, it's becoming more accessible to individual investors, critical infrastructure, especially in emerging markets, ports, housing, agriculture, digital info, all of these things that have commodity exposure. So as inflation starts to hit, some of the more traditional equity asset classes, you'll see some alternative investments that actually do well in inflation.

ADAM SHAPIRO: Yeah a lot of investors have to make a decision to if they're in it for the long term or in the short term. Just real quick when you brought up-- I know our cryptocurrency fans were cheering Bitcoin off today. But we saw not too long ago, well over $65000. Got to say thank you, Greg Swenson, Brigg Macadam founding partner.