Biden’s infrastructure plan poses risks to the upside: Opimas CEO

Octavio Marenzi, Opimas CEO, joins Yahoo Finance’s Alexis Christoforous and Kristin Myers to discuss inflation risks and market outlook.

Video transcript

KRISTIN MYERS: I want to look now at that market action. We have, of course, the three majors right now in the green, S&P 500 still right at those record highs. We have Octavio Marenzi, Opimas CEO here with us now. So Octavio, looking at the markets now, I'm a little bit-- I want to ask you about some concerns that I've heard from folks about the second half of the year, expecting a correction up ahead. Do you think that we're headed there? How much of a correction are you expecting, if so?

OCTAVIO MARENZI: Well, I'm not really expecting a correction in the next half year. I think really what's been driving the markets and supporting the markets more than anything else has been the Fed with its ultra low interest rates and ultra accommodative monetary policy. I don't see that changing in the next six months. And I think the Fed will say to yourself, if it sees the market start to correct themselves, they will intervene quite heavily and push rates down even further.

Bear in mind in the US, the Fed still has a fairly large amount of margin for maneuver. I mean, we've looked at sort of the 10-year rates that went up to almost 1.7% and then came down a bit. But bear in mind, in other countries around the world, 10-year rates are in negative territory. So the Fed could still drive those interest rates down further. And I would expect them to do that if they started to see the market misbehave a bit. So I don't think that a correction is in the cards for the next six months. I think we're probably pretty safe that it might occur, but the Fed will fix it. So we have sort of that put option that the Fed is providing for us.

ALEXIS CHRISTOFOROUS: Yeah, the market definitely still very addicted to that cheap money, Octavio. I would like your take, though, on the inflation data we've got today. The producer price index up 1% in March, up 4.2% year over year. That was a little more than expected, even if you break out core food and energy came in a little bit hotter than expected. What do you think the Fed's going to do with that information, or what more will they need to see before they do move on inflation?

OCTAVIO MARENZI: Well, I think the tendency is going to be to let it go quite away. I mean, their target has been 2%. And that's the target they've set for quite some time. And they've come below that for a couple of quarters now. So I think they'd quite welcome the inflation rate to go up a bit. I'm not saying that's a good idea with us, at least the way the Fed thinks. So I think the balance of the risks for them is that the economy still sort of fragile. And they're probably willing to take on a bit of inflation to make sure the economy is going in the right direction.

So I think they'll probably let it slide and we'll probably let the inflation rate overshoot their target before they really intervene heavily. And that could take some time before that happens. So like I said, I think for the next six months, we're probably in pretty safe territory. I don't think the Fed is going to start tightening monetary policy in the next half year.

KRISTIN MYERS: So I hear what you're saying. We're in pretty safe territory. What are some of the biggest risks or catalysts to the downside? And then even on the flip side, what are the biggest catalysts to the upside as you're seeing it for the remainder of the year?

OCTAVIO MARENZI: Well, I mean things have gone so well, it's hard to talk about even more upside in terms of equities market. They've had an absolutely fantastic year. It would seem to be a bit indecent to talk about more upside. So I think if things just carry on going the way they are, that is the upside. And that looks pretty good. I think an area that concerns me is if you look at President Biden's new infrastructure plan or not new plan, but something he was touting during his campaign, and now he's starting to push through.

I mean, if you read through the thing, he literally wants to create millions of new houses. He wants to fix all the railroads. He wants to make a high speed rail network. He wants to make sure that the US energy industry is zero carbon by 2035. He wants to add a million workers in the auto industry, making electric vehicles. A million jobs here, a million jobs there, a million jobs everywhere. It's absolutely incredible what he's planning on doing. It's the most ambitious piece of legislation I think there's ever been. Maybe it's on par with the New Deal or something like that.

But what that does risk is that there's going to be a big, big increase in deficits. And that has to be paid for somehow. And that's probably going to be monetized. And that could eventually lead to higher interest rates. So as the Fed now start-- the Fed will probably monetize that-- by those treasuries almost as soon as they're issued. And that will probably then put some pressure on the interest rates. And that could crash the market and correct the market.

So if this infrastructure spending plan goes through the way Biden is trying to drum up trillions of dollars to make this happen, that, of course, is going to lead to a surge in debt. And that could have a knock-on effect of increased higher interest rates. And the markets do not like higher interest rates. They hate them. And we'll see a market correction if that happens. So I think that's the cloud on the horizon, is this enormous spending program that looks like something so ambitious that it really is sort of breathtaking in scope and scale.

ALEXIS CHRISTOFOROUS: Where is the opportunity there, though? I mean, are municipal bonds suddenly going to be, you know, the hot ticket, as all of these different municipalities try to get that money to work from the Biden infrastructure plan?

OCTAVIO MARENZI: Well, I mean, municipal bonds have never been a terribly exciting end of the market, you know? I mean, you're talking about getting really small returns there. Of course, it depends on the particular project. And it's very hard to talk about municipal bonds in general because there's so many different types. There's millions of different municipal bonds literally. Some of them finance the municipal swimming pool. Others will do the wastewater treatment plant and some bridge.

And so it's such a mishmash of different kinds of projects that are typically financing that's paying back the interest on those bonds that is really hard to generalize about that market. But yeah, so municipalities could see that, but it looks like the federal government is really going to be the one spending this money, as opposed to the municipalities. And so it looks like the kinds of companies that would benefit our sort of infrastructure construction companies.

A lot of money is going to be channeled through Amtrak to get this high speed rail network going. So companies like that stand to certainly benefit from it. Now, I'm not saying that pumping money through Amtrak is necessarily a good idea. It's not exactly a company that's covered itself in glory in the high speed rail business over the course of the past 15 years.

I mean, they've built this thing called a [INAUDIBLE] on the Northeast Corridor that keeps an average speed of about 70 miles an hour as it pops back and forth between Washington and Boston. It's not a terribly impressive thing, so. But Joe Biden seems to think that's the way to go to make a high speed rail network in the US. So we'll see how that works. I'm not terribly optimistic on that front.

KRISTIN MYERS: I don't know. I feel like anyone who's written on the [INAUDIBLE]-- I have many times-- automatically is in favor of some of these infrastructure plans. Because it's a little bit embarrassing what we've got going on with our railways, compared to what was happening over in Asia and even Europe. Octavio, I want to talk to you about reallocations to portfolios. Where are you seeing opportunities up ahead?

OCTAVIO MARENZI: Well, I think the tech sector is going to continue to be a really interesting space. So that's where I think the-- most of the upside is going to come. And that's simply because I think we're going to continue to see a very, very low interest rate environment. And that favors companies that have long-term growth prospects. So any company that has sort of very long-term future earnings potential is going to really benefit from that. So I think that's really where the opportunities are.

There's another sector that is kind of interesting, which is sort of the financial services sector, the banking sector. I think that's a sector that could benefit from sort of medium term to longer term interest rates actually inching up. So if you think about the core activity of banks, it's sort of to borrow money short-term from depositors and then lend it out long-term to borrowers. They benefit from a steeper yield curve. So if we start to see the yield curve steepening and longer term and 10-year Treasury yields inching upwards, banks stand to benefit in the form of higher net interest margins. It would be an interesting sector to look at there.

KRISTIN MYERS: All right, Octavio Marenzi, CEO of Opimas, thanks so much, as always, for joining us and giving us your insights.