"shwag" is short for "shwiggity shwag" which was birthed from the phrase "sliggety slag": a cute reference to slag bud.
"Slag bud" is marijuana that has been highly compressed into bricks (while still green). Heat and lack of ventilation tipically cause plant decay and mold growth. Once dry, these bricks (when broken apart) tend to come apart in large flakes that look like the by-product of iron smelting(slag).
Now that Califorina has allowed "medical marijuana" growers to industrialize, days of nothing but "slag sliggety, shwag shwiggety, sliggety slag, shwiggety shwag" will disapear.