We opened our doors at Stone Creek Advisors (“SCA”) a month and a half ago. We hit the ground running, eager to tell our story of why we founded SCA. It has been fun to lay out our process and illustrate what differentiates us in the marketplace. It has been energizing to see how well it has been received and to hear feedback.  

Our favorite summation of SCA so far was in an e-mail from one of our new clients: “I’m coming on board with Stone Creek, a solid rock in turbulent waters.” Marc and I immediately looked at each other and said, “I think she just gave us our tag-line”. Much easier to roll off the tongue than “Strength and dynamism in a changing world.” 

The world has fundamentally changed. What worked for decades will not work today. For the past several decades, many strong tailwinds acted in concert to create a perfect scenario for risk assets:  

• Globalization fueled a strong and synchronized global growth story with higher potential GDP through an expanded consumer and producer base. Opening the world up increased competition and enabled countries to import deflation when necessary and gain efficiencies. Labor share of corporate GDP decreased over the past twenty years, fueling margin growth.  

• Global debt increased for four decades, pulling forward demand and pushing pain to a later date.  

• Central banks provided an economic floor. Money printing machines prevented excesses from being wringed out in recessions, disengaging the cyclical reset mechanism. The financial markets were energized by rates driven towards zero and trillions in liquidity.  

• Low discount rates supported high valuations in the TINA (There Is No Alternative) environment. Stocks were cheap relative to extremely expensive bonds.  

• Subdued inflation in the goldilocks era allowed for extended cycles. 

Absent extremes, the macroeconomic environment is not as relevant. However, decades of tailwinds, easy monetary policy and money printing are reversing.  

• We believe we are past peak globalization. This means less competition, more pricing power, reworking of supply chains, and a smaller consumer base. The ability to import deflation from abroad is more limited.  

• Inflation is difficult to tame once it becomes broad-based. And the Federal Reserve’s tools really can only impact the demand side, which isn’t the issue. Furthermore, inflation is a global problem so central banks around the globe are all tightening at once. Several things aside from the pandemic and the war in Ukraine have converged to create this perfect storm of supply side issues:  

• Reduced carbon emissions are inflationary. 

• Demographics mean there are fewer producers for the same number of consumers.  

• Underinvestment in homes, cars, and infrastructure in the last decade are being felt now. 

• Monetary policy acts with a lag. It is difficult to see the impact that the Fed’s actions are having in real time, increasing the risk of them tightening too far. If they do, inflation has left little in the way of fiscal and monetary policy tools to reverse course. We expect a restrictive policy stance to be maintained for some time. 

• Economies are being cut off the debt binge. This could trigger a wave of bankruptcies as higher interest rates raise debt services costs for variable debt and borrowers rolling over debt at the same time the economy is slowing. There are companies that will and should fail.  

• Margin expansion will be more difficult going forward. Deglobalization, inflation, the rejiggering of supply chains, rainy day inventories, mean-reversion in labor share of GDP, and environmental regulations will all weigh on margins. This is not priced into earnings estimates.  

The culmination of this reversal of tailwinds weighs on potential GDP and means we are likely to see shorter, more muted cycles going forward.  In this environment the impact of macroeconomic investing matters A LOT.  

MGO One Seven LLC (“MGO One Seven”) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). Registration with the SEC does not imply a certain level of skill or training. Services are provided under the name Stone Creek Advisors, LLC, a DBA of MGO One Seven. Investment products are not FDIC insured, offer no bank guarantee, and may lose value.