GUILD INVESTMENT
M A N A G E M E N T
GLOBAL MARKET COMMENTARY
Market Desperately Seeking Reason to
Bounce
First, let’s touch on the inflation level re-
vealed by the Guild Basic Needs Index
[GBNI] -- our in-house, real-world inflation
measure which we compile from a simple
set of data series covering consumer ex-
penses for food, shelter, clothing, and trans-
portation. We had to adjust the x-axis on
May 26, 2022
our graph: year-on-year, the GBNI was
up 40.3% in April. That likely feels like a
more realistic assessment to you than the
single-digit percent price increases you hear
from the Fed or the Bureau of Labor Sta-
tistics (which publishes the most commonly
cited consumer price data).
© Guild Investment Management Inc.
 GUILD INVESTMENT
M A N A G E M E N T
EDITORS Market Participants Parse Fed
Minutes Trying to Determine
How Much Further Rates Will
Rise… and Trying to Spot the
Fed “Put”
Yesterday, May 25th, saw the re-
lease of the minutes from the Fed-
eral Reserve’s FOMC meeting on
May 3rd and 4th. At this meeting,
MONTY GUILD the committee reiterated that in-
Founder
flation is too high, raised rates by
0.5%, charted a path forward for
several more large rate increases,
and indicated how they intend to
begin balance-sheet reduction. It
seems unlikely that the Fed
will achieve victory in the in-
flation war soon, and if the
Fed “put” comes into play, we
believe it comes after signifi-
ANTHONY cantly more market stress.
DANAHER
President The minutes noted that:
“Consumer prices continued to
rise rapidly. Total PCE price in-
flation was 6.6 percent over the
12 months ending in March, and
core PCE price inflation, which
excludes changes in consumer en-
ergy prices and many consumer
food prices, was 5.2 percent over
RUDI
the same period. The
VON ABELE trimmed mean measure
Senior Research
Analyst of 12 month PCE price
inflation constructed
12400 Wilshire Blvd by the Federal Reserve
Suite 820 Bank of Dallas was 3.7
Los Angeles, CA 90025
percent in March, 2 per-
310-826-8600
centage points higher
guild@guildinvestment.com than its year-earlier rate
Mon–Fri 06:30–16:30 of increase.”
2
May 26, 2022
Problematic Inflation Mea-
sures
PCE inflation, or “personal con-
sumption expenditures,” has been
the Fed’s preferred inflation mea-
sure since 2012. PCE is even less
transparent and granular than CPI
(see chart below), and tends over
time to provide a lower estimate of
inflation. When additional finessing
is applied, as in the construction of
the “trimmed mean measure” not-
ed above, the number is even more
constrained relative to what we see
in the straightforward price indices
for consumer goods that comprise
the GBNI. The Federal govern-
ment has many reasons to want
to lowball inflation -- of course
political reasons, but also bud-
getary reasons. As we’ve often
said, the utility of official inflation
statistics, whether “core” mea-
sures, measures with malleable and
ever-changing baskets, etc., is that
they can be used to obfuscate and
manipulate the public’s perception
of unsavory inflation reality. We
look at them mostly to understand
what officials want us to think… rath-
er than to understand what is actu-
ally happening.
© Guild Investment Management Inc.
 GUILD INVESTMENT 3
M A N A G E M E N T May 26, 2022

Regardless of the index one uses, the reality assessed that the Committee’s previ-
is that the Fed is in a bind, and needs to get ous communications had been helpful
inflation expectations down. in shifting market expectations regard-
ing the policy outlook into better align-
What the Fed Has Already Accom- ment with the Committee’s assessment
plished and had contributed to the tightening
of financial conditions.” And this was al-
Many agreed that the Fed’s minutes sound- most a month ago; more economic deteriora-
ed hawkish. They contained many comments tion has happened since.
about the underlying strength of the U.S.
economy and the risks posed by inflation -- While not yet any sort of declaration of victo-
presumably conveying a message of deter- ry over inflation, there is thus some admission
mination so that markets would continue that the Fed’s actions and communications
to believe (or to fear) that a lot more rate thus far have already had a significant effect in
hikes are coming, probably past “neutral” to cooling off certain parts of the economy and
“restrictive” financial conditions. “All partic- in taking some froth out of markets.
ipants reaffirmed their strong commitment
and determination to take the measures nec- The massive spike in money creation that came
essary to restore price stability.” from pandemic stimulus is now falling off, and
some measures of money supply growth, such
However, there does appear to be some as M2 (which measures both cash and highly
weakening of resolve among members when liquid assets such as money market accounts)
they went on to note: “Many participants are returning to more normal levels.

© Guild Investment Management Inc.

Source: Bloomberg, LLP

Modern Market Cycles Are Credit Cy- er (even if it is seldom wielded effective-
cles ly). Watch credit spreads and credit
relationships closely. Overall, finan-
The huge global credit balloon driving all cial conditions have already tightened
markets gives the Fed a great deal of pow- to the levels which caused the Fed to
 GUILD INVESTMENT 4
M A N A G E M E N T May 26, 2022

pivot in 2018. The current environment pectations for inflation. “All told, total
may be more fraught -- because of inflation, PCE price inflation was expected to be 4.3
and because of Russia’s war in Ukraine and percent in 2022. PCE price inflation was
China’s slowing lockdown economy, among then expected to step down to 2.5 per-
other reasons -- but it is still an instructive cent in 2023 and to 2.1 percent in 2024 as
observation. supply-demand imbalances in the economy
were reduced…”
Cracks Appearing In the Economy
If this projection proved accurate, it would
The CEO of Snapchat [SNAP] set the tone suggest that the Fed has not eleven increas-
for a series of disappointing retail earn- es, and not six increases, but perhaps only
ings reports (including Target [TGT] and three 50-basis-point increases ahead of it;
Walmart [WMT]) when he said: “The and that would allow for a “pause” in Sep-
macro environment has deteriorated tember -- a few months before the midterm
further and faster than we anticipat- elections, conveniently. This possibility was
ed when we issued our quarterly guid- already floated by U.S. Atlanta Federal Re-
ance last month.” That comment caused serve Bank President Raphael Bostic a few
SNAP to fall 40% and brought down the days ago, when he said “a pause in Septem-
whole ad-driven online social media com- ber might make sense.” Could the Fed be
plex. setting the stage to declare victory in
the war on inflation, if PCE measures
The FOMC minutes also noted, “With re- are following their expected trajecto-
spect to the business sector, participants ry and if elements of economic distress
cited robust consumer demand, healthy are beginning to appear more clearly?
household balance sheets, and inventory Please note that we don’t believe the Fed
rebuilding as factors supportive of business will achieve victory… merely that it might
activity and investment.” However, oth- declare enough victory to justify a pause.
ers, even the FOMC within the same
minutes, have noted the very rapid in- Perhaps the recent bounce in high-yield
crease in consumers’ credit card bal- bonds [HYG] are reflecting the market tak-
ances. While pandemic transfer payments ing several future rate hikes off the table.
did improve the household balance sheet,
the more recent trends are not so healthy
If that possibility began to trickle into mar- © Guild Investment Management Inc.
-- driven, we expect, by inflation and real
ket consciousness, it could set the stage for
wages that are eroding even as nominal wag-
a stock market rally as well. So, while the
es rise. As for rising inventories, from an-
high-yield bond market may have turned
other perspective, those are simply pulling
higher based on interest rates not going up
forward future orders and imply depressed
as high as feared, this asset class may not
future demand. be taking into account the increased credit
risk that will arrive should recession come.
Setting the Stage For a Pause? The same could be said for stocks; any ral-
ly could ultimately be reversed later in the
The FOMC has laid out its own ex- year when recession heaves into view.
 GUILD INVESTMENT 5
M A N A G E M E N T May 26, 2022

Source: Bloomberg, LLP

All of This Is To Say: Be Ready for A Ral- • Margins, balance sheets, and earnings
ly, But it May be Brief quality will matter more in a persistently
elevated inflation regime than they have
Ongoing inflation that is well above the for a generation.
“lowflation” trend of recent decades, • The company should be situated in a sec-
and an eventual recession, remains our tor or industry that is advantaged by on-
base case. Recession is probably the Fed’s going global geopolitical, social, techno-
real base case as well, at least implicitly, given logical, and economic trends. In short, it
the progression from Chair Powell’s discus- should be thematically desirable. We’ve
sion of a “smooth landing” to a “bumpy land- described these very often in recent let-
ing [with] some pain.” The Fed always tries ters -- primarily focused on technology
to communicate its bad news gradually. (both software and hardware), new ener-
gy tech, tech-adjacent materials, precious
The market can rally strongly, and if it begins metals, and cryptocurrencies.
to price in a hoped-for Fed “pause,” we think • Geopolitics can wreck or make an invest-
it will do so. This can lead in two directions, ment. Some emerging themes that have
depending on your constitution as an inves- risen to prominence -- such as legacy en-
tor. If you have the skill and desire to trade, ergy and hydrocarbon production -- de-
you can trade the rally. pend for their future evolution on the
global geopolitical landscape.
If you are more long-term oriented, you can
look around now for attractive entry-points. If you’re willing to endure some volatility,
We would say that what constitutes “attrac- we think attractive entry points are available © Guild Investment Management Inc.
tive” has a few factors: now for the establishment of investment po-
sitions in certain sectors with longer-term
• The company should exhibit GARP -- growth trends still intact.
growth at a reasonable price. After the
recent declines, GARP is no longer the Thanks for listening; we welcome your calls
purely mythical beast it has been for the and questions. We’ll be hosting a Zoom
past several years. (Of course, there’s a call on June 30 -- keep an eye out for
lot of growth at completely unreasonable the link, and please send us your ques-
prices still out there -- price matters.) tions ahead of time.
 GUILD INVESTMENT 6
M A N A G E M E N T May 26, 2022
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Aboutthis This
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Please note that investing in stocks, other securities, and commodities is inherently risky, and you should rely on your personal financial advisors and conduct your own
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If you are an investment advisory client of GIM who is receiving this newsletter, please note that the fact that a general recommendation is made of a particular security,
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