President's Message

From the President's Desk

President's Message


Happy 4th Quarter everyone. I hope this message finds you in good health and holiday spirits. Before outlining what we will discuss in this quarter's newsletter, I want to first thank you for giving me the gift of helping you and your family accomplish your financial goals. This year we had to say goodbye to two clients, who, over the past 6 or 7 years, became like adopted grandmothers to me, my wife, and my children. Their love, words of encouragement, and confidence in my ability to help them, particularly so early in my career, will forever be cherished and appreciated. Similarly, the photos you post online or share with me in person, of your families, or couples vacations, particularly the ones we budget for and I encourage you to take ��, keep me going and motivate me to fulfill my potential as your financial planner and asset manager. Of the many things I am grateful for this Thanksgiving season, you, my client, are at the top of that list.

So, in keeping with that theme, I want to announce some changes we are instituting that I am confident will help us bring you the best service and experience possible. But before I do, I want you to know; the following will not apply to you if you are an existing client or someone I have already begun to help.

We will now have minimum requirements to become a client of Guiding Light Financial, LLC.

Those over the age of 50 must have at least $250,000 of assets to give us to manage.

Those under the age of 50 must have $100,000 per annum in income for single filers, $150,000 in income for married filers, OR $250,000 of assets for us to manage.

Exceptions to the above will only be considered if your referral is your beneficiary or of course, a pro-bono case.

I will never turn down a soul in need who is willing to implement the recommendations I give them.

I want to make that clear.

I'll say again if you are an existing client or someone I have already begun to help, the above does not apply to you.

These requirements are being installed to protect and improve the level of service you receive from us. It requires time to do your planning, asset management, and service work. My priority is my existing clients and making sure they get the service they require.  Anyone interested in becoming a client must provide us with enough revenue to support the addition of new staff members.

Now that that is out of the way, we have one more housekeeping item to address before moving into the market update, outlook, and the financial planning topics associated with them. That item is Required Minimum Distribution. If you know you have to take RMD(s) or you do not know what RMD is, please take a moment to read the Important Admin Notes section on the next page. If that does not apply to you, then please feel free to skip ahead to the What time is it? Section for a brief update on the state of the economy and markets followed by an in-depth explanation and outlook in the How the watch works Section. The newsletter will wrap up with a summary of our economic outlook and how it affects your investments, as well as what you need to know, and what I'd like you to know.


Quote of the Quarter


“We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” – Warren Buffett





Important Admin Notes

Its RMD time again! If you haven't taken your Required Minimum Distribution on your retirement accounts in 2019, now is the time!

How do I know if I need to take RMD?

If you have one of the following accounts:

  • IRA
  • 401k
  • 403b
  • 457
  • Profit-Sharing
  • SEP

AND you are at least 70 years and six months of age by December 31st, 2019.

OR, if you inherited a Roth IRA, Roth 401k, NQ annuity, or the accounts mentioned above, regardless of your age.

Michele has her list and will be combing through your records, looking for accounts that still require RMD. If she contacts you to take RMD, please return the documents in a hurried fashion. If you have retirement accounts held outside our offices, please make sure Michele is aware of their Dec 31st, 2018 balances so that your RMD suffices the required amount for all accounts. If you simply want to make sure your RMD was done and done correctly, please do not hesitate to call and confirm. We are reliant on you to help you with your RMD, so please do not be shy.

Technology and Paperwork Updates

To improve our efficiency and your experience with us, we have introduced some new technologies that will be heavily utilized in the new year. The first one is called Laserfiche; we are currently working on scanning all your documents and my notes into a digital cloud-based system that can be accessed from wherever we are. This way, when we visit you away from our Milford, PA office, we have every document we could ever need to reference in a digital format. This also helps us quickly answer questions when you call in regardless of our geographic proximity to the physical filing cabinets. It will also help us do reviews over the internet using another new technology.

Zoom is a web-conferencing system that allows you to see me and my computer screen when we do phone reviews. And if you want me to see you, I can; if you have a webcam on your laptop or desktop. Zoom will not just allow me to meet more frequently with those of you who live far from our home office in Milford, PA. It also allows us to meet when you're too busy with kids and work to come in during normal business hours; or when we have to cancel a physical meeting due to inclement weather. I encourage you to take advantage of this new way of meeting regardless of your geographic location.

Finally, we will be using Docusign to process much of our paperwork in 2020 and beyond. Docusign is an e-signature platform that allows us to complete paperwork in a more efficient matter and will cut down on mail time and mistakes like missed initials or signatures. This program is run through our e-mails. So if you don't use e-mail, we will continue to provide you with the physical paper that you prefer. For the rest of you, this will significantly improve the operational and processing time of transfers, new accounts, distributions, RMDs, etc.…

What time is it?

Late CycleIt's Late Cycle in America

Since late last Summer, we have favored the sectors and assets that perform well at the end of an expansion. These investments include, but are not limited to, government bonds, investment-grade bonds, gold, utilities, healthcare, consumer staples, and real estate. The equity sectors mentioned have provided positive year-over-year profit growth despite the difficult comparables of 2018. These defensive sectors have performed better than the sectors that are more cyclically sensitive since last summer. Additionally, solid credit quality bonds and precious metals have not just added stability to our portfolios but also solid returns.

Today, the economy is still slowing down, and economic data has continued to indicate we are past peak growth. Economic growth is still positive but is much weaker than where we were after the initial passing of tax reform. Cutting Corporate Taxes gave a powerful boost to profits, but now we are left recovering from the sugar high we experienced as a result. The growth associated with tax reform set the bar very high for American companies, and they have had difficulty meeting these new higher standards that were set in 2018. The good news is that the Federal Reserve has decided to switch its policy from restrictive to accommodative in an attempt to keep the current expansion going. We have also gotten through the toughest of 1-year comparables. This provides some reprieve from the deceleration we have experienced since the end of last year. That being said, we do not currently see a re-acceleration but rather a stagnation near trend growth levels in the coming quarters. Therefore, we will continue to hold the assets that have historically outperformed towards the end of an expansion. The only tweaks we will be making are in response to the Fed's new accommodative policy, which encourages us to shorten the maturity and the type of the bonds we hold and buy energy instead of consumer staples due to a likely weakening dollar. Other than that, our outlook remains the same.

Please keep in mind, the stock market commonly makes new highs at the end of a cycle despite slowing growth; and we can remain in a late-cycle, slowing growth environment for quite some time. The current expansion is now the longest in American history at 124 months, more than ten years. The previous three expansions, finished by first showing signs of trouble, followed by federal reserve accommodation and finally a large market rally before a recession manifested. This entire process can take 2 to 3 years and has been known to mess with investors' emotions, often luring them in at an inopportune time. This phenomenon is known as FOMO, Fear Of Missing Out. I remain firmly committed to our data-dependent process and will not change our outlook and allocations until the data signals the risk profile of markets and their underlying economies have improved. So turn off the TV and the cheerleaders on CNBC. They're not there to inform or educate you.

The most accurate recession signal we have, yield curve inversion, shown above, may have un-inverted; but market history tells us un-inversion (steepening) typically happens post inversion and before recession manifests.

How the Watch Works

Late CycleIn this Quarter's “How the Watch Works,” we will take an in-depth look at the gears of the economic machine and explain why we are in a late-cycle environment. We will also discuss why the stock market has been able to hold up so well despite the deceleration in growth. And Lastly, we'll address what economic season(s) we expect and how they will affect our allocations.

How do we know we are in a late-cycle environment?

We first use market history as a guide. We examine the state of economic and market data in the lead up to recessions. When one does this, they will find certain characteristics that have a habit of repeating themselves at these points in time. Late cycle environments are typically characterized by the following: low unemployment rates, accelerating private-sector wage growth, high inventory levels, the Fed switching from tightening to accommodating in response to decelerating economic growth. We see inverted yield curves, a strong dollar, copper breaking down as gold moves up, high market-cap to GDP, cycle lows in survey data, and the consumer expectations index well below the present situation index, just to name a few. Currently, we have everything I just listed and more. The preponderance of confirming data is overwhelming, particularly in an environment of growing investor complacency. Which brings us to our next topic:

Why is the US stock market making new highs as year-over-year profit growth goes negative?

There are a few reasons for this, but the primary reason is the actions of the Federal Reserve. When the US economy was peaking last year, the Federal Reserve was beginning a program called Quantitative Tightening, which in effect was taking roughly 50 Billion US Dollars out of circulation each month. They were also raising the interest rate they control, which directly affects the rate banks receive for depositing cash with the Federal Reserve. This rate, called the Federal Funds Rate, also tends to impact other short-term interest rates. The Fed's actions last year and into this year created a dollar shortage for many emerging and foreign countries, like China. The US Dollar is the world's reserve currency and is used as the primary medium of exchange for important economic inputs like Oil, Natural Gas, or grains. When countries can't get the US Dollars they need to function, the value of the dollar relative to other currencies rises. This creates a negative feedback loop that affects emerging countries' ability to pay their debts (which are usually dollar-denominated) and fund their normal operations, which negatively impacts the trading of physical goods. We've seen that show up in the data this year as manufacturing industries around the world have entered recession.

The primary reason the market's been able to rally is the fact that the Fed has stopped Quantitative Tightening and begun to inject liquidity into the economy again. You can see in the chart below the Fed has created over 200 Billion Dollars in just the past two months alone. This action was in response to a crisis in the overnight lending market.


This graph shows the Federal Reserve shrinking its balance sheet via Quantitative Tightening in 2018 and much of 2019 before reversing course in September to bailout the overnight lending markets. Equity investors have seen this as a sign of more “money printing” to come; but the Fed has stated this is a temporary measure. We will see if they capitulate to the easy money addicted.


The overnight lending market, called the Repo market (Repo means Repurchase), needed to be bailed out. This is because the demand for overnight cash (dollars) exceeded the available supply. As a result, the overnight lending rate spiked as high as 9% at a time when the Federal Funds Rate was 2%. The last time we saw this happen was 2008. So this phenomenon raises questions about the structural liquidity in markets today. That being said, the stock market has not reacted negatively to this event and the shift in monetary policy from the FED. The stock market has interpreted it as a willingness from the central bank to step in to prevent calamity. In effect, equity investors believe they are being backstopped by the central bank and their eagerness to come to the rescue. This is another sign that investors are growing complacent and acting more out of greed than out of fear.

The latest example of this propensity for risk-taking behavior is the current cumulative short position in the Volatility Index or VIX. When the volatility of an asset class is going down, the price is typically rising. The inverse is typically true when volatility spikes. VIX measures the volatility of the S&P 500, which is the most popular large-cap stock index. Currently, we have the largest short position ever recorded in the VIX. This means investors are betting volatility continues to decrease in record numbers. Record short positions in the VIX are typically followed by huge spikes in volatility that are coincided with market corrections.

Economic Outlook Summary

In conclusion, we have seen most of the historically reliable recession indicators trigger. These include the 10-year minus 3-month Treasury Yield Curve Inversion, Real GDP above the CBO's estimate for sustainable potential GDP, Age-Adjusted Employment to Population Ratio above 63%, and a large negative spread in the Consumer Confidence Indices' Present Situation vs. Expectations (Included Below).


These indicators are historically accurate but don't necessarily mean immediate impending doom. They tell us we are most likely near the end of the current expansion. It tells me as an asset manager to hold the assets that have historically outperformed in late-cycle environments. It tells me as a financial planner to encourage clients to sell the assets they've wanted to sell, like privately held businesses or homes. It gives us the context needed to make important decisions.

What You Need to Know

You need to know that we are not making an immediate or short-term recession call, nor are we predicting a market crash. Our forecast for GDP remains positive (above zero) in the near term while still slowing (decelerating) towards the anemic trend of 1 or 2 percent per annum. The Federal Reserve has begun to inject the economy with cash and has lowered interest rates thrice. This, coupled with some easing base effects, should modestly lift inflation numbers. We expect the US to be in economic fall in the near term with a possible winter coming 2nd quarter of 2020. Therefore, we will continue to hold US treasuries, Gold, REITs, and Utilities. Consumer Staples will be swapped for Energy and Healthcare, and in tax-deferred accounts, we will continue to trim some of our bond duration as much of the historic move in long-dated bonds is likely behind us… for now. Treasury Inflation-Protected Securities will be our favored bond allocation in the near term.

Economic Fall is historically associated with market peaks due to multiple expansion. Price multiple expansion means the market makes new all-time highs despite the profits of the underlying companies decelerating. In effect, the stock market gets more expensive. We are watching this take place now. S&P 500 earnings declined by roughly 1% year-over-year in the 3rd Qtr. and the stock market still made an all-time high. We expect 4th Qtr. S&P 500 Earnings to also be negative on a year-over-year basis. If this happens, then we will have an earnings recession, as we discussed in the 2nd Quarter Newsletter. Since 1954 we've had 12 earnings recessions, and 9 of them have been accompanied by full-blown economic recessions.

You will know when the investment research we depend on to deliver your version of All-Weather tells us that GDP is likely going negative. Until then, we will continue to hold the assets that have historically outperformed at the end of a cycle.


What I Want You to Know

  • You are not missing out
    • I've had many of you ask if you're missing out on the current stock rally because of our outlook
    • Since the beginning of September 2018, the month S&P 500 peaked that year, to the beginning of this month (November 2019), the Vanguard 500 Index fund (VFFSX) returned 6.07% annualized
    • In that same timeframe, many of your core positions have outperformed, see below
      • XLU (Utilities) has returned 21.17% annualized
      • XLRE (REITs) has returned 17.97% annualized
      • VCLT (Long-Term Inv. Grade Corp. Bonds) 16.94% annualized
      • TLT (Long-Term Treasury Bonds) 17.13% annualized
      • XLP (Consumer Staples) 15.07% annualized
    • Additionally, Healthcare was outperforming the S&P 500 when we sold it in favor of Gold, Gold Miners, and the Energy Sector at the beginning of the year.
      • From the beginning of March to the beginning of this month the Vanguard 500 did 9.11% CAGR
      • In the same timeframe…
        • AGGNX (Gold Miners) returned 17.32% annualized
        • GLD (Gold Bullion) returned 8.15% annualized
        • XLE (Energy) returned -4.97% annualized
  • Many of your Year-to-Date and One-Year-Trailing returns are underperforming the S&P 500 now because the stock market dropped 20% at the end of last year.
    • Would you rather be comparing against the large drawdowns of tech and consumer discretionary sectors or against the significantly smaller drawdowns we experienced in our holdings?
    • Since we shifted our outlook at the end of summer 18', most of our core holdings have outperformed the broader stock market.
      • This means you are better off having been in these holdings than if you were 100% invested in stocks, which isn't even appropriate for most of you anyway
  • Heading into the 2020 Elections, you should know two things about the economy that the politicians and television personalities are not talking about
    • #1 - Wealth and Income inequality are primarily the result of central banking policies
      • Quantitative Easing, ZIRP (Zero Interest Rate Policy) & NIRP (Negative Interest Rate Policy) have done more to increase the divide between rich and poor than any other law, rule, or mechanism
      • Central Banks have inadvertently and unintentionally (I think) created an environment of easy money for the very wealthy
      • Since 2008, Central Banks around the world have been buying bonds and some even stocks
        • This helps support and increase the prices of the assets they are buying
        • This helps increase the net worth of people who own bonds and stocks
      • Since 2008 Central Banks have helped keep interest rates at historic lows
        • Many developed countries even have negative interest rates
          • Currently, roughly $13 Trillion of bonds are negative yielding
            • Over 10% of the entire global bond market
        • Low-interest rates help the creditworthy acquire or refi mortgages to buy real estate
          • This helps support and increase the price of real estate
          • This helps increase the net worth of people who own real estate



  • Low-interest rates help corporations borrow money by issuing low-interest-rate bonds
    • Corporate debt to GDP is currently at an All-Time High
    • Today, more than half of all Stock Buybacks are done with borrowed money by issuing bonds
    • The primary purchasers of stocks have been corporations buying back their stock shares
    • This helps increase the net worth of people who own stocks
    • ImageCurrently, Wealth and Income Inequality are the worst they've been since the 1920s and '30s
      • So you'll likely hear a lot about it
      • The Central Banking Response to the Great Recession of 2008-2009 helped the wealthy recover and then some, but left the masses behind the curve
      • We are only now seeing the lowest-paid workers beginning to see their wages and hours increase. Sadly, this is a sign that we are in a late-cycle environment because these wage increases decrease profit growth.
  • In conclusion, wealth and income inequality are primarily caused by central bank policies of low-interest rates and asset purchases followed by stock buybacks, executive comp. tied to share price performance & current corporate culture.
  • #2 – GDP growth north of 2% is unsustainable without artificial stimulus
    • The two biggest components of economic growth are population growth and productivity growth
    • Working-age population growth has now entered an era of near-zero growth that won't pick up until the 2nd half of the 2020s, barring some massive unexpected immigration
    • Japan and then Europe have gone before us with similar (but worse) demographics
      • The Japanese Stock Index (Nikkei 225) is still below its 1991 High
      • The Euro Stoxx 50 Index is still below its 2000 and 2007 Highs


  • The above graph shows the Year-Over-Year percent change in working-age population growth

  • The above graph shows productivity growth has been muted in the current expansion.
    • Last Quarter, Q3 19', Productivity growth went negative for the first time in 4 years
  • Productivity has been low due to the law of diminishing returns on technologies, the amount of debt being refinanced to keep “zombie” companies alive, and the economically risk-averse nature of millennials, among other factors
  • Tax Cuts and Deregulation took us up over 3% GDP growth, but we've been decelerating ever since.
    • Getting GDP growth above the natural trend line in working-age population and productivity is like fighting gravity
    • Creative Economic Stimulus is required to overcome these two realities

Thank you for taking the time to read this quarter's newsletter. I will be creating videos to accompany many of the topics covered in the newsletter. So keep an eye out for an e-mail or social media post where we dig even deeper than we have here.