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This is not about Elon Musk

August 21, 2018

This past Thursday James B. Stewart wrote about Elon Musk in a NY Times article titled “Inside the Mind of a Visionary.” The article provides an interesting description of a grand visionary entrepreneur with an established business. Here are excerpts from that article describing the traits of some of these visionary entrepreneurs.

  • Entrepreneurs often have a temperament and a constellation of traits that can create enormous value
  • The same traits that create value can also associated with significant risk taking
  • Entrepreneurs generally have higher levels of creativity, energy, risk tolerance and impulsivity
  • Impulsivity evidences a need for speed, a sense of urgency, higher motivation and greater restlessness
  • Entrepreneurs are quicker to spot and act on opportunities…sometimes leading them into problems
  • Some develop behavioral destabilizers such as sleep deficiency leading to impaired functioning, higher irritability and adversely affected judgment
  • Some feel that many rules get in the way of getting things done and should not apply to them
  • A suggested solution to reduce risks is to have the visionary slow done by “sleeping on a decision”
  • Founders need a constraint to slow some things down by being willing to consult with their board before an important decision is made
  • There needs to be a balance to make the positive strengths work while minimizing the downside
  • Oh, and they need to stop making announcements through Twitter
  • Another Oh. Grand visionaries do not like to be controlled

I found the article and observations interesting and insightful and while I believe some of these traits applied to the visionaries I have worked with, most did not; but again, Elon Musk’s brilliance and creativity is off the charts.

Avoidable $500,000 embezzlement

August 16, 2018

The front page of Tuesday’s NY Post told about two sisters that allegedly stole a half million dollars over five years from a school cafeteria. The article indicated this might have been going on for as long as fifteen years. I believe all such thefts could be avoided.

Let’s get something straight. Thefts cannot be stopped if someone wants to steal. But they can be caught early on with the right controls that are looked at. Further the knowledge of being caught quickly will also serve as a deterrent. What is needed is an understanding of the system by the person in charge and a regular review of the data generated by that system. Even a bad system can still be effective if the output is looked at timely and understood by the boss or the people that are ultimately responsible.

There are a number of ways this would work. What is needed is a consistent method of recording transactions; a benchmark to measure the results against; a recognition of digressions from the normal trends; percentages not synced with the standard ratios; and an understanding of what the aggregate transactions represent. An example in the case of a cafeteria is total daily sales being matched against the meals served to the total number of customers to determine an average customer check; some of the larger selling entrees being compared to the quantity purchased; and a requirement that all sales be recorded on a customer check and in a cash register. While each business is different, each has characteristics that can be measured to control performance and adherence to the system.

This example is about a school cafeteria, but the point here applies to every type of business and operation. You need a system that can control activities and provide needed information timely and it needs to be done in a manner that is a deterrent to fraud and embezzlement. Further, and most importantly, no system can be effective if the reports and data generated aren’t reviewed. And it is the review will make almost all thefts avoidable.

Some more about the National Debt

August 14, 2018

The previous blog indicated that the national debt is complex and confusing and that no one is doing anything about it. Well, it is also overwhelming for those that really think about it. So, maybe it is better to do nothing..… Well, that might work if the problem would eventually go away; but I do not believe this is not one of those “eventualities.”

There are some move moving parts that I want to add to my last blog:

  1. Our dysfunctional Congress periodically plays political chicken by holding votes on approving the debt limits. There is no logic to withholding approval since every penny spent was preapproved by Congress. If they had concerns about increasing the debt limit, they should have not voted for the spending instead of approving it. Not permitting the increase in the debt limit because of their prior vote to increase it is totally illogical, mean spirited and likely a self-aggrandizing grandstanding charade. This tête-á-tête is referred to as the fiscal cliff.
  2. There are previously legislated debt increases that are not being addressed in any manner. One of these is the deficit that will be caused by the complete depletion of the Social Security “trust fund” in 2034. This will occur because the annual of Social Security outgoes became greater than its revenues in 2010. When taking into account interest received by the trust fund, an actual reduction of the trust fund will occur for the first time this year. Starting in 2034 the excess outgoes will then be added to our national debt if nothing is done. A comment here is that this was a major issue during the Bush – Gore campaign in 2000. However, NOTHING has been done about this from 2000 through today. Does this mean we were being kidded with a fallacious campaign issue; or maybe we are the brunt of a massive “kid” of incompetence inaction and ignorance?
  3. There is a similar issue with Medicare.

It is human nature to not want to deal with overwhelming problems that will not occur in the foreseeable future. It is easy to ignore and figure that someone else will deal with it when it becomes a real problem. This is like ignoring a very small ceiling leak until the ceiling is about to cave in, or rather, actually caves in. Note that the “foreseeable future” differs for different groups of people. For me 2034 is far away and not a concern; for the government it is not so far off that it should be totally ignored. Actually, based on a government’s life span and considering phase in periods, 2034 in this situation is just around the corner.

It seems to me that the people we elect to represent us in governing the country need to consider all of major issues. To me, that includes those far on the horizon that are highly likely to occur. And I consider the rising debt and the root causes in the highly likely category.

The above are my opinions only and in no way expresses the views of my firm or anyone else. Again I want to thank Anthony Imbesi for his studious research. Ed Mendlowitz.

Understanding the National Debt

August 9, 2018

Dealing with the national debt is a continuing conversation and regardless of how anyone in Congress feels or what they say, no one is doing anything to address its mounting rise. Here is some information to help you make some sense of its multifaceted complexity.

Some facts

  • The national debt is what the federal government owes. The amount as of today is about $21,300,000,000,000; that is $21.3 trillion. You can get an update anytime you want by clicking here:
  • The projected interest to be paid in the next twelve months is $310 billion.
  • The total federal projected expenditures over the next twelve months is $4.2 trillion.
  • The total federal projected revenues over the next twelve months is $3.4 trillion.
  • Simple arithmetic: $4.2 – $3.4 = $.8 trillion deficit or $800 billion more spending than income increasing the national debt by that amount in the next year.

A logical argument

  • More arithmetic: If the average interest rate the government pays increases by 1 percentage point the interest payments will increase by about $220 billion making the total interest payments $530 billion.
  • For the past few years interest rates have been pretty stable, but that stability has been drastically disrupted recently by large increases in the short term rates. At some point, it is probable that the long term rates will also increase further pushing up the government’s interest costs.
  • Simple fact: When governmental expenditures increase it will increase the national debt unless there is a corresponding increase in revenue.
  • The primary source of government revenues are taxes. Tax revenues usually increase when the economy expands raising income levels that are then subject to taxation, or when the tax rates are increased.
  • Comment: When tax rates are increased it tends to stunt economic growth, which then will reduce or retard government revenue growth sometimes wiping out any windfall from the tax rate increase.
  • Tax rate increases also will reduce taxpayer spending which will dampen the economy.
  • A possible plan that has been suggested is for the government to increase spending on projects that will accelerate job creation thereby increasing the tax base, but at its best this is a slow drawn out process, and the funding for these projects will further increase the debt.

Vicious cycle

  • When there is a deficit and taxes are reduced, and if income doesn’t expand sufficiently keeping the gap between spending and revenue about the same, a vicious cycle is created by growing interest costs on increasing debt that then further increases the interest costs.
  • Note that as the government borrowing is increased, interest rates will trend upward to offset the increased amount of debt that the market will need to absorb.
  • More fuel for the vicious cycle.
  • Increased borrowing and increased interest rates usually are accompanied by decreased confidence in governmental policy further causing interest rate increases and reductions in taxpayer spending. Add that to the vicious cycle.

It won’t be getting better

  • All of these items, i.e. the national debt, annual deficits, interest rates and a lessening of taxpayer confidence, will be increasing annually for the foreseeable future exasperating the situation.
  • That is, it won’t be getting better anytime soon.

What is being done about this?

  • Question: Who in Washington is doing anything about this?
  • Answer: No one!
  • Question: What legislator would actively move to cut government spending, or increase taxes?
  • Answer: No one!
  • Question: Is the level of taxpayer confidence in our legislators increasing or decreasing?
  • Answer: What do you think?

Alternative hypotheses

  • Inflation can help cure some of the burden of repaying the debt by lessening the value of the debt.
  • The government can literally “print” money fueling inflation and that would increase the money in circulation having the effect of devaluing the debt.

I am concerned about the mounting debt, but cannot figure out anything I could do, other than writing a blog such as this attempting to make people aware of the situation, as I see it. As to my long term planning, it is only as good as the stability of the country’s economic situation. Right now this is not keeping me awake, but it has been creeping into my mind a little more than I would like.

The above expresses my personal opinions. I have been assisted with considerable research from a summer intern, Anthony Imbesi, who skillfully found me the objective data I needed to present my opinions, but he is in no way expressing any opinion about the above.

Ed Mendlowitz

This is not about Paul Manafort

August 7, 2018

According to the news, Paul Manafort is in a bit of trouble, is a big spender, is broke and cheated on his taxes. All alleged since none of this has been proven or admitted to. However, this is not about him, but about people that think they lead a charmed life, buy whatever they want, believe they will never run out of money and can do whatever they want to maintain that lifestyle.

If you have been following my blogs you will know that I am concerned about clients’ future financial security. Part of achieving that is investing sensibly for the future; and/or reducing current spending so you don’t have to curtail essential spending later on. Excessive spending to feed an ego or present an image that tries to elicit envy from others is a fool’s game. Nobody cares. There might be a momentary glimmer of admiration and then it is gone just as quickly being replaced by the expected results and benefits from the relationship or encounter. Being a legend in your own mind is just that.

So called power brokers certainly need to appear to have access to decision makers, so image is part of the persona, but delivery of value is the ultimate test, and many times that doesn’t follow. Empty suits don’t remain tall.

Some people have substantial value in houses and occasionally more than one property. However, as you get older and slow down, it is cash flow that becomes important and not the asset values. Cash comes from earnings, pensions, and interest and dividends; not from houses…or art or other tangible objects of value. For long term financial security it is necessary to arrange your affairs so you will have a steady reliable stream of cash flow. Further, conventional mortgages are made to people with adequate cash flow able to make the payments, not those with their value residing solely in real estate sans cash flow. There is an exception for reverse mortgages but I recommend that only as a last resort.

Wasteful spending without abandon is a travesty to your and your family’s future financial security. Tomorrow does come except if you are dead. Make tomorrow the tomorrow you want it to be by making today a sensible today.

The Ten Commandments rewritten by Moses

August 2, 2018

The Ten Commandments appear in Exodus and reappear in Deuteronomy. The version in Deuteronomy is substantially the same, but there are some differences.

The Ten Commandments were transmitted by God soon after the Israelites left Egypt. Deuteronomy has Moses’ recapitulation of the Journey forty years later as the Jews prepared to enter the Promised Land. Moses attempted to remind those present about the circumstances that led to where they were, and his words in Deuteronomy indicate some differences along with added laws and observances. The Ten Commandments had some changes in the 4th, 5th and 10th Commandments that you can see below. None of the substance was changed and most of the public representations of The Ten Commandments use the version in Exodus. Occasionally post issuance editing of a document is appropriate; even with The Ten Commandments.

Be aware that the different religions, while using the same words, have different divisions of the ten. I posted a blog indicating this on June 17, 2014. Here is a link: The wording used here is from the New International Version (NIV).

The Ten Commandments

Ten Commandments Img

What to do when there is a flat yield curve

July 31, 2018

The previous blog explained yield curves. I felt it was important to post what it is so my readers would have an awareness of it, since it will likely be more in the news if the curve flattens out further. However, I received a few calls questioning what it means and if there is any relevance to the average investor, so here is today’s column.

I do not recommend that the average nonprofessional investor do anything about it. It is an economic phenomenon that occurs occasionally in the ever present economic cycles. At some point it will right itself out.

It is normal to have a yield curve with longer term rates greater than the short term rates and when that is not the case, then either the short term rates will decline or long term rates will increase (or a combination of directional moves) getting the curve back to normal. It is actually not that complicated; the rate structure will change and the differences will widen.

Right now, bank certificate of deposit rates are higher than they’ve been for a number of years, and I have been suggesting CDs for shorter term investors. For fixed income investors for longer terms, i.e. over 5 years, I am suggesting fixed annuities up to about 8 or 9 years and then corporate bonds for longer periods. CDs and annuities are quite easy to buy; bonds are more difficult.

Because of the difficulty in acquiring bonds, many people invest in bond funds or index funds. I do not suggest this since the funds’ values will fluctuate and will certainly decrease if interest rates increase. Actual bonds will also fluctuate in value, but at the end of the term, assuming no default and the bonds are retained, the principal will be repaid. That is not the case with the bond funds where there is no “end of the term”. My only warning with actual bonds is to only buy them if you are very certain you will not have to sell them prior to maturity. See previous blogs on how to handle long term bonds.

A comment I get from many of my older clients is that they do not want to buy longer term bonds since they might not live that long. Well, I have news for most of you; hopefully you are in a position where you will outlive your money. If you won’t, then you have a problem that needs to be addressed sooner, rather than later. So assuming your investments are such that they will survive you, then what is the problem with buying long term bonds? The longer term bonds should provide a greater cash flow than the shorter term CDs and it is the cash flow that you are living off of; not really the asset values.

Flattening yield curves are interesting to see and talk about, but unless you are an active bond trader, should be of no concern. Secure investing for cash flow should be your focus. Pay attention to what can affect you, and be interested or curious at what won’t, but do not be overly concerned about it.