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2009 Speaker Series: Prof. Michael Mandelbaum

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2009 Speaker Series: Prof. Michael Mandelbaum

Minneapolis Portfolio Management Group (MPMG), a value-based money management firm, welcomed its clients, valued members of the investment community and distinguished members of the Twin Cities to their 4th annual MPMG speaker series event. This year featured Dr. Michael Mandelbaum on August 27 2009. Just as MPMG has been dedicated to strengthening the financial security of the firm‘s clients, the purpose of this event is aimed at enriching the investment knowledge of the Twin Cities community by bringing speakers of Professor Mandelbaum‘s prominence and experience to share their insights, knowledge and wisdom.

Below is a summary of the August 2009 event. For more information about MPMG or the MPMG Speaker Series, please contact MPMG at 612-334-2000.

mandelbaum grodnick

Michael Mandelbaum – Biography

Dr. Michael Mandelbaum is the Christian A. Herter Professor of American Foreign Policy at the Johns Hopkins University School of Advanced International Studies in Washington, D.C.; where he is also the chairman of the Department of American Foreign Policy. Before joining Johns Hopkins in 1990, Professor Mandelbaum taught at Harvard University, Columbia University and at the United States Naval Academy. He also has taught business executives at the Wharton School of Business at the University of Pennsylvania.

Prof. Mandelbaum is the author of ten books and editor of 12 more covering America‘s nuclear policy, international relationships, sports enthusiasts and the global economy. His most recent works include “The Case for Goliath: How America Acts as the World‘s Government in the 21st Century,” (2006), a provocative, eye-opening look at America‘s global role; and “Democracy‘s Good Name: The Rise and Risks of the World‘s Most Popular Form of Government,” (2007), stressing the role of free markets, providing not only economic growth, but also a school in the qualities that liberal democracy depends on.

Prof. Mandelbaum has explained American foreign policy to diverse groups around the world. His ability to cut through clichés and misunderstandings has made him a popular speaker for more than two decades.

Please note that the illustrations used on the following pages were prepared by MPMG to demonstrate the information presented by Dr. Mandelbaum.

A Summary of Professor Michael Mandelbaum‘s Speech: “Economic Turmoil, the Financial Crisis & the Silver Lining: What Lies Ahead for America and the World”

The Lessons of the Past Year and What Lies Ahead

Approximately one year has passed since the major melt-down of the financial marketplace occurred, putting the entire financial system in jeopardy. Prof. Mandelbaum‘s presentation focused on the causes of the crisis, the lessons learned and what investors may expect going forward.

What happened?

Prof. Mandelbaum believes the difficulties encountered in the past year can be summarized in three primary points:

  1. The latest “bubble” burst in the economy

A housing bubble was created in large part due to government efforts encouraging home ownership and the development of securitized mortgages. This masked the risk of certain types of loans. “A bubble is like a drinking binge,” says Prof. Mandelbaum, “eventually you crash, and end up with a terrible hangover.”

the bursting housing bubble S&P/Case-Shiller National Home Price Index (Seasonally Adjusted)

  1. The financial crisis

The financial industry got into significant trouble due to the leverage it incurred and its poor management of risk. “When Lehman Brothers collapsed (in September 2008), it sowed panic around the world,” says Prof. Mandelbaum. He says the fear created in the financial industry left lenders unwilling to provide credit even to the most worthy borrowers, which caused significant economic damage.

  1. The recession

The economy faced what Prof. Mandelbaum describes as a “deep and damaging” recession, which may be nearing an end. Lower interest rates, tax cuts and government stimulus seem to be combining to help the country overcome the recession.

What have we learned?

For some reassurance that the challenges of the last year are not suffered in vain, Prof. Mandelbaum suggests there are three lessons that can be taken away from it:

Lesson #1 – Bubbles can do enormous damage

Bubbles, he says, have occurred for centuries, yet many people denied that a housing bubble was forming, even when home prices reaches a point of being unsustainable. As a result, investors have become far more cau- tious, though Prof. Mandelbaum fears they may be overly cautious.

Lesson #2 – The U.S. economy remains a central force in the global marketplace

Despite all of the talk of “de-coupling” of other economies from the fortunes of the U.S., the events of the past year have proven otherwise. No country escaped the economic downturn. What‘s more, many overseas investors poured money into the U.S. housing market (in one form or another) and suffered the consequences. The consumer pullback in the U.S. clearly took a toll on other markets, notes Prof. Mandelbaum. He asserts that other countries must develop their own domestic consumer demand to limit a similar impact in the future.

Lesson #3 – The fragility of financial systems

“We need a proper regulatory framework,” says Prof. Mandelbaum who claims the financial system has out- grown existing regulatory standards, set in large part in the wake of the Great Depression. This includes increased regulation of hedge funds, higher capital requirements and greater transparency.

Coping with the coming challenges

In the short-term, Prof. Mandelbaum believes the global economy needs to deal with what may be a weak economic recovery and growing protectionist tendencies that could disrupt global trade (such as the “Buy America” provisions in the stimulus package).

Over the longer-term, he believes the nation needs to address far bigger obstacles, including:

  • Energy issues – Prof. Mandelbaum says a sudden run-up in oil prices could choke off an economic recovery. Beyond that immediate concern, our de- pendence on foreign sources of energy, particularly from unfriendly nations (Iran, Russia, Venezuela) makes us more vulnerable. He believes the U.S. needs to take action to reduce its dependency on foreign sources and the impact that carbon emissions have on climate change.
  • Entitlements – as others who have been featured in the MPMG Speaker Series point out , the demographic tide of baby boomers reaching retirement age will put significant pressure on the Social Security and Medicare systems. This dilemma‘s solutions being considered are cutting benefits to seniors, raising taxes on working people or printing more dollars at the risk of higher inflation, none of which are either easy to implement or desirable.
  • Budget challenges – even without regard to entitlement programs, the government has run up significant debt, due in part to the “bailout” program implemented last year and also the stimulus program. The long-term debt forecasts put the U.S. in a risky position.

The growing federal debt creates a challenge Gross Federal Debt at Year End (Estimate from U.S. Gov‘t Budget for FY 2010) (in $ millions)

The U.S. Economy Remains Resilient Despite a serious crisis that put the U.S. financial system on the ropes in 2008 and helped drive the economy into a deep recession, the potential melt-down has been averted and signs point to a possible end to what has been a difficult recession.

Prof. Mandelbaum believes this reflects the strength of the U.S. economy, and also offers residual benefits. The recession, he says “rids us of things we don‘t need. We are seeing a transfer from less productive to more productive industries.” For example, he sees fewer young people being attracted to “financial engineering” and choosing instead to become mechanical, electrical and environmental engineers.

He is also encouraged by Asia‘s apparent economic strength as we move into a recovery phase. China and India continue to grow rapidly. He pointed out that not only will the world‘s global population continue to grow, but that the rise of the middle class will also continue expanding. Prof. Mandelbaum expects that growth throughout Asia will provide benefits to the U.S. economy well into the future.

world population development

Currency trends reflect the fact, according to Prof. Mandelbaum, that despite all of our troubles, the U.S. is still considered a safe harbor. He points out that after a three-year slide, the dollar regained strength as the financial crisis hit. Even with the nation‘s economy facing its most significant crisis since the Great Depression, it is clear that overseas investors were still drawn to the U.S. economy as a place of refuge.

The explosion of the global middle class population worldwide (in millions)

Going forward, Prof. Mandelbaum anticipates that, due to budget issues and the realities of the booming demand for entitlements like Social Security and Medicare, the nation‘s tax structure will need to be adjusted in the coming years. He suggests this may not necessarily be reflected in higher income taxes, but possibly in new forms of taxation, including a type of consumption tax similar to what is commonly applied in European countries. Carbon taxes may also come into play.

While the nation and the global economy face significant obstacles, Prof. Mandelbaum remains optimistic. “If we muster the political will to meet the challenges, the future can be brighter than the present.”

MPMG agrees with Mandelbaum‘s optimism. Even though our country faces many challenges, the United States has recovered from past issues and is more resilient today because of them. Our strong belief in capitalism and our country motivates us to uncover and invest in companies that we believe will be beneficiaries of these world challenges and reward our clients in the years ahead.

Although the information in this document has been carefully prepared and is believed to be accurate as of the date of publication, it has not been independently verified as to its accuracy or completeness. Information and data included in this document are subject to change based on market and other condition. All prices mentioned above are as of the close of business on the last day of the quarter unless otherwise noted.

The information in this document should not be considered a recommendation to purchase any particular security. There is no assurance that any of the securities noted will be in, or remain in, an account portfolio at the time you receive this document. It should not be assumed that any of the holdings discussed were or will prove to be profitable, or that the investment recommendations or decisions we make in the future will be profitable. The past performance of investments made by MPMG does not guarantee the success of MPMG‘s future investments. As with any investment, there can be no assurance that MPMG‘s investment objective will be achieved or that an investor will not lose a portion or all of its investment.