Toward a More Prosperous Future

Goldman Sachs 2013 Global Macro Conference New York May 15, 2013

Michael Milken
Chairman, The Milken Institute

Milken Institute Global Conference

Finance Industries Regions Education Human Capital Philanthropy Health Climate/Energy Government Media

April 28 May 1, 2013

www.milkeninstitute.org

Milken Institute Global Conference

165 panels

620 speakers

www.milkeninstitute.org

3,700 attendees

April 27 30, 2014

Investing in African Prosperity

Tony Blair
Former Prime Minister Great Britain and Northern Ireland

Bill Gates
Co-Chair and Trustee Bill & Melinda Gates Foundation

H.E. Paul Kagame Rhonda Zygocki Strive Masiyiwa Michael Milken

President Republic of Rwanda Executive Vice President, Policy and Planning Chevron Chairman and Founder, Econet Wireless Chairman, Milken Institute

What is the most powerful force the world has ever produced?

y=Ce

kt

#4 Compound interest.

A=Pe
a= P= r = t =

rt

Future Value Original Principal Rate Time

Towards a More Prosperous Future

Things We Know for Sure
Things That Will Change the World

Rate of Return Concerns

How to Save $1-Million in 40 Years $25,000-a-year
@

0%

$6,642-a-year
$1,304-a-year

@
@

6%
12%

(or a one-time investment of $10,747)

Towards a More Prosperous Future

Things We Know for Sure
Things That Will Change the World

Percent of Population Owning a Passport

100%

75%
75%

50%

25%

20%
U.S. U.K.

Sources: U.S. State Dept.; U.K. Parliament

Expansion of balance sheets of major central banks

Central bank total assets (% of GDP)

35
BoJ

30 25 20 15 10 5
0
Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012

ECB

BoE Fed

Source: Bloomberg.

Central bank target interest rates remain low

Percent 6 5

Bank of England

4
3 2 Bank of Japan 1 Federal Reserve European Central Bank

0 2007
Source: Bloomberg

2008

2009

2010

2011

2012

Quantitative Easing Effect on S&P 500

1,600 1,500
1

25%
1,400 1

1,300 1,200 1,100

1,000 1

S&P 500 Index

40%

21%
0

900 800 700

600 0

QE

QE2

Operation Twist QE3

QE4
0

Source: Bloomberg, 4/21/2013 Washington Post, NY Times, Babson Capital.

Global real short-term interest rates are negative

Global real interest rate (%)

5 4
3

2 1 0
-1 -2

1996

1998

2000

2002

2004

2006

2008

2010

2012

Note: 3-month interest rates: Canada, China, France, Germany, Italy, Japan, United Kingdom, United States; Weighted by 2012 GDP. Sources: DataStream, International Monetary Fund, Milken Institute.

Record low 10-year treasury yields

Ten-year Treasury yield, percent 18

16
14

12
10

8
6

4
2

Average: 6.7 percent

1971 1978 1985 1992 1999 2006 2013

0 1964
Source: Bloomberg

Interest Rates and Buying a Car

1981
3-year loan $10,000 car 18% interest

2012
5-year loan $25,000 car 2.99% interest

$796* monthly payment

* = 2012 dollars

$423 monthly payment

Wealth Patterns in Selected Countries

2012 wealth per adult in 1,000 U.S. dollars (rounded)

Country Australia France Germany Italy Japan United Kingdom United States

Average $354.9 $265.4 $174.5 $212.9 $269.7 $250.0 $262.3

Median $193.7 $81.3 $42.2 $123.7 $141.4 $115.2 $38.8

<$10k 8.8% 17.0% 32.0% 20.8% 4.3% 17.4% 31.9%

>$1M 5.5% 4.8% 2.2% 2.4% 3.4% 3.3% 4.7%

Source: Global Wealth Databook 2012, Credit Suisse

When Social Security was introduced in 1935, the average life span in the U.S. was 61.7 years. In 2012, life expectancy in the U.S. reached 78.6 years.

Sources:

National Center for Health Statistics, National Vital Statistics Reports, vol. 54, no. 19, June 28, 2006. U.S. Census Bureau, International Database.

Longer Life Expectancy; Longer Retirements

France
95

85

Life Expectancy at age 65

26.2 30.8 14.4 18.3 22.0 26.5 Retirement Age

Women Men

28.6 32.9

75

65

55 1970 1980 1990 2000 2010 2020 2030 2040 2050

Source: OECD Ageing and Employment Policies, France 2005

Funding of the 100 Most-Underfunded S&P 500 Defined-Benefit Pension Plans

US$ Billions

$50 $0 -$50 -$100 -$150

-$200
-$250 -$300
Source: Bloomberg

2001 2002 2003

2004 2005 2006 2007 2008 2009 2010 2011

2012

Low interest rates are keeping a lid on funded levels

S&P 500 U.S. Plans

The Worlds Top 10 Economies

Today
U.S. (21.4%) China (10.4%) Japan (8.4%) Germany (5.2%) France (4.4%) Brazil (3.6%) U.K. (3.5%) Italy (3.2%) Russia (2.7%) India (2.6%)
(Percent of World GDP)

2050

1820
China (28.7%) India (16.0%) France (5.4%) England (5.2%) Prussia (4.9%) Japan (3.1%) Austria (1.9%) Spain (1.9%) U.S. (1.8%) Russia (1.7%)

China (18.2%) U.S. (16.6%) India (12.1%) Brazil (4.8%) Indonesia (3.5%) Japan (3.1%) Mexico (3.1%) Russia (2.7%) Germany (2.4%) U.K. (2.2%)

Sources: World Bank/Angus Maddison, The World Economy: Historical Statistics (OECD)/ PricewaterhouseCoopers/Milken Institute/Goldman Sachs (9/09); updated 2/25/13

Worlds 10 Fastest Growing Economies

Annual Average GDP Growth, %

2001 - 2010 Angola China Myanmar Nigeria Ethiopia Kazakhstan Chad Mozambique Cambodia Rwanda 11.1% 10.5% 10.3% 8.9% 8.4% 8.2% 7.9% 7.9% 7.7% 7.6%

2011 - 2015 China India Ethiopia Mozambique Tanzania Vietnam Congo Ghana Zambia Nigeria 9.5% 8.2% 8.1% 7.7% 7.2% 7.2% 7.0% 7.0% 6.9% 6.8%

Source: The Economist; IMF (excludes countries with populations<10 million)

Emerging market and developing economies are expected to surpass advanced economies in 2013
Share of world GDP, based on purchasing -power -parity (PPP) 65 Advanced economies 60

55
50 45 40

Developing economies

35
30 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017
Source: International Monetary Fund.

Market Capitalization: 1950

Japan 9% Europe 26% Other 6%

U.S. 59%

US + Japan = 68%

Market Capitalization: 1988

Other 14%
Europe 17% Japan 40%

U.S. 29%

US + Japan = 69%

Market Capitalization: 2013

Europe 23%

Japan 8%

U.S. 34%

Other 35%

US + Japan = 42%

Advancing Technology
Cost

Speed
Storage Access

Cost of a 1-Minute Phone Call from the U.S. to India

1975 $10 2013 $.01 Telecommunications cost to business approaches zero.

Download speed
Ten years ago, a T1 line could download 1.2 megabits per second.
Today, a 4G device can download 6.4 megabits per second. and much faster speeds are coming soon.
Source: PC World

IBM System 370/168 in 1976

8 megabytes for $8 million

Cost per megabyte: $1 million

Apple iPad Mini

64 gigabytes for $529 Cost per megabyte: $0.008

By 2014, there will be more mobile phones 7.3 billion than people on the planet.

Source: Silicon India 2/28/13

Blockbuster vs. Netflix - 2002

Market Value

40 Netflix = 1 Blockbuster

Blockbuster
$4.5 billion

Netflix
$0.16 billion

Blockbuster vs. Netflix - 2013

Market Value

Netflix
$13.1 billion

Blockbuster $0
Date: 5/14/13

Towards a More Prosperous Future

Things We Know for Sure
Things That Will Change the World

Things That Will Change the World

1. Human Capital and Education

P=SFti*(SHCi+SSCi+SRAi)
P Ft HC SC RA = = = = = Prosperity Financial Technology Human Capital Social Capital Real Assets

The 21st century will see a worldwide competition

for human capital.

Human capital is the largest asset class.

Cost of Raw Materials & Energy

1920s Automobile Todays Microchip

60%

<2%

60% of the nearly 1 million Chinese people with assets over 10 million yuan ($1.6 million) are thinking about emigrating to the U.S. or Europe.

Source: U.S. Department of Homeland Security (WSJ 2/22/12 Plan B for Chinas Wealthy: Moving to the U.S./Europe)

Examples of Social Capital

Universal suffrage Universal education and health care Police and fire protection Religious freedom Cultural resources Property rights Protection of creditors Financial reporting standards

Three Ways for a Country to Build Human Capital

Increase education and practical skills Import people with skills Improve health and quality of life so people are more productive

Between 1870 and 1950, Americans added almost one year of education each decade. By 1960, the highest average grade level in the U.S. exceeded every other nation by two years. Since 1960, we have made no progress and several other nations have surpassed us.
Source: Claudia Goldin and Lawrence Katz / The Race between Education and Technology

I believe we can keep the promise of our founding, the idea that if youre willing to work hard you can make it here in America, if youre willing to try. - Reelection Night
Source: New York Times 11/7/12

Skilled and Unskilled Jobs

1950 Today
65%
Skilled
20% Semiskilled

60%
Unskilled

20% Skilled

15%
Unskilled

20% Semiskilled

U.S. lags significantly in graduating engineers

2008 (or most recent year)
Percent of first university degrees in engineering

35 30 25 20 15 10 5 0 U.S.
Sources: National Science Foundation, MAPI.

U.K.

Canada

Germany

Japan

Korea

China

The Jobs Problem (It Isnt Jobs Its Trained Workers)

Millions

125 100 75 50 25

123,000,000 highskilled jobs will be available in 2020 50,000,000 Americans will qualify for those jobs

Source: Edward Gordon, Winning the Global Talent Showdown

Return on Human Capital Investment

Preschool Programs
Return

School
Opportunity Cost of Funds

Job Training
Age

Source: James Heckman, University of Chicago

Big gaps in educational attainment are present by age 5. Some children are bathed in an atmosphere that promotes human capital development, and, increasingly, more are not. By 5, it is possible to predict with depressing accuracy, who will complete high school and who wont.
Source: New York Times July 29, 2008

James Heckman

Nobel Prize in Economics

Knowledge Universe

Knowledge Universe
U.S. - Domestic International

Early Childhood Education

Dependent Care Services

Life Long Learning

Consumer Spending U.S. Asia

Housing Transportation Food Insurance/pensions Healthcare Entertainment Apparel and services Supplemental Education 33% 18% 13% 11% 6% 5% 4% 2% Food 23% Supplemental Education 15% Housing 10% Clothing 8% Other 8% Transportation 6% Healthcare 5% Communication 5%
Source: U.S. Bureau of Labor Statistics/CLSA

Things That Will Change the World

2. Immigration

Highly skilled, entrepreneurial

and educated immigrants are

crucial to any nations prosperity.

Immigrants in Silicon Valley

More than half of Silicon Valleys science and engineering workforce is foreign-born. More than 15 percent of Silicon Valley startup companies were founded by immigrants from India.

Another 13 percent had CEOs from China or Taiwan.

Sources: Vivek Wadhwa, Duke University

World University Ranking

Life Sciences and Medicine
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Harvard University University of Cambridge University of Oxford Stanford University Berkeley University of Tokyo Johns Hopkins University MIT Yale University UCLA 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. Imperial College London UC San Diego National University/Singapore University of Melbourne University College London University of Toronto University of Edinburgh Kyoto University University of Sydney University of British Columbia

2000 9,500 students 20% foreign 108 from China

2010 14,500 students 29% from non-EU countries 1,800 from China and Malaysia

Students at Imperial College come from 126 nations. 36% of staff members are immigrants.

Where U.S. Immigrants Were Born 1960

Latin Asia 5% America 9% Other 1%

2011
Other 4% Canada 2%

Canada 10%
Europe 75%

Asia 28% Latin America 53%

Source: Migration Policy Institute, U.S. Census

Americas Changing Faces

Annual Population Growth Rate (2001-2011)

Asians 3.1%
Source: U.S. Census Bureau

Blacks 1.1%

Hispanics 3.5%

European 0.2%

Californias Changing Faces

Population Growth (2000 - 2011)

Blacks 2.9%
Source: U.S. Census Bureau

Asians 21.8%

Latinos 23.8%

European (4.0%)

Top Ten Home-Buyer Surnames

California

1990
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Smith Lee Johnson Garcia Brown Williams Miller Wong Martinez Jones

2010
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. Nguyen Lee Garcia Chen Lopez Rodriguez Gonzalez Hernandez Martinez Kim

Source: MDA DataQuick, county records / California Association of Realtors

Latino participation in U.S. presidential elections

Actual voters
Eligible voters

Source: Pew Hispanic Center.

Mexico is the second largest importer of U.S. goods

U.S. exports by country (2012)

Source: International Trade Administration.

Mexico is the 3rd largest exporter to the U.S.

U.S. imports by country (2012)

Source: International Trade Administration.

Things That Will Change the World

3. The Rise of the Middle Class

Percentage of Population in Asias Middle Class

Malaysia China Thailand Indonesia Philippines India
0% 10% 20% 30% 40% 50% 60% 70%
Sources: Euromonitor; World Bank; CLSA Asia-Pacific Markets / 2010

2014 2009

Indias Developing Middle Class

Percent of Total Population by Age
100% 80% 60% 40% 20% 2000
Source: Eurostat (EU27 projections)

5%

14% 31% 46%

Wealthy Middle Class

Aspiring Middle Class Impoverished

2008 2020 2030

China and India will make waves in the global middle class
Share of global middle-class consumption, 2000-2050

Source: OECD.

Global Middle-Class Consumer Spending

2009
EU 30% Rest of World 26% Other Asia 9% EU 14% U.S. 7% Japan 4%

2030
Rest of World 20%

Other Asia 14%

India 2% U.S. 21%

China 18% India 23%

Japan 8%

China 4%

Source: Morgan Stanley Smith Barney. Households with daily per capita incomes between $10 and $100, adjusted for local purchasing power.

Vehicle Ownership by Country

Cars Per 1,000 People
1,000 800 600 400 200

U.S.
Source: HIS Global Insight / Guggenheim

Italy

Spain

Russia

China

Brazil Indonesia India

Projected Global Vehicle Population

5,000 4,000 3,000 2,000 1,000

2000 - 4000

979 2012 2050E

Source: HIS Global Insight / Guggenheim

Things That Will Change the World

4. Access to Financial Capital

P=SFti*(SHCi+SSCi+SRAi)
P Ft HC SC RA = = = = = Prosperity Financial Technology Human Capital Social Capital Real Assets

America Goes to Work

U.S. and Fortune 500 Employment
200 180 160 140 120 New financial technologies are fully implemented
U.S. = +62 million jobs

100
80 60 Modern capital markets begin 75 80
Fortune 500 = minus 4 million

70

85

90

95

00

Index 1970 = 100

Institutional Investor Base for Non-investment Grade Loans

Banks CLOs
Hedge, distressed and high-yield funds Prime rate funds, financial and insurance companies

Sources: S&P LCD / JPMorgan.

European credit is a bank market

Bonds and loans as a share of total corp. debt

Sources: ECB

Job Creation Since 1970

Number of jobs, Index, 1970=100 190

170
150 130 110 90 1970 1975 1980 1985 1990 1995 2000 2005 United States Western Europe

Cyprus: Large bank assets relative to GDP

Bank assets (% country GDP) 800 700

600 500
400

300 200
100

Ireland

Cyprus

France

Spain

Portugal Germany

Italy

Greece

Note: Data as of 03/09/2012. Source: DataStream.

Bank assets are several times higher than GDP in some European countries
Percent 500 400 300

Assets of the 4 biggest banks (%GDP), 2012

441
358 314

251
189

200 100 0

160

131

129

119

99 50

Sources: BankScope, Milken Institute.

Chinese small businesses create jobs; Large enterprises get the bank loans
Large Enterprises
88% 44% 35%

Mid-size enterprises Small Enterprises

17%
Number of Enterprises
Sources: McKinsey

Number Employed

GDP

Bank Loans

The Nature of Credit

1. Credit is what counts, not leverage. 2. Most loans to real estate are not investment-grade. 3. Interest rates are volatile and unpredictable.

4. Credit research is more than ratings.

5. Sovereign debt is historically risky.

6. Debt values underpin all capital markets

Sovereign Debt Has Long Been Suspect

When national debts have once been accumulated to a certain degree, there is scarce, I believe, a single instance of their having been fairly and completely paid.
Adam Smith

A Greek History of Default

In the 4th century BC, the Temple of Delos had to take an 80% haircut on loans extended to 13 Greek city-states.
-Kenneth Rogoff and Carmen Reinhart Economists
Source: Financial Times 11/4/11

A Greek History of Default

Greece has been in default for roughly one out of every two years since it gained independence (1829).
Economists Kenneth Rogoff and Carmen Reinhart
Source: Financial Times 11/4/11

Sovereign Debt Defaults

Brazil Ecuador Greece Nigeria Russia Turkey Venezuela

1828 1898 1902 1914 1931 1937 1961 1964 1983 1986 1990

1832 1868 1911 1914 1931 1982 1999 2008

1826 1843 1852 1893 1932 2011

1982 1986 1992 2001 2004

1839 1885 1918 1991 1998

1876 1915 1940 1978

1826 1848 1860 1865 1892 1898 1983 1990 1995 1998 2004

Sources: This Time is Different Chartbook: Country Histories on Debt, Default, and Financial Crises, Carmen M. Reinhart

Unit Labor Costs in Europe

Index (2005 125 120

115
110 105

100

Greece

Italy

Spain

Source: European Central Bank, Q4 2011

Euro area unit labor costs

Selected countries
Index (2000=100) 150 140
130 120 Ireland

Greece Italy

110 100 90
80

France

Germany

2000

2002

2004

2006

2008

2010

2012

2014

Source: OECD Economic Outlook.

Euro area: Divergent trends in unemployment rate

2012
Unemployment rate, percent
30 25.0

25
20

24.3

15.9 15
10

14.8

11.4

10.7

10.2 8.1

7.9
5.5

5
0 Spain Greece Portugal Ireland Euro area average Italy France U.S. U.K. Germany

Source: EuroStat.

Euro area: Youth unemployment rates are alarmingly high in euro zone 2012
Youth unemployment rate, percent 60 50 55.4

53.2

40
30

37.7

35.3
30.6 24.7

23.1

21.0
16.2

20
10

8.2

Greece

Spain

Portugal

Italy

Ireland

France Euro are average

U.K.

U.S.

Germany

Source: EuroStat.

Things That Will Change the World

5. Energy

Technology Game Changer

Traditional Drilling
Modern Techniques

Spindletop (Beaumont, TX), 1901 Drilling Depth: 1,139 feet

Marcellus Shale (Pennsylvania), 2012 Drilling Depth: 9,000 feet

Major Shale Basins Around the World

Source: U.S Energy Information Administration.

Technology Game Changer

U.S. now has the largest energy reserves in the world
Total fossil fuel reserves, % of world total
17.016.6

8.3 5.7 5.5 5.4 4.0 3.7 3.2 2.9 2.4 2.4 2.3

1.2 0.9 0.8 0.7 0.7 0.7

Note: Fossil fuels include oil, natural gas and coal. Source: U.S. Congressional Budget Office

Things That Will Change the World

6. Crowdsourcing

Crisis: Deepwater Horizon Oil Spill

April 20, 2010

Crisis: Deepwater Horizon Oil Spill

Oil flowed unabated 53,000 gallons a day into the Gulf of Mexico for three months

Up to 180,000-square kilometer area

Time needed to cap the well: 5 months Average daily oil collection rate: 2000 barrels per day

$1.4 million prize

The Challenge: create an innovative solution to speed the

pace of cleaning up seawater surface oil resulting from spillage from ocean platforms, tankers, and other sources.

The Winners: Two teams demonstrated the ability to recover

oil at a rate of more than 2,500 gallons per minute with a 70% efficiency rate. The first-place winner recovered oil 3X faster than the industrys best cleanup rate.

Among the Top 10 finalists

5 teams from the U.S.
2 teams from Norway 2 teams from Finland 1 from the Netherlands 7 teams exceeded the previous industry-best recovery rate 7 teams exceeded a 70% efficiency

Team Vor-Tek: A Top 10 Finalist Fred Giovannitti

Things That Will Change the World

7. Bioscience

The Value of Health

Each life is priceless
but in economic terms, over the past two centuries, as much as 50% of all economic

growth can be traced to advances in health.

Worldwide Life Expectancy Growth

+36 +18 +5 26 Years 49 Years +18

67 Years

31 Years

1820
Source: United Nations Development Program

1900

1950

2010

Life Expectancy in East Asia

80

75.4

60

46.5
40 1955-1960 2011

Source: : United Nations, Department of Economic and Social Affairs, Population Division (2011). World Population Prospects: The 2010 Revision, CD-ROM Edition

Lifestyle Makes a Difference

70% of health-care spending about $2.5 trillion is spent on lifestyle-related diseases. 30% is spent on hereditary diseases.

U.S. Economy $15.3 trillion

Sources: CIA Handbook / Centers for Medicare and Medicaid Services (2009)

Obesity Prevalence Among U.S. Adults

1991

> 15% < 15%

Sources: Trust for America's Health and the Robert Wood Johnson Foundation

Obesity Prevalence Among U.S. Adults

2012

<25% 25-30%+ 30%+

Sources: Trust for America's Health and the Robert Wood Johnson Foundation

The price of a souvenir bucket of popcorn at Yankee Stadium is only $12! But with 2,473 calories whats the real cost to you?
More than 100% of daily recommended calorie requirement.

If David Lived in America

In 2009, which state had the highest percentage of adults who ate more than three daily servings of vegetables?
a. b. c. d. e. Alabama California Hawaii Oregon Tennessee

Of course, the U.S. Department of Agriculture lists among vegetables:

French fries Catsup Iceberg lettuce

Chronic Disease Study Failure to address chronic diseases adequately costs the U.S. economy more than $1 trillion annually.

National Institutes of Health Budget

$US billions
$30 $25 $20 $15 $10 $5
98 99 00 01 02 03 04 05 06 07 08 09 10 11

$200 billion

Source: National Institutes of Health

Outlook for Biomedical Research Spending (2012)

20% China India
Brazil Korea Japan

10%

Germany Australia UK

0%

Singapore
France

-10%
Source: OECD Government Budget Appropriations or Outlays for Research and Development (2012)

US

Canada

An organization dedicated to shortening the time to find cures and better treatments for all life-threatening diseases

Celebration of Science - 2012

U.S. Energy Secy Steven Chu The Beery Family

DNA Pioneer James Watson

Elias Zerhouni, President, Global R&D, Sanofi

National Science Foundation Director Subra Suresh

Elizabeth and Ariel Glaser

November 7, 1991

Earvin Magic Johnson at Global Conference

With AIDS pioneering researcher Tony Fauci at Celebration of Science

The Berlin Patient

Timothy Brown First person cured of AIDS Recent research reports that bone marrow transplant resulted in a new immune system

Sequencing the Human Genome

2003: 13 years $3 billion
Today: A few hours Approaching $1,000

We are entering an

Age of Precision Medicine.

Precision medicine Immunology Stem cells Orgs

3-D Printing

Create a legacy that relegates cancer and other life-threatening diseases to our childrens history books.

Toward a More Prosperous Future

Goldman Sachs 2013 Global Macro Conference New York May 15, 2013

Michael Milken
Chairman, The Milken Institute