a new global perspective: yesterday, today and … · a new global perspective: yesterday, today...

1

Citadel Investment GroupCitadel Investment Group

A New Global Perspective:Yesterday, Today and Tomorrow


ChicagoMarch 1, 2011

Michael MilkenChairman, The Milken Institute



• Perception vs. Reality• Perception vs. Reality



• Capital Markets

• Building Human Capital

• Toward a New American Century

• Capital Markets



• Democracy• Disease• Education


Humanity’s Top 10 Problems for Next 50 Years


Education• Energy• Environment• Food• Population• Poverty• Terrorism & War• Water

Education• Energy• Environment• Food• Population• Poverty• Terrorism & War• Water



EducationEducation• Education• Energy• Education• Energy

Nobel Laureates in Science/Medicine

Nobel Laureates in Science/Medicine



• Education• Education• Education

• Education• Education• Education

Humanity’s Top 10 Solutions for Next 50 Years

Humanity’s Top 10 Solutions for Next 50 Years

• Energy• Environment• Food• Population• Poverty• Terrorism & War• Water

• Energy• Environment• Food• Population• Poverty• Terrorism & War• Water

• Energy• Energy• Energy• Education• Education• Education• Energy

• Energy• Energy• Energy• Education• Education• Education• Energy

“Real estate pricescollapsed, creditdried up, house

“Real estate pricescollapsed, creditdried up, housebuilding stopped ...

in 1792.”

building stopped ...

in 1792.”

2

• The stock market dropped 50 percent.

• Banks curtailed lending.

• Commentators predicted widespread industrial bankruptcies

• The stock market dropped 50 percent.

• Banks curtailed lending.

• Commentators predicted widespread industrial bankruptcies

…in 1974.…in 1974.

industrial bankruptcies.

• Unemployment rose quickly.

• Interest rates were volatile.

industrial bankruptcies.

• Unemployment rose quickly.

• Interest rates were volatile.

What is the most valuable real estate in the world?


1. New York City

2. Moscow

1. New York City

2. Moscow

3. London

4. Dubai

5. Beverly Hills

6. Tokyo

3. London

4. Dubai

5. Beverly Hills

6. Tokyo



BlockbusterBlockbuster$4.5 billion$4.5 billion40 Netflix = 1 Blockbuster

Blockbuster vs. Netflix - 2002Market Value


$$

Netflix$0.16 billion

Netflix$0.16 billion



Netflix$11.2 billionNetflix

$11.2 billion431 Blockbusters = 1 Netflix

BlockbusterBlockbuster$26 million$26 million

Source: WSJ.com – 2-25-11

U.S. (23.6%)China (8.7%) Japan (8.6%) Germany (5 2%)

U.S. (23.6%)China (8.7%) Japan (8.6%) Germany (5 2%)

TodayToday

The World’s Top 10 Economies(Percent of World GDP)

The World’s Top 10 Economies(Percent of World GDP)

China (18.5%) U.S. (16.5%) India (12.0%)Brazil (4 8%)

China (18.5%) U.S. (16.5%) India (12.0%)Brazil (4 8%)

20502050 18201820China (28.7%) India (16.0%)France (5.4%) England (5 2%)

China (28.7%) India (16.0%)France (5.4%) England (5 2%) Germany (5.2%)

France (4.4%) U.K. (3.6%)Italy (3.4%) Brazil (3.1%)Canada (2.6%)Russia (2.4%)

Germany (5.2%)France (4.4%) U.K. (3.6%)Italy (3.4%) Brazil (3.1%)Canada (2.6%)Russia (2.4%)

Sources: World Bank/Angus Maddison, “The World Economy: Historical Statistics” (OECD)/PricewaterhouseCoopers/Milken Institute/Goldman Sachs (9/09)

Brazil (4.8%)Indonesia (3.5%)Japan (3.1%)Mexico (3.0%)Russia (2.7%) U.K. (2.3%)Germany (2.3%)

Brazil (4.8%)Indonesia (3.5%)Japan (3.1%)Mexico (3.0%)Russia (2.7%) U.K. (2.3%)Germany (2.3%)

England (5.2%) Prussia (4.9%) Japan (3.1%) Austria (1.9%)Spain (1.9%) U.S. (1.8%) Russia (1.7%)

England (5.2%) Prussia (4.9%) Japan (3.1%) Austria (1.9%)Spain (1.9%) U.S. (1.8%) Russia (1.7%)

3

Market Capitalization: 1950Market Capitalization: 1950

EuropeEurope

Japan9%

Japan9%

Other6%

Other6%

Europe26%

Europe26% U.S.

59%U.S.59%

US + Japan = 68%US + Japan = 68%

Europe17%

Europe17%

JapanJapan

Other14%

Other14%


17%17%

U.S.29%U.S.29%

Japan40%

Japan40%


Europe25%

Europe25%

Japan8%

Japan8%

U SU S


U.S.30%U.S.30%

Other37%

Other37%


2009The Third Greatest Year of Wealth Creation


Brazil 143%Russia 129%Indonesia 123%


Chile 85% China 80%Israel 75%

Chile 85% China 80%Israel 75%Indonesia 123%

Peru 118%Turkey 102%India 97%Argentina 95%Ukraine 91%

Indonesia 123%Peru 118%Turkey 102%India 97%Argentina 95%Ukraine 91%

Israel 75%S. Korea 69%Mexico 51%U.K. 35%U.S. (S&P 500) 23%U.S. (Dow) 18%


Date: Bloomberg / December 31, 2009

1406%

World Stock Market PerformancePercent Gain (January 2000 to February 24, 2011)


962%715%704% EstoniaEstonia

611% RomaniaRomania571% QatarQatar

Sri LankaSri LankaRussiaRussia

PeruPeru

Japan -45%Japan -45%

Source: Bloomberg, February 24, 2011

-100%-100% 900%900% 1200%1200% 1500%1500%

UK -15%UK -15%

600%600%300%300%

429%434%

4% US/DJIA4% US/DJIA2.5% Germany2.5% Germany

418%

0%0%

PakistanPakistanKuwaitKuwait

Czech RepublicCzech Republic





Chile 85% China 80%Israel 75%

Chile 85% China 80%Israel 75%Indonesia 123%

Peru 118%Turkey 102%India 97%Argentina 95%Ukraine 91%

Indonesia 123%Peru 118%Turkey 102%India 97%Argentina 95%Ukraine 91%



Date: Bloomberg / December 31, 2009

4

1406%



962%715%704% EstoniaEstonia

611% RomaniaRomania571% QatarQatar

Sri LankaSri LankaRussiaRussia

PeruPeru

Japan -45%Japan -45%

Source: Bloomberg, February 24, 2011

-100%-100% 900%900% 1200%1200% 1500%1500%

UK -15%UK -15%

600%600%300%300%

429%434%

4% US/DJIA4% US/DJIA2.5% Germany2.5% Germany

418%

0%0%

PakistanPakistanKuwaitKuwait

Czech RepublicCzech Republic

The Nature of CreditThe Nature of Credit

1. Credit is what counts, not leverage.

2. Most loans to real estate are not investment-grade.

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.

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.

High-Yield Corporate Bond Spread1986-2010

1,200

1,400

1,600

1,800

2,000

ds (

basi

s po

ints

)

L t

0

200

400

600

800

1,000

1,200

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010

Hig

h-Yi

eld

Bond

Spr

ead Long-term average

(1986-2010)

Data is as of October 2010.Source: Bloomberg.

Leverage Finance YieldsLeverage Finance Yields

15%

18%

21%

High yield bond yieldHigh yield bond yield

Source: JPMorgan.

6%

9%

12%

15%

86 88 90 92 94 96 98 00 02 04 06 08 10

Institutional loan yieldInstitutional loan yield8.06%8.06%7.03%7.03%

Most Texas Banks were AAA in the 1980sMost Texas Banks were AAA in the 1980s

First RepublicBank CorporationFirst RepublicBank Corporation

The prices of residential real estate in Houston (in real terms) declined 40% from

The prices of residential real estate in Houston (in real terms) declined 40% from te s) dec ed 0% f o 1983-1988.

- OFEHO Housing Index / FRB study

te s) dec ed 0% f o 1983-1988.

- OFEHO Housing Index / FRB study

5

Foreclosures in HoustonForeclosures in Houston

30,00030,000

20,00020,000,,

19801980

10,00010,000

1,0001,00019861986 19921992

Source: Harris County Foreclosure Listing ServiceSource: Harris County Foreclosure Listing Service

Annual U.S. Bank Failures 1979-2007Annual U.S. Bank Failures 1979-2007

200200

150150

Source: FDIC

100100

5050

19801980 19851985 19901990 19951995 20002000 20052005

AAA 16,907AA+ 240AA 2,098AA- 3 414

AAA 16,907AA+ 240AA 2,098AA- 3 414

BB+ 238BB 313BB- 331B+ 339

BB+ 238BB 313BB- 331B+ 339

Investment-Grade SecuritiesInvestment-Grade Securities Non-investment Grade SecuritiesNon-investment Grade Securities

Standard & Poor’s RatingsNew Issues: 1/1/2000 to 9/30/2008

Standard & Poor’s RatingsNew Issues: 1/1/2000 to 9/30/2008

AA- 3,414A 2,602A- 2,027BBB+ 903BBB 1,371BBB- 1,359

AA- 3,414A 2,602A- 2,027BBB+ 903BBB 1,371BBB- 1,359

B+ 339B 330B- 1,189CCC+ 293CCC 214CCC- 104CC 36C 11

B+ 339B 330B- 1,189CCC+ 293CCC 214CCC- 104CC 36C 11

Source: Bloomberg 11/6/08

U.S. Lending to Third-World CountriesAt Face Value

U.S. Lending to Third-World CountriesAt Face Value

$1,300$1,300

$1,500$1,500$ billions$ billions

$700$700

$900$900

$1,100$1,100

19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989

“When national debts have once been accumulated to a certain degree, there is “When national debts have once been accumulated to a certain degree, there is

Sovereign Debt Has Long Been SuspectSovereign Debt Has Long Been Suspect

scarce, I believe, a single instance of their having been fairly and completely paid.”

Adam Smith

scarce, I believe, a single instance of their having been fairly and completely paid.”

Adam Smith

Secondary Market Prices of Third-World Debt

Secondary Market Prices of Third-World Debt

7070

8080

100100Cents on the dollarCents on the dollar

2020

3030

4040

5050

6060

19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989

6

Sovereign Debt DefaultsSovereign Debt DefaultsArgentinaArgentina EcuadorEcuador ParaguayParaguay RomaniaRomania TurkeyTurkey UruguayUruguay

•• 18301830•• 18901890•• 19151915

•• 18321832•• 18681868•• 19111911

•• 18271827•• 18741874•• 18921892

••18761876••19151915••19401940

•• 18761876•• 18911891•• 19151915

••19151915••19331933••19811981

Sources: Sturzenegger and Zettelmayer (2006), Moody‘s, Milken Institute.

•• 19151915•• 1930s1930s•• 19821982•• 20012001

•• 19111911•• 19141914•• 19311931•• 19821982•• 19991999•• 20082008

•• 18921892•• 19201920•• 19321932•• 19861986•• 20032003

••19401940••19781978

•• 19151915•• 19331933•• 19831983•• 20032003

••19811981• Perception vs. Reality• Perception vs. Reality



• Capital Markets



• Capital Markets



Berkeley1964

Los Angeles Under Siege

P = ProsperityP = Prosperity

P=ΣFti*(ΣHCi+ΣSCi+ΣRAi)P=ΣFti*(ΣHCi+ΣSCi+ΣRAi)P = ProsperityFt = Financial TechnologyHC = Human CapitalSC = Social CapitalRA = Real Assets

P = ProsperityFt = Financial TechnologyHC = Human CapitalSC = Social CapitalRA = Real Assets

America Goes to WorkU.S. and Fortune 500 EmploymentAmerica Goes to WorkU.S. and Fortune 500 Employment

200200

180180

160160

140140

U.S. = +62 million jobsU.S. = +62 million jobsNew financialtechnologies arefully implemented

New financialtechnologies arefully implemented

0000959590908585808075757070

140140

120120

100100

8080

6060Fortune 500 = minus 4 millionFortune 500 = minus 4 million

Index 1970 = 100Index 1970 = 100

7

Partnering Talent with CapitalPartnering Talent with Capital

Ted TurnerTed Turner

Craig McCawCraig McCaw

Bill McGowanBill McGowan

Research Sales

The Wall Street Pyramid^

Trading

Sales Research

Trading

The $55 Billion MisunderstandingInvesting in the Nifty Fifty

12/31/72 – 12/31/81


12/31/72 – 12/31/81

90% of the “Nifty Fifty” showed a 90% of the “Nifty Fifty” showed a negative return over nine years. The average inflation-adjusted

rate of return was -46%.

negative return over nine years. The average inflation-adjusted

rate of return was -46%.


12/31/72 – 12/31/81


12/31/72 – 12/31/81

The average P/E ratio of these 16 i d d f 66

The average P/E ratio of these 16 i d d f 66 companies dropped from 66 to 11.companies dropped from 66 to 11.

Avon ADP Coke Disney

Dr. Pepper Kodak H-P J&J

Eli Lilly Marriott McDonald’s Merck

Polaroid Rite-Aid Wal-Mart Xerox

Avon ADP Coke Disney

Dr. Pepper Kodak H-P J&J

Eli Lilly Marriott McDonald’s Merck

Polaroid Rite-Aid Wal-Mart Xerox

19741974RESULT #1:

Companies with the highest returns on capital fastest rates of growth in market

RESULT #1:Companies with the highest returns on

capital fastest rates of growth in market capital, fastest rates of growth in market share and employment, and greatest

innovation were denied access to equity and debt capital.

capital, fastest rates of growth in market share and employment, and greatest

innovation were denied access to equity and debt capital.

19741974RESULT #2:

With financial institutions weakened by the recession public and private markets

RESULT #2:With financial institutions weakened by

the recession public and private markets the recession, public and private markets began displacing banks as the source of

most corporate financing.

the recession, public and private markets began displacing banks as the source of

most corporate financing.

8

Institutional Investor Base forNon-investment Grade LoansInstitutional Investor Base forNon-investment Grade Loans

100%

BanksBanks CLOsCLOs Hedge, distressed andhigh-yield fundsHedge, distressed andhigh-yield funds

Prime rate funds, financial and insurance companiesPrime rate funds, financial and insurance companies

Sources: S&P LCD, JPMorgan (4/12/2010).

20%

40%

60%

80%

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

CompanyCompany

Effects of Regulation … or Just Proposed Regulation


• 1985 – Media attacks high-yield bonds (nomenclature changes to “junk”)

• 1985 – Media attacks high-yield bonds (nomenclature changes to “junk”)

• 1987 – Congress considers limiting tax deductibility of interest on acquisition-related debt

• 1989 – FIRREA (S&L); HLT (banks)

• 1987 – Congress considers limiting tax deductibility of interest on acquisition-related debt

• 1989 – FIRREA (S&L); HLT (banks)



• 1990 – Largest negative rate of return on high-yield bonds (-9-10%)

• 1990 – Largest negative rate of return on high-yield bonds (-9-10%)

• 1991 – Highest rate of return on high-yield bonds in one year since WWII (higher than 1975-76)

• 1990-1991 - High yield-bonds out-perform all investment classes, including equities and government

• 1991 – Highest rate of return on high-yield bonds in one year since WWII (higher than 1975-76)

• 1990-1991 - High yield-bonds out-perform all investment classes, including equities and government

High-Yield Annual Returns 1982 - 1991High-Yield Annual Returns 1982 - 1991

40%40%

30%30%

46.3%46.3%

19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989 19901990 19911991

20%20%

10%10%

0%0%

-10%-10%

Sources: Bloomberg and Merrill Lynch

Dow Industrials: 1973-76 and 2008-11

11500

13000

900

1000

DJIA, 1973-1976 DJIA, 2008-2011

Feb 28, 2011

5500

7000

8500

10000

500

600

700

800

578 on Dec. 6, 1974 6,547 on March 9, 2009

9

High-Yield Annual Returns 2004 - 2010High-Yield Annual Returns 2004 - 2010

2020

4040

6060PercentPercent

-4040

-2020

00

2020

20042004 20052005 20062006 20072007 20082008 20092009

Sources: Bank of America; Merrill Lynch, July 12, 2010

2010YTD2010YTD

Neutron LegislationLate 1980s

Neutron LegislationLate 1980s

“It was OK to lend money to build a “It was OK to lend money to build a money to build a building, but it wasn’t OK to lend money to any company that would hire a person to work in the building.”

money to build a building, but it wasn’t OK to lend money to any company that would hire a person to work in the building.”

Merck1986 - 1992

Merck1986 - 1992

250$ billions

Market Caps of Top 10 Pharma

$257B

$190B125

0August 1992 April 1994

$190B

"I thought we were doing God's work.”"I thought we were doing God's work.”

- Gordon BinderFormer CEO, Amgen

- Gordon BinderFormer CEO, Amgen




• Capital Markets



• Capital Markets



10

2010 U.S. Household Balance Sheet$69 Trillion Total

2010 U.S. Household Balance Sheet$69 Trillion Total

Insurance Reserve Funds

20%

Insurance Reserve Funds

20%Other Financial Other Financial

Shares and Securities

33%

Shares and Securities

33%

Loans1%

Loans1%

Deposits and Currency

9%

Deposits and Currency

9%

Source: Federal Reserve Flow of Funds, Q3 2010

Real Estate27%

Real Estate27%

Assets3%

Assets3%

Other tangible7%

Other tangible7%

Gary Becker1992 Nobel Prize in Economics

(at the Milken Institute Global Conference)

Gary Becker1992 Nobel Prize in Economics

(at the Milken Institute Global Conference)

U.S. Financial Assets24%

U.S. Financial Assets24%

Q3 2010 Human Capital in the U.S.$295 Trillion Total

Q3 2010 Human Capital in the U.S.$295 Trillion Total

Human and SocialCapital

76%

Human and SocialCapital

76% Source: Derived from Kevin Murphy and Federal Reserve, Flow of Funds Q3, 2010

Human capitalis the largest asset class.

Human capitalis the largest asset class.

The 21st Century will see a worldwide competition The 21st Century will see a worldwide competition a worldwide competition

for human capital.a worldwide competition

for human capital.

People Make the DifferencePeople Make the Difference

e

487,000

651,000737,000 $30

Att

enda

nce

1984

261,000

1985 1986 1989$15

11

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at

“Innovation has nothing to do with how many R&D dollars you have. When Apple came up with the Mac, IBM was spending at least 100 times more on R&D. It's about the people you have [and] how you're led.”

-Steve Jobs

least 100 times more on R&D. It's about the people you have [and] how you're led.”

-Steve Jobs

Apple vs. Sony 1997Market Value


Sony$34 3 billi

21 Apple = 1 Sony$34.3 billion

Apple$1.65 billion

Apple$1.65 billion

8 Sony = 1 Apple

AppleApple



Sony$37 billion

Sony$37 billion

Date: February 24, 2011

Apple$321 billion

Apple$321 billion

SingaporeSingapore

Per Capita GDPPer Capita GDP

19601960

$40,336$40,336

20102010

$2,229$2,229

JamaicaJamaica

$4,825$4,825

Source: IFS, WEO;IMF; in 2008 USD

,,

$2,213$2,213




• Capital Markets



• Capital Markets



Toward a New American CenturyToward a New American Century•• HousingHousing

•• EducationEducation

•• ImmigrationImmigration

•• EntitlementsEntitlements

•• EnergyEnergy

•• Health / Medical ResearchHealth / Medical Research

12

Fallacy:“Any loan to real estate is a good loan … ”

Fallacy:“Any loan to real estate is a good loan … ”

• Low down payments• Tax preferences

Extended payback terms

• Low down payments• Tax preferences

Extended payback terms

The American Dream Turns into A NightmareThe American Dream Turns into A Nightmare

• Extended payback terms• Lack of pre-payment penalties• Non-recourse terms that shield non-housing assets• The myth that housing prices always rise

• Extended payback terms• Lack of pre-payment penalties• Non-recourse terms that shield non-housing assets• The myth that housing prices always rise

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WWIWWI WWIIWWIIGreat

DepressionGreat

Depression70’s

Boom70’s

Boom80’s

Boom80’s

BoomLatestBoomLatestBoom30%30%

20%20%

Home prices don’t go up foreverChange in home prices in 100-plus years

Home prices don’t go up foreverChange in home prices in 100-plus years

19901990

Sources: Robert Shiller, Milken Institute.

18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010

10%10%

0%0%

-10%-10%

-20%-20%

When Lenders Make Non-Recourse LoansHeads they lose -- Tails they lose

When Lenders Make Non-Recourse LoansHeads they lose -- Tails they lose

• If prices rise, the borrower keeps the gain

• If prices fall, the borrower can

• If prices rise, the borrower keeps the gain

• If prices fall, the borrower can walk, sticking the lender witha long-term depreciating asset

• If interest rates rise, the value ofthe loan depreciates as the “real” average life of the asset is extended

• If interest rates fall, the borrower prepays

walk, sticking the lender witha long-term depreciating asset

• If interest rates rise, the value ofthe loan depreciates as the “real” average life of the asset is extended

• If interest rates fall, the borrower prepays

•• These loans were never worth what the government These loans were never worth what the government

… the biggest problem was government… the biggest problem was government--guaranteed mortgage loans.guaranteed mortgage loans.

said they were worth.said they were worth.

•• They were worth less the day they were issued.They were worth less the day they were issued.•• Lack of call protectionLack of call protection•• High transaction costHigh transaction cost

• An investor can sell 1,000 shares of IBM stock –worth about $165,000 – in less than a second with a transaction cost under $10.

• An investor can sell 1,000 shares of IBM stock –worth about $165,000 – in less than a second with a transaction cost under $10.

High Transaction CostsHigh Transaction Costs

• But a $165,000 house in foreclosure takes months to sell with fix-up costs, commissions and legal fees that can exceed $20,000.

• But a $165,000 house in foreclosure takes months to sell with fix-up costs, commissions and legal fees that can exceed $20,000.

13

Current Home Ownership RatesCurrent Home Ownership Rates

70%70%

75%75%

Sources: EuroStat, HUD, Milken Institute.

50%50%

55%55%

60%60%

65%65%

U.K.U.K. CanadaCanada U.S.U.S. DenmarkDenmark FranceFrance JapanJapan GermanyGermany

Historical U.S. Home Ownership RatesHistorical U.S. Home Ownership Rates

60%

65%

70%

Sources: HUD, Historical Statistics of the United States, Milken Institute.

40%

45%

50%

55%

60%

1900 1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010

In the second quarter 2010, the U.S. home ownership rate was 66.9 percent, the lowest since 1999.

In the second quarter 2010, the U.S. home ownership rate was 66.9 percent, the lowest since 1999.

July 27, 2010U.S. Census Bureau

July 27, 2010U.S. Census Bureau

Housing 32.7%Transportation 18.0%Food 12.8%


Consumer SpendingConsumer SpendingU.S.U.S. AsiaAsia

Food 23%Education 15%Housing 10%


Insurance/pensions 11.2%Healthcare 5.7%Entertainment 5.1%Apparel and services 4.1%Cash contributions 3.6%Education 2.0%Personal care products 1.2%

Insurance/pensions 11.2%Healthcare 5.7%Entertainment 5.1%Apparel and services 4.1%Cash contributions 3.6%Education 2.0%Personal care products 1.2% Source: U.S. Bureau of Labor Statistics/CLSA

Clothing 8%Other 8%Transportation 6%Healthcare 5%Communication 5%


2,1352,135

Average Size of American HousesAverage Size of American Houses

2,5002,500

2 0002 000

square feetsquare feet2,4692,469

2009200919701970 19801980 19901990 20002000 20062006

2,0002,000

1,5001,500

1,0001,000

Source: National Association of Home Builders / U.S. Census Bureau



Consumer SpendingConsumer SpendingU.S.U.S. AsiaAsia



Insurance/pensions 11.2%Healthcare 5.7%Entertainment 5.1%Apparel and services 4.1%Cash contributions 3.6%Education 2.0%Personal care products 1.2%

Insurance/pensions 11.2%Healthcare 5.7%Entertainment 5.1%Apparel and services 4.1%Cash contributions 3.6%Education 2.0%Personal care products 1.2% Source: U.S. Bureau of Labor Statistics/CLSA



14

Culture change is coming.America’s priorities will change.

Culture change is coming.America’s priorities will change.

• We’ll spend relatively less on housing, cars and consumables.

• We’ll spend relatively less on housing, cars and consumables.and consumables.

• A greater portion of household income will be allocated to education, medical research and savings.

and consumables.

• A greater portion of household income will be allocated to education, medical research and savings.





•• EnergyEnergy


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

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 the U.S. exceeded every other nation by two years.

Since 1960, we have made no progress and several other nations have surpassed us.

the U.S. exceeded every other nation by two years.

Since 1960, we have made no progress and several other nations have surpassed us.

“If an unfriendly foreign power had attempted to impose on America the mediocre educational

f th t i t

“If an unfriendly foreign power had attempted to impose on America the mediocre educational

f th t i t performance that exists today, we might have viewed it as an act of war.”

- 1983

performance that exists today, we might have viewed it as an act of war.”

- 1983

• Hong Kong 542• Canada 534• Japan 531

Estonia 531

• Hong Kong 542• Canada 534• Japan 531

Estonia 531

How 15-Year-Olds Score in SchoolHow 15-Year-Olds Score in SchoolScienceScience

• Hong Kong 547• South Korea 547• Canada 527

Japan 523

• Hong Kong 547• South Korea 547• Canada 527

Japan 523

MathMath

Source: OECD Programme for International Student Assessment 2006

• Estonia 531• South Korea 522• United Kingdom 515• Germany 513• OECD average 500• Poland 498• United States 489• Russian Federation 479

• Estonia 531• South Korea 522• United Kingdom 515• Germany 513• OECD average 500• Poland 498• United States 489• Russian Federation 479

• Japan 523• Estonia 515• Germany 504• OECD average 498• Poland 495• United Kingdom 495• Russian Federation 476• United States 474

• Japan 523• Estonia 515• Germany 504• OECD average 498• Poland 495• United Kingdom 495• Russian Federation 476• United States 474

The Jobs Problem(It Isn’t Jobs – It’s Trained Workers)

The Jobs Problem(It Isn’t Jobs – It’s Trained Workers)

125125

100100 123,000,000 123,000,000

Millions

Source: Edward Gordon, “Winning the Global Talent Showdown”

7575

5050

2525

high-skilled U.S. jobs will be

available in 2020

high-skilled U.S. jobs will be

available in 2020 50,000,000 Americans will qualify

for those jobs

50,000,000 Americans will qualify

for those jobs

15

Five times more people

are learning English in

China than there are

l i E l d ”

Five times more people

are learning English in

China than there are

l i E l d ”people in England.”

- HSBC Bank

people in England.”

- HSBC Bank

India… India… • Extracurricular activities

consisted of academic coaching in 95% of the households

• Extracurricular activities consisted of academic coaching in 95% of the householdshouseholds.

• 43% of parents want their children to get a Master’s degree; 29% want them to get a PhD.

households.

• 43% of parents want their children to get a Master’s degree; 29% want them to get a PhD.

South KoreaSouth Korea•Spend more on education

(22%) than housing (13%)

•70% of Korean parents

•Spend more on education (22%) than housing (13%)

•70% of Korean parents pexpect their children to work overseas, of which more than half expect their children to work in the US.

pexpect their children to work overseas, of which more than half expect their children to work in the US.

Knowledge UniverseEarly Childhood EducationKnowledge UniverseEarly Childhood Education

Knowledge UniversePrimary and Secondary Education

Knowledge UniversePrimary and Secondary Education

We must not be afraid of competition.

We must not be afraid of competition.

We must be ready to compete.

We must be ready to compete.

16

Eddie “The Eagle” EdwardsEddie “The Eagle” Edwards

• 1988 Calgary Olympics

• Britain’s first (and last!) ski jumper



• Last place finish with a jump of 253 feet


Matti Nykanen of Finland wins the gold with a jump of 412 feet.

Eddie “The Eagle” EdwardsEddie “The Eagle” Edwards







Eddie “The Eagle” Rule:Olympic qualifiers must compete in international events and place in the Top 30 percent or Top 50 competitors.

Eddie “The Eagle” Rule:Olympic qualifiers must compete in international events and place in the Top 30 percent or Top 50 competitors.





•• EnergyEnergy


Highly skilled, entrepreneurial

and educated immigrants are

Highly skilled, entrepreneurial

and educated immigrants are g

crucial to the United States’

prosperity.

g

crucial to the United States’

prosperity.

Doctorates Awarded in the U.S.Doctorates Awarded in the U.S.

• 1/3 of all doctoral students in the U.S. are foreign born, up from one in ten 30 years ago

• 1/3 of all doctoral students in the U.S. are foreign born, up from one in ten 30 years ago

Sources: National Science Foundation/Div of Science Resource Statistics

years ago.

• 84% of their doctorates are in engineering and the sciences.

years ago.

• 84% of their doctorates are in engineering and the sciences.

A 3-Point Plan to Invest in AmericaA 3-Point Plan to Invest in America

• Encourage skilled non-citizen workers and their families to live legally in the U.S.

• Encourage skilled non-citizen workers and their families to live legally in the U.S.

• Retain the students we train.

• Induce entrepreneurs to invest in the American dream.

• Retain the students we train.

• Induce entrepreneurs to invest in the American dream.

17

It’s time to level the playing field.It’s time to level the playing field.

• Canada, the United Kingdom and Australia encourage immigrant investors

• Canada, the United Kingdom and Australia encourage immigrant investors

• Singapore entices leading researchers and technologists to its $2 billion Biopolisbiomedical center.

• Singapore entices leading researchers and technologists to its $2 billion Biopolisbiomedical center.

Albert EinsteinAlbert Einstein

Building Human Capital Through ImmigrationBuilding Human Capital Through Immigration

Jerry YangJerry Yang Madeleine AlbrightMadeleine Albright(Germany)(Germany) (Taiwan)(Taiwan)

Sergey Brin(Russia)

Sergey Brin(Russia)

Alex. Graham Bell(Scotland)

Alex. Graham Bell(Scotland)

(Czechoslovakia)(Czechoslovakia)

Gustavo Dudamel(Venezuela)

Gustavo Dudamel(Venezuela)





•• EnergyEnergy


• Unrealistic assumptions about rates of return on assets

• Unrealistic assumptions about rates of return on assets

Entitlements Entitlements –– The Math Doesn’t Add UpThe Math Doesn’t Add Up

• Falling ratios of current workers to retirees• Workers who pay in to the system for too few years• Pensioners who live longer than the original system

planners assumed.

• Falling ratios of current workers to retirees• Workers who pay in to the system for too few years• Pensioners who live longer than the original system

planners assumed.

When Social Security was introduced in When Social Security was introduced in 1935, the average life span in the U.S. was 1935, the average life span in the U.S. was 61.7 years.61.7 years.

In 2009, life expectancy in the U.S. In 2009, life expectancy in the U.S. reached 78.1 years. reached 78.1 years.

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

18

In many countries, people have come to believe that they could – were entitled to – retire in their fifties.

R f liti ll i ibl

In many countries, people have come to believe that they could – were entitled to – retire in their fifties.

R f liti ll i ibl

Restoring Economic GrowthRestoring Economic Growth

Reform can seem politically impossible.

The U.S. has an opportunity to fix its entitlements dilemma before it reaches an economic tipping point.

Reform can seem politically impossible.

The U.S. has an opportunity to fix its entitlements dilemma before it reaches an economic tipping point.

9595

8585

Longer Life Expectancy; Longer RetirementsFrance

Longer Life Expectancy; Longer RetirementsFrance

Life Expectancy at age 65Life Expectancy at age 65

WomenWomenMenMen

28.628.6 32.932.9

19701970 19801980 19901990 20002000 20102010 20202020 20302030 20402040 20502050

7575

6565

5555

Retirement AgeRetirement Age

14.414.4 18.318.322.022.0 26.526.5

26.226.2 30.830.8

Source: OECD Ageing and Employment Policies, France 2005

Redefining Retirement in the U.S.Redefining Retirement in the U.S. Nationwide Protests in FranceNationwide Protests in France

“Retired at last!”“Retired at last!”





•• EnergyEnergy


What we pay vs. the true cost

19

• Uncertainty faced by investors and producers because of price volatility.

• Uncertainty faced by investors and producers because of price volatility.

Energy ChallengesEnergy Challenges

• The rise in atmospheric greenhouse gases.

• Loss of energy technology leadership.

• The potential for political instability in oil-exporting nations.

• The rise in atmospheric greenhouse gases.

• Loss of energy technology leadership.

• The potential for political instability in oil-exporting nations.

2.5

3.0

70

90

2000 $/barrel 2000 $/gallon

Price Volatility Increases Alternative-Fuel Investment Risk

Price Volatility Increases Alternative-Fuel Investment Risk

Retail GasRetail Gas

1.0

1.5

2.0

10

30

50

1975 1980 1985 1990 1995 2000 2005

Source: Richard Newell, Resources for the Future

Crude OilCrude Oil

“This difficult effort will be “This difficult effort will be the ‘moral equivalent of war’ the ‘moral equivalent of war’

President Jimmy Carter on the energy crisisPresident Jimmy Carter on the energy crisisand proposed energy legislationand proposed energy legislation

---- except that we will be except that we will be uniting our efforts to build uniting our efforts to build and not destroy.”and not destroy.”

40.5%

43.6%Reagan

Carter

36.1%

37.1%Ford

Nixon

Percentage Percentage of Oil from of Oil from F ig F ig

65.5%

66.2%Obama

Bush

47.2%

49.8%Clinton

Bush

gForeign Foreign SourcesSources





•• EnergyEnergy


20

Half of all economic growth in the last two centuries can be traced to medical research advances.

Half of all economic growth in the last two centuries can be traced to medical research advances.to medical research advances.to medical research advances.

Company Value ComparisonU.S. $ billions

Company Value ComparisonU.S. $ billions

Average: Consumer $131.6 19.2(P&G Estée Lauder Coca Cola Pepsi Kraft)

Average: Consumer $131.6 19.2(P&G Estée Lauder Coca Cola Pepsi Kraft)

EnterpriseValue

EnterpriseValue

Est.P/E Ratio

Est.P/E Ratio

(P&G, Estée Lauder, Coca Cola, Pepsi, Kraft)

Average: Pharma $105.3 11.2(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis,Abbott Labs, AstraZeneca, Amgen, BMS and Eli Lilly)


Average: Pharma $105.3 11.2(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis,Abbott Labs, AstraZeneca, Amgen, BMS and Eli Lilly)


• Invention of the wheel

• Development of agriculture

• Invention of the wheel

• Development of agriculture

Some Great Achievements in HistorySome Great Achievements in History

• The printing press

• Copernican revolution

• Industrial and technology revolutions

• Extension of life expectancy

• The printing press

• Copernican revolution

• Industrial and technology revolutions

• Extension of life expectancy

67Years

55

+18+18

+18+18+36+36

Worldwide Life Expectancy GrowthWorldwide Life Expectancy Growth

18201820 19001900 19501950 20102010

26Years

31Years

49Years

Source: United Nations Development Program

+5+5

Half of all economic growth in the last two centuries can be traced to medical research advances.

Half of all economic growth in the last two centuries can be traced to medical research advances.to medical research advances.to medical research advances.

Company Value ComparisonCompany Value Comparison

Average: Consumer 20.8(P&G, Estée Lauder, Coca Cola, Pepsi, Kraft)

Average: Consumer 20.8(P&G, Estée Lauder, Coca Cola, Pepsi, Kraft)

Est. P/E RatioEst. P/E Ratio


Average: Pharma 12.8(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis, Medtronic

Abbott Labs, AstraZeneca, Teva, Amgen, BMS and Eli Lilly, UnitedHealth)


Average: Pharma 12.8(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis, Medtronic

Abbott Labs, AstraZeneca, Teva, Amgen, BMS and Eli Lilly, UnitedHealth)


21

Top Causes of DeathTop Causes of Death

1. Pneumonia/flu2. Tuberculosis1. Pneumonia/flu2. Tuberculosis

1. Heart disease2. Cancer1. Heart disease2. Cancer

19071907 20102010

Source: AARP Bulletin / June 2007

3. Heart disease4. Diarrhea5. Stroke

3. Heart disease4. Diarrhea5. Stroke

3. Stroke4. Respiratory disease5. Accidents

3. Stroke4. Respiratory disease5. Accidents

Since 1900, childhood death rates from pneumonia Since 1900, childhood death rates from pneumonia and influenza have fallen 93 percent.and influenza have fallen 93 percent.

Three Solutionsto Healthcare Challenges


• Prevention• Prevention

• Cost reduction

• Research leading to cures

• Cost reduction


Lifestyle Makes a DifferenceLifestyle Makes a Difference

30% is spent on hereditary diseases30% is spent on hereditary diseases

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

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

U.S. Economy$14.14 trillionU.S. Economy$14.14 trillion

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

hereditary diseases.hereditary diseases.

Only in AmericaOnly in America Only in AmericaOnly in America

22

Obesity Prevalence Among U.S. Adults 1991

Obesity Prevalence Among U.S. Adults 1991 > 15%> 15%

< 15%< 15%



25-30%25-30%> 30%> 30%

15-20%15-20%20-25%20-25%

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

Obesity Rates: U.S. vs. WorldObesity Rates: U.S. vs. World

20022005

24 2%24 2%

41.8%41.8%

21.6%

36.5%

U.K.U.K.

U.S.U.S. MENWOMENWOMEN

34.3%34.3%24.0%MexicoMexico

Source: World Health Organization / Estimated obesity rates for people aged 15 years and older / 2005 1.5%1.5%

1.9%1.9%

6.6%6.6%

20.4%20.4%

24.2%24.2%

1.8%1.8%

1.6%1.6%

7.8%

20.9%

JapanJapan

ChinaChina

FranceFrance

GermanyGermany

U.K.U.K.



• Prevention• Prevention

• Cost reduction


• Cost reduction


Major Spending Initiatives in the U.S.Major Spending Initiatives in the U.S.

National Cancer Institute budget $4.9B

National Heart Institute budget $3.0BNational Heart Institute budget $3.0B

Source: Center for Responsive Politics

2008 U.S. political campaigns $5.3B

National Cancer Institute budget $4.9B

Consumer spending on potato chips $5.3BConsumer spending on potato chips $5.3B

Failure to address chronic diseases Failure to address chronic diseases

Chronic Disease StudyChronic Disease Study

adequately costs the U.S. economy more than

$1 trillion annually.

adequately costs the U.S. economy more than

$1 trillion annually.

23

Finally, do we have the will to …Finally, do we have the will to …

• Transcend partisan politics?

• Support teachers, but demand accountability?

• Transcend partisan politics?

• Support teachers, but demand accountability?

• Unshackle small- and mid-size businesses?

• Designate medical research funds to young investigators?

• Live … both governments and households … within our means?

• Unshackle small- and mid-size businesses?

• Designate medical research funds to young investigators?

• Live … both governments and households … within our means?

“Never doubt that a small group of thoughtful, committed citizens can change the world: indeed,

“Never doubt that a small group of thoughtful, committed citizens can change the world: indeed, it’s the only thing that does.”

-Margaret Mead

it’s the only thing that does.”

-Margaret Mead

Addressing the Issues(Non-Profit Organizations)

Addressing the Issues(Non-Profit Organizations)

Milken Family Foundation (1982)• Education reform/teacher recognition/medical research

The Milken Institute (1991)• Economics/public-policy research and conferences

Prostate Cancer Foundation (1993)• World’s leading philanthropic source of support for research

FasterCures (2003)• Removing barriers to progress on all life-threatening diseases

Melanoma Research Alliance (2007)• Advancing research on the most-deadly skin cancer

More than 2,500 educators nationwideMore than 2,500 educators nationwide

M lti l thM lti l th• Multiple career paths

• Ongoing applied professional growth

• Instructionally focused accountability

• Performance-based compensation

• Multiple career paths

• Ongoing applied professional growth

• Instructionally focused accountability

• Performance-based compensation

“Far and away the best prize that life offers is the chance to work hard at work worth doing.”

“Far and away the best prize that life offers is the chance to work hard at work worth doing.” wo t do g.

-Theodore Roosevelt

wo t do g.

-Theodore Roosevelt

24

Citadel Investment GroupCitadel Investment Group

A New Global Perspective: Yesterday, Today and Tomorrow

A New Global Perspective: Yesterday, Today and Tomorrow





a new global perspective: yesterday, today and … · a new global perspective: yesterday, today...

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