leadership in turbulent times - milken...

Leadership in Turbulent TimesLeadership in Turbulent TimesLeadership in Turbulent TimesLeadership in Turbulent Times

Milken Institute Summit - LondonHeron Tower

Milken Institute Summit - LondonHeron TowerHeron Tower

October 18, 2011Heron Tower

October 18, 2011

Michael MilkenChairman, The Milken Institute

Michael MilkenChairman, The Milken Institute,,


• Seeing the World Through New Eyes

C it l M k t


C it l M k t• Capital Markets

• Building Human Capital

• Capital Markets

• Building Human Capital• Building Human Capital

• Where’s Sputnik?



“It was the best of times, “It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness

it was the worst of times, it was the age of wisdom, it was the age of foolishness it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity,

it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope

it was the season of Light, it was the season of Darkness, it was the spring of hope it was the spring of hope, it was the winter of despair, we had everything before us,

it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us …”we had nothing before us …”

“Real estate prices“Real estate pricescollapsed, creditdried up, housecollapsed, creditdried up, housed ed up, ousebuilding stopped ...d ed up, ousebuilding stopped ...

in 1792.”in 1792.”

• The stock market dropped 50 percent.• The stock market dropped 50 percent.• The stock market dropped 50 percent.

• Banks curtailed lending.

• The stock market dropped 50 percent.

• Banks curtailed lending.

• Commentators predicted widespread industrial bankruptcies

• Commentators predicted widespread industrial bankruptciesindustrial bankruptcies.

• High unemployment.

industrial bankruptcies.

• High unemployment.

• Volatile interest rates.• Volatile interest rates.

i 1974i 1974…in 1974.…in 1974.

What is the most valuable real estate i th ld?

What is the most valuable real estate i th ld?in the world?in the world?

kk1. New York City

2. Moscow

1. New York City

2. Moscow

3. London

4 Dubai

3. London

4 Dubai4. Dubai

5. Beverly Hills

4. Dubai

5. Beverly Hills

6. Tokyo6. Tokyo

What is the most valuable real estate i th ld?

What is the most valuable real estate i th ld?in the world?in the world?

Blockbuster vs. Netflix - 2002Blockbuster vs. Netflix - 2002Market ValueMarket Value

BlockbusterBlockbuster$4.5 billion$4.5 billion28 Netflix = 1 Blockbuster $$

Netflix$0 16 billion

Netflix$0 16 billion$0.16 billion$0.16 billion

Blockbuster vs. Netflix - 2011Blockbuster vs. Netflix - 2011Market ValueMarket Value

Netflix$6 1 billionNetflix

$6 1 billion$6.1 billion$6.1 billion

BlockbusterBlockbuster$0$0$0$0

Source: WSJ.com 10/16/11

Facebook Membership Tops 800 MillionFacebook Membership Tops 800 Millionp pp p

800800 ..600 600

..400 400 ..200 200

.. ....Dec

2004Dec

2004

..Dec

2010Dec

2010Feb

2010Feb

2010Aug

2008Aug

2008Jan

2009Jan

2009Source: Facebook 10/3/11

Oct2011Oct

2011

IBM System 370/168 in 1976IBM System 370/168 in 1976IBM System 370/168 in 1976IBM System 370/168 in 1976

• 8 megabytes for$8 million

• 8 megabytes for$8 million$

• Cost per megabyte:

$

• Cost per megabyte:p g y$1 million

p g y$1 million

Apple iPod Classic - 2010Apple iPod Classic - 2010Apple iPod Classic 2010Apple iPod Classic 2010

• 160 gigabytes for $249• 160 gigabytes for $249

• Cost per megabyte: <$0 0016

• Cost per megabyte: <$0 0016<$0.0016<$0.0016

Today there are more than 500 Today there are more than 500 Today, there are more than 500

million cell phones in China

Today, there are more than 500

million cell phones in China million cell phones in China …million cell phones in China …

Source: China’s Ministry of Information Industry

and more than 6 billion in and more than 6 billion in… and more than 6 billion inthe world!

… and more than 6 billion inthe world!

Down on the FarmDown on the FarmDown on the FarmDown on the Farm

Source: McGraw Hill advertisement

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

1975$101975$10

20112011$.01$.01

Telecommunications cost to business Telecommunications cost to business Telecommunications cost to business approaches zero.

Telecommunications cost to business approaches zero.

The World’s Top 10 Economies(P t f W ld GDP)

The World’s Top 10 Economies(P t f W ld GDP)

U.S. (21.5%)U.S. (21.5%)TodayToday

(Percent of World GDP)(Percent of World GDP)20502050 18201820

China (28.7%) China (28.7%) China (18.5%) China (18.5%) U.S. (21.5%)China (10.0%) Japan (8.4%) Germany (5 2%)

U.S. (21.5%)China (10.0%) Japan (8.4%) Germany (5 2%)

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

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

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%)Germany (5.2%)

France (4.4%) Brazil (3.6%)

Germany (5.2%)France (4.4%) Brazil (3.6%)

England (5.2%) Prussia (4.9%) Japan (3.1%)

England (5.2%) Prussia (4.9%) Japan (3.1%)

Brazil (4.8%)Indonesia (3.5%)Japan (3.1%)

Brazil (4.8%)Indonesia (3.5%)Japan (3.1%)

U.K. (3.5%) Italy (3.2%)Russia (2.7%)

U.K. (3.5%) Italy (3.2%)Russia (2.7%)

Austria (1.9%)Spain (1.9%) U.S. (1.8%)

Austria (1.9%)Spain (1.9%) U.S. (1.8%)

Mexico (3.0%)Russia (2.7%) Germany (2.4%)

Mexico (3.0%)Russia (2.7%) Germany (2.4%)Russia (2.7%)

India (2.6%)Russia (2.7%)India (2.6%)

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

U.S. (1.8%) Russia (1.7%)U.S. (1.8%) Russia (1.7%)

Germany (2.4%)U.K. (2.2%)Germany (2.4%)U.K. (2.2%)

The World’s Economic Clout Moves EastThe World’s Economic Clout Moves EastLeading Cities Ranked by GDPLeading Cities Ranked by GDP

• More than 20 of the world’s Top 50 cities will be located in Asia by 2025, up from 8 in 2007.

• More than 20 of the world’s Top 50 cities will be located in Asia by 2025, up from 8 in 2007.

• More than half of Europe’s Top 50 cities will drop off the list, as will three in North America.

• More than half of Europe’s Top 50 cities will drop off the list, as will three in North America.

• Shanghai and Beijing will outrank Los Angeles and London … Mumbai and Doha will surpass Munich and D

• Shanghai and Beijing will outrank Los Angeles and London … Mumbai and Doha will surpass Munich and DDenver.Denver.

Source: McKinsey Global Institute (March 2011)

World Population Shares, 203020 34 Y Old

World Population Shares, 203020 34 Y Old20-34 Year Olds20-34 Year Olds

N America S America Europe Africa Asia Australia / N ZN. America S. America Europe Africa Asia Australia / N.Z.7% 6% 6% 21% 59% 0.5%

Source: U.S. Bureau of Census

U.S. Population Living On FarmsU.S. Population Living On Farmsp gp g

1800 20002000N t li iN t li i Living on Living on Not livingon farms

2%

Not livingon farms

2%

Living on farms

2%

Living on farms

2%

li i li i Living on farms98%

Not living on farms98%

Not living on farms98%98%98%

In 1900, 40 million Americans livedon farms and fed 76 million domestically

In 1900, 40 million Americans livedon farms and fed 76 million domestically on farms and fed 76 million domestically plus 15 million people outside the U.S.

on farms and fed 76 million domestically plus 15 million people outside the U.S.

Each farm person fed about two others.Each farm person fed about two others.

In 2000, 1.5 million Americans lived on farms and fed 290 million domestically plus 220

In 2000, 1.5 million Americans lived on farms and fed 290 million domestically plus 220 and fed 290 million domestically plus 220

million others.and fed 290 million domestically plus 220

million others.

Each farm person fed about 340 others!Each farm person fed about 340 others!

Fi i l HN l FinancialResources

HumanResources

Natural Resources

Cost of Raw Materials & EnergyCost of Raw Materials & Energygygy

1920’sb l

1920’sb l

Today’s h

Today’s hAutomobileAutomobile MicrochipMicrochip

60%60% 2%2%60%60% <2%<2%

Growth of World Population andthe History of Technology

Growth of World Population andthe History of Technologythe History of Technologythe History of Technology

60006000High-Speed ComputersHigh-Speed Computers

Man Lands on MoonMan Lands on MoonGenome ProjectGenome Project

PCsPCs

Population (millions)Population (millions)InternetInternet

50005000

40004000kk

Peak of RomePeak of Rome

Invention of AirplaneInvention of Airplane

2nd Agricultural Revolution2nd Agricultural RevolutionIndustrial RevolutionIndustrial Revolution

NuclearEnergy

NuclearEnergy

DNA DiscoveredDNA Discovered

30003000

Peak of GreecePeak of Greece PenicillinPenicillin

AutomobileAutomobile

TelephoneTelephone20002000

10001000Watt EngineWatt Engine

RailroadsRailroads

Germ TheoryGerm Theory

TelephoneTelephone

Source: Robert Fogel/University of Chicago

-9000-9000 -6000-6000 -3000-3000 -2000-2000 00 10001000 20002000-4000-400000

Watt EngineWatt Engine



C it l M k t




• Capital Markets





B k lBerkeley19641964

Los Angeles Under SiegeLos Angeles Under Siege

P=ΣFti*(ΣHCi+ΣSCi+ΣRAi)P=ΣFti*(ΣHCi+ΣSCi+ΣRAi)P = ProsperityP = Prosperity

i ( i i i)i ( i i i)P = ProsperityFt = Financial TechnologyHC = Human Capital

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

HC = Human CapitalSC = Social CapitalRA = Real AssetsRA = Real AssetsRA = Real Assets

America Goes to WorkU S and Fortune 500 EmploymentAmerica Goes to Work

U S and Fortune 500 EmploymentU.S. and Fortune 500 EmploymentU.S. and Fortune 500 Employment200200

180180 U.S. = +62 million jobsU.S. = +62 million jobsNew financialNew financial180180

160160

140140

jjNew financialtechnologies arefully implemented

New financialtechnologies arefully implemented

140140

120120

100100100100

8080

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

Modern capitalmarkets beginModern capitalmarkets begin

00009595909085858080757570706060

Index 1970 = 100Index 1970 = 100

The Nature of CreditThe Nature of CreditThe Nature of CreditThe Nature of Credit

1 Credit is what counts not leverage1 Credit is what counts not leverage1. Credit is what counts, not leverage.

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

1. Credit is what counts, not leverage.


3. Interest rates are volatile and unpredictable.

4. Credit research is more than ratings.


4. Credit research is more than ratings.g

5. Sovereign debt is historically risky.

6 Debt values underpin all capital markets

g


6 Debt values underpin all capital markets6. Debt values underpin all capital markets6. Debt values underpin all capital markets

Leverage ratios of financial institutionsLeverage ratios of financial institutionsTotal assets/common equity – June 2008Total assets/common equity – June 2008

67 9F ddi MF ddi M

21 5

67.9

Fannie MaeFannie Mae

Freddie MacFreddie Mac

23.7

21.5

Federal Home Loan BanksFederal Home Loan Banks

Fannie MaeFannie Mae

31.6

23.7

Brokers/hedge fundsBrokers/hedge funds

Federal Home Loan BanksFederal Home Loan Banks

Sources: Federal Deposit Insurance Corporation, Office of Federal Housing Enterprise Oversight, National Credit Union Administration, Bloomberg, Google Finance, Milken Institute.

gg












g


6 Debt values underpin all capital markets6. Debt values underpin all capital markets.6. Debt values underpin all capital markets.

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

Home prices don’t go up foreverCh i h i i 120

Home prices don’t go up foreverCh i h i i 120

WWIWWI WWIIWWII

GreatDepression

GreatDepression

70’sBoom70’s

Boom80’s

Boom80’s

BoomLatestBoomLatestBoom30%30%

Change in home prices in 120 yearsChange in home prices in 120 years

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20%20%

10%10%

0%0%

-10%-10%

19901990

Sources: Robert Shiller, Milken Institute.

18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010-20%-20%

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

• If prices rise the borrower keeps • If prices rise the borrower keeps • 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 p ,walk, sticking the lender witha long-term depreciating assetIf i i h l f

p ,walk, sticking the lender witha long-term depreciating assetIf i i h l f• If interest rates rise, the value ofthe loan depreciates as the “real” average life of the asset is extended

• 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• If interest rates fall, the borrower prepays

Current Home Ownership RatesCurrent Home Ownership RatesCurrent Home Ownership RatesCurrent Home Ownership Rates

0%0%

65%65%

70%70%

55%55%

60%60%

45%45%

50%50%

Sources: EuroStat, HUD, Milken Institute.

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












g



1981:1981:Unrealized losses on AAA assets because of Unrealized losses on AAA assets because of

interest-rate increases exceeded $1 trillion.

E j fi i l i i i

interest-rate increases exceeded $1 trillion.

E j fi i l i i i Every major financial institution was essentially under water on a mark-to-market

Every major financial institution was essentially under water on a mark-to-market

basis.basis.

Interest Rates and Buying a CarInterest Rates and Buying a Car

19811981 20112011

Interest Rates and Buying a CarInterest Rates and Buying a Car

19811981 20112011• 3-year loan

$10 000 • 3-year loan

$10 000 • 5-year loan

$2 000 • 5-year loan

$2 000 • $10,000 car• 18% interest• $10,000 car• 18% interest

• $25,000 car• 3.24% interest• $25,000 car• 3.24% interest

$796* monthly payment$796* monthly payment

$424 monthly payment$424 monthly paymentpaymentpayment paymentpayment

* = 2011 dollars












g



AAA-rated Industrial Companies in the U SAAA-rated Industrial Companies in the U SAAA-rated Industrial Companies in the U.S.AAA-rated Industrial Companies in the U.S.

• Microsoft• Microsoft• ADP• Exxon-Mobil• ADP• Exxon-Mobil• Johnson & Johnson• Johnson & Johnson

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

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

AAA 16,907AAA 16,907 BB+ 238BB+ 238Investment-Grade SecuritiesInvestment-Grade Securities Non-investment Grade SecuritiesNon-investment Grade Securities

New Issues: 1/1/2000 to 9/30/2008New Issues: 1/1/2000 to 9/30/2008

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+ 339AA 3,414

A 2,602A- 2,027BBB+ 903

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

B+ 339B 330B- 1,189CCC+ 293

B+ 339B 330B- 1,189CCC+ 293BBB+ 903

BBB 1,371BBB- 1,359

BBB+ 903BBB 1,371BBB- 1,359

CCC+ 293CCC 214CCC- 104CC 36

CCC+ 293CCC 214CCC- 104CC 36CC 36C 11CC 36C 11

Source: Bloomberg 11/6/08












g



Sovereign Debt Has Long Been SuspectSovereign Debt Has Long Been Suspect

“Wh ti l d bt h b “Wh ti l d bt h b

Sovereign Debt Has Long Been SuspectSovereign Debt Has Long Been Suspect

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

Adam Smith

g y p y p

Adam Smith

Alexander Hamilton,Alexander Hamilton,

first U.S. Secretaryfirst U.S. Secretary

of the Treasuryof the Treasury

Secondary Market Prices Secondary Market Prices of Third-World Debtof Third-World Debt

100100Cents on the dollarCents on the dollar

7070

8080

100100

5050

6060

2020

3030

4040

202019821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989

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

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

$1,300$1,300

$1,500$1,500

$1,100$1,100

$700$700

$900$900

$700$70019821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989

Venezuela’s Sovereign Debt RatingVenezuela’s Sovereign Debt Ratingdd

AAAAAA

AAAA

S&P Credit RatingS&P Credit Rating

AAAA

A-A-

A+A+

BB+BB+BBBB

BBBBBB

BB-BB-BB

CCC+CCC+

19771977 19821982 19871987 19921992 19971997 20022002 20092009

Sovereign Debt DefaultsSovereign Debt DefaultsSovereign Debt DefaultsSovereign Debt DefaultsArgentinaArgentina EcuadorEcuador ParaguayParaguay GreeceGreece TurkeyTurkey UruguayUruguay

18301830 18321832 18271827 18761876 1876187618261826•• 18301830•• 18901890•• 19151915

•• 18321832•• 18681868•• 19111911

•• 18271827•• 18741874•• 18921892

••18761876••19151915••19401940

•• 18761876•• 18911891•• 19151915

••18261826••18431843••18521852•• 19151915

•• 1930s1930s•• 19821982

•• 19111911•• 19141914•• 19311931

•• 18921892•• 19201920•• 19321932

••19401940••19781978

•• 19151915•• 19331933•• 19831983

••18521852••18931893••1932193219821982

•• 2001200119311931

•• 19821982•• 19991999

19321932•• 19861986•• 20032003

19831983•• 20032003

19321932

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

•• 20082008

Greece’s Sovereign DefaultsGreece’s Sovereign DefaultsGreece s Sovereign DefaultsGreece s Sovereign Defaults• 1826• 1826• 1843• 1852• 1843• 18521852• 1893

1852• 1893• 1932• 1932• 2011?• 2011?

Annualized return on Mexico EquitiesAnnualized return on Mexico EquitiesAfter 1982 Sovereign Default After 1982 Sovereign Default

115%115% 114%114%

Mexico

115%115% 114%114%

Mexico BOLSAIndex

U S S&P 500U S S&P 500

18%18% 23%23%

Sources: Milken Institute, Bloomberg, International Monetary Fund.

U.S. S&P 500U.S. S&P 500

2 years 5 years

Annualized return on Brazil EquitiesAnnualized return on Brazil EquitiesAfter 1983 Sovereign Default After 1983 Sovereign Default

127%127%

Brazil

127%127%

IBOVIndex

U.S. S&P 500U.S. S&P 500 24%24%8%8% 11%11%


2 years 5 years

Annualized Return on Russia EquitiesAnnualized Return on Russia EquitiesAfter 1998 Sovereign Default After 1998 Sovereign Default

116%116%

Russian

116%116%

RussianRTS

Index59%59%

U.S. S&P 500U.S. S&P 500

26%26%

1%1%


U.S. S&P 500U.S. S&P 500 1%1%2 years 5 years

Russia:1998-2000 and Italy: 2010-11

26000900

1,000 Italy FTSE MIB index

20000

22000

24000

700800900

16000

18000

20000

400500600

12000

14000

16000

100200300 Russia RTS index

100000100

October 4, 2011

January 1997—August 1998 August1998—December 2000












g



19741974

Th t i t t Th t i t t

19741974

The most important yearin financial history

The most important yearin financial historyin financial historysince World War IIin financial historysince World War IIsince World War II.since World War II.

19741974

RESULT #1:RESULT #1:Companies with the highest returns on

capital fastest rates of growth in market 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

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

innovation were denied access to equity innovation were denied access to equity and debt capital.

innovation were denied access to equity and debt capital.

19741974

RESULT #2:RESULT #2:With financial institutions weakened by

the recession public and private markets 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 financingmost corporate financing.most corporate financing.

Institutional Investor Base forInstitutional Investor Base forNon-investment Grade LoansNon-investment Grade Loans

B kB k CLOCLO Hedge, distressed andHedge, distressed and Prime rate funds, financial Prime rate funds, financial

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

60%

80%

20%

40%

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

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

Dow Industrials: 1973-76 and 2008-11

1000

DJIA, 1973-1976 DJIA, 2008-2011

11500

13000

900

1000

8500

10000

700

800

7000600

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

October 4, 2011

5500500



C it l M k t




• Capital Markets





2009 U.K. Balance Sheet: Households£8 8 T illi

2009 U.K. Balance Sheet: Households£8 8 T illi£8.8 Trillion£8.8 Trillion

44%44%26%

Ins rance 26%

Ins rance

2% Other2% Other

44%Real Estate

44%Real Estate

6%6%

Insurance Technical Services

Insurance Technical Services

<1%<1%

Shares & SecuritiesShares & Securities

3 %O h T ibl A 3%O h T ibl A

13% 13% <1%

Bonds &<1%

Bonds &

Long-Term Loans Long-Term Loans

Source: U.K. Office for National Statistics; Blue Book 2010

Other Tangible Assets Other Tangible Assets Currency & Deposits

Currency & Deposits

Bonds &Money Markets

Bonds &Money Markets 7%

Intangible Non-Financial Assets

7%Intangible Non-Financial Assets

“What is the world’s “What is the world’s largest asset class?” largest asset class?”

Human capital is the Human capital is the Human capital is the largest asset class.

Human capital is the largest asset class.

2009 Human Capital in the U.K.2009 Human Capital in the U.K.

U K Financial U K Financial

£29.3 Trillion Total£29.3 Trillion Total

U.K. Financial Assets30%

U.K. Financial Assets30%

Human and SocialHuman and SocialCapital

70% Capital

70%

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

for human capitala worldwide competition

for human capitalfor human capital.for human capital.

1880s Eastern Europe1880s Eastern Europe

Warsaw

Samuel GoldwynMGM, ParamountSamuel GoldwynMGM, Paramount

Louis B. MayerMGM

Louis B. MayerMGM

Warsaw

Carl Laemmlel d

Carl Laemmlel d

Jack WarnerJack WarnerUniversal StudiosUniversal Studios Warner Bros. StudiosWarner Bros. Studios

Adolph ZukorParamount Pictures

Adolph ZukorParamount Pictures

William FoxFox Films


1880s Eastern Europe1880s Eastern EuropeViacomViacom SonySony

Samuel GoldwynMGM, ParamountSamuel GoldwynMGM, Paramount

Louis B. MayerMGM

Louis B. MayerMGM

WarsawComcastComcastCarl Laemmle

l dCarl Laemmle

l dJack WarnerJack Warner

WarsawComcastComcast Time-WarnerTime-Warner

Universal StudiosUniversal Studios Warner Bros. StudiosWarner Bros. Studios

ViacomViacomNewsCorpNewsCorpAdolph Zukor

Paramount PicturesAdolph Zukor

Paramount PicturesWilliam FoxFox Films


pp

Do human capital strategies work?Do human capital strategies work?Per Capita GDPPer Capita GDP

19601960 20102010

p gp g

SiSi 19601960

$43,117$43,117

20102010

$2,271$2,271

SingaporeSingapore

,,

JamaicaJamaica

$ 5,039$ 5,039$2,255$2,255

JamaicaJamaica

Source: IFS, WEO; IMF; in 2010 USD

$ ,$ ,$ ,$ ,



C it l M k t




• Capital Markets





Where’s Sputnik?Where’s Sputnik?•• EnergyEnergy

Where s Sputnik?Where s Sputnik?gygy

•• HousingHousingEntitlementsEntitlements•• EntitlementsEntitlements

•• EducationEducation•• ImmigrationImmigration•• HealthHealthHealthHealth

President Jimmy Carter on the energy crisisPresident Jimmy Carter on the energy crisisy gyy gyand proposed energy legislationand proposed energy legislation

“This difficult effort will be “This difficult effort will be the ‘moral equivalent of war’ the ‘moral equivalent of war’ ---- except that we will be except that we will be uniting our efforts to build uniting our efforts to build

d t d t ”d t d t ”and not destroy.”and not destroy.”

36.1%Nixon 36.1%

37.1%Ford

Nixon

Percentage Percentage 40.5%

43.6%Reagan

CarterPercentage Percentage of Oil from of Oil from F i F i

47.2%

49 8%Cli t

Bush

gForeign Foreign SourcesSources

65.5%Bush

49.8%Clinton

66.2%Obama

The American DreamThe American Dream

• Equal opportunity not based on • Equal opportunity not based on q pp y• Where you were born• Where you went to school

q pp y• Where you were born• Where you went to school• Where you went to school• Who your parents are

Wh t li i i

• Where you went to school• Who your parents are

Wh t li i i• What your race or religion is

• Access to capital based on ability• What your race or religion is

• Access to capital based on ability


• Father born in Syria• Father born in Syria• Father born in Syria

• Adopted

• Father born in Syria

• Adopted

• Dropped out of college• Dropped out of college

Steve JobsSteve Jobs


• Born poor in Algeria• Born poor in Algeria• Born poor in Algeria

• Former Director, l

• Born poor in Algeria

• Former Director, lNational Institutes of

HealthNational Institutes of Health

• President, Global R&D, Sanofi

• President, Global R&D, Sanofi

Elias Elias ZerhouniZerhouni

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

• Low down payments• Low down payments

gg

• Low down payments• Tax preferences

Extended payback terms

• Low down payments• Tax preferences

Extended payback terms• Extended payback terms• Lack of pre-payment penalties

h h ld h

• Extended payback terms• Lack of pre-payment penalties

h h ld h• Non-recourse terms that shield non-housing assets• The myth that housing prices always rise• Non-recourse terms that shield non-housing assets• The myth that housing prices always rise

Consumer SpendingConsumer Spending

Housing 33%Housing 33%

U.S.U.S. AsiaAsiaFood 23%Food 23%Housing 33%

Transportation 18%Food 13%

Housing 33%Transportation 18%Food 13%

Food 23%Supplemental Education 15%Housing 10%

Food 23%Supplemental Education 15%Housing 10%

Insurance/pensions 11%Healthcare 6%Entertainment 5%

Insurance/pensions 11%Healthcare 6%Entertainment 5%

Clothing 8%Other 8%Transportation 6%

Clothing 8%Other 8%Transportation 6%Entertainment 5%

Apparel and services 4%Supplemental Education 2%

Entertainment 5%Apparel and services 4%Supplemental Education 2%

Transportation 6%Healthcare 5%Communication 5%

Transportation 6%Healthcare 5%Communication 5%pppp

Source: U.S. Bureau of Labor Statistics/CLSA

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 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 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.

Longer Life Expectancy; Longer RetirementsF

Longer Life Expectancy; Longer RetirementsF

9595

FranceFrance

Life Expectancy Life Expectancy WomenWomenMenMen

8585Life Expectancy at age 65Life Expectancy at age 65

MenMen

28.628.6 32.932.9

7575

14.414.4 18.318.322.022.0 26.526.5

26.226.2 30.830.8

6565

5555

Retirement AgeRetirement Age

14.414.4 18.318.3

19701970 19801980 19901990 20002000 20102010 20202020 20302030 20402040 205020505555

Source: OECD Ageing and Employment Policies, France 2005

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

• Unrealistic assumptions about rates of return on assets.

• Unrealistic assumptions about rates of return on assets.

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

planners assumed

• Workers who pay in to the system for too few years.• Pensioners who live longer than the original system

planners assumedplanners assumed.planners assumed.

“If f i dl f i “If f i dl f i “If an unfriendly foreign power had attempted to impose on America the

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

impose on America the mediocre educational performance that exists performance that exists today, we might have viewed it as an act of

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

1983war.”

1983

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

Millions125125

100100

Millions

123,000,000 h h k ll d b

7575

5050

high-skilled jobs will be available

in 202050 000 000 5050

252550,000,000

Americans will qualify for those jobs

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

j

Skilled and Unskilled JobsSkilled and Unskilled Jobs

19501950 T dT d

Skilled and Unskilled JobsSkilled and Unskilled Jobs

19501950 TodayToday

60% 65%Skill d

20%Skilled

20%Semi-skilled

60%Unskilled

20%Semi-skilled

Skilled

15%Skilled skilledUnskilled

Occupy Movement:Occupy Movement:Occupy Movement:Ignore at Your Own Peril

Occupy Movement:Ignore at Your Own Peril

There are 600 million There are 600 million There are 600 million

children in India and China

There are 600 million

children in India and China

whose future buying power

ill l f

whose future buying power

ill l f will grow at least as fast as

their rapidly improving

will grow at least as fast as

their rapidly improving their rapidly improving

educations.

their rapidly improving

educations.

ChiChi

• Parents spend an average • Parents spend an average

ChinaChina

Parents spend an average of 15% on their children’s education … and only 10%

Parents spend an average of 15% on their children’s education … and only 10% on housing.

• 55% of parents in China

on housing.

• 55% of parents in China 55% of parents in China send their children for extra lessons in English.

55% of parents in China send their children for extra lessons in English.

I di I di India… India… • Extracurricular activities

i t d f d i • Extracurricular activities

i t d f d i consisted of academic coaching in 95% of the households

consisted of academic coaching in 95% of the householdshouseholds.

• 43% of parents want their children to get a Master’s

households.

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

children to get a Master s degree; 29% want them to get a PhD.get a PhD.get a PhD.

We must not be afraid of We must not be afraid of f fcompetition.

f fcompetition.

We must be ready to We must be ready to We must be ready to compete.

We must be ready to compete.

Eddie “The Eagle” EdwardsEddie “The Eagle” EdwardsEddie The Eagle EdwardsEddie The Eagle Edwards

• 1988 Calgary Olympics• 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” EdwardsEddie The Eagle EdwardsEddie The Eagle Edwards

• 1988 Calgary Olympics• 1988 Calgary Olympics





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

Highly skilled, entrepreneurial Highly skilled, entrepreneurial

and educated immigrants are

l ’

and educated immigrants are

l ’crucial to any nation’s prosperity. crucial to any nation’s prosperity.

Immigrants in Silicon Valley Immigrants in Silicon Valley

• More than half of Silicon Valley’s science and engineering workforce is foreign born

• More than half of Silicon Valley’s science and engineering workforce is foreign bornengineering workforce is foreign-born.

• More than 15 percent of Silicon Valley start-

engineering workforce is foreign-born.

• More than 15 percent of Silicon Valley start-p yup companies were founded by immigrants from India.

p yup companies were founded by immigrants from India.

• Another 13 percent had CEOs from China or Taiwan

• Another 13 percent had CEOs from China or Taiwan

Sources: Vivek Wadhwa, Duke University

Taiwan. Taiwan.

20002000 201020102000– 9,500 students

20% foreign

2000– 9,500 students

20% foreign

2010– 14,500 students

29% from non EU countries

2010– 14,500 students

29% from non EU countries– 20% foreign– 108 from China– 20% foreign– 108 from China

– 29% from non-EU countries– 1,800 from China and

Malaysia

– 29% from non-EU countries– 1,800 from China and

MalaysiaMalaysiaMalaysia

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

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

International Students inU S Doctoral/Research Programs

International Students inU S Doctoral/Research ProgramsU.S. Doctoral/Research ProgramsU.S. Doctoral/Research Programs

Int’l Students

Int’l Students

TotalEnrollment

TotalEnrollment

1. University of Southern California 7,115 33,3892. Columbia University 5,937 24,4173 New York University 5 827 50 917

1. University of Southern California 7,115 33,3892. Columbia University 5,937 24,4173 New York University 5 827 50 9173. New York University 5,827 50,9174. University of Illinois (Urbana Champaign) 5,685 41,3425. Purdue University 5,581 39,2286 University of Michigan (Ann Arbor) 5 429 40 025

3. New York University 5,827 50,9174. University of Illinois (Urbana Champaign) 5,685 41,3425. Purdue University 5,581 39,2286 University of Michigan (Ann Arbor) 5 429 40 0256. University of Michigan (Ann Arbor) 5,429 40,0257. University of Texas (Austin) 5,303 49,7388. University of California, Los Angeles 4,704 38,2189 Harvard University 4 514 20 042

6. University of Michigan (Ann Arbor) 5,429 40,0257. University of Texas (Austin) 5,303 49,7388. University of California, Los Angeles 4,704 38,2189 Harvard University 4 514 20 0429. Harvard University 4,514 20,04210. Boston University 4,484 31,5749. Harvard University 4,514 20,04210. Boston University 4,484 31,574

Source: Open Doors 2007

Three SolutionsThree SolutionsThree Solutionsto Healthcare Challenges

Three Solutionsto Healthcare Challenges

• Prevention• Prevention

• Cost reduction• Cost reduction

• Research leading to cures• Research leading to curesResearch leading to curesResearch leading to cures

Lifestyle Makes a DifferenceLifestyle Makes a Differenceyy

Obesity Prevalence Among U.S. Adults 1991

Obesity Prevalence Among U.S. Adults 199119911991 > 15%> 15%

< 15%< 15%



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

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

Only in AmericaOnly in Americayy

Obesity Rates: U.S. vs. WorldObesity Rates: U.S. vs. World20022005 41.8%41.8%

36.5%U.S.U.S. MENWOMENWOMEN

24.0%MexicoMexico

24.2%24.2%21.6%U.K.U.K.

34.3%34.3%24.0%MexicoMexico

6 6%6 6%

20.4%20.4%7.8%

20.9%

FranceFrance

GermanyGermany

1.9%1.9%

6.6%6.6%

1 8%1 8%

1.6%1.6%ChinaChina

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

1.5%1.5%1.8%1.8%JapanJapan

W ld W I W ld W I World War I poster urges World War I poster urges “sacrifice” – eatfruits and veggies“sacrifice” – eatfruits and veggiesfruits and veggiesso the troops can have the good

fruits and veggiesso the troops can have the good have the good sugar and fats!have the good sugar and fats!

Diabetes in England 1905-1950Diabetes in England 1905-1950Diabetes in England 1905 1950Diabetes in England 1905 1950• The incidence of diabetes increased steadily except for two

periods:• The incidence of diabetes increased steadily except for two

periods:p

• 1915-1918 and 1940-1945

p

• 1915-1918 and 1940-1945

• During these war years, meat, cheese, butter, cooking fats andsugar were rationed.

• During these war years, meat, cheese, butter, cooking fats andsugar were rationed.sugar were rationed.

• Naval blockades cut supplies ofgasoline, forcing people to walk more.

sugar were rationed.

• Naval blockades cut supplies ofgasoline, forcing people to walk more.gasoline, forcing people to walk more.gasoline, forcing people to walk more.

Source: American Diabetes Association

Chronic Disease StudyChronic Disease Study

Failure to address chronic diseases Failure to address chronic diseases adequately costs the

U S th adequately costs the

U S th U.S. economy more than $1 trillion annually.

U.S. economy more than $1 trillion annually.

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

National Heart Institute budget $3 0BNational Heart Institute budget $3 0B

National Cancer Institute budget $4.9B

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

2008 U.S. political campaigns $5.3B

National Cancer Institute budget $4.9B

2008 U.S. political campaigns $5.3B

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

Source: Center for Responsive Politics

p g p p $p g p p $

Half of all economic growth in the l i b d

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

last two centuries can be traced to medical research advances.to medical research advances.to medical research advances.

Company Value ComparisonCompany Value Comparisonp y pU.S. $ billions

p y pU.S. $ billions

Enterprise ValueEnterprise Value Est P/E RatioEst P/E Ratio

Average: Consumer $120.0 16.2(P&G, Estée Lauder, Coca Cola, Pepsi, Kraft)

Average: Consumer $120.0 16.2(P&G, Estée Lauder, Coca Cola, Pepsi, Kraft)

Enterprise ValueEnterprise Value Est. P/E RatioEst. P/E Ratio

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

Average: Pharma $106.6 9.9

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

Average: Pharma $106.6 9.9ve age: a a $ 06.6 9.9(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis,

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

ve age: a a $ 06.6 9.9(Pfizer, J&J, Roche, Norvartis, Merck, GSK, SanofiAventis,

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

Source: Bloomberg 9/6/11

Economic Value of Eliminating Deaths in the U.S.Economic Value of Eliminating Deaths in the U.S.gg

Heart Disease $60.5THeart Disease $60.5T$ .$ .

Cancer $58.1T

Stroke $9.5TStroke $9.5T

AIDS $9.3TAIDS $9.3T

U.S. Balance Sheet 2009 $67TU.S. Balance Sheet 2009 $67T

Source: Estimates base on 1999 studies by Kevin Murphy and Robert Topel/University of Chicago

U.S. Balance Sheet 2009 $67TU.S. Balance Sheet 2009 $67T

World University RankingWorld University Ranking

1. Harvard University1. Harvard University

y gLife Sciences and Medicine

y gLife Sciences and Medicine

11. Imperial College London11. Imperial College London2. University of Cambridge3. University of Oxford4 Stanford University

2. University of Cambridge3. University of Oxford4 Stanford University

12. UC San Diego13. National University/Singapore14 University of Melbourne

12. UC San Diego13. National University/Singapore14 University of Melbourne4. Stanford University

5. Berkeley6. University of Tokyo

4. Stanford University5. Berkeley6. University of Tokyo

14. University of Melbourne15. University College London16. University of Toronto

14. University of Melbourne15. University College London16. University of Torontoy y

7. Johns Hopkins University8. MIT

y y7. Johns Hopkins University8. MIT

y17. University of Edinburgh18. Kyoto University

y17. University of Edinburgh18. Kyoto University

9. Yale University10. UCLA9. Yale University10. UCLA

19. University of Sydney20. University of British Columbia19. University of Sydney20. University of British Columbia

Do we have the will?Do we have the will?•• EnergyEnergyDo we have the will?Do we have the will?

•• HousingHousing•• EntitlementsEntitlements•• EntitlementsEntitlements•• EducationEducation•• ImmigrationImmigration•• HealthHealth

wheressputnik.comwheressputnik.com

“Success is not final, failure is not fatal; it is “Success is not final, failure is not fatal; it is the courage to continue that counts.”the courage to continue that counts.”

- Winston Churchill- Winston Churchill- Winston Churchill- Winston Churchill


Milken Institute Summit - LondonHeron Tower

Milken Institute Summit - LondonHeron TowerHeron Tower

October 18, 2011Heron Tower

October 18, 2011

Michael MilkenChairman, The Milken Institute

Michael MilkenChairman, The Milken Institute,,

leadership in turbulent times - milken...

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