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 April 28 – May 1, 2013 • Philanthropy • Health www.milkeninstitute.org • Climate/Energy • Government • Media Milken Institute Global Conference

• 165 panels

• 620 speakers

• 3,700 attendees www.milkeninstitute.org

April 27 – 30, 2014

Investing in African Prosperity

Tony Blair Bill Gates H.E. Paul Kagame Rhonda Zygocki Strive Masiyiwa Michael Milken Former Prime Minister Co-Chair and Trustee President Executive Vice Chairman and Founder, Chairman, Great Britain and Bill & Melinda Gates Republic of Rwanda President, Econet Wireless Milken Institute Northern Ireland Foundation Policy and Planning Chevron What is the most powerful force the world has ever produced? y=Cekt

#4 – “Compound interest.” A=Pert a = Future Value P = Original Principal r = Rate t = 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 @ 6%

$1,304-a-year @ 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 ECB 25 BoE 20 Fed 15

0 Q1 2006 Q1 2007 Q1 2008 Q1 2009 Q1 2010 Q1 2011 Q1 2012

Source: Bloomberg. Central bank target interest rates remain low

Percent 6 Bank of England 5

3 Federal Reserve European Central Bank 2 Bank of Japan 1

0 2007 2008 2009 2010 2011 2012

Source: Bloomberg Quantitative Easing Effect on S&P 500

1,600 1

1,500 25% 1,400 1

1,300

1,200 1

1,100 21% 40%

S&P 500Index 1,000 0

900

800 0

700 QE QE2 Operation Twist QE3 QE4 600 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

-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 Treasuryyield, percent 18 16 14 12 10 8 6 4 Average: 6.7 percent 2 0 1964 1971 1978 1985 1992 1999 2006 2013

Source: Bloomberg

Interest Rates and Buying a Car

1981 2012 • 3-year loan • 5-year loan • $10,000 car • $25,000 car • 18% interest • 2.99% interest $796* monthly $423 monthly payment payment

* = 2012 dollars Wealth Patterns in Selected Countries 2012 wealth per adult in 1,000 U.S. dollars (rounded)

Country Average Median <$10k >$1M Australia $354.9 $193.7 8.8% 5.5% France $265.4 $81.3 17.0% 4.8% Germany $174.5 $42.2 32.0% 2.2% Italy $212.9 $123.7 20.8% 2.4% Japan $269.7 $141.4 4.3% 3.4% United Kingdom $250.0 $115.2 17.4% 3.3% United States $262.3 $38.8 31.9% 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 Women Men Life 85 Expectancy at age 65 28.6 32.9

75 26.2 30.8 22.0 26.5 14.4 18.3 65 Retirement Age

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 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: Bloomberg Low interest rates are keeping a lid on funded levels S&P 500 U.S. Plans The World’s Top 10 Economies (Percent of World GDP) Today 2050 1820 U.S. (21.4%) China (18.2%) China (28.7%) China (10.4%) U.S. (16.6%) India (16.0%) Japan (8.4%) India (12.1%) France (5.4%) Germany (5.2%) Brazil (4.8%) England (5.2%) France (4.4%) Indonesia (3.5%) Prussia (4.9%) Brazil (3.6%) Japan (3.1%) Japan (3.1%) U.K. (3.5%) Mexico (3.1%) Austria (1.9%) Italy (3.2%) Russia (2.7%) Spain (1.9%) Russia (2.7%) Germany (2.4%) U.S. (1.8%) India (2.6%) U.K. (2.2%) Russia (1.7%)

Sources: World Bank/Angus Maddison, “The World Economy: Historical Statistics” (OECD)/ PricewaterhouseCoopers/Milken Institute/Goldman Sachs (9/09); updated 2/25/13 World’s 10 Fastest Growing Economies Annual Average GDP Growth, %

2001 - 2010 2011 - 2015 Angola 11.1% China 9.5% China 10.5% India 8.2% Myanmar 10.3% Ethiopia 8.1% Nigeria 8.9% Mozambique 7.7% Ethiopia 8.4% Tanzania 7.2% Kazakhstan 8.2% Vietnam 7.2% Chad 7.9% Congo 7.0% Mozambique 7.9% Ghana 7.0% Cambodia 7.7% Zambia 6.9% Rwanda 7.6% Nigeria 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

45 Developing economies 40

30 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: International Monetary Fund. Market Capitalization: 1950 Japan Other 9% 6%

Europe 26% U.S. 59%

US + Japan = 68% Market Capitalization: 1988 Other 14%

Europe Japan 17% 40%

U.S. 29% US + Japan = 69% Market Capitalization: 2013 Japan Europe 8% 23%

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

Blockbuster 40 Netflix = 1 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 = Prosperity Ft = Financial Technology HC = Human Capital SC = Social Capital RA = 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 1920’s Today’s Automobile 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 China’s 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 you’re willing to work hard … you can make it here in America, if you’re willing to try.” - Reelection Night Source: New York Times 11/7/12 Skilled and Unskilled Jobs

1950 Today

65% 60% Skilled Unskilled 20% 20% 20% Semi- Semi- Skilled 15% skilled Unskilled skilled U.S. lags significantly in graduating engineers 2008 (or most recent year)

Percent of first university degrees in engineering 35

0 U.S. U.K. Canada Germany Japan Korea China

Sources: National Science Foundation, MAPI. The Jobs Problem (It Isn’t Jobs – It’s Trained Workers)

Millions 125 123,000,000 high- 100 skilled jobs will be 75 available in 2020

50 50,000,000 25 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 James Heckman complete high school and who Nobel Prize in won’t.” Economics

Source: New York Times – July 29, 2008 Knowledge Universe Knowledge Universe

U.S. - Domestic International

Early Childhood Education

Dependent Care Services

Life Long Learning Consumer Spending U.S. Asia Housing 33% Food 23% Transportation 18% Supplemental Education 15% Food 13% Housing 10% Insurance/pensions 11% Clothing 8% Healthcare 6% Other 8% Entertainment 5% Transportation 6% Apparel and services 4% Healthcare 5% Supplemental Education 2% 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 nation’s prosperity. Immigrants in Silicon Valley

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

• More than 15 percent of Silicon Valley start- up 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. Harvard University 11. Imperial College London 2. University of Cambridge 12. UC San Diego 3. University of Oxford 13. National University/Singapore 4. Stanford University 14. University of Melbourne 5. Berkeley 15. University College London 6. University of Tokyo 16. University of Toronto 7. Johns Hopkins University 17. University of Edinburgh 8. MIT 18. Kyoto University 9. Yale University 19. University of Sydney 10. UCLA 20. University of British Columbia 2000 2010 – 9,500 students – 14,500 students – 20% foreign – 29% from non-EU countries – 108 from China – 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 2011 Latin Asia 5% Other Other 4% Canada 2% America 1% 9%

Canada Asia 10% 28% Europe 75% Latin America 53%

Source: Migration Policy Institute, U.S. Census America’s Changing Faces Annual Population Growth Rate (2001-2011)

Asians Blacks Hispanics European 3.1% 1.1% 3.5% 0.2% Source: U.S. Census Bureau California’s Changing Faces Population Growth (2000 - 2011)

Blacks Asians Latinos 2.9% 21.8% 23.8% European (4.0%) Source: U.S. Census Bureau

Top Ten Home-Buyer Surnames California 1990 2010 1. Smith 1. Nguyen 2. Lee 2. Lee 3. Johnson 3. Garcia 4. Garcia 4. Chen 5. Brown 5. Lopez 6. Williams 6. Rodriguez 7. Miller 7. Gonzalez 8. Wong 8. Hernandez 9. Martinez 9. Martinez 10. Jones 10. 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 Asia’s Middle Class

Malaysia 2014 2009 China Thailand Indonesia Philippines India 0% 10% 20% 30% 40% 50% 60% 70% Sources: Euromonitor; World Bank; CLSA Asia-Pacific Markets / 2010 India’s Developing Middle Class Percent of Total Population by Age

100% 5% Wealthy 14% 31% 80% 46% Middle Class 60%

40% Aspiring 20% Middle Class Impoverished 2000 2008 2020 2030 Source: Eurostat (EU27 projections) 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 2030

Rest of World EU EU Rest of World 26% 14% 30% U.S. 20% 7% Other Japan Asia 4% Other 9% Asia 14%

India 2% China U.S. 18% 21% Japan China 4% India 23% 8%

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. Italy Spain Russia China Brazil Indonesia India

Source: HIS Global Insight / Guggenheim Projected Global Vehicle Population

5,000 2000 - 4000 4,000

3,000

2,000 979 1,000

2012 2050E

Source: HIS Global Insight / Guggenheim Things That Will Change the World 4. Access to Financial Capital P=SFti*(SHCi+SSCi+SRAi)

P = Prosperity Ft = Financial Technology HC = Human Capital SC = Social Capital RA = Real Assets America Goes to Work U.S. and Fortune 500 Employment 200 U.S. = +62 million jobs 180 New financial technologies are 160 fully implemented 140 120 100 80 Modern capital markets begin Fortune 500 = minus 4 million 60 70 75 80 85 90 95 00 Index 1970 = 100 Institutional Investor Base for Non-investment Grade Loans

Hedge, distressed and Prime rate funds, financial Banks CLOs high-yield funds 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 United States 150 Western Europe 130

110

90 1970 1975 1980 1985 1990 1995 2000 2005 Cyprus: Large bank assets relative to GDP

Bank assets (% country GDP) 800 700 600 500 400 300 200 100 0 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 Assets of the 4 biggest banks (%GDP), 2012 500 441

400 358 314 300 251 189 200 160 131 129 119 99 100 50

Sources: BankScope, Milken Institute. Chinese small businesses create jobs; Large enterprises get the bank loans

Large Enterprises

88% Mid-size enterprises 44% 35% Small 17% Enterprises Number of Number GDP Bank Enterprises Employed Loans Sources: McKinsey 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 • 1832 •1826 • 1982 • 1839 •1876 • 1826 • 1898 • 1868 •1843 • 1986 • 1885 •1915 • 1848 • 1902 • 1911 •1852 • 1992 • 1918 •1940 • 1860 • 1914 • 1914 •1893 • 2001 • 1991 •1978 • 1865 • 1931 • 1931 •1932 • 2004 • 1998 • 1892 • 1937 • 1982 •2011 • 1898 • 1961 • 1999 • 1983 • 1964 • 2008 • 1990 • 1983 • 1995 • 1986 • 1998 • 1990 • 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) Greece 150 Ireland Italy 140 130 120 110 France

100 Germany 90 80 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 24.3 25

20 15.9 14.8 15 11.4 10.7 10.2 10 8.1 7.9 5.5 5

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

Source: EuroStat. Euro area: Youth unemployment rates are alarmingly high in euro zone 2012

Youth unemployment rate, percent 60 55.4 53.2 50

37.7 40 35.3 30.6 30 24.7 23.1 21.0 20 16.2

10 8.2

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

Source: EuroStat. Things That Will Change the World 5. Energy Technology Game Changer Traditional Drilling Modern Techniques

Spindletop (Beaumont, TX), 1901 Marcellus Shale (Pennsylvania), 2012 Drilling Depth: 1,139 feet 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 industry’s 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 +18 +36

+18 67 Years +5 49 Years 31 26 Years Years

1820 1900 1950 2010

Source: United Nations Development Program Life Expectancy in East Asia

80 75.4

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 … what’s 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. Alabama b. California c. Hawaii d. Oregon e. 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 $200 billion $15 $10 $5

98 99 00 01 02 03 04 05 06 07 08 09 10 11

Source: National Institutes of Health Outlook for Biomedical Research Spending (2012)

20% China India

Brazil Korea Japan 10% Germany

Australia UK Singapore 0% France US Canada -10%

Source: OECD – Government Budget Appropriations or Outlays for Research and Development (2012) 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 Sec’y Steven Chu DNA Pioneer James Watson

The Beery Family

Elias Zerhouni, President, National Science Foundation Global R&D, Sanofi Director Subra Suresh Elizabeth and Ariel Glaser

November 7, 1991 Earvin “Magic” Johnson at With AIDS pioneering researcher Tony Fauci Global Conference 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 children’s history books. Toward a More Prosperous Future

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

Michael Milken Chairman, The Milken Institute