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 10 5 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 4 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 4 3 2 1 0 -1 -2 1996 1998 2000 2002 2004 2006 2008 2010 2012 Note: 3-month interest rates: Canada, China, France, Germany, Italy, Japan, United Kingdom, United States; Weighted by 2012 GDP. Sources: DataStream, International Monetary Fund, Milken Institute. Record low 10-year treasury yields Ten-year 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 55 50 45 Developing economies 40 35 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 30 25 20 15 10 5 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.