a new global perspective - mike milken handout.pdfa tale of two nations: one focused on human...

Strategas 1‐21‐16Milken Institute

1

Social and Human Capital

Technology

Capital Markets

A New Global Perspective

P = ProsperityFt = FinancialTechnologyHC = HumanCapitalSC = SocialCapitalRA = RealAssets

P=Fti*(HCi+SCi+RAi)


2

P=Fti*(HCi+SCi+RAi)HumanCapital

SocialCapital

RealAssets

Productivity: Skills Education Training Experience Creativity Habits Values

Ruleoflaw Propertyrights Publichealth Universaleducation Religiousfreedom Police/fireprotection Culturalresources Universalsuffrage Protectionofcreditors Rigorousfinancial

reportingstandards Transparentmarkets Regulatorycontinuity

Cash Receivables Realestate Factories Capital

equipment Roads Buildings Infrastructure

FinancialTechnology

Innovativeprocesses&componentsincluding: Convertiblebonds Preferredstock High‐yieldbonds Collateralizedloans Collateralizedbonds Equity‐linked

securities Securitizedobligations

(mortgages,creditcards,etc.)

Derivatives

The 21st century is being defined by a worldwide

competition forhuman capital.


3

“Tomostofyou,capitalmeansabankaccount,stockcertificatesorfactories.

“I’mtalkingaboutadifferentkindofcapital.Schooling,acomputertrainingcourse,expendituresonmedicalcareandlecturesonthevirtuesofpunctualityandhonestyarecapitaltoo.”

Human CapitalGary Becker, 1992 Nobel Prize in Economics

Source:FederalReserveFlowofFundsQ32015.

Q3 2015 U.S. Household Balance Sheet

$93.9 Trillion Total

Deposits,11%

Sharesandsecurities,26%

Loans,1%

Insurancereserves,1%

Pensionentitlements,

22%

Othertangible,12%

Realestate,27%


4

Human Capital in the U.S.

25%Financial

Assets

75%Human and Social

Capital

$93.9 Trillion Total

Cost of Raw Materials & Energy

1920’sAutomobile

60% <2%

Today’sMicrochip


5

$2,255Source:IMFOct2015.

ATaleofTwoNations:Onefocusedonhumancapital,theotheron

tourismandfarming.

Per Capita GDP

1960

$2,271

Singapore

Jamaica

$4,912

2015

$53,224

Universalsuffrage Ruleoflaw Educationandhealthcare Policeandfireprotection Religiousfreedom Culturalresources Propertyrights Protectionofcreditors Financialreportingstandards

Examples of Social Capital


6

Throughouthistory,peoplehavesoughttoliveinnationsthatprovidethefreedomsthatcomewithvibrantsocialcapital–especiallytheRuleofLaw.

Inthe19th century,50millionEuropeansemigratedtotheUnitedStates.


7

60% of Chinese people with assets over $1.6 million are thinking about

emigrating to the U.S. or Europe.

Source:U.S.DepartmentofHomelandSecurity(WSJ2/22/12“PlanBforChina’sWealthy:MovingtotheU.S./Europe)


Technology

Capital Markets



8

Technology: Innovation and Disruption

1. Agriculture/FoodProduction2. Communications/Media3. Education/Research/BigData4. Energy/PowerfromtheSun5. Environment/Air/Water6. HealthCare/MedicalResearch7. Retail/Distribution8. TheSharingEconomy/Uber/Airbnb9. Transportation

Each farm person fed about two others.

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


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Each farm person fed about 340 others!

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

IfAfrica,LatinAmericaandAsiaachievetheagriculturalproductivityofEuropeandNorthAmerica,asmanyas500millionworkersmaybeunemployed.


10

21 Apple = 1 Sony21 Apple = 1 Sony

Apple vs. Sony - 1997 Market Value

$0

$10

$20

$30

$40

APPLE SONY

$34.3 Billion

$1.65 Billion

Billion

20 Sony = 1 Apple20 Sony = 1 Apple

Apple vs. Sony - 2015 Market Value

$0

$200

$400

$600

APPLE SONY

$27 Billion

$538 BillionBillion

Date:1/18/16


11

28 Netflix = 1 Blockbuster28 Netflix = 1 Blockbuster

Blockbuster vs. Netflix – 2002 Market Value

NETFLIX BLOCKBUSTER

$4.5 Billion

$0.16 Billion

Blockbuster vs. Netflix – 2016 Market Value

NETFLIX BLOCKBUSTER

$0

$44 Billion

Source:YahooFinance1/18/16


12

Source: Energy Information Administration.Note: 2/5/15. 2014 values used where 2015 values not available. Fossil fuels include petroleum, natural gas, and coal; each converted to BTUs.

15.54 15.49

7.696.09 5.48 5.24 4.66 3.85 3.42 2.91 2.74 2.68 2.43 2.22 2.14 2.02

0

5

10

15

20

Technology Game Changer

Total fossil fuel reserves, % of world total

U.S. has the largest energy reserves in the world

Sequencing the Human Genome

2003: 13years $3billion

Today: Afewhours Approaching$1,000


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The 7-Second Genome!

AGeorgiaTechPh.D.studentindexedahumangenomein7.3seconds usingaparalleldistributed‐memoryalgorithm.

Source:gatech.edu

We are entering a newAge of Medicine.

Precision Medicine, Immunology, Stem Cells…


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DiseasesAffectingtheHumanFamily

10,000

DiseasesforWhichWeHaveTreatments

600

Sources:WorldHealthOrganization;NationalInstitutesofHealth

Overthepast20years,theriskofapregnantwomanpassingAIDStoherchildhasdroppedfrom90%tolessthan2%.

Source:MarchofDimes;AmericanPregnancyAssociation


15

Onaverage,wemoveaboutthreediseasesperyearfromtheuntreatable

categorytotreatable.

Atthisrate,itwilltake2,000yearstohavetreatmentsforallknown

diseases.

Source:ChristopherAustin,Director,NCATS

TheU.S.spends90centsofeveryhealthdollar

ontreatment...

…andlessthanadimeonpreventionand

research.


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An organization dedicated to shortening the time to find cures and better treatments for

all life-threatening diseases

November13‐16,2016

• Aging

• AntibioticResistance

• WashingtonDCHealth

• EatingDisorders

• GlobalHealth

• RedstoneCenterforGlobalPreventionandWellness

• TreatmentandCare


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Abundantfoodandcleanwater

Defenseagainstpandemics

Shieldagainstbioterrorism

Reliableenergysupplies

Environmentalsustainability

Bioscience is more than health


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Enterprise Value Per Employee

Sources:Bloomberg,CapitalIQ1/19/16.Notes:MeasureincludeslatestEVandlatestemploymentnumbers.

Macy’s $111,000

Walmart $111,000

Sony $233,000

IBM $431,000

Amazon $2.0million

Microsoft $3.2million

Apple $4.1million

Alibaba $5.5million

Google $7.0million

Facebook $23.3million

WalMart toShutter269Stores;154ofThemintheU.S. January15,2016

AmazonPrimeAir:Dronestocarry5lbpackagesover10milesin30minutes

January18,2016


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Avis Stock Price

30

35

40

45

50

55

November‐15 December‐15 January‐16

Source:CapitalIQ1/15/2016.

Avis Stock vs. Uber Usage

Sources:CapitalIQ,SecondMeasure,MilkenInstitute1/15/2016.Note:ActualUber dataendsJuly2015,withremainingmonthscalculatedfrom2012– 2015trend.

0

1000

2000

3000

4000

5000

6000

10

20

30

40

50

60

70

2012 2013 2014 2015

Uber users(Right)

PercentgrowthStockprice

AvisStockPrice(Left)


20

TRANSPORTATION

Then NOW


Technology

Capital Markets



21

40%ofDemocratslikelytovoteintheIowacaucusesdescribethemselvesas“anti‐WallStreet”or“socialist.”

‐ BloombergJanuary15,2016

LikelyRepublicancaucus‐goers

Capitalist 62% 38%

Anti‐WallStreet 16% 44%

Socialist 4% 43%

Financiallyhard‐pressed 15% 24%

Poll: How Iowans Describe Themselves

LikelyDemocraticcaucus‐goers

Source:BloombergPolitics/DesMoinesRegisterJanuary7‐10,2016


22

15

61

23 15 227

258 8

206

138

97

67 60 5436

16 13

0

40

80

120

160

200

240

Apple+1218%

GE+126%

Microsoft+312%

Google+342%

Cisco+171%

Oracle+674%

Pfizer+42%

Merck+91%

Chevron+63%

Q42007 Q32015US$billions

Source:Bloomberg8/25/15.Note:Cashandmarketablesecurities.

Source:BloombergandInternationalMonetaryFund.Note:Includescashandnearcashitems.

Increase in Corporate Cash Balances 2005 to 2015Cash holdings of publicly listed companies, percent of GDP

17%

6% 7% 8%4% 6%

1%

9%13%

7% 6% 3% 3% 4%

74%

35%30%

22%16% 15% 14% 11% 11% 9% 9% 6% 6% 4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Japan$3,034

China$3,975

U.K.$846

France$541

Spain$196

Korea$208

Russia$172

U.S.$2,053

Canada$178

Germany$289

Brazil$153

Italy$116

India$139

Mexico$46

Q42005 Q32015PercentofGDP


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Global Liquidity – Sovereign Wealth Funds(US$ Billions)

1. GovernmentPensionFundofNorway $8732. AbuDhabiInvestmentAuthority $7733. ChinaInvestmentCorp. $7474. SAMAForeignHoldingsofSaudiArabia $6865. KuwaitInvestmentAuthority $5926. SAFEInvestmentCompanyofChina $5687. NationalPensionServiceofRepublicofKorea $4558. Stichting Pensioenfonds ABP(Netherlands) $4409. FederalRetirementThrift(U.S.) $42210. GICPrivateLimited(Singapore) $344

Source:SWFInstitute,June2015

CompanyCompany


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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

Leverage ratios of different financial firms

Sources: FederalDepositInsuranceCorporation,OfficeofFederalHousingEnterpriseOversight,NationalCreditUnionAdministration,Bloomberg,GoogleFinance,MilkenInstitute.

Leverage ratio, total assets/common equity – June 2008

9.1

9.8

9.4

31.6

23.7

21.5

67.9

CREDITUNIONS

COMMERCIALBANKS

SAVINGSINSTITUTIONS

BROKERS/HEDGEFUNDS

FEDERALHOMELOANBANKS

FANNIEMAE

FREDDIEMAC


25

FALLACY:

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

Federal Spending Priorities

FDA CDCNIH

Education

HousingSubsidies

$0

$100

$200

$300

Sources:FDA,CDC,NIH,DOE,PewCharitableTrusts.EducationreflectstotalDOEbudget.Housingsubsidiesreflectestimated forgonetaxrevenuesfromdeductionsforimputedrent,mortgageinterestandpropertytaxes.Alldata2016budgetrequestsexcepthousing,whichisestimatedforFY2014.

Annual, in $ billions

(forgonetax

revenue)


26

45%

50%

55%

60%

65%

70%

Canada UK Denmark U.S. France Japan Germany

Home Ownership Rates

Sources:EuroStat,U.S.CensusBureau,AEI,MilkenInstitute.Q12014

Sources:IHSGlobalInsight,MilkenInstitute,10/24/2015.

Home prices don’t go up forever

WWI WWII

GreatDepression

70’sBoom

80’sBoom

LastBoom

Change in home prices in 125 years

‐20%‐15%‐10%‐5%0%5%10%15%20%25%30%

1890 1902 1914 1926 1938 1950 1962 1974 1986 1998 20102015


27

“The no-recourse mortgage is virtually unique to the United States. That’s why falling house

prices in Europe do not trigger defaults. The creditors’ ability to go beyond the house

to other assets or even future salary is a deterrent.”

‐MartinFeldsteinU.S.Economist

Degradationofenvironment

Divorce Spousalabuse Drugabuse Alcoholism Hypertension Depression

Social Effects of Overly Large Houses


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Source:GlobalWealthDatabook 2015,CreditSuisse

Wealth Patterns in Selected Countries

Country Average Median <$10K >$1M

Australia $364 $168 7.2% 5.7%

France $262 $86 16.9% 3.7%

Greece $81 $39 19.7% 0.6%

Italy $204 $89 12.4% 2.3%

Japan $190 $96 9.0% 2.0%

UnitedKingdom $320 $126 10.0% 4.9%

UnitedStates $353 $50 28.1% 6.4%

2015wealthperadultin1,000U.S.dollars(rounded)

Microsoft Exxon‐Mobil Johnson&Johnson

AAA-rated Industrial Companies in the U.S.


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Investment‐GradeSecurities

Source:Bloomberg11/6/08

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

AAA 16,907

AA+ 240

AA 2,098

AA- 3,414

A 2,602

A- 2,027

BBB+ 903

BBB 1,371

BBB- 1,359

Non‐investmentGradeSecurities

BB+ 238

BB 313

BB- 331

B+ 339

B 330

B- 1,189

CCC+ 293

CCC 214

CCC- 104CC 36C 11

A Greek History of Default

“Inthe4th centuryBC,theTempleofDeloshadtotakean80%haircutonloansextendedto13Greekcity‐states.”

Source:FinancialTimes11/4/11

—KennethRogoffandCarmenReinhart


30

“Greecehasbeenindefaultforroughlyoneoutofeverytwoyears

sinceitgainedindependence(1829).”

Source:FinancialTimes11/4/11

A Greek History of Default

KennethRogoffandCarmenReinhart

Sovereign Debt Defaults

Sources:ThisTimeisDifferentChartbook:CountryHistoriesonDebt,Default,andFinancialCrises, CarmenM.Reinhart/MilkenInstitute

• 1828• 1898• 1902• 1914• 1931• 1937• 1961• 1964• 1983

• 1826• 1868• 1894• 1900• 1906• 1914• 1929• 1982• 1999• 2008

•1876•1915•1931•1940•1959•1965•1978•1982•2000

• 1826• 1848• 1860• 1865• 1892• 1898• 1983• 1990• 1995• 1998• 2004

Brazil Ecuador• 1839• 1885• 1917• 1918• 1947• 1957• 1991• 1998

Russia•1826•1843•1860•1894•1932•2011•2015

Greece Turkey Venezuela• 1982• 1986• 1992• 2001• 2004

Nigeria


31

Puerto Rico’s First-Ever Default

Sources:BBC,Bloomberg,S&P.Note:YieldonS&Pmarket‐weightedPuertoRicomunicipalbondindex.

3

4

5

6

7

8

9

10

112013 2014 2015 2016

Jun2015– GovernorwarnsPuertoRicoisnearingdefault,can’tpayits$72Bdebt.

Aug2015&Jan2016–PuertoRicodefaultson$50Mand$37Mdebtpayments

Municipalbondyield(inverted)

Oct2013– Federalassistanceconsideredinlightofmountingdebtcrisis

Interest rates double in one year; highest level in recent recorded U.S. history

Regulation restricts lending

Energy prices skyrocket

U.S. stock market plunges 50%

Unemployment almost doubles

1974


32

Companieswiththehighestreturnsoncapital,fastestratesofgrowthinmarketshareandemployment,andgreatestinnovationweredeniedaccesstoequityanddebtcapital.

RESULT #1:

1974

Withfinancialinstitutionsweakenedbytherecession,publicandprivate

marketsbegandisplacingbanksasthesourceofmostcorporatefinancing.

RESULT #2:

1974


33

Thecreationofthemodernmoney‐managementindustry(mutualfundsandnon‐trustmoneymanagers).

RESULT #3:

1974

Dow Industrials: 1973-76 and 2008-11

October4,2011

5500

7000

8500

10000

11500

13000

500

600

700

800

900

1000

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

DJIA, 1973-1976 DJIA, 2008-2011


34

AsiaCenter

CaliforniaCenter

FasterCures

CenterforFinancialMarkets

CenterfortheFutureofAging

CenterforJobsandHumanCapital

CenterforPublicHealth

CenterforStrategicPhilanthropy

• Finance/Access to Capital/Job Creation

• Technology

• Cities, States and Regions of the World

• Industries

• Media and Entertainment

• Education/Human Capital

• Energy/Environment

• Government/Leadership

• Aging and Longevity

• Public Health and Medical Research

• Philanthropy/Impact InvestingMay 1-4

Los Angeles

a new global perspective - mike milken handout.pdfa tale of two nations: one focused on human...

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