Despite being known for the collapse of Drexel Burnham and the insider trading scandal, Michael Milken is by far, one of the sharpest financial minds of our time. It’s unusual to hear his thoughts on the markets and life in general, but Hunter at Distressed Debt Investing attended a conference which Milken spoke at this week and he provided us with some notes. There are some other good thoughts from the other speakers at his site. I’ve attached the notes from Milken’s speech.. Thought provoking at the very least:
Michael Milken – The Milken Institute
- Milken noted that he would not be making specific predictions, but a thematic view of how he sees the world
- Thinks it’s valuable to understand history, and, unfortunately, we never learn from history
- Churchill said that when a solution to a problem is manageable it is always neglected
- It is no surprise why Germany is winning in the EU, their unit labor cost are much less than all the PIIGS
- Germany’s unemployment level is less than 6% vs 21% in Spain
- Northern Europe has routinely the least amount of problems, and Southern Europe has the most
- Valuable to look at 1) Perception vs Reality and 2) Capital Markets
- Perception: What came first the chicken or the egg? The correct answer is egg. Reptiles were laying eggs before chickens existed, and the birds that layed the egg to the first chicken were not chickens.
- You just need a different perspective on the problem to find the solution. Are we asking the right questions?
- The U.S. surprisingly has grown it’s oil production more than any other country in the past 3 years. Volatility created alternative production. North Dakota is the 4th largest producing state. ~ 6% of crude output
- Digital real estate is the important real estate. 6 billion digital phones in the world. Who is going to control the real estate?
- Brazil: Manaus Brazil use to be the rubber capital of the world. Now it is an electronic manufacturing powerhouse. Foxconn is investing 12 billion in Manuas.
- The world is moving east. Of the 50 largest GDP cities, 20 will be in Asia. Half of the European cities will drop of the list.
- Asia has 59% of their population that is 20-34 years old. This is where production and demand will be.
- The middle class is booming in China, Malasia, Thailand, Indonesia, Phillipines and India -This is where you need to invest.
- Milken then moved on to his view of the capital markets by beginning with: What is the American Dream?
- Access to capital is based on ability and not on social status.
- Profit is a function of Financial Capital * (Human Capital + Social Capital + Real Assets)
- Give capital to the productive people and employment booms. Figure out how to empower human capital. It is our largest asset as a nation.
- In the 1920’s the automobile was innovation. 60% of the cost was raw materials and energy. Now innovation is the microchip which is less than 2% materials and energy.
- It is too difficult to get into the U.S. which means we are losing the top minds. Other countries are getting the students that we will not let in. Australia and Canada, Singapore, and the U.K. are developing the best technology because they are talking more students from Asia.
- An example of this is Hollywood. All of the 6 largest film studios were started by someone from within 50 miles from Warsaw, Poland. Think if we would not have let them in the country.
- ½ of all growth is from medical research
- 70% of health is lifestyle, 30% hereditary
- The U.S. is the heaviest country on Earth 36.5% obese
- 1 trillion spent annually on obesity in this country. Think if we could save this just by eating less and changing lifestyle (Apparently we can deep fry butter and dip it in bacon fat. That is why we are fat)
- Education: U.S. spends 2% of income on Education (33% on housing), Asia spends 15% on education
- Moving on to Credit: Credit is what counts. Not leverage. Equity is too small a fraction of assets. This has all happened before. All banks in Texas were AAA, but when the energy cycle busts they all defaulted. We need to be extremely careful how we deleverage because it is a multiple factor on the economy.
- Loans to real estate: Real Estate does not always go up forever it never has. No one knows when interest rates will go up but they know that they will and the cost of homes will go up.
- 4 companies are rated AAA. However, S&P found away to rate 1600 leveraged securities AAA.
- Sovereign debt is by far the worst credit. They always default. Adam Smith noted that countries never pay their debts after they reach a certain point of leverage. Greece defaults 1 of every two years before they were in the euro zone.
- 1974 is important year to study. Interest rates doubled. The market feels like 74. The Nifty Fifty went from a P/E of 66 to 11. Investors lost half their money. Investors flocked to money managers to manage their money. (They could no longer just get by investing int the Nifty Fifty)
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.