Updated: The Animal Spirits Index rebounded in March Economic agents - - PowerPoint PPT Presentation

Updated: The Animal Spirits Index rebounded in March

• Economic agents expectations of near-term economy improved
• Animal Spirits Index (ASI) is constructed from five variables:

(1) The S&P 500 index

• Rebounded back above 2,800

(2) The Conference Board’s consumer confidence index

• Improving, consumer spending rebounded

(3) The yield spread

• Shortly went into negative

(4) The VIX index (market’s volatility expectations)

• Dropped in March

(5) The economic policy uncertainty index

• Trade talks promising

Yield Curve flattening: means less now

0.00 0.50 1.00 1.50 2.00 2.50 3.00 2012-01-01 2012-05-01 2012-09-01 2013-01-01 2013-05-01 2013-09-01 2014-01-01 2014-05-01 2014-09-01 2015-01-01 2015-05-01 2015-09-01 2016-01-01 2016-05-01 2016-09-01 2017-01-01 2017-05-01 2017-09-01 2018-01-01 2018-05-01 2018-09-01 2019-01-01 Treasury Spread: 10-year yield - 1-year yield

• Previously a signal of recession in 12-18 months
• Narrowing recently because of Fed’s QE policies and

unwinding of their balance sheet (estimation is that it reduced the term premium by about 60 bps)

• Flood to safety from Europe
• This inversion was rather insignificant compared to

previous cycles and would need to invert significantly more and remain inverted for longer period of time to be a reliable signal.

• Also, financial conditions are not currently as

restrictive as in previous cycles and economic fundamentals remain strong

Talk of an imminent U.S. recession is a bit overdone

• Expansions perpetuate themselves with a self-generating mechanism (jobs – income – consumption

– jobs)

• Economic expansion has reached 118 months, record is 120 months
• The underlying fundamentals of the U.S. economy are generally solid at present
• 2018 Growth: 3.2% with .75% fiscal stimulus after-burner
• Residential fixed investment contributed 0.23 and 0.13 points to GDP in 2016, 2017; detracted

0.01 in 2018

• 2019: back to a steady pace of 2 to 2.5% growth
• Labor markets, consumer spending, business investment, wages, exports, energy, debt levels still all
• n steady sustainable paths
• Interest rates still low, inflation still constrained
• Still a low chance of recession in next 12 months

What’s different this time?

Housing market in 2007 The big 3 imbalances

• Finance
• Inexhaustible demand for securitized

loans

• Low quality loans
• Loosely regulated
• Housing
• Overbuilt
• Highly overvalued
• Consumer
• Highly indebted
• Buyer irrational exuberance

Housing Market in 2019

• Finance
• Dodd-Frank
• Well-capitalized
• Housing
• single-family housing starts are roughly 50% below last

peak

• Severely underbuilt, and getting worse
• Consumer
• households have de-levered over the past ten years
• student debt an issue for future consumption but not

enough for a recession

• disposable personal income is up 50% over the past ten

years

IPO floodgate opens – 2019 on pace for record exit value

Is the “Uber Effect” going to be as large as the “Facebook Effect”?

• Uber made its S-1 public on Thursday
• The company is eyeing a price range of $48 to $55 per share, which would raise about $10 billion

and value the company between $90 billion and $100 billion.

• SoftBank is the biggest shareholder, 16.3% interest. If Uber hits the high end of its range and is

valued at $100 billion, would be worth $16.3 billion.

• Uber claims consumers used its services to travel about 26 billion miles during 2018—or enough

to circumnavigate the globe more than a million times.

• MaaS (Mobility-as-a-Service) platform, global, one-stop shop for urban transportation as well as

auxiliary services

• Uber will spin out the next generation of notable founders, according to survey of founders, but

so will Slack, Airbnb, and other IPO…..

1Q is the second-highest recorded capital investment in the last decade

500 1,000 1,500 2,000 2,500 3,000 3,500 $0 $5 $10 $15 $20 $25 $30 $35 $40 $45 $50 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2015 2016 2017 2018 2019 Deal value ($B) Deal count Angel & Seed Early VC Later VC

• 2018 largest on record for VC activity, 2019 continue
• n same pace
• Fewer, larger venture deals
• Hot item: life sciences (digital+biology)
• The slew of VC-backed IPOs coming up in 2019 will

create significant liquidity for investors to reinvest in venture funds for the next wave of startups

• Policy issues:
• foreign investment - the Foreign Investment

Risk Review Modernization Act (FIRRMA) could push away foreign co-investors and reduce capital for US startups; and immigration(!!).

But, housing a critical issue: California needs 3.5 million housing units to close the housing gap

6 Jobs per 1 Housing Permits Added

• ver last 6 years

CA has lowest housing per capita ratio after Utah

7

BAY AREA MARKET UPDATE

San Francisco inventory lowest in 5 years – are sellers waiting for IPO rush?

YOY Change in for-sale (March) $0- $1M $1M-2 M $2M- 3M $3M+ All Invent

• ry

Alameda 22% 37% 28% 17% 26% Contra Costa 11% 15% 18% 13% 12% Marin 8% 3% 16% 24% 9% Napa 20% 8%

• 16% 14%

14% San Francisco

• 31% -11% -4%
• 3%
• 17%

San Mateo

• 10% 29% 27% 32%

17% Santa Clara 23% 33% 24% 26% 27% Sonoma 15%

• 6%

0% 15% 11% Total 12% 18% 15% 19% 14%

Nov_18, 8% Mar_19, -9% Nov_18, 5% Mar_19, -31% Dec_18, 36% Mar_19, 19%

• 40%
• 30%
• 20%
• 10%

0% 10% 20% 30% 40% Mar_17 Apr_17 May_17 Jun_17 Jul_17 Aug_17 Sep_17 Oct_17 Nov_17 Dec_17 Jan_18 Feb_18 Mar_18 Apr_18 May_18 Jun_18 Jul_18 Aug_18 Sep_18 Oct_18 Nov_18 Dec_18 Jan_19 Feb_19 Mar_19 SF More than $1M SF Less than $1M Bay Area Total Less SF

Selma Hepp’s Economic Update

• It will be a good year
• GDP growth outlook for 2019: 2%+
• Labor markets to remain tight
• Rising wages to put pressure on profits
• Exports, business investment continue to grow
• Inflation to remain constrained
• Interest rates still low
• Debt levels still safe
• Where people move (want to move) will drive regional growth
• VC investment continue to fuel our economy and local housing markets