CEO confidence sinks to lowest level since 2016

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1 big thing: CEO confidence sinks to lowest level since 2016

By: Courtenay Brown • Newsletter: Axios Markets  

President Trump delivers opening remarks at the beginning of a policy forum with CEOs. Photo: Chip Somodevilla/Getty Images.

Confidence among the nation's top CEOs saw the biggest quarter-over-quarter drop in 7 years and hit a level not seen since the 4th quarter of 2016, according to a closely-watched survey by the Business Roundtable.

Why it matters: Corporate America's level of optimism has dramatically receded from the levels when President Trump took office. Amid heightened trade war uncertainty, CEOs have downgraded expectations for hiring, capital spending and sales growth — potentially exacerbating fears that the record economic expansion could be coming to an end.

“American businesses now have their foot poised above the brake, and they're tapping the brake periodically.” — Joshua Bolten, president and CEO of Business Roundtable, in statement

Details: The BRT's economic outlook index has declined for 6 consecutive quarters.

• At 79.2, this quarter's reading came in above the 50-point level that would indicate the onset of a recession, but the reading "suggests some moderation in the pace of economic growth going forward," the lobbying group noted in the release.
• 20% of CEOs surveyed expect their company's sales to decrease in the next 6 months — a notable jump from the 9% that said the same last quarter.

Go deeper:

• The flying blind economy
• The synchronized global slump

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2. Reviving mom-and-pop investors

By: Dan Primack • Newsletter: Axios Pro Rata

Illustration: Sarah Grillo/Axios

There is a revived push to allow mom-and-pop investors to buy shares in private companies, something from which they have been generally prohibited.

The state of play: At issue is how a lot of startup value creation has become over-weighted to the private markets, with fewer gains being generated post-IPO.

It wasn't always this way. Amazon, for example, went public in 1997 with a market cap of just $382 million. Google took the plunge eight years later at a $23 billion market cap, still just a fraction of its subsequent worth.

• Combined, the two companies raised less than $100 million in venture capital — in a pre-cloud era of higher fixed IT costs.
• Today, four different startups announced $100 million+ rounds.

The current environment was created by three main factors:

1. Low interest rates. This forced investors to search for yield, in order to beat the benchmarks, and that leads to increased interest in alternative assets like venture capital and growth equity. Included in the rush have been startup "tourists" like mutual fund, hedge fund, and sovereign wealth fund managers.
2. Bull public equity markets. Even if a public pension maintains a stable allocation to venture capital and growth equity, it represents more actual dollars.
3. The JOBS Act of 2012. When passed with bipartisan support, most of the attention was on how it would permit equity crowdfunding for startups. Plus the advent of "confidential" IPO submissions and some new general solicitation provisions. But it also eviscerated the so-called 500 Shareholder Rule, which basically forced startups (including Google) to go public once they reached a certain scale.

The big picture: SEC chair Jay Clayton has regularly bemoaned how Main Street investors are being shut out of private capital formation, saying in a speech last week that his agency will "take a fresh look" at enabling retail access. It's possible this would increase a relaxing of accredited investor rules, which conflate wealth with sophistication.

• Also last week, the House Financial Services Committee held a hearing on the matter. This was the one in which Rep. Alexandria Ocasio-Cortez mistakenly suggested that retail investors had access to WeWork, and therefore got "fleeced" by its recent valuation drop.

Bipartisan consensus is that D.C. must make it easier for startups to go public, so that they'll no longer want to remain private.

• But it's not filing costs or reporting requirements that are creating "unicorns" on the sidelines.
• It's broader market conditions, which only have been exacerbated by recent policy pushes: White House pressure to lower interest rates even further, corporate tax cuts juicing public equities, Clayton and the SEC's refusal to revisit the 500 shareholder rule change.

The bottom line: D.C. can help mom and pop, but only if it first comes to grip with how it hurt them.

Go deeper: The 55 minotaur companies

Sign up for my daily newsletter Pro Rata for insider views on deals and dealmakers in venture capital, private equity and mergers and acquisitions.

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3. Banks don't have enough money

By: Dion Rabouin • Newsletter: Axios Markets  

Illustration: Aïda Amer/Axios

Today's interest rates decision in the face of global economic turmoil but strong U.S. data is going to be dicey enough — but Fed chair Jerome Powell and the Federal Open Market Committee (FOMC) may also need to announce a comprehensive bond-buying program on top of that.

Driving the news: Following an emergency $53 billion repurchase agreement operation on Tuesday, the New York Fed announced it would hold another repo auction today for as much as $75 billion.

• Interest rates jumped as high as 9% Tuesday, well above 2.25%, which is the top of the Fed funds rate that should guide the market.
• The New York Fed was forced to intervene, something it hasn't done since 2008.

Why it matters: Market participants worry this is a sign there's a widespread lack of liquidity in the repo market, which is used by large, systemically important financial institutions to quickly borrow cash in exchange for securities like U.S. Treasuries.

• A lack of liquidity starts to break markets down as the trading and pricing of assets becomes increasingly difficult. This happened to the repo market during the 2008 financial crisis.

The big picture: The Fed could indicate it plans to stabilize the level of reserves at today's FOMC meeting, meaning it increases its bond purchases, a process that "will look, walk and talk like quantitative easing," says Gennadiy Goldberg, senior U.S. rates strategist at TD Securities, a primary dealer that does business directly with the Fed.

What they're saying: Tuesday was the fourth time in the past year the repo rate has jumped to abnormally high levels, following episodes in December, April and on Monday.

• Analysts say the culprit is a scarcity of bank reserves, which have been declining since 2014 and are expected to fall further.
• "None of this was a shocker to anyone, so the question is why did the market panic," Goldberg tells Axios. "You’ve had enough of these repo events to suggest that we are getting to the point where there isn’t enough liquidity in the system."

What's next: Analysts at Bank of America Merrill Lynch see "substantial risks" that the Fed announces outright bond purchases to stabilize the repo market. That could mean $150 billion of additional Treasury purchases, bringing the total to $400 billion in the next year.

• "Such a statement would imply that permanent balance sheet growth and outright purchases are necessary," BAML rates strategists said in a note to clients.

Go deeper: The "data-dependent" Fed is fighting the data

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Thanks for reading. See you on Friday.