Hi, everyone. Happy 2019.
Today, as is my custom on the first day of the new year, I am going to take a stab at what the year ahead will bring. I find it useful to think about what we are in for. It helps me invest and advise the companies we are invested in. Like our investing, I will get some of these right and some wrong. But having a point of view--a foundation--is very helpful when operating in a world that is full of uncertainty.
I believe and have been telling those around me that I think 2019 will be a "doozy." I think we will see major dislocations in the leadership of the United States, a bear market in stocks, a weakening economy, and a number of issues with the global economy including a messy Brexit and a sluggish China. All of this will lead to a more cautious stance by investors in the startup economy. And crypto will not be a safe haven for any of this, although there will be signs of life in crypto land in 2019.
Let's take each of those in the order that I mentioned them.
I believe that we will have a different president of the United States by the end of 2019. The catalyst for this change will be a devastating report issued by Robert Mueller that outlines a history of illegal activities by our president going back decades, including in his campaign for president.
The House will react to Mueller's report by voting to impeach the president. Which will set up a trial in the Senate. That trial will go so badly for the president that he will, like Nixon before him, negotiate a resignation that will lead to him and those close to him being pardoned for all actions, and Mike Pence will become the president of the United States sometime in 2019.
I believe this drama will play out through most of 2019. I expect the Mueller report to be issued sometime in the late winter/early spring, and I expect an impeachment vote by the House before the summer, leading to a trial in the Senate in the second half of the year.
The drama in Washington will have serious impacts to the economy in the United States, starting with our capital markets.
The U.S. equity capital markets enter 2019 on shaky ground. Though the last week of the year brought us a relief rally, the markets are dealing with higher rates, some early indications of a weaker economy in 2019 (possibly due to higher rates), and, of course, the potential for the drama in Washington that we've already discussed. Here is a chart of the S&P 500 over the past five years:
I expect the S&P 500 to visit 2,000 sometime in 2019 and then bounce around that bottom for much of the year. This would represent a decrease in the S&P's trailing PE multiple to around 15x, which feels like a bottom to me given the recent history of the equity markets in the U.S.:
Interest rates have been rising gradually in the U.S. for the past three years. The Fed has taken its Fed Funds rate from essentially zero three years ago to almost 2.5 percent today:
The rates that are available to consumers and businesses have followed, and I expect that to continue in 2019. Here is a chart of the interest rates on the three most popular mortgage products in the U.S.:
When it gets more expensive to borrow, marginal projects don't get funded. And what happens at the margin has a much larger impact on the economy than most people understand. No wonder the president wants to fire the Fed chairman.
I expect the combination of higher rates, uncertainty in Washington, and storm clouds globally (which we will get to soon) will cause business leaders in the U.S. to become more cautious on hiring and investment. Consumers will make essentially the same calculations. And that will lead to a weaker economy in the U.S. in 2019.
The global picture is not much better. The Eurozone is about to go through the most significant change in decades with some sort of departure of the U.K. from the E.U. (Brexit). It remains unclear exactly how this will happen, which in and of itself is creating a lot of uncertainty on the Continent. I don't expect most businesses in Europe to do anything but play defense in 2019.
Probably the biggest unknown for the global economy is the resolution of the ongoing trade tensions between China and the U.S. It seems inevitable that China will make some concessions to the U.S. to resolve these trade tensions. But, of course, what happens in Washington (the first issue) may impact all of that. In the meantime, the uncertainty around trade and exports hangs over the Chinese economy. China's GDP has been slowing in recent years as it achieved relative parity with the U.S. and the Eurozone:
Any significant trade concessions from China could impact its growth prospects in 2019 and beyond, which will take the most powerful engine of global growth off the table this year.
So all of that is a pessimistic take on the broader macro environment in 2019. How will all of this impact the startup/tech economy?
The startup/tech economy is somewhat immune to macro trends. Many startups and big tech companies were able to grow and expand their businesses during the last financial downturn in 2008 and 2009. Some very important tech companies were even started in those years.
The tech/startup economy is driven first and foremost by technical and creative (i.e., business model) innovation. And that is not impacted by the macro environment.
So I expect that we will continue to see big tech companies invest and grow their businesses and do well in 2019. I expect we will see IPOs from big names like Uber, Lyft, and Slack, although I also expect those deals will get priced well below the lofty expectations they have in mind right now. Some of that will be because of weak equity markets in the U.S., but it is also true that most of the IPOs in 2018 also priced below the lofty "going in" expectations of founders, managers, boards, and their bankers. The public markets have been much more sanguine about value than the late-stage private markets for a long time now.
However, I do think a difficult macro business and political environment in the U.S. will lead investors to take a more cautious stance in 2019. It would not surprise me to see total venture capital investments in 2019 decline from 2018. And I think we will see financings take longer, diligence on new investments actually occur, and valuations to come under pressure for even the most attractive opportunities.
But all of that is going to happen at the margin. I expect 2019 to be another solid year for the tech/startup sector, as we are in a possibly century-long conversion from an industrial economy to an information economy and the tailwinds for tech/startup versus the rest of the economy remain in place and strong.
Any set of predictions for 2019 from me on this blog would not be complete without some thoughts on crypto. So here is where my head is on that topic.
I think we are in the process of finding the bottom on the large, liquid, and lasting crypto-tokens. But I think that process could take much of 2019 to play out. I expect we will see some bullish runs, followed by selling pressures taking us back to retest the lows. I think this bottoming-out process will end sometime in 2019 and we will slowly enter a new bullish phase in crypto.
I think the catalyst for the next bullish phase will come as the result of some of the many promises made in 2017 coming to fruition in 2019. Specifically, I think we will see some big-name projects ship, like the Filecoin project from our portfolio company Protocol Labs, and the Algorand project from our portfolio company Algorand. I think we will see a number of "next gen" smart contract platforms ship and challenge Ethereum for leadership in this super important area of the crypto sector. I also expect the Ethereum open-source community to ship a number of important improvements to its system in 2019 and defend its leadership in the smart contract space.
Other areas of crypto where I expect to see meaningful progress and consumer adoption happen in 2019 are stablecoins, NFT/cryptoassets/cryptogaming, and earning/spending opportunities, particularly in the developing world.
There will also be pressure on the crypto sector in 2019. The area I am most concerned about are actions brought by misguided regulators who will take aim at high-quality projects and harm them. And we will continue to see all sorts of failures, from scams, hacks, failed projects, and losing investments, be a drag on the sector. But that is always the case with an emerging technology that allows anyone to set up shop and get going. Permission-less innovation produces the greatest gains over time but also comes with the inevitable bad actors and actions.
So that's where my head is on 2019. Do I sound pessimistic? I suspect I do, but I am not. I am incredibly optimistic, like my partner Albert, and can't wait to get going and make things happen in this new year. It is going to be a doozy.