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Deflation Tsunami

https://bondvigilantes.com/wp-content/uploads/2023/05/1-deflation-tsunami-1-1024×576.pngInflation is one of the great economic debates and often leaves…

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Inflation is one of the great economic debates and often leaves big economic thinkers at loggerheads. I am not a financial titan, but looking at the world from 100,000 feet, the conditions are in place for the world to see inflation heading meaningfully lower.


Source: Getty Images

For years, inflation has been too low for comfort for the world’s major central banks. Inflation remained elusive despite ultra-accommodative policy through negative interest rates and an eye-watering amount of quantitative easing (QE). It wasn’t until a pandemic that shuttered economies and ground supply chains to a halt, a war that raised geopolitical tensions and damaged global food and energy security, and a further increase in money supply in response ,that inflation moved meaningfully higher. The question is, is it here to stay?

Inflation is the measurement of the price change for goods and services. As prices start to find a level and stop increasing, the year on year (YoY) change will eventually trend to zero. We will begin seeing these ‘base effects’ drop out, and inflation will start behaving.

Covid is now thankfully a distant memory, and supply chains have eased and are now back to ‘normal’ – a disinflationary impulse.


Source: Bloomberg (May 2023)

The energy-induced spike from Putin’s invasion of Ukraine has eased and is another disinflationary impulse.


Source: Bloomberg (May 2023)

The aggressive rate hiking cycle the Bank has embarked on should bring about a slowdown in growth. This is particularly acute for economies with housing exposure linked to floating-rate mortgage products, less of a concern for the US, as most will have 30yr fixed mortgages. With house prices at unaffordable levels across most of the developed world and the cost of borrowing moving sharply higher, house prices will undoubtedly be pressured downwards, another disinflationary impulse. Alongside the housing market, the commercial real estate (CRE) sector is particularly vulnerable as it grapples with tighter monetary policy and a cascade of debt maturities. Rolling the debt over will hurt profitability as the cost of funding is now higher, but also potentially very difficult to do in the current environment. Regional banks in the US are going through their own crisis and are responsible for circa 70% of US CRE lending. Look out below.


Source: St Louis Federal Reserve (March 2023)

Perhaps the market has avoided a nasty recession to date as the consumer has remained defiant and run down their savings and significantly increased credit card debt over the past few years. The ability to do so going forward seems limited given savings rates are at or near the lows and credit card debt is at record highs with increasing annual percentage rates (APRs).


Source: Bloomberg (May 2023)

What is the market pricing? The ‘market’ has a particularly gloomy outlook and suspects recession is all but assured. The 2s/10s yield curve has been an accurate predictor of recession in the past and is currently highly inverted, signalling recession risk.


Source: Bloomberg (May 2023)

On the other hand, the Fed needs to engender confidence; they have said that the spread between 18m forward 3m and spot 3m yield is a better indicator and inferred that recession was less likely. I’m not here to say which measure is better, but… the Fed’s measure has rolled over in spectacular fashion and now suggests the same. That was quick.


Source: Bloomberg (May 2023)

Perhaps the biggest threat to inflation is artificial intelligence (AI)

AI has been predicted to destroy up to 300 million jobs in the coming years. Possibly a doomsday scenario, perhaps not. Mo Gawdat’s bestselling business book of the year, ‘Scary Smart’ gives a splendid and balanced view of this new technology and its impact on humanity. Gawdat was the former chief engineer at Google X, so we can be confident that he has a deep understanding of the sector. Worryingly, this was published in 2021, and things have moved on since then. Several takeaways from the book which struck a chord with me are:

  1. It is happening and cannot be stopped
  2. AI can already communicate better, observe visuals better and create as well as humans
  3. In 2019, Google’s supercomputer, Sycamore, outperformed the previous supercomputer by solving a problem which was considered impossible for normal machines and would have taken the then super compute 10,000 years to complete. Sycamore did this in 200 seconds. It is 1.5 trillion times faster.

Read the book, it really is terrifying.

Is this all scaremongering? Well, there must be something to this. Influential voices worldwide are pleading for regulation around the sector, but this is unlikely to meet its intended purpose. AI is simply progressing too quickly.

During the internet revolution, we witnessed Schumpeter’s creative destruction whereby the destruction of existing economic structures such as industries, firms and jobs were replaced by new ones via innovation and technological change. It always felt like a few industries were at risk, and if you weren’t in that industry, you could breathe a sigh of relief and move on happily with your life. This time it feels different. The breadth and scale of jobs now at risk are frightening.

A few examples are always helpful to help drive home the idea. Least at risk was always the Arts; this is no longer the case.

  1. Imagery/Art can be created in seconds – all that is required is a good description. Below is fully AI-generated image which I created/generated myself in 5 mins. This included downloading the app and fumbling around trying to figure out how it was done.  

Source: Rob Burrows’ original creation

  1. Modelling – now take the above image and think about the modelling world. We no longer need models. Imagine advertising a pair of jeans. The advertising can be done globally and in seconds by simply picking your market and generating the image of an ‘attractive’ person wearing the said item of clothing for that demographic. Selecting male/female/young/old/small/big will be a simple button click.
  2. Music – AI is now creating music and is trending. Drake’s (I personally don’t know who this is) ‘wear my heart on my sleeve’ is currently trending. Musicians are now offering up the use of their vocals for a share in any future profits. It won’t be long until we no longer need human vocals. Hatsune Miku in Japan is an example of entirely generated AI music with a hologram presence and is extremely popular.
  3. The written word – Books and research papers can be written in seconds and across multiple languages. In fact, Hollywood screenwriters are going on strike to try and protect their industry and livelihoods. 

An employment earthquake could be on the near horizon. Mass unemployment is certainly not a recipe for rampant inflation. There may, however, be unchecked profits for those companies that benefit from AI and a cost-cutting drive. Not a bright outlook for the man on the street. How will we all survive while on the unemployment scrap heap?

If such drastic change is upon us, we must rethink everything we know about economics and how society functions—no wonder the topic of universal basic income has reared its head again.

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Four burning questions about the future of the $16.5B Novo-Catalent deal

To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.
Beyond spending billions of dollars to expand…

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To build or to buy? That’s a classic question for pharma boardrooms, and Novo Nordisk is going with both.

Beyond spending billions of dollars to expand its own production capacity for its weight loss drugs, the Danish drugmaker said Monday it will pay $11 billion to acquire three manufacturing plants from Catalent. It’s part of a broader $16.5 billion deal with Novo Holdings, the investment arm of the pharma’s parent group, which agreed to acquire the contract manufacturer and take it private.

It’s a big deal for all parties, with potential ripple effects across the biotech ecosystem. Here’s a look at some of the most pressing questions to watch after Monday’s announcement.

Why did Novo do this?

Novo Holdings isn’t the most obvious buyer for Catalent, particularly after last year’s on-and-off M&A interest from the serial acquirer Danaher. But the deal could benefit both Novo Holdings and Novo Nordisk.

Novo Nordisk’s biggest challenge has been simply making enough of the weight loss drug Wegovy and diabetes therapy Ozempic. On last week’s earnings call, Novo Nordisk CEO Lars Fruergaard Jørgensen said the company isn’t constrained by capital in its efforts to boost manufacturing. Rather, the main challenge is the limited amount of capabilities out there, he said.

“Most pharmaceutical companies in the world would be shopping among the same manufacturers,” he said. “There’s not an unlimited amount of machinery and people to build it.”

While Novo was already one of Catalent’s major customers, the manufacturer has been hamstrung by its own balance sheet. With roughly $5 billion in debt on its books, it’s had to juggle paying down debt with sufficiently investing in its facilities. That’s been particularly challenging in keeping pace with soaring demand for GLP-1 drugs.

Novo, on the other hand, has the balance sheet to funnel as much money as needed into the plants in Italy, Belgium, and Indiana. It’s also struggled to make enough of its popular GLP-1 drugs to meet their soaring demand, with documented shortages of both Ozempic and Wegovy.

The impact won’t be immediate. The parties expect the deal to close near the end of 2024. Novo Nordisk said it expects the three new sites to “gradually increase Novo Nordisk’s filling capacity from 2026 and onwards.”

As for the rest of Catalent — nearly 50 other sites employing thousands of workers — Novo Holdings will take control. The group previously acquired Altasciences in 2021 and Ritedose in 2022, so the Catalent deal builds on a core investing interest in biopharma services, Novo Holdings CEO Kasim Kutay told Endpoints News.

Kasim Kutay

When asked about possible site closures or layoffs, Kutay said the team hasn’t thought about that.

“That’s not our track record. Our track record is to invest in quality businesses and help them grow,” he said. “There’s always stuff to do with any asset you own, but we haven’t bought this company to do some of the stuff you’re talking about.”

What does it mean for Catalent’s customers? 

Until the deal closes, Catalent will operate as a standalone business. After it closes, Novo Nordisk said it will honor its customer obligations at the three sites, a spokesperson said. But they didn’t answer a question about what happens when those contracts expire.

The wrinkle is the long-term future of the three plants that Novo Nordisk is paying for. Those sites don’t exclusively pump out Wegovy, but that could be the logical long-term aim for the Danish drugmaker.

The ideal scenario is that pricing and timelines remain the same for customers, said Nicole Paulk, CEO of the gene therapy startup Siren Biotechnology.

Nicole Paulk

“The name of the group that you’re going to send your check to is now going to be Novo Holdings instead of Catalent, but otherwise everything remains the same,” Paulk told Endpoints. “That’s the best-case scenario.”

In a worst case, Paulk said she feared the new owners could wind up closing sites or laying off Catalent groups. That could create some uncertainty for customers looking for a long-term manufacturing partner.

Are shareholders and regulators happy? 

The pandemic was a wild ride for Catalent’s stock, with shares surging from about $40 to $140 and then crashing back to earth. The $63.50 share price for the takeover is a happy ending depending on the investor.

On that point, the investing giant Elliott Investment Management is satisfied. Marc Steinberg, a partner at Elliott, called the agreement “an outstanding outcome” that “clearly maximizes value for Catalent stockholders” in a statement.

Elliott helped kick off a strategic review last August that culminated in the sale agreement. Compared to Catalent’s stock price before that review started, the deal pays a nearly 40% premium.

Alessandro Maselli

But this is hardly a victory lap for CEO Alessandro Maselli, who took over in July 2022 when Catalent’s stock price was north of $100. Novo’s takeover is a tacit acknowledgment that Maselli could never fully right the ship, as operational problems plagued the company throughout 2023 while it was limited by its debt.

Additional regulatory filings in the next few weeks could give insight into just how competitive the sale process was. William Blair analysts said they don’t expect a competing bidder “given the organic investments already being pursued at other leading CDMOs and the breadth and scale of Catalent’s operations.”

The Blair analysts also noted the companies likely “expect to spend some time educating relevant government agencies” about the deal, given the lengthy closing timeline. Given Novo Nordisk’s ascent — it’s now one of Europe’s most valuable companies — paired with the limited number of large contract manufacturers, antitrust regulators could be interested in taking a close look.

Are Catalent’s problems finally a thing of the past?

Catalent ran into a mix of financial and operational problems over the past year that played no small part in attracting the interest of an activist like Elliott.

Now with a deal in place, how quickly can Novo rectify those problems? Some of the challenges were driven by the demands of being a publicly traded company, like failing to meet investors’ revenue expectations or even filing earnings reports on time.

But Catalent also struggled with its business at times, with a range of manufacturing delays, inspection reports and occasionally writing down acquisitions that didn’t pan out. Novo’s deep pockets will go a long way to a turnaround, but only the future will tell if all these issues are fixed.

Kutay said his team is excited by the opportunity and was satisfied with the due diligence it did on the company.

“We believe we’re buying a strong company with a good management team and good prospects,” Kutay said. “If that wasn’t the case, I don’t think we’d be here.”

Amber Tong and Reynald Castañeda contributed reporting.

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Petrina Kamya, Ph.D., Head of AI Platforms at Insilico Medicine, presents at BIO CEO & Investor Conference

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb….

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Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

Credit: Insilico Medicine

Petrina Kamya, PhD, Head of AI Platforms and President of Insilico Medicine Canada, will present at the BIO CEO & Investor Conference happening Feb. 26-27 at the New York Marriott Marquis in New York City. Dr. Kamya will speak as part of the panel “AI within Biopharma: Separating Value from Hype,” on Feb. 27, 1pm ET along with Michael Nally, CEO of Generate: Biomedicines and Liz Schwarzbach, PhD, CBO of BigHat Biosciences.

The session will look at how the latest artificial intelligence (AI) tools – including generative AI and large language models – are currently being used to advance the discovery and design of new drugs, and which technologies are still in development. 

The BIO CEO & Investor Conference brings together over 1,000 attendees and more than 700 companies across industry and institutional investment to discuss the future investment landscape of biotechnology. Sessions focus on topics such as therapeutic advancements, market outlook, and policy priorities.

Insilico Medicine is a leading, clinical stage AI-driven drug discovery company that has raised over $400m in investments since it was founded in 2014. Dr. Kamya leads the development of the Company’s end-to-end generative AI platform, Pharma.AI from Insilico’s AI R&D Center in Montreal. Using modern machine learning techniques in the context of chemistry and biology, the platform has driven the discovery and design of 30+ new therapies, with five in clinical stages – for cancer, fibrosis, inflammatory bowel disease (IBD), and COVID-19. The Company’s lead drug, for the chronic, rare lung condition idiopathic pulmonary fibrosis, is the first AI-designed drug for an AI-discovered target to reach Phase II clinical trials with patients. Nine of the top 20 pharmaceutical companies have used Insilico’s AI platform to advance their programs, and the Company has a number of major strategic licensing deals around its AI-designed therapeutic assets, including with Sanofi, Exelixis and Menarini. 

 

About Insilico Medicine

Insilico Medicine, a global clinical stage biotechnology company powered by generative AI, is connecting biology, chemistry, and clinical trials analysis using next-generation AI systems. The company has developed AI platforms that utilize deep generative models, reinforcement learning, transformers, and other modern machine learning techniques for novel target discovery and the generation of novel molecular structures with desired properties. Insilico Medicine is developing breakthrough solutions to discover and develop innovative drugs for cancer, fibrosis, immunity, central nervous system diseases, infectious diseases, autoimmune diseases, and aging-related diseases. www.insilico.com 


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Another country is getting ready to launch a visa for digital nomads

Early reports are saying Japan will soon have a digital nomad visa for high-earning foreigners.

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Over the last decade, the explosion of remote work that came as a result of improved technology and the pandemic has allowed an increasing number of people to become digital nomads. 

When looked at more broadly as anyone not required to come into a fixed office but instead moves between different locations such as the home and the coffee shop, the latest estimate shows that there were more than 35 million such workers in the world by the end of 2023 while over half of those come from the United States.

Related: There is a new list of cities that are best for digital nomads

While remote work has also allowed many to move to cheaper places and travel around the world while still bringing in income, working outside of one's home country requires either dual citizenship or work authorization — the global shift toward remote work has pushed many countries to launch specific digital nomad visas to boost their economies and bring in new residents.

Japan is a very popular destination for U.S. tourists. 

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This popular vacation destination will soon have a nomad visa

Spain, Portugal, Indonesia, Malaysia, Costa Rica, Brazil, Latvia and Malta are some of the countries currently offering specific visas for foreigners who want to live there while bringing in income from abroad.

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With the exception of a few, Asian countries generally have stricter immigration laws and were much slower to launch these types of visas that some of the countries with weaker economies had as far back as 2015. As first reported by the Japan Times, the country's Immigration Services Agency ended up making the leap toward a visa for those who can earn more than ¥10 million ($68,300 USD) with income from another country.

The Japanese government has not yet worked out the specifics of how long the visa will be valid for or how much it will cost — public comment on the proposal is being accepted throughout next week. 

That said, early reports say the visa will be shorter than the typical digital nomad option that allows foreigners to live in a country for several years. The visa will reportedly be valid for six months or slightly longer but still no more than a year — along with the ability to work, this allows some to stay beyond the 90-day tourist period typically afforded to those from countries with visa-free agreements.

'Not be given a residence card of residence certificate'

While one will be able to reapply for the visa after the time runs out, this can only be done by exiting the country and being away for six months before coming back again — becoming a permanent resident on the pathway to citizenship is an entirely different process with much more strict requirements.

"Those living in Japan with the digital nomad visa will not be given a residence card or a residence certificate, which provide access to certain government benefits," reports the news outlet. "The visa cannot be renewed and must be reapplied for, with this only possible six months after leaving the countr

The visa will reportedly start in March and also allow holders to bring their spouses and families with them. To start using the visa, holders will also need to purchase private health insurance from their home country while taxes on any money one earns will also need to be paid through one's home country.

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