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Goldman: “The World Is On The Brink Of A Rather Severe Recession”

Goldman: "The World Is On The Brink Of A Rather Severe Recession"

Goldman, which like Morgan Stanley and unlike Nomura and Deutsche Bank,…

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Goldman: "The World Is On The Brink Of A Rather Severe Recession"

Goldman, which like Morgan Stanley and unlike Nomura and Deutsche Bank, refuses to make a recession its base case (but is quick to make it very clear that in case of recession the S&P will drop to 3,150), has looked back at all the 77 recessions across the globe since 1961 to provide context around the current economic environment in a report titled "Revisiting Recession Facts" (available to pro subs).  The report's bottom-line according to Goldman's Chris Hussey: some of what we are seeing today -- economic overheating and large increases in rates -- suggests that the world could be on the brink of a rather severe recession." That said, the bank highlights several other aspects of the current environment which provide a buffer against a notable turndown in activity. And for once we agree with Goldman, according to which the key thing to watch is the "fiscal and monetary response to a downturn." And since Democrats will lose Congress this November and there will be no new fiscal stimulus until 2025 at the earliest, we would add that the only thing to watch is the monetary response, i.e., when the Fed will i) cut rates back to zero, ii) resume QE and/or iii) cut rates negative.

Before we dig into the Goldman report, which looks at key facts about the frequency and severity of recessions analyzing 77 recessions in advanced economies since 1961, here are the main findings:

  • According to Goldman, the odds that the economy enters a recession in the next year at 30% in the US, 40% in the Euro area, and 45% in the UK.
  • Goldman's subjective recession probabilities are significantly higher than the average 15% annual unconditional probability of advanced economies to enter a recession since the 1960s.
  • The unemployment rate has risen by 2.7% in the median advanced economy recession since the 60s with larger increases in the 1980s and the UK but smaller increases in Japan. The distribution is slightly skewed towards larger increases in more severe recessions.
  • Economic overheating—high unit labor cost growth and high core inflation—and large cumulative increases in the policy rate often precede severe recessions. In contrast, elevated private sector financial surpluses often foreshadow less severe recessions.
  • Currently, across the advanced economies, unit labor cost growth, core inflation, and the expected total increase in the policy rate are generally running at levels similar to the runup of the typical advanced economy recession. Higher measures of economic overheating in the US, UK, and Canada than in Japan and the Euro area suggest that the next recession may be somewhat less shallow in these English-speaking G10 economies. In contrast, the private sector financial balance has been much higher than ahead of the typical recession for all economies, hinting at a shallow next recession.
  • Other factors outside the historical dataset paint a mixed picture. On the pessimistic side, the monetary and fiscal policy response might be more limited than usual and energy disruptions are the main risk in Europe. On the optimistic side, long run inflation and wage expectations still appear mostly anchored and substantial supply side improvement opportunities remain.

With that in mind, let's delve deeper into the report starting with...

Frequency

Goldman summarizes the historical frequency of recessions using official recession classifications, such as the NBER in the US, when available. Exhibit 1 shows that the annual unconditional probability of advanced economies to enter a recession since the 1960s has been roughly 15% on average. It also shows that recession risk has not varied much across countries or over time over the past several decades.

Goldman's subjective recession probability in the US of 30% over the next year is also elevated relative to its own extended history. The annual probability of entering a recession in the US has averaged 12% since the 90’s (Exhibit 2), though it averaged a much higher 23% between 1855-1990. US recessions have become less frequent following the creation of the Federal Reserve, the anchoring of inflation expectations, and the decline in the relative importance of the cyclical manufacturing sector.

Severity

Goldman then defines the severity of recessions using the trough to peak change in the unemployment rate. The list excludes the “exogenous” pandemic recession of 2020 as increases in the unemployment rate were either outsized outliers in countries such as the US and Canada or significantly limited by furlough schemes in Europe and Japan.

Exhibit 3 shows that the unemployment rate has risen by 2.7% in the median advanced economy recession since the 60s, with somewhat larger increases in the 1980s (Exhibit 3, left). Countries with larger increases in the unemployment rate also tend to have less frequent recessions—including the UK, Netherlands, and Sweden. In contrast, countries with smaller increases in the unemployment rate tend to have more frequent recessions, such as Germany, Italy, and Japan.

The distribution of the change in the unemployment rate during recessions shows a slight skew towards more severe recessions. The distributions in the UK and Canada are especially skewed towards more severe recessions, while the distribution in Japan is skewed towards less severe recessions.

Predictors of Severity

Goldman next summarizes the predictors of recession severity focusing on variables that have a long history: it finds that economic overheating—unit labor cost growth and high core inflation (Exhibit 5)—and large cumulative increases in the policy rate often precede severe recessions. In contrast, large private sector financial surpluses often foreshadow less severe recessions.

Implications

What do these findings imply for the size of the next recession? Across advanced economies, unit labor cost growth, core inflation, and the expected total increase in the policy rate are generally running at levels similar to the runup of the typical advanced economy recession, with more overheating in the US, UK, and Canada and less in Japan and the Euro area. In contrast, the private sector financial balance has been much higher than ahead of the typical recession across advanced economies.

 

Taken together, Exhibits 6 and 7 paint a mixed picture about the size of the next recession in the English-speaking G10 economies.

According to Goldman, on the pessimistic side, elevated economic overheating measures point to a higher than usual right tail risk of severe recession. On the optimistic side, the bank's strategists suggest that the large private sector surplus points to a shallow recession; what they ignore is the adverse effect of tens of trillions in lost equity value, which last time we looked is viewed as "savings" by modern economists too. So while there may be $2 trillion more in excess savings, there is $20 trillion less in stock market equity. Which is worse?

Turning to other factors outside of Goldman's historical dataset, we again see a mixed picture.

On the pessimistic side, the monetary and fiscal policy response might be more limited than usual because policy rates remain close to their effective lower bound while both central bank balance sheets and government debt levels are very large by historical standards. Moreover, the exposure to the war in Ukraine and the risk of energy supply shortages paint a relatively negative view for Germany and Italy, especially with the possibility of gas shutdowns in the winter. On the more optimistic side, long run inflation and wage expectations still appear mostly anchored, although as even Powell will admit, that is changing fast. Moreover, substantial supply side improvement opportunities remain in both global supply chains—where delivery times have shortened—and in the labor market.

What is more relevant however, is that as Goldman writes in a separate report titled Timing the cuts, "Investors seem to be shifting focus from pricing a potential recession, to pricing future Fed cuts ... for as early as 2023." Indeed, as we have been pounding the table since early this year, the timing of those cuts is all that matters.

Tyler Durden Wed, 07/06/2022 - 21:45

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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.

More Travel:

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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