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Nouriel Roubini: The “Mother Of All Economic Crises” Is Coming – Here’s Why

Economist Nouriel Roubini believes the world economy is lurching toward an unprecedented confluence of economic, financial, and debt crises, following…

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Economist Nouriel Roubini believes the world economy is lurching toward an unprecedented confluence of economic, financial, and debt crises, following the explosion of deficits, borrowing, and leverage in recent decades.

By* Lorimer Wilson, Managing Editor of munKNEE.com – Your KEY to Making Money. Here’s why.

In his latest commentary, titled ‘The Unavoidable Crash’, Roubini writes: After years of ultra-loose fiscal, monetary, and credit policies and the onset of major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. The mother of all economic crises looms, and there will be little that policymakers can do about it.

Central to his thesis is the mountain of private and public debt that has been accumulating. Private debt includes corporations and households (mortgages, credit cards, car loans, etc.) while public debt comprises government bonds and other formal liabilities, as well as implicit debts such as pay-as-you-go pension schemes.

Globally, total private- and public-sector debt as a share of GDP rose from 200% in 1999 to 350% in 2021. The ratio is now 420% across advanced economies, and 330% in China. In the United States, it is 420%, which is higher than during the Great Depression and after World War II.

For years, many at-risk borrowers were propped up by ultra-low interest rates, which kept their debt-servicing costs manageable but now, inflation has ended what Roubini calls “the financial Dawn of the Dead”. Central banks, forced to raise interest rates to deal with inflation, have sharply increased debt-servicing costs (higher interest):

For many, this represents a triple whammy, because inflation is also eroding real household income and reducing the value of household assets, such as homes and stocks. The same goes for fragile and over-leveraged corporations, financial institutions, and governments: they face sharply rising borrowing costs, falling incomes and revenues, and declining asset values all at the same time.

The next part of Roubini’s argument harkens back to an earlier article he wrote, titled ‘The long forecast stagflationary debt crisis of the world has begun’.

According to Roubini, global debt, when combined with the coming stagflation, sets up a “stagflationary debt crisis” (stagflation = high inflation + low growth). What would this look like?

The first thing to understand, is this stagflationary period differs from that of the late 1970s/ early 1980s, due to the much higher debt levels. read: A stagflationary debt crisis looms.

According to the FRED chart below, the US debt to GDP ratio in the ‘70s was around 35%. Today it is three and a half times higher, at 125% and this severely limits how much and how quickly the Fed can raise interest rates, due to the amount of interest that the federal government will be forced to pay on its debt.

US debt to GDP ratio
Total public debt

During 2021, before interest rates began rising, the federal government paid $392 billion in interest on $21.7 trillion of average debt outstanding, @ an average interest rate of 1.8%. If the Fed raises the Federal Funds Rate to 4.6%, interest costs would hit $1.028 trillion — more than 2021’s entire military budget of $801 billion!

The national debt has grown substantially under the watch of Presidents Obama, Trump and Biden. Foreign wars in Afghanistan and Iraq have been money pits, and domestic crises required huge government stimulus packages and bailouts, such as the 2007-09 financial crisis and the covid-19 pandemic in 2020-22.

Each interest rate rise means the federal government must spend more on interest. That increase is reflected in the annual budget deficit, which keeps getting added to the national debt, now sitting at a shocking $31.3 trillion.

Now let’s bring in what Roubini says about the stagflationary debt crisis. First, he argues that debt ratios in advanced economies and most emerging markets were much lower in the 1970s, compared to today.

Conversely, during the financial crisis, high private and public debt ratios caused a severe debt crisis, exemplified by the housing bubble bursting. The ensuing recession led to low inflation/ deflation (falling prices), and there was a shock to aggregate demand. This time, however, we can’t simply cut interest rates to stimulate demand. Today, the risks are on the supply side, such as the Ukraine war’s impact on commodity prices (fertilizer, food, diesel, metals) China’s zero-covid policy, and a series of prolonged droughts.

According to Roubini, the economist who predicted the 2008 market meltdown,

Unlike in the 2008 financial crisis and the early months of COVID-19, simply bailing out private and public agents with loose macro policies would pour more gasoline on the inflationary fire. That means there will be a hard landing – a deep, protracted recession – on top of a severe financial crisis…

With governments unwilling to raise taxes or cut spending to reduce their deficits, central-bank deficit monetization will once again be seen as the path of least resistance but you cannot fool all of the people all of the time. Once the inflation genie gets out of the bottle – which is what will happen when central banks abandon the fight in the face of the looming economic and financial crash – nominal and real borrowing costs will surge. The mother of all stagflationary debt crises can be postponed, not avoided.

Targeting the wrong inflation

Another key point, that ties into what Roubini is saying, is the fact that the Federal Reserve is targeting the wrong inflation. The Consumer Price Index (CPI) is currently 7.7%. This is the number most quoted in the financial press; it is the official inflation rate. The CPI includes food, energy and rent increases.

US inflation (CPI). Source: Trading Economics

In contrast the Fed’s go-to inflation gauge, core PCE, under-weights rent and over-weights health care. It also strips out two of the most vital categories of household spending, food and energy/ gasoline.

According to Moody’s Analytics’ analysis of October 2022 inflation data, via CNBC, the average American household is spending $433 more a month to buy the same goods and services it did a year ago.

Among the most dramatic price increases, food at work and school rose 95.2%, eggs were up 45%, butter and margarine climbed 33.2%, and public transportation was 28.1% more expensive. These are all “non-discretionary” expenditure items.

While October’s core CPI was down 0.3% compared to 6.6% in September, the so-called necessities of life — shelter, food and energy — continue to climb. Year over year, shelter prices are up 6.9%, food prices gained 10.9%, gasoline prices rose 17.6%, and staples such as eggs (+43%), bread (+14.8%) and milk (+14%) remain elevated, according to the Bureau of Labor Statistics.

Surely for the broader CPI to fall substantially, food and energy costs must decline; I have my doubts whether this will happen anytime soon.

According to the US Department of Agriculture, food prices in 2023 are predicted to rise between 3 and 4%. Within this category, food at home prices are forecast to rise 2.5-3.5%, and food away from home is expected to go up 4-5%.

US food inflation. Source: Trading Economics

As for energy prices dropping, they probably won’t, at least not for the foreseeable future. When the OPEC+ group of countries meets on Dec. 4, they are expected to stick to their current output target, two sources told Reuters on Friday. The 13-member crude oil cartel plus 10 other oil-exporting nations, including Russia, in October agreed to cut their collective oil production by 2 million barrels a day.

WTI crude futures have come down considerably from their one-year pinnacle of $119.78, on March 8, but they remain high by historical standards. Ditto for US natural gas futures and US retail gasoline.

WTI crude futures. Source: Trading Economics
US natural gas futures. Source: Trading Economics
US retail gas for the week of Nov. 28. Source: YCharts

Conclusion

If Nouriel Roubini is right about “the mother of all economic crises” heading our way, and we are correct about inflation not coming down, investors would be wise to adjust their portfolios accordingly.

For one thing, the stock market is unlikely to be a growth vehicle.

In a recent letter to investors, Mark Spiegel of Stanphyl Capital said he believes the major indexes, though not all individual stocks, have considerably more downside — “the inevitable hangover from the biggest asset bubble in US history.”

Spiegel via Quoth the Raven (Zero Hedge) also observes that the US stock market’s valuation as a percentage of GDP (the “Buffett Indicator”) is very high, and thus valuations have a long way to go before reaching “normalcy”. The indicator is currently sitting at 166%, 30% higher than the long-term trend line.

As importantly, Spiegel predicts commodities “will have a brand new tailwind in 2023,” thanks to the eventual end of China’s zero-covid policy, its November reversal of bailing out its real estate industry, combined with the end of President Biden’s SPR (Strategic Petroleum Reserve) drawdowns.

The commodities bull market is just getting started

Longer terms, he believes the “war on fossil fuel”, expensive “onshoring”, fewer available workers and perpetual government deficits will make a new 4% baseline inflation likely — double the Fed’s current 2% target.

This shows we’re not alone in thinking that the Fed has to bump up its inflation expectations to fit economic reality, given that price increases are certain to continue into next year and likely beyond.

Spiegel also agrees with Roubini in his assessment of how interest rate increases will play out with US government interest payments on its monstrous debt, writing:

Meanwhile, interest costs on the Federal debt are already set to grow massively. Does anyone seriously think this Fed has the stomach to face the political firestorm of Congress having to slash Medicare, the defense budget, etc. in order to pay the even higher interest cost that would be created by upping those rates to a level commensurate with crushing even just 4% inflation? [let alone the current 7.7% – Rick]

Powell doesn’t have the guts for that, nor does anyone else in Washington; thus, this Fed will likely be behind the inflation curve for at least a decade. And that’s why we remain long gold.”

Few analysts seem to recognize the direct link between debt, looming deficits and inflation. Inflation is the fourth horseman of an economic apocalypse, accompanying stagnation, unemployment and financial chaos. The size of the US government’s debt — currently $31.3T — and unsustainable future deficits, puts us in an unfamiliar danger zone.

Raising interest rates won’t work, because the current inflation is supply-oriented not demand-driven.

The crisis threatens to envelope both the developed economies and the emerging markets. Developing-world economies that borrowed heavily in dollars when interest rates were low, are now facing a huge surge in refinancing costs. About 60% of the poorest countries are already in, or at high risk of, debt distress.

Gold historically performs best when government deficits are large and/ or growing. It appears all but certain the world economy will enter a recession within the next six to 12 months. The warnings are written in the inverted yield curve (an extremely reliable recession indicator), stagnant US manufacturing data, and a return to high debt levels among US and Canadian consumers, post-pandemic. The latter is a concern because it ups the risk of bankruptcies, delinquencies and forced stock selling, amid higher interest rates.

Gold does well during stagflationary episodes. Gold is also a traditional inflation hedge, and while high inflation hasn’t yet resulted in a flight to gold, I believe it will happen when there is a shift from monetary tightening to easing as a result of poor US economic performance and/or the widely anticipated recession. The latter will almost certainly crush the dollar, bringing about higher commodity prices.

*The content of the above article is sourced from one by Richard (Rick) Mills of aheadoftheherd.com and has been edited ([ ]) and abridged (…) for the sake of clarity and brevity to provide the reader with a fast and easy read.

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide…

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Glimpse Of Sanity: Dartmouth Returns Standardized Testing For Admission After Failed Experiment

In response to the virus pandemic and nationwide Black Lives Matter riots in the summer of 2020, some elite colleges and universities shredded testing requirements for admission. Several years later, the test-optional admission has yet to produce the promising results for racial and class-based equity that many woke academic institutions wished.

The failure of test-optional admission policies has forced Dartmouth College to reinstate standardized test scores for admission starting next year. This should never have been eliminated, as merit will always prevail. 

"Nearly four years later, having studied the role of testing in our admissions process as well as its value as a predictor of student success at Dartmouth, we are removing the extended pause and reactivating the standardized testing requirement for undergraduate admission, effective with the Class of 2029," Dartmouth wrote in a press release Monday morning. 

"For Dartmouth, the evidence supporting our reactivation of a required testing policy is clear. Our bottom line is simple: we believe a standardized testing requirement will improve—not detract from—our ability to bring the most promising and diverse students to our campus," the elite college said. 

Who would've thought eliminating standardized tests for admission because a fringe minority said they were instruments of racism and a biased system was ever a good idea? 

Also, it doesn't take a rocket scientist to figure this out. More from Dartmouth, who commissioned the research: 

They also found that test scores represent an especially valuable tool to identify high-achieving applicants from low and middle-income backgrounds; who are first-generation college-bound; as well as students from urban and rural backgrounds.

All the colleges and universities that quickly adopted test-optional admissions in 2020 experienced a surge in applications. Perhaps the push for test-optional was under the guise of woke equality but was nothing more than protecting the bottom line for these institutions. 

A glimpse of sanity returns to woke schools: Admit qualified kids. Next up is corporate America and all tiers of the US government. 

Tyler Durden Mon, 02/05/2024 - 17:20

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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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