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Stoeferle: 5 Reasons Why 60/40 Is Dead & Gold’s The Great Stabilizer

Stoeferle: 5 Reasons Why 60/40 Is Dead & Gold’s The Great Stabilizer

Authored by Ron Stoeferle via,

1) Bonds are…



Stoeferle: 5 Reasons Why 60/40 Is Dead & Gold's The Great Stabilizer

Authored by Ron Stoeferle via,

1) Bonds are no longer the antifragile portfolio foundation

2022 has been a highly unpleasant year for bonds so far. Over the course of the year, 30-year US Treasuries, for example, fell by around 45%, 10-year US Treasuries by around 18% and German Bunds by around 19%. One of our central theses of the In Gold We Trust reports of the past years is now likely to come true: (government) bonds are no longer the antifragile portfolio foundation they have been over the past 40 years.

By their very nature, the price declines are particularly sharp for bonds with particularly long maturities. The second of the two 100-year Austrian government bonds issued so far has been anything but a good deal. It was issued in 2020 with a coupon of a measly 0.850% and an issue yield of 0.880%. This EUR 2bn bond was oversubscribed 12 times (!!!) when it was issued, which must have made the finance minister pretty happy. However, with inflation now running at more than 10.0%, investors are facing significant losses. The price loss since the issue is now around 62%, from the interim high in the fall of 2020, the minus is even around 70%. The chart is more reminiscent of a volatile junior miner than of supposedly safe government bonds. Many investors have thus had to learn painfully what duration risk means in practice.

2) The negative correlation of stocks and bonds is a myth

For a long time, the number combination 60/40 was considered an unarguable certainty, almost the holy grail of asset management. A portfolio with a 60% share of equities and a 40% share of bonds would ensure capital growth with manageable risk. But what was considered an eternal truth turns out to be a wealth-threatening myth upon closer inspection. The following chart shows the 10-year annualized real return of stocks (S&P 500 TR) and bonds (10-year US Treasuries) over the past 140 years.

It is noteworthy that the returns are largely symmetrical, suggesting a positive correlation between the two asset classes over the longer term. But while equities are still yielding high returns, the annualized real return on bonds is in negative territory for the first time in almost 40 years.

In the past 140 years, stock returns have only slipped into negative territory four times. The triggers were the two world wars, stagflation in the 1970s and the financial crisis of 2007/08. And each time before the long-term return collapsed, the stock market had previously been in a phase of euphoria, characterized by annualized returns of well over 10% in some cases.

However, the negative correlation is the exception rather than the rule when viewed over the long term. For example, the correlation between stocks and bonds in the US has been slightly positive in 70 of the last 100 years. The decisive factor for the negative correlation in the last 30 years was primarily the low inflationary pressure or the decreasing inflation volatility in the course of the Great Moderation.

3) The positive correlation of bonds and equities has become a problem

So what are actually the consequences, e.g. for mixed portfolios or risk parity investment strategies, if the positive correlation between equities and bonds continues? Stock-bond correlation regimes are stable for a long time, but can reverse rapidly – usually in response to higher inflation rates. The bulk of today’s market participants can hardly imagine the impact of a possible reversal of the correlation, because many investment concepts are built on a low or negative correlation between the two main asset classes.

The chart below shows the one-year rolling correlation between 10-year US Treasury bonds and the S&P 500, as well as the average yield on 10-year Treasuries.

One can clearly see that the 1-year correlation has recently turned into positive territory. Since 1955, the correlation coefficient between equities and bonds in the US has been around -0.033, which, when looking at the period as a whole, indicates that the two asset classes are virtually uncorrelated. On the other hand, when looking at individual time periods, we find that stocks and bonds tended to be uncorrelated in exceptional cases. Between 1960 and 2000, when high (nominal) interest rates influenced market activity for long periods, the correlation coefficient was mostly above 0.2, while in an environment of low inflation and interest rates it was mostly below -0.2. Currently, inflation is thus again positively influencing correlation properties, which is probably causing heated discussions at asset allocation committees and sleepless nights for portfolio managers.

4) The situation on the bond markets could soon become precarious

In the US, demand for US Treasuries from the Federal Reserve, US banks and foreign institutions is negative for the first time in at least 10 years each. This collapse in demand is occurring while the US deficit in fiscal year 2021/2022, which ended in late September, was significantly larger at USD 1.4trn than in the pre-Covid-19 fiscal year 2018/2019 with just under USD 1trn. In combination with the expected further interest rate hikes and the continuation of quantitative tightening (QT), this should give bond yields a further boost, at least until the investment models and algorithms that rely on perpetual disinflation face collapse.

On this side of the Atlantic, the situation is even more precarious. On September 28, the Bank of England intervened massively in the British bond market to prevent a Lehman 2.0. The sharp fall in bond prices put British pension funds in a difficult position because of the margin calls due. Two weeks later, the relief owed to the intervention was already gone. In any case, the Bank of England has shown that it will at least interrupt its tightening course in the event of a systemic risk.

This intervention is also due to the fact that mark-to-market losses on derivatives linked to liability-driven investments (LDI) could amount to over GBP 125bn, according to an estimate by JP Morgan. This is equivalent to around 6% of UK GDP.

5) Gold as a stabilizer of the 60/40 portfolio

For a large proportion of mixed portfolios, simultaneously falling stocks and bonds are the absolute worst-case scenario. However, in the last 90 years, there have only been four years in which both US stocks and bonds had negative annual performance in the same year. Currently, all indications are that 2022 could be the fifth year.

In two of the four previous cases, 1931 and 1969, a dramatic devaluation of currencies against gold followed. In 1931, sharp declines in stocks and bonds led to Roosevelt’s devaluation of the US dollar against gold by 70% three years later. In 1969, it took only two years for the US to be forced to abandon the gold standard. What will happen this time? What exactly will happen, we do not yet know. But that something historic will happen is likely.

It can be seen that inflation played a central role in all the cases mentioned. For it is not only assets that are devalued by inflation, but also the business models of many companies.

The decoupling between gold and bonds that we announced in previous years has thus taken place in recent months. The bond market and the gold market are sending the same message: deflation or disinflation are no longer the biggest threat to portfolios, inflation is the new reality.

And one thing is certain: the stagflation that is now setting in will not be overcome with a classic 60/40 portfolio. Not only the historical performance of gold, silver and commodities in past periods of stagflation argue for a correspondingly higher weighting of these assets than under normal circumstances. The relative valuation of technology companies to commodity producers is also an argument for a countercyclical investment in the latter. Market strategists at BofA coined the term FAANG 2.0 early on in anticipation of the turnaround:

  • Fuels

  • Aerospace

  • Agriculture

  • Nuclear and Renewables

  • Gold and Metals/Minerals

It may sound surprising at first, but recessions are typically a positive environment for gold. As our analysis in the In Gold We Trust report 2019 has shown, periods when the bear dominates the markets and the real economy are bullish times for gold. Looking at performance over the entire recession cycle, it is notable that gold saw significant average price gains in each of the four recession phases – Phase 1: Entry Phase, Phase 2: Unofficial Recession, Phase 3: Official Recession, Phase 4: Last Quarter of Recession – in both US dollar and euro terms. By contrast, equities – as measured by the S&P 500 – were only able to post significant gains in the final phase of the recession. Gold was thus able to compensate excellently for the equity losses in the early phases of the recession. Moreover, it is noticeable that gold performed on average all the stronger, the higher the price losses of the S&P 500 were.

In summary, gold has largely been able to cushion stock price losses during recessions. For bonds, the classic equity diversifier, on the other hand, things look less good. High levels of debt, the zombification of the economy, and sharp bond price declines as a result of soaring interest rates not only diminish the potential of bonds as an equity corrective, but completely rob bonds of this characteristic.

If the relationship between equities and bonds is now actually reversed on a sustained basis, the basis of the 60/40 portfolio – namely a negative correlation between equities and bonds – would be structurally and thus longer-term removed. The fundamental question would then arise as to which asset would take the scepter from Treasuries. Gold, at any rate, would be a hot candidate. And in our opinion, it is high time to ask this question and act accordingly.

Tyler Durden Sun, 11/13/2022 - 11:00

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EY Eyes Comeback for Biopharma M&A

EY noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021. The $88 billion accounted for most of the…



A recent trickle of mergers and acquisitions (M&A) announcements in the billion-dollar-and-up range suggests that biopharma may be ready to resume dealmaking this year—although the value and number of deals isn’t expected to return to the highs seen just before the pandemic.

2022 ended with a handful of 10- and 11-figure M&A deals, led by Amgen’s $27.8 billion buyout of Horizon Therapeutics, announced December 13. The dealmaking continued into January with three buyouts announced on the first day of the recent J.P. Morgan Healthcare Conference: AstraZeneca agreed to acquire CinCor Pharma for up to $1.8 billion, while Chiesi Farmaceutici agreed to shell out up to $1.48 billion cash for Amryt, and Ipsen Group said it will purchase Albireo Pharma for $952 million-plus.

Biopharmas generated about $88 billion in M&A deals in 2022, down 15% from $104 billion in 2021. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. The number of biopharma deals fell 17%, to 75 deals from 90. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine. [EY]
EY—the professional services firm originally known as Ernst & Young—recently noted that the total value of biopharma M&A in 2022 was $88 billion, down 15% from $104 billion in 2021 [See Chart]. The $88 billion accounted for most of the $135 billion in 124 deals in the life sciences. That $135 billion figure is less than half the record-high $313 billion recorded in 2019, including $261 billion in 70 biopharma deals.

The number of biopharma deals fell 17% to 75 deals from 90. EY’s numbers include only deals greater than $100 million. The other 49 deals totaling $47 million consisted of transactions in “medtech,” which includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.

We expect this to be a more active year as the sentiment starts to normalize a little bit,” Subin Baral, EY Global Life Sciences Deals Leader, told GEN Edge.

Baral is not alone in foreseeing a comeback for biopharma M&A.

John Newman, PhD, an analyst with Canaccord Genuity, predicted last week in a research note that biopharma companies will pursue a growing number of smaller cash deals in the range of $1 billion to $10 billion this year. He said rising interest rates are discouraging companies from taking on larger blockbuster deals that require buyers to take on larger sums of debt.

“We look for narrowing credit spreads and lower interest rates to encourage larger M&A ($50 billion and more) deals. We do not anticipate many $50B+ deals that could move the XBI +5%,” Newman said. (XBI is the SPDR S&P Biotech Electronic Transfer Fund, one of several large ETFs whose fluctuations reflect investor enthusiasm for biopharma stock.)

Newman added: “We continue to expect a biotech swell in 2023 that may become an M&A wave if credit conditions improve.”

Foreseeing larger deals than Newman and Canaccord Genuity is PwC, which in a commentary this month predicted: “Biotech deals in the $5–15 billion range will be prevalent and will require a different set of strategies and market-leading capabilities across the M&A cycle.”

Those capabilities include leadership within a specific therapeutic category, for which companies will have to buy and sell assets: “Prepared management teams that divest businesses that are subscale while doubling down on areas where leadership position and the right to win is tangible, may be positioned to deliver superior returns,” Glenn Hunzinger, PwC’s U.S. Pharma & Life Science Leader, and colleagues asserted.

The Right deals

Rising interest and narrowing credit partially explain the drop-off in deals during 2022, EY’s Baral said. Another reason was sellers adjusting to the drop in deal valuations that resulted from the decline of the markets which started late in 2021.

Subin Baral, EY Global Life Sciences Deals Leader

“It took a little bit longer to realize the reality of the market conditions on the seller side. But on the buyer side, the deals that they were looking at were not just simply a valuation issue. They were looking at the quality of the assets. And you can see that the quality deals—the right deals, as we call them—are still getting done,” Baral said.

The right deals, according to Baral, are those in which buyers have found takeover targets with a strong, credible management team, solid clinical data, and a clear therapeutic focus.

“Rare disease and oncology assets are still dominating the deal making, particularly oncology because your addressable market continues to grow,” Baral said. “Unfortunately, what that means is the patient population is growing too, so there’s this increased unmet need for that portfolio of assets.”

Several of 2022’s largest M&A deals fit into that “right” category, Baral said—including Amgen-Horizon, Pfizer’s $11.6-billion purchase of Biohaven Pharmaceuticals and the $6.7-billion purchase of Arena Pharmaceuticals (completed in March 2022); and Bristol-Myers Squibb’s $4.1-billion buyout of Turning Point Therapeutics.

“Quality companies are still getting funded one way or the other. So, while the valuation dropped, people were all expecting a flurry of deals because they are still companies with a shorter runway of cash that will be running to do deals. But that really didn’t happen from a buyer perspective,” Baral said. “The market moved a little bit from what was a seller’s market for a long time, to what we would like to think of as the pendulum swinging towards a buyers’ market.”

Most biopharma M&A deals, he said, will be “bolt-on” acquisitions in which a buyer aims to fill a gap in its clinical pipeline or portfolio of marketed drugs through purchases that account for less than 25% of a buyer’s market capitalization.

Baral noted that a growing number of biopharma buyers are acquiring companies with which they have partnered for several years on drug discovery and/or development collaborations. Pfizer acquired BioHaven six months after agreeing to pay the company up to $1.24 billion to commercialize rimegepant outside the U.S., where the migraine drug is marketed as Nurtec® ODT.

“There were already some kind of relationships there before these deals actually happened. But that also gives an indication that there are some insights to these targets ahead of time for these companies to feel increasingly comfortable, and pay the valuation that they’re paying for them,” Baral said.

$1.4 Trillion available

Baral sees several reasons for increased M&A activity in 2023. First, the 25 biopharma giants analyzed by EY had $1.427 trillion available as of November 30, 2022, for M&A in “firepower”—which EY defines as a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals from sources that include cash and equivalents, existing debt, and market cap.

That firepower is up 11% from 2021, and surpasses the previous record of $1.22 trillion in 2014, the first year that EY measured the available M&A capital of large biopharmas.

Unlike recent years, Baral said, biopharma giants are more likely to deploy that capital on M&A this year to close the “growth gap” expected to occur over the next five years as numerous blockbuster drugs lose patent exclusivity and face new competition from lower-cost generic drugs and biosimilars.

“There is not enough R&D in their pipeline to replenish a lot of their revenue. And this growth gap is coming between 2024 and 2026. So, they don’t have a long runway to watch and stay on the sidelines,” Baral said.

This explains buyers’ interest in replenishing pipelines with new and innovative treatments from smaller biopharmas, he continued. Many smaller biopharmas are open to being acquired because declining valuations and limited cash runways have increased investor pressure on them to exit via M&A. The decline of the capital markets has touched off dramatic slowdowns in two avenues through which biopharmas have gone public in recent years—initial public offerings (IPOs) and special purpose acquisition companies (SPACs).

EY recorded just 17 IPOs being priced in the U.S. and Europe, down 89% from 158 a year earlier. The largest IPO of 2022 was Prime Medicine’s initial offering, which raised $180.3 million in net proceeds for the developer of a “search and replace” gene editing platform.

Another 12 biopharmas agreed to SPAC mergers with blank-check companies, according to EY, with the largest announced transaction (yet to close at deadline) being the planned $899 million merger of cancer drug developer Apollomics with Maxpro Capital Acquisition.

“For the smaller players, the target biotech companies, their alternate source of access to capital pathways such as IPOs and SPACs is shutting down on them. So how would the biotech companies continue to fund themselves? Those with quality assets are still getting funded through venture capital or other forms of capital,” Baral said. “But in general, there is not a lot of appetite for the biotech that is taking that risk.

Figures from EY show a 37% year-to-year decline in the total value of U.S. and European VC deals, to $16.88 billion in 2022 from $26.62 billion in 2021. Late-stage financing rounds accounted for just 31% of last year’s VC deals, down from 34% in 2021 and 58% in 2012. The number of VC deals in the U.S. and Europe fell 18%, to 761 last year from 930 in 2021.

The decline in VC financing helps explain why many smaller biopharmas are operating with cash “runways” of less than 12 months. “Depending on the robustness of their data, their therapeutic area, and their management, there will be a natural attrition. Some of these companies will just have to wind down,” Baral added.

M&A headwinds

Baral also acknowledged some headwinds that are likely to dampen the pace of M&A activity. In addition to rising interest rates and inflation increasing the cost of capital, valuations remain high for the most sought-after drugs, platforms, and other assets—a result of growing and continuing innovation.

Another headwind is growing regulatory scrutiny of the largest deals. Illumina’s $8 billion purchase of cancer blood test developer Grail has faced more than two years of challenges from the U.S. Federal Trade Commission and especially the European Commission—while Congress acted last year to begin curbing the price of prescription drugs and insulin through the “Inflation Reduction Act.”

Those headwinds may prompt many companies to place greater strategic priority on collaborations and partnerships instead of M&A, Baral predicted, since they offer buyers early access to newer technologies before deciding whether to invest more capital through a merger or acquisition.

“Early-stage collaboration, early minority-stake investment becomes increasingly important, and it has been a cornerstone for early access to these technologies for the industry for a long, long time, and that is not changing any time soon,” Baral said. “On the other hand, even on the therapeutic area side, early-stage development is still expensive to do in-house for the large biopharma companies because of their cost structure.

“So, it is efficient cost-wise and speed-wise to buy these assets when they reach a certain point, which is probably at Phase II onward, and then you can pull the trigger on acquisitions if needed,” he added.

The post EY Eyes Comeback for Biopharma M&A appeared first on GEN - Genetic Engineering and Biotechnology News.

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IMF Upgrades Global Growth Forecast As Inflation Cools

IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday,…



IMF Upgrades Global Growth Forecast As Inflation Cools

The International Monetary Fund published its latest World Economic Outlook on Monday, painting a slightly less gloomy picture than three and a half months ago, as inflation appears to have peaked in 2022, consumer spending remains robust and the energy crisis following Russia’s invasion of Ukraine has been less severe than initially feared.

But, as Statista's Felix Richter notes, that’s not to say the outlook is rosy, as the global economy still faces major headwinds.

However, the IMF predicts the slowdown to be less pronounced than previously anticipated.

Global growth is now expected to fall from 3.4 percent in 2022 to 2.9 percent this year, before rebounding to 3.1 percent in 2024.

The 2023 growth projection is up from an October estimate of 2.7 percent, as the IMF sees far fewer countries facing recession this year and does no longer anticipates a global downturn.

Infographic: IMF Upgrades Global Growth Forecast as Inflation Cools | Statista

You will find more infographics at Statista

One of the reasons behind the cautiously optimistic outlook is the latest downward trend in inflation, which suggests that inflation may have peaked in 2022.

The IMF predicts global inflation to cool to 6.6 percent in 2023 and 4.3 percent in 2024, which is still above pre-pandemic levels of about 3.5 percent, but significantly lower than the 8.8 percent observed in 2022.

“Economic growth proved surprisingly resilient in the third quarter of last year, with strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe,” Pierre-Olivier Gourinchas, the IMF’s chief economist, wrote in a blog post released along with the report.

“Inflation, too, showed improvement, with overall measures now decreasing in most countries—even if core inflation, which excludes more volatile energy and food prices, has yet to peak in many countries.”

The risks to the latest outlook remain tilted to the downside, the IMF notes, as the war in Ukraine could further escalate, inflation continues to require tight monetary policies and China’s recovery from Covid-19 disruptions remains fragile. On the plus side, strong labor markets and solid wage growth could bolster consumer demand, while easing supply chain disruptions could help cool inflation and limit the need for more monetary tightening.

In conclusion, Gourinchas calls for multilateral cooperation to counter “the forces of geoeconomic fragmentation”.

“This time around, the global economic outlook hasn’t worsened,” he writes. “That’s good news, but not enough. The road back to a full recovery, with sustainable growth, stable prices, and progress for all, is only starting.”

However, just because the 'trend' has shifted doesn't mean it's mission accomplished...

That looks an awful lot like Central Bankers' nemesis remains - global stagflation curb stomps the dovish hopes.

Tyler Durden Tue, 01/31/2023 - 14:45

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Nike Escalates Design Battle Against Lululemon

The sportswear giant is accusing lululemon of patent infringement.



The sportswear giant is accusing lululemon of patent infringement.

The Gucci loafers. The Burberry  (BBRYF) trench coat. When it comes to fashion, having a unique design is everything. This is why brands spend millions both creating and protecting their signature looks and the reason, as in the case of Adidas  (ADDDF) , extricating a brand's design from creators who behave badly is a costly and difficult process.

There is also the constant effort to release new styles without infringing on another group's style. This week, sportswear giant Nike  (NKE) - Get Free Report filed a lawsuit accusing lululemon  (LULU) - Get Free Report of infringing on its patents in the shoe line that the Vancouver-based activewear company launched last spring.

After years of selling exclusively clothing, accessories and the odd yoga mat, lululemon expanded into the world of footwear with a running shoe it dubbed Blissfeel last March. These were soon followed by training shoe and pool slide styles known as Chargefeel, Strongfeel -- all three of the designs (including a Chargefeel Low and a Chargefeel Mid design) have been mentioned in the lawsuit as causing "economic harm and irreparable injury" to Nike.

Nike's History Of Suing Lululemon Over Design

The specific issue lies in the technology used to build the shoes. According to the lawsuit filed in Manhattan federal court, certain knitted elements, webbing and tubular structures are too similar to ones that had been used by Nike earlier.

Nike is keeping the amount it hopes to receive from lululemon under wraps but is insisting the company infringed on its patent when releasing a shoe line too similar to its own. Lululemon had previously talked about how its shoe line "far exceeded" its leaders' expectations both in terms of sales and ability to expand.

In a Q1 earnings call, chief executive Calvin McDonald said that the line "definitely had a lot more demand than we anticipated."

Nike has already tried to go after lululemon through the courts once before. In January 2022, it accused the company of infringing on six patents over its at-home Mirror Home Gym. As the world emerged out of the pandemic, lululemon has been billing it as a hybrid model between at-home and in-person classes. 

The lawsuit was also filed in the U.S. District Court in Manhattan but ultimately fizzled out.

When it comes to the shoe line lawsuit, Lululemon has been telling media outlets that "Nike's claims are unjustified" and the company "look[s] forward to proving [their] case in court."


Some More Examples Of Prominent Design Battles

In the fashion industry, design infringement accusations are common and rarely lead to high-profile rulings. While Nike has gone after the technology itself in both cases, lawsuits more often focus on the style or pattern on a given piece.

Shein, a China-based fast-fashion company that took on longtime leaders like H&M  (HNNMY)  and Fast Retailing  (FRCOF) 's Uniqlo with its bottom-of-the-barrel pricing, has faced numerous allegations from smaller and independent designers over the copying of designs -- in some cases not even from fashion designers but artists painting in local communities.

"They didn't remotely bother trying to change anything," U.K.-based artist Vanessa Bowman told the Guardian after seeing her painting of a local church appear on a sweater on Shein's website. "The things I paint are my garden and my little village: it’s my life. And they’ve just taken my world to China and whacked it on an acrylic jumper."

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