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The Fed Put: Is Powell Repealing It?

A week before the January 26th Fed policy meeting we asked Instability or Inflation, Which Will The Fed Choose?

Liquidity is the lifeline of markets, and the Fed, directly and indirectly, manages its flow via QE and zero rates. With inflation raging,…

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A week before the January 26th Fed policy meeting we asked Instability or Inflation, Which Will The Fed Choose?

Liquidity is the lifeline of markets, and the Fed, directly and indirectly, manages its flow via QE and zero rates. With inflation raging, the pandemic subsiding, and economic activity normalizing, the Fed is keen to start reducing liquidity via higher interest rates and reductions in its balance sheet. The purpose of normalizing monetary policy is to bring inflation down. However, the removal of said liquidity could prove problematic for stock prices, especially if done more aggressively than expected. 

Per the article:

“The Fed is making it clear they want to reduce inflation. They are also telling us they will ensure financial stability. Sounds like a good plan, but walking the narrow tightrope successfully by achieving lower inflation without destabilizing markets is an incredibly tough task.

“We think the odds of success are poor. As such, we must carefully consider which goal they will prioritize when push comes to shove.”

Deciphering Fed speak is tedious but given the Fed’s new fight on inflation and the considerable impact they can have on markets, it is worth getting a little wonky. Please stick with us as we dissect Powell’s insightful press conference and what it may mean for monetary policy and inflation. Equally important is Powell willing to sacrifice the Fed put and leave investors without the support they are accustomed to.

The following LINK provides access to the press conference we will discuss throughout this article.

Will Powell Sacrifice The Fed Put to Quell Inflation?

Until the last Fed meeting, we thought the answer was yes, but only until the stock market fell by 10% or a little more.

Following Jerome Powell’s recent FOMC press conference, we may have underestimated his concern for inflation. As such, we now think he is willing to let stock prices fall more than we initially imagined. Might a 20% decline or even more be an acceptable price for Powell?

As a point of reference, the recent 10% drawdown is in line with other periods leading to the first rate hike of a tightening cycle.

Powell on Inflation

Powell’s tone throughout the question-and-answer session felt different than prior sessions. Broadly speaking, his confidence level in managing inflation has fallen sharply. At times he appeared shaken by the high and persistent level of inflation. In prior meetings, he brushed off inflation as transitory and purely a function of Covid and related supply line problems. The arrogance in the Fed’s ability to manage inflation has vanished.

Powell’s inflation forecast since the mid-December meeting, just six weeks ago, is now higher “by a few tenths.” More telling, he seems disturbed by the trend higher in prices. It appears he fears the trend is more potent than expected thus will not be as easy to reverse.

That said, he thinks supply line-related price pressures will abate in the latter half of 2022. However, he stresses on numerous occasions that the red-hot labor market will keep upward pressure on inflation. Further, his attention to labor shortages appears more acute than before.

He used the word “inflation” 71 times in the one-hour session. While inflation is the most important economic data to watch, those factors that feed inflation, such as the tight labor market, bear close attention.

cpi inflation

Political Pressure on the Fed

Rachel Siegel asked Chair Powell “how inflation affects different groups of Americans, especially lower-income earners.

For the first time, Powell seems to reflect on how damaging inflation is and its detrimental impact on lower-income classes. It appears that political pressure from the President and members of Congress are influencing his view on inflation and its harmful effects.

  • “I think the problem that we’re talking about here is really that people are on fixed incomes who are living paycheck to paycheck, they’re spending most or all of their — of what they’re earning on food, gasoline, rent, heating their heating, things like that, basic necessities. And so inflation right away, right away forces people like that to make very difficult decisions.”
  • “The point is some people are just really in — prone to suffer more. I mean, for people who are economically well off, inflation isn’t good. It’s bad. High inflation is bad, but they’re going to be able to continue to eat and keep their homes and drive their cars and things like that.”
  • “But part of the — part of it is just that it’s particularly hard on people
    with fixed incomes and low incomes
    who spent most of their income on necessities, which are experiencing high inflation now.”

The Fed’s shift toward fighting inflation occurred right after Powell met President Biden and secured his renomination bid. We don’t know what happened in that meeting, but based on the abrupt change in tone around fighting inflation, the President is likely pressuring the Fed to stop high inflation. With a mid-term election around the corner, such is in Biden’s best interest. It appears Powell took the bait or, at a minimum, is talking the talk.

Inflation or Financial Stability

So having established the Fed seems much more serious about fighting inflation, we move onto financial stability. Investors believe the Fed will do everything in its power to keep higher stock prices and lower bond yields. Many market participants believe the term financial stability is Fed code for strong asset markets.

In the conference’s last question, a reporter asks about prior hiking cycles and how they were problematic for asset bubbles that resulted from easy monetary policy. Powell’s response:

“So asset prices are somewhat elevated, and they reflect a high-risk appetite and that sort of thing. I don’t really think asset prices themselves represent a significant threat to financial stability, and that’s because households are in good shape financially than they have been. Businesses are in good shape financially. Defaults on business loans are low and that kind of thing. The banks are highly capitalized with high liquidity and quite resilient and strong.”

He is saying current asset prices are not a threat to financial stability. Powell also distinguishes asset prices from more valid measures of financial stability. His response is a clear signal that the recent downdraft in prices is not a concern.

Background QT

Curiously Powell uses the term “background QT.” The phrasing makes it appear QT is not an important issue and should not be followed by the public. Specifically, he claims QT is in the background to interest rate hikes. His quote reminded us of when Janet Yellen in 2017 declared the QT process would be “like watching paint dry.” It turns out the market did not think it was so dull. 

“So, again, we think of the balance sheet as moving in a predictable manner, sort of in the background, and that the active tool meeting to meeting is not — both of them, it’s the federal funds rate.”

Minimizing QT will not get investors to forget about QT. The problem is higher rates and less liquidity are not supportive of record valuations. Investors will link QT with liquidity, just as they link QE with liquidity. As they say, you can’t have your cake and eat it too.

Fisher Votes Inflation Over The Fed Put

Former Dallas Fed President Richard Fisher provides insight on whether Powell will follow through on his fight against inflation at the expense of the stock market.

“Let’s face it Joe, I want to come back to the alcohol metaphor we started with, the market has been wearing beer goggles for the longest possible time…and they just assume the Fed’s going to bail them out. I think the strike price on the Fed put has moved significantly…and unless we have a dramatic turn in the markets that indicates it can infect the real economy, I don’t believe – under this chair in particular who has a credit market background – that they will be weak in following through on what they pronounced.”

Summary

It appears the Fed’s sensitivity to stock prices is not as acute as some investors believe. In the words of Richard Fisher, the strike price on the Fed put has moved significantly. If this take is correct, the Fed may sit idly by if markets voice displeasure with abrupt changes in monetary policy.

We caveat that statement by reminding you the Fed will relent if stocks fall enough. For the last 30 years, they have been increasingly aggressive in defending markets. While protecting asset prices is not in their Congressional mandate, we have little doubt this time will be different. The only thing that might be different is the losses the Fed will tolerate before it exercises its put.

The post The Fed Put: Is Powell Repealing It? appeared first on RIA.

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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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