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The Trolley Car Problem- Part 1 The Fed’s Predicament

An unstoppable trolley car is barreling down the track. As the switchman, you stand at the junction where the track branches into two and you must choose…

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An unstoppable trolley car is barreling down the track. As the switchman, you stand at the junction where the track branches into two and you must choose which path the trolley will follow. Unfortunately, people are tied to both tracks, making the decision incredibly difficult. 

The trolley car problem is an ethical question that forces one to choose between two poor consequences. 

The Fed and many other central banks face trolley car problems, albeit lives are not on the line. With inflation running hot and economic activity faltering, years of questionable monetary policy force central bankers to make tough decisions. The last time such tricky decisions were made most policymakers were in school or just starting their careers.

Given the extreme debt accumulation of the last 40 years and the heightened speculative nature of financial markets, their choices may be the most important monetary policy actions we see in our lifetimes. These decisions will likely have outsized effects on the investment environment today and possibly for some time.

Rubber Band Theory

Let’s move from ethics to physics and introduce a second theory, the rubber band effect. When you stretch a rubber band, it builds up energy. The longer the stretch, the more energy it builds. When the rubber band can’t be stretched anymore, energy releases forcefully in the opposite direction.

For the last 40 years, most developed nations have fostered an unsustainable debt growth cycle. Debt was increasingly encouraged as the primary fuel for economic growth and prosperity. As the cycle wore on, debt became less productive. In a steadily increasing number of cases, the applications of the borrowed money could not support the borrowers’ ability to pay interest or repay the principal on the debt.

Instead of letting the rubber band release its pent-up energy, policymakers chose to keep stretching the debt cycle. They consistently chose a more aggressive monetary policy over letting irresponsible debtors go bankrupt. Meager and even negative interest rates along with QE fostered growing amounts of unproductive debt and allowed marginal borrowers the ability to remain solvent.   

The handiwork of the central bankers was possible because there were few consequences for their actions. That changed in 2021.

This two-part article tells the tale of three central banks, their grossly stretched debt cycles, and the trolley car problems they now face.

The Three Musketeers

The Federal Reserve, European Central Bank (ECB), and the Bank of Japan (BOJ) are confronting significant inflation, weakening economic growth, and bear markets in their stock markets. Despite similar challenges, they are taking vastly different approaches.

Central banks fight high inflation by increasing interest rates and reducing their bond holdings (QT). The objective is to stifle demand for goods and slow economic activity. Conversely, weakening economic activity is usually met with lower interest rates and bond purchases (QE) to encourage borrowing and spending. What has worked so well in the past is awkward today. Inflation is on the rise, and economic growth is rapidly slowing. Central banks can fight inflation or try to bolster the economy, but not both.

Making matters more demanding, they must also consider the fallout of their decisions on their respective currencies and capital markets. Adding to the pressure, they must remain highly mindful of the overstretched debt cycle.  

The diagram below by Lily Lebowitz helps us visualize the Fed’s trolley car problem. Jerome Powell can tackle inflation but risk a recession and lower stock prices. Or he can try to avoid a recession and risk persistently high inflation.

Comparing Central Banks

Jerome Powell- Federal Reserve

At his June 15, 2022, FOMC policy press conference Jerome Powell made it evident the Fed will aggressively use its tools to their fullest extent to reduce inflation back to 2%. He was also clear unemployment may rise as a result.

  • We at the Fed understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.
  • If you don’t have price stability, the economy’s really not going to work the way it’s supposed to and it won’t work for people, their wages will be eaten up. So we want to get the job done.
  • So, a 4.1 percent unemployment rate (current 3.6%) with inflation well on its way to 2 percent, I think that would be, I think that would be a successful outcome. So, we’re not looking to have a higher unemployment rate, but I would say that I would certainly look at that as a successful outcome
  • We don’t seek to put people out of work, of course, we never think too many people are working and fewer people need to have jobs, but we also think that you really cannot have the kind of labor market we want without price stability.

The Fed’s Misunderstanding

The Fed desperately wants to break inflation’s back. The problem making their task very difficult is that they grossly underestimated the persistent nature of inflation.  

We understand better how little we understand inflation“- Jerome Powell 6/29/2022

Throughout 2021, speculative activities flourished, economic activity was brisk, and inflation rose. Many, including ourselves, said the Fed must quickly pull back on the monetary policy reins. Despite stimulus-driven demand and significant supply line problems, the Fed kept interest rates at zero and bought $120 billion in bonds per month.

The price for their blunder is higher and more persistent inflation than would have been. As a result, economic activity stagnates, asset prices fall, and consumer/business confidence erodes rapidly.

The Fed’s Mandate

The graph below shows the Fed’s predicament. The red dot is the Fed’s objective as mandated by Congress. While exact levels of unemployment and inflation are not quantified, the Fed considers them to be a 4.1% unemployment rate and 2.0% core inflation rate. The other dots show each monthly intersection of unemployment and core prices since 2000.

fed mandate unemplyoment prices

For the last 20 years, as shown by the blue dots, the Fed was often tasked with reducing unemployment and frequently wanted more inflation. Other than a brief instance or two, the Fed never worried about high inflation.

Per CNBC 2019: “In order to move rates up, I would want to see inflation that’s persistent and that’s significant,” Powell said at a news conference in Washington. “A significant move up in inflation that’s also persistent before raising rates to address inflation concerns: That’s my view.”

The Fed’s Dilemma

As the yellow dots highlight, the Fed must now tackle the highest inflation rates in 40 years while the unemployment rate is slightly below target. Based on Powell’s recent comments, he is willing to increase unemployment to bring inflation back to its target.

First-quarter GDP was negative 1.6%. Based on the Atlanta Fed’s GDPNow forecast, second-quarter GDP growth may also be negative.

atlanta fed gdpnow dilemma

U.S. stock markets are in bear market territory as investors watch the Fed tighten policy despite faltering economic growth. For most investors, this is new ground. Over the last 20+ years, they grew accustomed to a Fed that reliably eases at the first hint of economic weakness. The new paradox is causing investors to lose confidence. Making matters more onerous for the Fed, bond yields have risen rapidly, adding to economic pressures and financial stability.

The Rubber Band Keeps Stretching

As a result of the pandemic and continued debt growth in the post-financial crisis era, the economy now has twice as much government debt as a percentage of GDP than in 2008. Corporate debt to GDP is also at record highs. The economy and livelihood of many borrowers are now much more reliant on low-interest rates. Unlike 2008, when lower interest rates and QE saved many struggling borrowers, reducing interest rates and QE are not viable as inflation is raging.

federal debt gdp rubber band

The Fed is opting to send the trolley car on the recession track and hopefully temper inflation. This harsh decision doesn’t bode well for the economy or financial markets. However, there is hope.

The Fed has been accommodative in the past when financial stability and economic problems arose. As such, will the financial markets and the economy cry uncle loud enough to get the Fed to change its policy?

It is possible the Fed partially un-stretches the rubber band with limited economic and market costs. However, that ability rests on inflation. If inflation declines enough, the Fed may be able to revert back to an easy monetary policy and keep the extended debt cycle intact.

If inflation is not as friendly, though, the Fed may continue to travel down the trolley track which sacrifices the economy and financial markets to tame inflation. That is the scenario that snaps the debt cycle rubber band and keeps us up at night.

“Until we see tangible evidence of a decline in inflation back to target, nobody should count on central bankers to reverse course.” – Brett Freeze

Summary Part one

We end part one with a quote from President John F Kennedy.

“There are risks and costs to action. But they are far less than the long-range risks of comfortable inaction.”

As we detail above and discuss further in part two, there are significant risks to the actions the Fed is taking, and other central bankers are contemplating. However, as Kennedy says, doing nothing, which has been the status quo, presents even greater risks.

The post The Trolley Car Problem- Part 1 The Fed’s Predicament appeared first on RIA.

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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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