phoffman@channelchek.com, Author at Channelchek

What Investors Should Note About SVB’s Loss

Posted on March 10, 2023March 11, 2023 by phoffman@channelchek.com

The SVB Loss Demonstrates A Risk Investors Should Pay Attention To

Individual investors and even some institutional money managers are reminded of a helpful truth from the Silicon Valley Bank (SVB) balance sheet problem. The reminder of the investment risk stands in conflict with what many top firms have been recommending to investors. So it should be revisited because, unlike banks, individuals and wealth managers tend to have a wider variety of places to look for return.

Bank balance sheet management is tricky. I say this with some credibility. In August of 2008, I accepted a role as the Treasurer of a mid-sized bank just two weeks before Freddie Mac and Fannie Mae were placed into conservatorship, and three weeks before Lehman filed for bankruptcy. I was responsible for quickly finding solutions for a big potential balance sheet problem. It was a problem similar to SVB’s. Depositors at the bank were taking money out at a faster pace than bank investments, including loans cashflows, could cover. Money that had not been committed to loans were invested in low-risk investment-grade fixed-income securities. It was nerve-racking, at one point, I calculated if any two of the largest ten customers withdrew all of their funds, the bank would not have the ability to cover the withdrawal. The pain that SVB is faced with is not dissimilar.

SVB is a bank that serves many fledgling companies during a period when capital and investment in start-ups have weakened from the days of easier money just a couple of years ago. Banks make money by borrowing short from customers (demand deposits, checking, and CDs) and then lend long, presumably at a higher rate. Here they make the spread that a typical upward-sloping yield curve provides. The main risk is in maturity. What happens if your longer-term loans were made at Fed Funds plus 2.50% two years ago when average deposit costs were 0.20%, since today Fed Funds are 4.50%? Your loans are paying the bank less than the bank’s cost to fund them with short deposits. This is a risk that all banks manage – balance sheet risk.

As deposits ran off at SVB because of business conditions in Silicon Valley, the bank turned to its investment portfolio to fund withdrawals. Securities in a US bank portfolio, when purchased, are designated at the custodian, by the Treasurer, either “Trading” which in this department of the bank is rare, “Available for Sale,” which provides the treasury department the ability to sell if need be, but also requires the assets to be priced at market (this impacts the banks valuation), or “Hold to Maturity” where the fixed income securities appear on the balance sheet at cost.

If the securities are designated at purchase “Hold to Maturity” and the bank finds itself needing to sell any “Hold to Maturity” security, all securities marked “Hold to Maturity” become what regulators call tainted. The entire portfolio also becomes designated “Available for Sale.” This decision could dramatically reduce the bank’s book value in cases when interest rates have risen and bond values have dropped.

In the case of SVB, its securities portfolio, designed to earn more than deposits, was marked “Available for Sale.” When they sold, the market values were in such a lower position, from just a year earlier, that they recognized a dramatic loss. A $1.8 billion dollar loss which prompted its shares to lose more than half their market price.

Self-Directed Investors and Money Managers Should Note

The SVB explanation above, wernt a long way to remind that bonds, including US Treasury Notes have prices that rise and fall. They are different than equities, but price risk is real, and the $1.8 billion loss SVB recognized is front page proof. But since the beginning of the year many top-tier investment firms have recommended investors increase these fixed income investments and capture the new higher yields. Some even suggested ETFs in mortgaged-backed securities (MBS) or emerging markets (EM).

Goldman Asset Management is just one of the respected firms that have loudly suggested fixed income investments (CNBC, February 7, 2023)

Bond prices fall as rates rise. The Chair of the Federal Reserve, the same person that had orchestrated near zero rates, has clearly stated that the Fed will continue orchestrating higher rates. So while the stock market has been unattractive over the past 14 months, so have bonds. The difference, of course, is that bond math is absolute. As rates rise, the present value of any fixed-income security is calculated by the future value of future cash flow – this more or less determines the bonds price movement. For example, if an investor buys a bond that yields 3%, and later rates go to 6% for the same maturity, the present value is about halved. This is a plausible scenario currently, with inflation near 6%.

Stock indexes have taken a beating over the past 14 months, just like bonds. The difference is rising rates sink all bonds. It doesn’t sink all stocks.

So while the S&P 500 is down 17% since January 1, 2022, and the Russell 2000 small-cap index is down 20%, one doesn’t even have to get out of the A’s to find AT&T (T) is up 4.15% in the same period, and Canadian Company Alvopetro (ALVOF) is up 43.6%). You won’t find this type of disparity in performance or direction on the fixed-income side. US Treasuries were down 10.5% for the period.

So from one perspective, stock selection may provide potential upside, whereas rising rates could mathematically sink all bond portfolio holdings.

Take Away

Silicon Valley Bank is in a unique situation as its customer base is not very diversified. The challenges they face may be similar to other banks, but this does not appear indicative of the whole sector based on recent stress tests. Banks are restricted in what they can invest in, with rates having risen, and promised to rise more, fixed-income holdings are at a loss in many portfolios, SVB’s need to raise cash caused them to recognize what was already a market loss.

Investors, however, can take a lesson from the loss the bank took. While I have seen articles this year suggesting capitalizing on higher interest rates, the ten-year US Treasury Note is well below its historical average (40-yr. avg.+5.17% vs 3.73% today). And rates are not even returning a real rate of return relative to current and expected inflation. This would indicate a period of likely market losses on bond holdings put on today.

A Stock, or portfolio of stocks, of course, may also present losses, but the odds that any particular stock, or even an index, would seem less certain than bonds.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.gsam.com/content/gsam/us/en/advisors/market-insights/gsam-insights/2022/1q2023-fixed-income-outlook.html#section-#policy

https://www.investopedia.com/articles/economics/09/lehman-brothers-collapse.asp

https://app.koyfin.com/share/c85b10bfc6

https://www.federalreserve.gov/supervisionreg/dfa-stress-tests-2022.htm

https://fred.stlouisfed.org/series/WGS10YR

The Key to Strong Real Estate Markets

Posted on March 9, 2023March 9, 2023 by phoffman@channelchek.com

Are Real Estate Markets Addicted to Easy Money?

Without the Fed’s easy money, demand for housing would collapse, according to Ryan McMaken. McMaken, who authored the below article, is a former housing economist for the State of Colorado. He believes once the Fed pivots back to forcing down interest rates and again buying mortgage-backed securities (MBS), housing prices that have recently dipped, will again continue their march upward. He makes the case here that the housing market, without Fed support, faces difficult headwinds. – Paul Hoffman, Managing Editor, Channelchek

Last Friday, residential real estate brokerage firm Redfin released new data on home prices, showing that prices fell 0.6 percent in February, year over year. According to Redfin’s numbers, this was the first time that home prices actually fell since 2012. The year-over-year drop was pulled down by especially large declines in five markets: Austin (-11%), San Jose, California (-10.9%), Oakland (-10.4%), Sacramento (-7.7%), and Phoenix (-7.3%). According to Redfin, the typical monthly mortgage payment is now at a record high of $2,520.

The Redfin numbers come a few days before new numbers from the Case-Shiller home price index showing further slowing in home prices growth since late last year. The market’s expectation for December’s 20-city index had been -0.5 percent, month over month, and 5.8 percent, year over year. But the numbers came in worse (from the seller’s perspective) than was hoped. For December—the most recent monthly data available—the index ended up showing a month-over-month drop of -1.5 percent (seasonally adjusted), and a year-over-year gain of 4.6 percent (not seasonally adjusted).

By most accounts, the rapidly-slowing market faces headwinds thanks to rising interest rates, including the standard 30-year fixed mortgage, which is now back up over 6 percent. This puts homeownership out of reach for many first-time buyers and is also a big disincentive for current owners to “move-up” into higher-priced houses since any new home would come with a much higher mortgage rate than was available a year ago.

Not surprisingly, demand for new mortgages has plummeted. CNBC reported last week:

“Mortgage applications to purchase a home dropped 6% last week compared with the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Volume was 44% lower than the same week one year ago and is now sitting at a 28-year low.”

So, sales have fallen and, at least according to Redfin, prices are falling too. This is what we should expect to see in any environment where the real estate market is not being incessantly fueled by easy money from the central bank. After all, easy money for real estate markets had been the main story since 2009. In recent months, however, the Fed has allowed interest rates to rise while pausing efforts to add more mortgage-backed securities (MBS) to the Fed’s portfolio. Without those key supports from policymakers, the real estate market simply lacks the market demand that is necessary to sustain rapid growth. Contrary to what countless mortgage brokers and real estate agents tell themselves and each other, there is precious little capitalism in real estate markets. It is a market that is thoroughly addicted to, and dependent on, continued stimulus and subsidization from the central bank.

Without the central bank propping up MBS demand in the secondary market, primary-market mortgage lenders have fewer dollars to throw around. That means higher interest rates and fewer eligible buyers. Similarly, by setting a higher target rate for the federal funds rate that banks must pay to manage liquidity, markets face less monetary growth in general. That comes with a lessening overall demand that—in the short term, at least—drives up incomes for both current and potential homebuyers.

Even worse, continued nominal income growth that does exist is not keeping up with price inflation. The result has been 22 months in a row of negative real wage growth, and that will translate to falling demand.

This close connection between easy money and demand for homes can be seen when we compare growth in the Case-Shiller index to growth in the money supply. This has been especially the case since 2009. As the graph shows, once money-supply growth begins to slow, a similar change occurs in home prices one year later.

As money-supply growth rapidly slowed after January 2021, we then saw a similar trend in home prices 12 months later, with a rapid deceleration in the Case-Shiller index. Remarkably, in November of last year, money-supply growth turned negative for the first time since 1994. That points toward continued drops in home prices throughout this year. If Redfin’s February numbers are any indicator, we should expect price growth to turn negative in the Case-Shiller numbers this spring.

Now just imagine how much more lackluster real estate markets would be without the Fed buying up all those trillions in MBS over the past decade. It’s now been more than a decade since we had any idea what real estate prices actually would be without enormous amounts of stimulus from the Fed. The money-printing-for-mortgages scheme entered its first phase throughout 2009 and 2010, and then was almost non-stop from 2013 to 2022, topping out around $1.7 trillion in 2018. The Fed had begun to pull back on its MBS assets in 2018 and 2019, but of course reversed course in 2020 and engaged in a frenzy of new MBS buying. In that period the Fed purchased an additional $1.4 trillion in MBS. That finally ended (for now) in the fall of 2022. The Fed still holds over $2.6 trillion in MBS assets.

If we look at year-over-year changes in these MBS purchases along side Case-Shiller home prices, we again see a clear correlation:

It’s clear that once markets think the Fed may again increase its MBS purchases, home prices again surge. This close relationship should not surprise us since the volume of MBS purchases is a sizable portion of the overall market. Since 2020, the Fed’s MBS stockpile has equaled at least 20 percent of all the household mortgage debt in the United States. In early 2022, Fed-held MBS assets peaked at 24 percent of all US mortgage debt, but they still made up over 20 percent of the market as of late 2022.

Lest we think that real estate markets seem to be weathering the storm fairly well, let’s keep in mind this is all happening during a period when the unemployment rate is very low. Yes, the federal government has greatly exaggerated the amount of job growth that has occurred in the economy over the past 18 months. However, it’s also fairly clear that real estate markets are not yet seeing large numbers of unemployed workers who can’t pay their mortgages. When that does occur, we can expect an acceleration in falling home prices. For now, most mortgages are being paid, and even as real wages fall, most homeowners are cutting in places other than their mortgage payments. Once job losses do set in, all bets are off, and a wave of foreclosures will be likely. Many jobless workers won’t be able to sell quickly to avoid foreclosure either. With so few borrowers who can afford rising mortgage rates, there will be relatively few buyers. That’s when prices will really start to come down—when there is a mixture of motivated sellers and rising interest rates.

For now, though, the investor class remains relatively optimistic. Marcus Millichap CEO Hessam Nadji was on Fox Business last week flogging the now well-worn narrative that we should expect a “small recession,” but Nadji did not even entertain the idea that there might be sizable layoffs. Instead, he suggested that there is now a mere temporary softening of demand, and that will reverse itself once the Fed reverses course and embraces easy money again. In other words, the Fed will time everything perfectly, and it will be a “soft landing.”

This well captures the attitude of the “capitalists” heading the real estate industry right now. It’s all about the Fed. Without the Fed’s easy money, demand is down. Once the Fed pivots back to forcing down interest rates and buying up more MBS, well then happy times are here again. Gone is any discussion of worker productivity, savings, or other fundamentals that would drive demand in a areal capitalist market. All that matters now is a return to easy money. The real estate industry will get increasingly desperate for it. In 2023, it’s become the very foundation of their “market.”

About the Author

Ryan McMaken has a bachelors degree in economics and a master’s degree in public policy and international relations from the University of Colorado. He is the author of Breaking Away: The Case of Secession, Radical Decentralization, and Smaller Polities and Commie Cowboys: The Bourgeoisie and the Nation-State in the Western Genre. He was a housing economist for the State of Colorado. Ryan is a cohost of the Radio Rothbard podcast, has appeared on Fox News and Fox Business, and has been featured in a number of national print publications including Politico, The Hill, Bloomberg, and The Washington Post.

Budget Discussions Likely to Roil Markets

Posted on March 9, 2023March 9, 2023 by phoffman@channelchek.com

Image: Director of the Office of Management and Budget Shalanda Young besides President Biden (Credit: The White House, March 2022)

Investor Buy/Sell Patterns Could Change Under Biden Budget Proposals

The White House’s annual budget request to Congress has the power to move market sectors, as it’s a preliminary look at spending priorities and possible revenue sources. This year, alongside the pressure of Congress wrestling with raising the debt limit, the House Ways and Means Committee hearings related to the President’s budget could have a more significant impact than before. Treasury Secretary Janet Yellen will address the House committee on Friday, March 10^th, and respond to questions. Taxation and spending priorities of the White House will be further revealed during this exchange.

Watch Live coverage at 9 AM ET.

What is Expected

The President’s proposed budget for the 2024 fiscal year proposes cutting the U.S. deficit “by nearly $3 trillion over the next decade,” according to White House Press Secretary Karine Jean-Pierre, this is a much larger number than the $2 trillion mentioned as a goal during the State of the Union address last month. Jean-Pierre explained to reporters that the proposed spending reduction is “something that shows the American people that we take this very seriously,” and it answers, “how do we move forward, not just for Americans today but for … other generations that are going to be coming behind us.”

Biden’s requested budget includes a proposal that could impact healthcare as it would grow Medicare financing by raising the Medicare tax rate on earned and investment income to 5% from the current 3.8% for people making more than $400,000 a year.

Railroad safety measures are also included in Biden’s proposal, it asks for millions of additional funding for railroad safety measures spurred by recent derailments. The President also proposes a 5.2% pay raise for federal employees.

The budget deficit would be expected to shrink over ten years in part by raising taxes. One proposal investors should look out for is what has been called the Billionaire Minimum Income Tax. According to a White House brief, it “will ensure that the wealthiest Americans pay a tax rate of at least 20 percent on their full income, including unrealized appreciation. This minimum tax would make sure that the wealthiest Americans no longer pay a tax rate lower than teachers and firefighters.” The tax will apply only to the top 0.01% of American households (those worth over $100 million).

At present, the tax system discourages taking taxable gains on investments to postpone taxes. If adopted by Congress, a 20% tax on the unrealized appreciation of investments could have the effect of altering buying and selling patterns of securities, as well as real estate and other investments.

Jean-Pierre did say that the budget would propose “tax reforms to ensure the wealthy and large corporations pay their fair share while cutting wasteful spending on special interests like big oil and big pharma.” One reform, the White House has been outspoken about is corporate buybacks. He proposes, quadrupling the tax on corporate stock buybacks.

Take Away

The market will get insight beginning the second week of March 2023 into the financial priorities of the White House and thoughts on members of the House Ways and Means Committee. While nothing is set in stone, the White House and Congress would both seem to be on the same side of more fiscal restraint.

And although nothing is close to complete, the discussions and news of debate can have a dramatic impact on markets. For example, investors may be treated to more buybacks if it appears the tax on buybacks will increase in 2024. Another example would be a tax on the appreciated investments of wealthy individuals. It could follow that accounts of these individuals would have an increased incentive to transact than under a system where capital gains are only recognized by the IRS after taken.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.whitehouse.gov/briefing-room/press-briefings/2023/03/08/press-briefing-by-press-secretary-karine-jean-pierre-19/

https://www.whitehouse.gov/omb/

https://www.congress.gov/event/118th-congress/house-event/115464?s=1&r=6

https://fortune.com/2023/02/10/how-much-would-musk-gates-bezos-pay-bidens-billionaire-tax/

What to Look for in a Biotech Stock

Posted on March 8, 2023March 8, 2023 by phoffman@channelchek.com

Steps to Discover Which Biotech Stocks May Get Hot

The biotech sector is in and of itself exciting. A company developing an idea that can improve human lives, decrease suffering, or even prevent death, by nature, could be a more rewarding endeavor than investing in a company that, by comparison, does little to make a big difference. If, at the same time, the opportunity to return the investor a multiple over returns available elsewhere in the market, then the motivation to allocate a portion of investment capital increases dramatically. But how does an investor gauge a company in the biotech sector and evaluate its chance of survival and likelihood of success?

As with much of investing, sure things don’t often provide a good return. And adding risk doesn’t necessarily equate to added return. The higher perceived risk of a sector such as biotech needs to be offset by research. Filtering stocks through a selection process is key, so the probability of picking those that survive and thrive is higher than average.

I spoke with Robert LeBoyer, the Senior Life Sciences Analyst at Noble Capital Markets, and asked him to list factors to improve the likelihood of choosing a successful biotech company. His knowledge and enthusiasm for the sector caused me to want to share what I learned.

Differentiation

Companies developing a drug that is different than all that came before for what it proposes to treat or prevent stand a good chance of getting funding to make it through the different phases of study. With a development time of 3-5 years, it is best if there is a clear unmet need for the therapy or no current therapies at all.

Investors should determine if there are treatments presently and ask whether the drug or treatment mechanism is a significant improvement over any current product. Also is the field crowded or will it soon be crowded with alternatives to what a company may bring to market? LeBoyer recommended asking where there is an improvement. He gave the example of many cholesterol-lowering drugs, which he said all target the same enzyme. A company with a drug that similarly targets that enzyme may not be worth exploring. Learning of a company that has a different mechanism of action, one which shows promise of greater efficacy, or, reduced cost, or fewer side effects may be worth exploring further.

As an example of a company that had met these criteria some years back, Gilead received approval for a once-daily tablet to treat hepatitis C. Prior to this, the only treatment options involved a year-long regimen of weekly interferon injections and ribavirin tablets. The side effects were depression, nausea, flu-like symptoms, and a reduction in some blood cells. The cost of the injections and treatments could cost a health insurer $1 million over the life of the patient. The Gilead treatment, which has a price tag of $93,000, is mathematically more cost-effective. The therapy which Gilead got approved in the U.S. in 2013 was a better treatment than what existed, and even better tolerated by patients. The stock went from $20 to $120 in about a years time after approval.

Development

Clinical development was another attribute brought up by Noble’s analyst. With even the best proof of concept or early-stage trial success, assessing the chance that clinical stage trials may fail for pipeline candidates is difficult. This is why a company with a diverse pipeline with a number of products being developed or in later stages of clinical trials, increases the probability of successful biotech investment. Many companies easily pass stage one trials and even stage two, but don’t get past the final hurdle. LeBoyer shared with me a story of a company he now covers that had a vaccine for Covid-19 early on. The human clinical trials, however, were not done in the U.S., but were instead the result of trials on persons mostly of similar lineage. The FDA required a sampling comparable to the diversification of heritage or gene pool in the U.S.

Obtaining a basic understanding of the FDA side of development is important for anyone making decisions on biotech stocks.

The drug approval process in the U.S. involves multi-layered (Step One through Step Four) with each representing an important milestone on the path to full approval so the product can be brought to market or meet rejection along the path.

Step One is the development phase, Step Two is research, Step Three is Clinical Trials, and Step Four is FDA Approval.

Knowing where companies stands in the FDA step process can help an investor assess the likelihood of approval. Many products, can get to the last step and not be approved, but those just starting out on Step One are a greater risk both in the time it will take and the chance for something to not be to the FDA’s liking.

Finances

Biotech companies, by and large burn through cash in their research, development and trial periods. Understanding how long the cash on hand and other available sources can last before they need to raise more cash, then comparing this with how close to an expected finish line they are, could help an investor steer away from a company that may have a product in the pipeline that meets other key elements investors should look at, but unfortunately, funds may stand in the way of success.

Robert LeBoyer explained that the current high-interest rate environment, coupled with depressed stock prices, makes this particularly important now. For those companies that can borrow, the cost of money is now far more expensive than it had been in the last decade and a half. And issuing more shares, essentially selling more of the company, dilutes the value of shares currently held. It could become a tricky situation that stockholders or those deciding to become a stockholder should monitor

Take Away

Are there companies with a pipeline that includes drugs that meet a large unmet need (as one example, Alzheimer’s), or can attack a disease like cancer in a unique way that would be embraced by the medical community and patients? “Unicorn” companies do exist, but finding them, assessing them, and doing it before a louder investment buzz occurs takes some digging. A solid place to start digging is under the biotech company section on Channelchek. Available by clicking here, here investors are exposed to many opportunities and the underlying data, the latest news, and of course, thorough company descriptions.

Biotech companies covered by analyst Robert LeBoyer, along with his current research are available here. Channelchek will be highlighting interesting biotechs in future articles and discussing their work and status against the criteria presented above. Join Channelchek to receive emails and gain free access to these articles, video presentations, updated research reports, and news of company roadshows. Visit Rob LeBoyers coverage list here.

Paul Hoffman

Managing Editor, Channelchek

Powell’s Testimony to Congress Revealed A Lot

Posted on March 8, 2023March 8, 2023 by phoffman@channelchek.com

Is the Fed Doing Too Much, Not Enough, or Just Right?

The Fed Reserve Chair Jerome Powell has an ongoing credibility problem. The problem is that markets, economists, and now Congress find him extremely credible. So credible that they have already declared him a winner fighting inflation, or of more pertinence, the economy a loser because Powell and the Fed policymakers have been so resolute in their fight against the rising cost of goods and services that soon there will be an abundance of newly unemployed, businesses will falter, and the stock market will be left in tatters. This view that he has already done too much and that the economy has been overkilled, even while it shows remarkable strength, was echoed many times during his visit to Capital Hill for his twice a year testimony.

“As of the end of December, there were 1.9 job openings for each unemployed individual, close to the all-time peak recorded last March, while unemployment insurance claims have remained near historic lows.” – Federal Reserve Chair Jay Powell (March 8, 2023).

Powell’s Address

Perhaps the most influential individual on financial markets in the U.S. and around the world, Fed Chair Powell continued his hawkish (inflation fighter, interest rate hiker) tone at his Senate and House testimonies. The overall message was; inflation is bad, inflation has been persistent, we will continue on the path to bring it down, also employment is incredibly strong, the employment situation is such that we can do more, we will do more to protect the U.S. economy from the ravages of inflation.

Powell began, “My colleagues and I are acutely aware that high inflation is causing significant hardship, and we are strongly committed to returning inflation to our 2 percent goal.” Powell discussed the forceful actions taken to date and added, “we have more work to do. Our policy actions are guided by our dual mandate to promote maximum employment and stable prices. Without price stability, the economy does not work for anyone. In particular, without price stability, we will not achieve a sustained period of labor market conditions that benefit all.”

Powell discussed the slowed growth last year; there were two periods of negative GDP growth reported during the first two quarters. He mentioned how the once red-hot housing sector is weakening under higher interest rates and that “Higher interest rates and slower output growth also appear to be weighing on business fixed investment.” He then discussed the impact on labor markets, “Despite the slowdown in growth, the labor market remains extremely tight. The unemployment rate was 3.4 percent in January, its lowest level since 1969. Job gains remained very strong in January, while the supply of labor has continued to lag.1 As of the end of December, there were 1.9 job openings for each unemployed individual, close to the all-time peak recorded last March, while unemployment insurance claims have remained near historic lows.”

On the subject of monetary policy, the head of the Federal Reserve mentioned that the target of 2% inflation has not been met and that recent numbers have it moving in the wrong direction. Powell also discussed that the Fed had raised short-term interest rates by adding 4.50%. He suggested that recent economic numbers require that an increase to where the sufficient height of fed funds peaks is likely higher than previously thought. All the while, he added, “we are continuing the process of significantly reducing the size of our balance sheet.”

Powell acknowledged some headway, “We are seeing the effects of our policy actions on demand in the most interest-sensitive sectors of the economy. It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation. In light of the cumulative tightening of monetary policy and the lags with which monetary policy affects economic activity and inflation, the Committee slowed the pace of interest rate increases over its past two meetings.” Powell added, “We will continue to make our decisions meeting by meeting, taking into account the totality of incoming data and their implications for the outlook for economic activity and inflation.”

Questions and Answers

Congressmen both in the Senate and the House use the Semiannual Monetary Policy Report to Congress (formerly known as Humphrey Hawkins Testimony) to ask questions of the person with the most economic insight in Washington. Often their questions have already been covered in the Chair’s opening address, but Congresspeople will ask anyway to show their constituents at home that they are looking after them.

Elizabeth Warren is on the Senate Banking Committee; her math concluded the result of even a 1% increase in unemployment is a two million-worker job loss. Warren asked Powell, “Do you call laying off two million people this year not a sharp increase in unemployment?” “Explain that to the two million families who are going to be out of work.” In his response, Powell went back to historical numbers and reminded the Senator that an increase in unemployment would still rank the current economy above what Americans have lived through in most of our lifetimes, “We’re not, again, we’re not targeting any of that. But I would say even 4.5 percent unemployment is well better than most of the time for the last, you know, 75 years,” Chair Powell answered.

U.S. House Financial Services Committee on Wednesday heard Congressman Frank Lucas concerned about the pressure for the Fed to include climate concerns as an additional Fed mandate. Lucas from Oklahoma asked, “How careful are you in ensuring that the Fed does not place itself into the climate debate, and how can Congress ensure that the Fed’s regulatory tool kit is not warped into creating policy outcomes?” Powell answered that the Fed has a narrow but real role involving bank supervision. It’s important that individual banks understand and can manage over time their risks from any climate change and it’s impact on business and the economy. He wants to make sure the Fed never assumes a role where they are becoming a climate policymaker.

Other non-policy questions included Central Bank Digital Currencies. House Congressman Steven Lynch showed concerns that the Fed was experimenting with digital currencies. His question concerned receiving a public update on where they are with their partnership with MIT, their testing, and what they are trying to accomplish. Powell’s response seemed to satisfy the Congressman. “we engage with the public on an ongoing basis, we are also doing research on policy, and also technology,” said Powell. Follow-up questions on the architecture of a CBDC, were met with responses that indicated that the Fed, they are not at the stage of making decisions, instead, they are experimenting and learning. “How would this work, does it work, what is the best technology, what’s the most efficient.” Powell emphasized that the U.S. Federal Reserve is at an early stage, but making technological progress. They have not decided from a policy perspective if this is something that the country needs or desires.

Issues at Stake

As it relates to the stock and bond markets, the Fed has been holding overnight interest rates at a level that is more than one percentage point below the rate of inflation. The reality of this situation is that investors and savers that are earning near the Fed Funds rate on their deposits are losing buying power to the erosive effects of inflation. Those that are investing farther out on the yield curve are earning even less than overnight money. The impact here could be worse if inflation remains at current levels or higher, or better if the locked-in yields out longer on the curve are met with inflation coming down early on.

The Fed Chair indicated at the two testimony before both Houses of Congress that inflation has been surprisingly sticky. He also indicated that they might increase their expected stopping point on tightening credit. Interest rates out in the periods are actually lower than they had been in recent days and as much as 0.25% lower than they were last Fall. The lower market rates and inverted yield curve suggest the market thinks the Fed has already won and has likely gone too far. This thought process has made it difficult for the Fed Chair and others at the Fed that discuss a further need to throw cold water on an overheated economy. Fed Tightening has not led to an equal amount of upward movement out on the yield curve. This trust or expectation that the Fed has inflation under control would seem to be undermining the Fed’s efforts. With this, the Fed is likely to have to move even further to get the reaction it desires. The risk of an unwanted negative impact on the economy is heightened by the trust the bond market gives to Powell that he has this under control and may have already won.

Powell’s words are that the Fed has lost ground and has much more work to do.

Take Away

At his semiannual testimony to Congress, an important message was sent to the markets. The Fed has the right tools to do the job of bringing inflation down to the 2% range, but those tools operate on the demand side. In the U.S. we are fortunate to have two jobs open for every person seeking employment. While this is inflationary, it provides policy with more options.

As of the reporting of January economic numbers, a trend may be beginning indicating the Fed is losing its fight against inflation. It is likely that it will have to do more, but the Fed stands willing to do what it takes. Powell ended his prepared address by saying, “Everything we do is in service to our public mission. We at the Federal Reserve will do everything we can to achieve our maximum-employment and price-stability goals.”

Paul Hoffman

Managing Director, Channelchek

Sources

https://www.federalreserve.gov/newsevents/testimony.htm

CBD – What We Know, What We Don’t, and What We Will

Posted on March 7, 2023March 7, 2023 by phoffman@channelchek.com

Here’s What Science Now Says about CBD’s Health Benefits

Over the last five years, an often forgotten piece of U.S. federal legislation – the Agriculture Improvement Act of 2018, also known as the 2018 Farm Bill – has ushered in an explosion of interest in the medical potential of cannabis-derived cannabidiol, or CBD.

After decades of debate, the bill made it legal for farmers to grow industrial hemp, a plant rich in CBD. Hemp itself has tremendous value as a cash crop; it’s used to produce biofuel, textiles and animal feed. But the CBD extracted from the hemp plant also has numerous medicinal properties, with the potential to benefit millions through the treatment of seizure disorders, pain or anxiety.

Prior to the bill’s passage, the resistance to legalizing hemp was due to its association with marijuana, its biological cousin. Though hemp and marijuana belong to the same species of plant, Cannabis sativa, they each have a unique chemistry, with very different characteristics and effects. Marijuana possesses tetrahydrocannabinol, or THC, the chemical that produces the characteristic high that is associated with cannabis. Hemp, on the other hand, is a strain of the cannabis plant that contains virtually no THC, and neither it nor the CBD derived from it can produce a high sensation.

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts of Kent E Vrana, Professor and Chair of Pharmacology, Penn State.

As a professor and chair of the department of pharmacology at Penn State, I have been following research developments with CBD closely and have seen some promising evidence for its role in treating a broad range of medical conditions.

While there is growing evidence that CBD can help with certain conditions, caution is needed. Rigorous scientific studies are limited, so it is important that the marketing of CBD products does not get out ahead of the research and of robust evidence.

Unpacking the Hype Behind CBD

The primary concern about CBD marketing is that the scientific community is not sure of the best form of CBD to use. CBD can be produced as either a pure compound or a complex mixture of molecules from hemp that constitute CBD oil. CBD can also be formulated as a topical cream or lotion, or as a gummy, capsule or tincture.

Guidance, backed by clinical research, is needed on the best dose and delivery form of CBD for each medical condition. That research is still in progress.

But in the meantime, the siren’s call of the marketplace has sounded and created an environment in which CBD is often hyped as a cure-all – an elixir for insomnia, anxiety, neuropathic pain, cancer and heart disease.

Sadly, there is precious little rigorous scientific evidence to support many of these claims, and much of the existing research has been performed in animal models.

CBD is simply not a panacea for all that ails you.

Childhood Seizure Disorders

Here’s one thing that is known: Based on rigorous trials with hundreds of patients, CBD has been shown to be a proven safe and effective drug for seizure disorders, particularly in children.

In 2018, the U.S. Food and Drug Administration granted regulatory approval for the use of a purified CBD product sold under the brand name Epidiolex for the treatment of Lennox-Gastaut and Dravet syndromes in children.

These two rare syndromes, appearing early in life, produce large numbers of frequent seizures that are resistant to traditional epilepsy treatments. CBD delivered as an oral solution as Epidiolex, however, can produce a significant reduction – greater than 25% – in the frequency of seizures in these children, with 5% of the patients becoming seizure-free.

More than 200 Scientific Trials

CBD is what pharmacologists call a promiscuous drug. That means it could be effective for treating a number of medical conditions. In broad strokes, CBD affects more than one process in the body – a term called polypharmacology – and so could benefit more than one medical condition.

As of early 2023, there are 202 ongoing or completed scientific trials examining the effectiveness of CBD in humans on such diverse disorders as chronic pain, substance use disorders, anxiety and arthritis.

In particular, CBD appears to be an anti-inflammatory agent and analgesic, similar to the functions of aspirin. This means it might be helpful for treating people suffering with inflammatory pain, like arthritis, or headaches and body aches.

CBD also holds potential for use in cancer therapy, although it has not been approved by the FDA for this purpose.

The potential for CBD in the context of cancer is twofold:

First, there is evidence that it can directly kill cancer cells, enhancing the ability of traditional therapies to treat the disease. This is not to say that CBD will replace those traditional therapies; the data is not that compelling.

Second, because of its ability to reduce pain and perhaps anxiety, the addition of CBD to a treatment plan may reduce side effects and increase the quality of life for people with cancer.

The Risks of Unregulated CBD

While prescription CBD is safe when used as directed, other forms of the molecule come with risks. This is especially true for CBD oils. The over-the-counter CBD oil industry is unregulated and not necessarily safe, in that there are no regulatory requirements for monitoring what is in a product.

What’s more, rigorous science does not support the unsubstantiated marketing claims made by many CBD products.

In a 2018 commentary, the author describes the results of his own study, which was published in Dutch (in 2017). His team obtained samples of CBD products from patients and analyzed their content. Virtually none of the 21 samples contained the advertised quantity of CBD; indeed, 13 had little to no CBD at all and many contained significant levels of THC, the compound in marijuana that leads to a high – and that was not supposed to have been present.

In fact, studies have shown that there is little control of the contaminants that may be present in over-the-counter products. The FDA has issued scores of warning letters to companies that market unapproved drugs containing CBD. In spite of the marketing of CBD oils as all-natural, plant-derived products, consumers should be aware of the risks of unknown compounds in their products or unintended interactions with their prescription drugs.

Regulatory guidelines for CBD are sorely lacking. Most recently, in January 2023, the FDA concluded that the existing framework is “not appropriate for CBD” and said it would work with Congress to chart a way forward. In a statement, the agency said that “a new regulatory pathway for CBD is needed that balances individuals’ desire for access to CBD products with the regulatory oversight needed to manage risks.”

As a natural product, CBD is still acting as a drug – much like aspirin, acetaminophen or even a cancer chemotherapy. Health care providers simply need to better understand the risks or benefits.

CBD may interact with the body in ways that are unintended. CBD is eliminated from the body by the same liver enzymes that remove a variety of drugs such as blood thinners, antidepressants and organ transplant drugs. Adding CBD oil to your medication list without consulting a physician could be risky and could interfere with prescription medications.

In an effort to help prevent these unwanted interactions, my colleague Dr. Paul Kocis, a clinical pharmacist, and I have created a free online application called the CANNabinoid Drug Interaction Resource. It identifies how CBD could potentially interact with other prescription medications. And we urge all people to disclose both over-the-counter CBD or recreational or medical marijuana use to their health care providers to prevent undesirable drug interactions.

In the end, I believe that CBD will prove to have a place in people’s medicine cabinets – but not until the medical community has established the right form to take and the right dosage for a given medical condition.

The Original Driver of Inflation has Sailed

Posted on March 7, 2023March 7, 2023 by phoffman@channelchek.com

The Supply Chain Part of Inflation Can be Declared Dead, Now What?

New data shows the supply chain is no longer putting meaningful pressure on inflation — will rising prices finally sail off and stay there?

Historically, the Global Supply Chain Pressure Index (GSCPI) is now on the low side. In fact, for the monthly period ending February 28, it’s below its 25-year average. What’s more, is this is the first time the GSCPI has released a below-average reading of supply chain pressure since August of 2019.

This is significant as the supply-chain issues related to the pandemic, would seem to be transitory and are now no longer the issue. From March 2020 until this more recent report, consumers with easier money available, including stimulus checks, drove demand higher for goods. The suddenness of the onslaught of demand for goods caught the modern world’s “just-in-time” inventory management systems off guard. To make that situation much worse, lockdown policies slowed global production, and shipping and transport became entrenched in gridlock due to undermanned loading docks all under some level of new pandemic processes designed for health and safety.

Inflation climbed as the price of shipping was bid up substantially, and shortages of products on shelves caused retailers to lessen demand by hiking prices. Some products, particularly new and used cars, experienced sharp price increases as supply chain-related shortages on automotive components such as computer chips and other parts became difficult to obtain.

Will Inflation Finally Recede?

An 18-month-long period of rampant inflation in goods, including vehicles, electronics, food, and sporting goods, (including bicycles for both indoor and outdoor use became unavailable) began to decompress starting in early 2022. The supply chains had slowly worked through the main causes.

Around this same period in 2022, inflation pressures began to build in services. As price hikes for goods lessened or backtracked, the cost for services, including wages, shot up. This is still fueling inflation today.

Often, the fear or expectation of rising prices drives inflation and vice versa. This may be the reason Fed Chairman Powell used the description “transitory” long past the period that it was obvious that inflation was likely persistent. If the Chair of the US Central Bank had suggested back then that we had a long-term problem, the worst of it may have arrived faster and been worse. Conversely, now that higher-than-target inflation is here, it makes sense for Powell to speak more hawkishly, this helps alter expectations of ongoing high rates of inflation.

With inflation primarily coming from services, the medicine for reducing the demand for human services is lessen demand, or even more difficult, increase the labor force. This is a bitter pill for the economy and creates an issue with the Federal Reserve which has two mandates, one to keep inflation modest and the other to maximize employment.

Take Away

The GSCPI is an indicator that the goods-based part of the economy has normalized. Inflation is still raging in services, which are barely tied to services. The hope is that the Fed can reduce the demand for higher and higher wages or perhaps bring more capable workers into the workforce. Another part of this plan may have nothing to do with tightening credit conditions. Talking publicly about being resolved to squash inflation also has an impact on expectations which will reduce the prices charged for service.

The initial battle, the one that kicked off the price hikes (supply chain), has ended, now we have to see how the rest of the Fed’s fight against inflation, both in policy and psychologically, plays out.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.house.mi.gov/hfa/PDF/RevenueForecast/NewYorkFed_Global_Supply_Chain_Pressure_Index_Jan2023.pdf

https://www.newyorkfed.org/research/policy/gscpi#/overview

Will Canada’s New Policy Weigh Heavy on Some Mining Investors?

Posted on March 6, 2023March 7, 2023 by phoffman@channelchek.com

The PDAC Mining Conference has a New Discussion Item for 2023

As analysts, investors, financiers, manufacturers, and others with a high interest in natural resources converge on the Prospectors and Developers Association of Canada (PDAC) conference this week, some of the conversations will revolve around the risks of having investments that may later be divested under a new Canadian policy enacted late last year. The Policy is intended to protect strategic minerals, especially those deemed critical to a greener energy future. The conference, which is expected to have close to 30,000 attendees, comes just four months after the enactment, which falls under the Investment Canada Act (ICA).

Background

Late last year, the Canadian Minister of Innovation, Science and Industry, in conjunction with the Minister of Natural Resources, issued a new policy relating to the treatment of foreign state-owned enterprise (SOE) investment in Canada’s critical minerals sector under the ICA.

The Policy which is now in effect identifies 31 minerals that the Canadian government says are essential to Canada’s prosperity in the emerging low-carbon and technology sectors, or that contribute to Canada’s national defense and security. At the same time, it works to not undermine the Canadian Critical Minerals Strategy, designed to position the natural resource-rich country as the preferred global supplier of critical minerals.

The Policy applies to any direct or indirect investment of any size by a foreign SOE in a Canadian business involved in the “critical minerals” supply chain. Under the ICA, any investment that is a foreign SOE will be reviewed by the Investment Canada Act (ICA). The Policy states that the Minister is required to determine whether an investment is of “net benefit to Canada.” This is expected to be a high hurdle. What’s more, all foreign SOE investment in the critical minerals sector, regardless of size or value, will be subject to enhanced scrutiny under the national security review provisions.

Days after the Policy was issued, the Minister announced that the Canadian government ordered the divestiture of three separate investments in Canadian critical mineral companies involved in (among other things) lithium mining activities, both within and outside of Canada.

The Policy does not impact the ability for individuals or funds and companies not meeting the definition of SOE or directly influenced by an SOE. However, it may lower the number of potential financiers and investors for Canadian companies involved in procuring the 31 minerals shown in the graphic below. Dean McPherson, head of global mining at the Toronto Stock Exchange has been quoted saying, “No doubt the implications of a decision to restrict a major avenue of capital flow needs to be supplemented by capital that is similar in size and timely.”

Canada’s 31 Critical Minerals and Uses

Source: Canada Critical Minerals Strategy (canada.ca)

As it relates to national security considerations, the Policy states that all investments by foreign SOEs (or foreign-influenced investors that involve a Canadian business or entity operating in a critical minerals sector in Canada will form the basis for a finding that the investment could be “injurious to national security”.

The changes are viewed as a defensive measure against China, which has invested $7 billion in Canada’s base metals sector in the past 20 years. Canadian officials last fall ordered Chinese companies to sell stakes in three Toronto-listed lithium companies, two of which are developing mines outside Canada.

When analysts, investors, financiers, manufacturers, and others with a high interest in natural resources converge on the Prospectors and Developers Association of Canada (PDAC) conference this week, some of the conversations will revolve around the risks of having investments that may later be divested of under a new Canadian policy enacted late last year. The Policy is intended to protect strategic minerals, especially those deemed critical to a greener energy future. The conference, which is expected to have close to 30,000 attendees, comes just four months after the enactment, which falls under the Investment Canada Act (ICA). — Not all investors and analysts can make it to the PDAC Mineral Exploration and Mining Conference in Toronto. In order for our subscribers to stay in the loop, Noble Capital Markets will be attending PDAC conference meetings and then interviewing select executives. This will be captured on video for the exclusive benefit of Channelchek subscribers (no cost). Learn more about the Channelchek Takeaway Series at PDAC.

PDAC and Impact

The conference which takes place in Canada this week will be the first forum of its size where questions surrounding the Ministers policy under the ICA can be discussed, and parties of varied interests on all sides can discuss there expectations of how this will impact financing, partnerships, and investments among important global producers and consumers of raw materials.

However, the hurdle that Canada has put in place for some investors and investing could cause some less-than-welcome investors from gaining too much control over a company and the resources it produces. Whether it also weighs heavily on the value of company’s based out of Canada will be discussed at the conference and remains to be seen. At present, after four months, the demand for some of the many protected resources has only increased. This is a positive sign for investors.

Paul Hoffman

Managing Editor, Channelchek

The Week Ahead – Chairman Powell’s Appearance Before Congress Could Cause Volatility

Posted on March 6, 2023March 6, 2023 by phoffman@channelchek.com

Powell’s Testimony, then Beige Book Ought to Give More Information

While this will be a quiet week for economic data, and earnings season is now past its peak, the probabilities are high that it will be a week of dramatic volatility. The reason is that Federal Reserve Chairman Jerome Powell will spend two days answering questions from elected officials that are members of Congress. There are typically a lot of pointed questions from members of the House and Senate as well as grandstanding politicians that want their constituents to see them fighting. In 2023’s case, the Fed intentionally weakens the US economy. Links to watch the live broadcasts of both the Senate and the House Semiannual Monetary Policy Report to Congress are provided below.

Monday 3/6

10:00 AM ET, Factory orders are expected to have fallen 1.8 percent in January versus December’s 1.8 percent rise. Evidence of this turnaround can be seen in Durable Goods Orders for January, which had already been released and is one of two major components of this report. Durable Goods fell 4.5 percent in the month.

Tuesday 3/7

10:00 AM ET, Day one of Fed Chair Jerome Poll’s Semiannual Monetary Policy Report to Congress will be with the US Senate Committee on Banking, Housing, and Urban Affairs. A link to stream the intense exchange that usually occurs can be found here.
3:00 PM ET, Consumer Credit is expected to increase $26.4 billion in January versus a smaller-than-expected increase of $11.6 billion in December. This report has a long lag from the measuring period, this makes it paid attention to less than other reports. However it is of increasing importance now that investors are wondering how long consumers can continue at a high rate despite tighter money.

Wednesday 3/8

8:30 PM ET, International Trade is expected to show a deficit of $69.0 billion during January for total goods and services trade. This would compare with a $67.4 billion deficit in December. A stronger dollar makes US goods less attractive overseas, and goods and services billed in a currency that is weakening in relationship to the US dollar become more attractive domestically when paid for in stronger dollars.
10:00 AM ET, the Jolts or job openings report is expected to decline. It has been strong and rose to 11.0 million in December, however January’s expectation move down to 10.6 million.
2:00 PM ET, The Beige Book is a discussion of what is going on economically in each of the Federal Reserve districts. It is made available roughly two weeks before the FOMC meetings. This report on economic conditions is used for discussion at FOMC meetings which is back to beingthe single most influential events during the year impacting markets.
10:00 AM ET, Day two of Fed Chair Jerome Powell’s Semiannual Monetary Policy Report to Congress will be with the U.S. House Financial Services Committee. A link to stream the intense exchange that usually occurs can be found here.

Thursday 3/9

8:30 AM ET, Jobless claims are a weekly release, but they always have the ability to impact investor thinking. For the week that ended March 4 week they are expected to come in at 196,000 versus 190,000 during the prior week.
4:30 PM ET, The Fed’s balance sheet is a weekly report presenting a balance sheet for all Reserve Bank districts that lists factors supplying reserves into the banking system and factors absorbing reserves from the system. The report is officially named Factors Affecting Reserve Balances. The Fed has been reducing its balance sheet by letting a specific amount of securities owned mature without being reinvested. Investong by the Fed adds money to the marketplace which is stimulative.

Friday 3/10

8:30 AM ET, the consensus for the Employment Sitation is a 215,000 rise for nonfarm payroll growth in February. This compares to 517,000 in January which. January was the ninth straight month and eleventh of the last twelve that payroll growth exceeded consensus of economists.

What Else

As far as what is scheduled, nothing can impact the market greater than the Federal Reserve Chair testifying before Congress both Tuesday and Wednesday. It would be surprising if they all like what he has to say. Stocks continue to be very sensitive; the US 10-year Treasury Note has been a key to the stock markets tone recently.

Paul Hoffman

Managing Editor, Channelchek

Sources:

https://www.econoday.com/

https://www.federalreserve.gov/newsevents/calendar.htm

Big Tech Trying to Act More Like Nimble Smaller Companies

Posted on March 6, 2023March 6, 2023 by phoffman@channelchek.com

Why Meta’s Embrace of a ‘Flat’ Management Structure May Not Lead to the Innovation and Efficiency Mark Zuckerberg Seeks

Big Tech, under pressure from dwindling profits and falling stock prices, is seeking some of that old startup magic.

Meta, the parent of Facebook, recently became the latest of the industry’s dominant players to lay off thousands of employees, particularly middle managers, in an effort to return to a flatter, more nimble organization – a structure more typical when a company is very young or very small.

Meta CEO Mark Zuckerberg joins Elon Musk and other business leaders in betting that eliminating layers of management will boost profits. But is flatter better? Will getting rid of managers improve organizational efficiency and the bottom line?

This article was republished with permission from The Conversation, a news site dedicated to sharing ideas from academic experts. It represents the research-based findings and thoughts ofAmber Stephenson, Associate Professor of Management and Director of Healthcare Management Programs, Clarkson University.

As someone who has studied and taught organization theory as well as leadership and organizational behavior for nearly a decade, I think it’s not that simple.

Resilient Bureaucracies

Since the 1800s, management scholars have sought to understand how organizational structure influences productivity. Most early scholars focused on bureaucratic models that promised managerial authority, rational decision-making and efficiency, impartiality and fairness toward employees.

These centralized bureaucratic structures still reign supreme today. Most of us have likely worked in such organizations, with a boss at the top and clearly defined layers of management below. Rigid, written rules and policies dictate how work is done.

Research shows that some hierarchy correlates with commercial success – even in startups – because adding just one level of management helps prevent directionless exploration of ideas and damaging conflicts among staff. Bureaucracies, in their pure form, are viewed as the most efficient way to organize complex companies; they are reliable and predictable.

While adept at solving routine problems, such as coordinating work and executing plans, hierarchies do less well adapting to rapid changes, such as increased competition, shifting consumer tastes or new government regulations.

Bureaucratic hierarchies can stifle the development of employees and limit entrepreneurial initiative. They are slow and inept at tackling complex problems beyond the routine.

Moreover, they are thought to be very costly. Management scholars Gary Hamel and Michele Zanini estimated in 2016 that waste, rigidity and resistance to change in bureaucratic structures cost the U.S. economy US$3 trillion in lost output a year. That is the equivalent of about 17% of all goods and services produced by the U.S. economy at the time of the study.

Even with the mounting criticisms, bureaucratic structures have shown resilience over time. “The formal managerial hierarchy in modern organizations is as persistent as are calls for its replacement,” Harvard scholars Michael Lee and Amy Edmondson wrote in 2017.

Fascinatingly Flat

Flat structures, on the other hand, aim to decentralize authority by reducing or eliminating hierarchy. The structure is harnessed to flexibility and agility rather than efficiency, which is why flat organizations adapt better to dynamic and changing environments.

Flat structures vary. Online retailer Zappos, for example, adopted one of the most extreme versions of the flat structure – known as holacracy – when it eliminated all managers in 2014. Computer game company Valve has a president but no formal managerial structure, leaving employees free to work on projects they choose.

Other companies, such as Gore Tex maker W. L. Gore & Associates and film-streaming service Netflix, have instituted structures that empower employees with wide-reaching autonomy but still allow for some degree of management.

In general, flat structures rely on constant communication, decentralized decision-making and the self-motivation of employees. As a result, flat structures are associated with innovation, creativity, speed, resilience and improved employee morale.

The promises of going flat are understandably enticing, but flat organizations are tricky to get right.

The list of companies succeeding with flat structures is noticeably short. Besides the companies mentioned above, the list typically includes social media marketing organization Buffer, online publisher Medium and tomato processing and packing company Morning Star Tomatoes.

Other organizations that attempted flatter structures have encountered conflicts between staff, ambiguity around job roles and the emergence of unofficial hierarchies – which undermines the whole point of going flat. They eventually reverted back to hierarchical structures.

“While people may lament the proliferation of red tape,” management scholars Pedro Monteiro and Paul Adler explain, “in the next breath, many complain that ‘there ought to be a rule.’”

Even Zappos, often cited as the case study for flat organizations, has slowly added back managers in recent years.

Right Tool

In many ways, flat organizations require even stronger management than hierarchical ones.

When managers are removed, the span of control for those remaining increases. Corporate leaders must delegate – and track – tasks across greater numbers of employees and constantly communicate with workers.

Careful planning is needed to determine how work is organized, information shared, conflicts resolved and employees compensated, hired and reviewed. It is not surprising that as companies grow, the complexity of bigger organizations poses barriers to flat models.

In the end, organizational structure is a tool. History shows that business and economic conditions determine which type of structure works for an organization at any given time.

All organizations navigate the trade-off between stability and flexibility. While a hospital system facing extensive regulations and patient safety protocols may require a stable and consistent hierarchy, an online game developer in a competitive environment may need an organizational structure that’s more nimble so it can adapt to changes quickly.

Business and economic conditions are changing for Big Tech, as digital advertising declines, new competitors surface and emerging technologies demand risky investments. Meta’s corporate flattening is one response.

As Zuckerberg noted when explaining recent changes, “Our management theme for 2023 is the ‘Year of Efficiency,’ and we’re focused on becoming a stronger and more nimble organization.”

But context matters. So does planning. All the evidence I’ve seen indicates that embracing flatness by cutting middle management will not, by itself, do much to make a company more efficient.

Was US Pharma Clinical Trial Activity Thwarted During the Pandemic?

Posted on March 3, 2023March 3, 2023 by phoffman@channelchek.com

The Volume Change of Non-Covid Related Medical Studies During the Pandemic

Did Covid19 related efforts by the pharmaceutical and biotech industry pull dollars from or impede the progression of non-Covid medical research? Also, were patient-enrolled studies significantly curtailed or paused during this period? Answers to these questions had been hard to quantify. Public estimates have ranged from the virus as having a minimal impact all the way to the other extreme of tragic decline. Applied Clinical Trials, an industry publication, has found a unique and accurate source from which to remove the guesswork and mine for a conclusion. From this, they were able to come to a definitive conclusion that surprised both extremes in expectations.

Statistical Sources

The US government’s Open Payments program is a national database that discloses payments made by drug and medical device companies to hospitals, physicians, and others in the health service provider field. The purpose of the data is to provide transparency; however, it has ample information to do analysis and provide conclusions on other questions related to clinical research or the broader medical arena.

Applied Clinical Trials discovered from Open Payments that the effect on the total volume of US clinical trial activity was quite limited. The statistics reveal that the overall pharmaceutical industry spending on all US patient enrollment and treatment activities did not decline in the years 2020 and 2021, from the year 2019, which was used as a baseline.

How the Data Was Used

The Open Payments database allowed direct measurement of the impact of COVID-19 on US industry-sponsored clinical trial activity through the end of 2021. More recent data is not yet available. The researchers learned Covid19 may have slowed and hindered the launch and execution of clinical trials in two ways. First, COVID-19 clinical trials may have displaced other clinical trial activity. Second, the Covid19 pandemic caused logistical and operational challenges to most clinical trials. Do you remember the six-foot rule? Recruiting patients, treating these patients, and validating source data are some of the areas where the pandemic created more than the normal amounts of hurdles for clinical trials.

The needed data was isolated by coding Open Payments by individual study indication. Also the U.S. National Library of Medicine (under the NIH) maintains the website clinicaltrials.gov. This website shows little or no decline in the number of US sites opened for Phase II and III clinical trials between 2019, 2020, and 2021. Of course open sites may reveal the amount of patient activity taking place. A Site may be opened, but have less patient activity. Therefore assessing actual activity levels from the ClinicalTrials.gov database is nt perfect. However, Open Payments provides more complete data since the payments are predominately tied to patient enrollment and treatment experienced.

*Pharmaceutical company US clinical research spending, reported in Open Payments ($billions)*

Overall Conclusion

The research shows there was no decline in non-COVID related study spending during the height of pandemic. Open Payments data show a constant, if undramatic, increase in US clinical trials between 2017 and 2021. Even when Covid19 related spending during the time period was removed, they saw no decline in study spending. Trials continued, through the period, at a rate that is similar to the year just prior to the start of the pandemic.

More About Open Payments

Open Payments is the result of a federal law, the Sunshine Act. Searches and downloads on the website are easy and may only be slowed by the size of many of the files. The data may not reach back beyond ten years because the site has only existed since late 2013. Since, pharmaceutical companies with at least one marketed product have been required to report payments to physicians and other medical professionals. These Open Payments include two types: general and research. General payments relate to pharmaceutical companies’ payments to medical professionals when marketed products are involved. Research payments are more restricted. They are broken down by clinical grant payments. These cover virtually all clinical investigators and their clinical trial experience across all indications.

Investor Take Away

Investors had been concerned that the pipeline at companies manufacturing medical devices and developing drugs, therapies, and other treatments may have a less full pipeline because of the pandemic and the US response to it. While the data doesn’t speak to the speed of the FDA approval process, it alleviates concerns that the related investment sectors were on hiatus and now behind on phase II and phase III trials.

Paul Hoffman

Managing Editor, Channelchek

Sources

https://www.appliedclinicaltrialsonline.com/view/the-limited-impact-of-covid-19-on-us-clinical-trial-activity

https://openpaymentsdata.cms.gov/

NobleCon Investor Conference Shares News of Enhancements for 2023

Posted on March 3, 2023March 23, 2023 by phoffman@channelchek.com

Why NobleCon19 Will Provide Even Greater Benefit to Presenters and Investors

In a significant announcement, the organizer of one of the investment industries leading conferences released information on an update to the annual event’s conference facility for 2023 along with format enrichments. The changes are designed to improve the overall benefit to presenting companies, corporate sponsors, and institutional and individual investors. In a press release dated March 1, 2023, Noble Capital Markets, along with Florida Atlantic University, gave details of the special location, and provided information on some of the many reasons why the 19^th NobleCon investor Conference (NobleCon19), will provide even more value to the company’s presenters and attending investors.

The New Facility

NobleCon19 will take advantage of the entire 54,000-square-foot College of Business Executive Education facility at Florida Atlantic University (FAU). The new facility in Boca Raton, FL, will provide tiered seating, which will provide easier visibility for both presenters and attendees. Investors will find the three large-screen monitors in each presenting room will make it easier to see and comprehend the presenters slide deck and other materials. Seeing the screen is a problem at many conferences of this magnitude. As a newly built presentation center, there will be full webcasting capabilities that include the most current technologically advanced conference environment.

Florida Atlantic University is surrounded by beauty. It’s in Boca Raton, Fl, which allows attendees to choose to stay on the ocean or at one of the other properties where conference organizers are negotiating discounts. South Florida is a popular destination for travelers from all over the world.

Noble Capital Markets joint press release with Florida Atlantic University announcing NobleCon19

NobleCon19 Format

NobleCon19 has always led the industry in its ability to place investors and executives of small-cap companies in a position to explore and interact. This year it was announced the presentations will be followed by fire-side chats with Noble analysts, so investors can gain insight from the industry analyst and company stock expert. One-on-one meetings will also be arranged for qualified investors. Several industry panel presentations are also planned for additional discovery. NobleCon19 will also feature high-profile keynote speakers and an evening event that includes entertainment for all to unwind and meet more casually with others of similar interests.

All company presentations and panel discussions will be digitally streamed and made available exclusively on www.channelchek.com

Take Away

Noble Capital Markets, through its annual NobleCon investor conference, has always been an innovator in bringing lesser-known companies with interesting stories to investors. It attracts investors that are looking for actionable ideas that they may not have discovered through other outlets. This year’s event again takes place in Florida. This is important because, over the past couple of years, the advantages of doing business in the sunshine state have drawn many new investment firms to the area. The joint press release did not say what the overall theme will be for NobleCon19; I’ll be attending and personally hope its theme ties to all that is worthwhile in this fast-growing region.

Get more information related to the dates, location, and FAU’s facility – click through to the press release here.

Paul Hoffman

Managing Editor, Channelchek

AI Design Simplifies Complicated Structural Engineering

Posted on March 2, 2023March 2, 2023 by phoffman@channelchek.com

Integrating Humans with AI in Structural Design

David L. Chandler | MIT News Office

Modern fabrication tools such as 3D printers can make structural materials in shapes that would have been difficult or impossible using conventional tools. Meanwhile, new generative design systems can take great advantage of this flexibility to create innovative designs for parts of a new building, car, or virtually any other device.

But such “black box” automated systems often fall short of producing designs that are fully optimized for their purpose, such as providing the greatest strength in proportion to weight or minimizing the amount of material needed to support a given load. Fully manual design, on the other hand, is time-consuming and labor-intensive.

Now, researchers (MIT) have found a way to achieve some of the best of both of these approaches. They used an automated design system but stopped the process periodically to allow human engineers to evaluate the work in progress and make tweaks or adjustments before letting the computer resume its design process. Introducing a few of these iterations produced results that performed better than those designed by the automated system alone, and the process was completed more quickly compared to the fully manual approach.

The results are reported this week in the journal Structural and Multidisciplinary Optimization, in a paper by MIT doctoral student Dat Ha and assistant professor of civil and environmental engineering Josephine Carstensen.

The basic approach can be applied to a broad range of scales and applications, Carstensen explains, for the design of everything from biomedical devices to nanoscale materials to structural support members of a skyscraper. Already, automated design systems have found many applications. “If we can make things in a better way, if we can make whatever we want, why not make it better?” she asks.

“It’s a way to take advantage of how we can make things in much more complex ways than we could in the past,” says Ha, adding that automated design systems have already begun to be widely used over the last decade in automotive and aerospace industries, where reducing weight while maintaining structural strength is a key need.

“You can take a lot of weight out of components, and in these two industries, everything is driven by weight,” he says. In some cases, such as internal components that aren’t visible, appearance is irrelevant, but for other structures, aesthetics may be important as well. The new system makes it possible to optimize designs for visual as well as mechanical properties, and in such decisions, the human touch is essential.

As a demonstration of their process in action, the researchers designed a number of structural load-bearing beams, such as might be used in a building or a bridge. In their iterations, they saw that the design has an area that could fail prematurely, so they selected that feature and required the program to address it. The computer system then revised the design accordingly, removing the highlighted strut and strengthening some other struts to compensate, and leading to an improved final design.

The process, which they call Human-Informed Topology Optimization, begins by setting out the needed specifications — for example, a beam needs to be this length, supported on two points at its ends, and must support this much of a load. “As we’re seeing the structure evolve on the computer screen in response to initial specification,” Carstensen says, “we interrupt the design and ask the user to judge it. The user can select, say, ‘I’m not a fan of this region, I’d like you to beef up or beef down this feature size requirement.’ And then the algorithm takes into account the user input.”

While the result is not as ideal as what might be produced by a fully rigorous yet significantly slower design algorithm that considers the underlying physics, she says it can be much better than a result generated by a rapid automated design system alone. “You don’t get something that’s quite as good, but that was not necessarily the goal. What we can show is that instead of using several hours to get something, we can use 10 minutes and get something much better than where we started off.”

The system can be used to optimize a design based on any desired properties, not just strength and weight. For example, it can be used to minimize fracture or buckling, or to reduce stresses in the material by softening corners.

Carstensen says, “We’re not looking to replace the seven-hour solution. If you have all the time and all the resources in the world, obviously you can run these and it’s going to give you the best solution.” But for many situations, such as designing replacement parts for equipment in a war zone or a disaster-relief area with limited computational power available, “then this kind of solution that catered directly to your needs would prevail.”

Similarly, for smaller companies manufacturing equipment in essentially “mom and pop” businesses, such a simplified system might be just the ticket. The new system they developed is not only simple and efficient to run on smaller computers, but it also requires far less training to produce useful results, Carstensen says. A basic two-dimensional version of the software, suitable for designing basic beams and structural parts, is freely available now online, she says, as the team continues to develop a full 3D version.

“The potential applications of Prof Carstensen’s research and tools are quite extraordinary,” says Christian Málaga-Chuquitaype, a professor of civil and environmental engineering at Imperial College London, who was not associated with this work. “With this work, her group is paving the way toward a truly synergistic human-machine design interaction.”

“By integrating engineering ‘intuition’ (or engineering ‘judgement’) into a rigorous yet computationally efficient topology optimization process, the human engineer is offered the possibility of guiding the creation of optimal structural configurations in a way that was not available to us before,” he adds. “Her findings have the potential to change the way engineers tackle ‘day-to-day’ design tasks.”

Reprinted with permission from MIT News ( http://news.mit.edu/ )