China’s economic activity probably faltered in October, with numbers that look good relative to last year seen masking a slowdown in activity headed into the final months of 2023.

That dynamic will be most evident in retail sales data, which is expected to show a 7% jump year-on-year as it compares to pandemic and lockdown-hit 2022. But economists see activity possibly slowing from September, as other indicators have shown consumer demand and confidence losing momentum. Growth in fixed-asset investment and industrial production, meanwhile, was likely flat.

That all adds up to softening momentum for the recovery, which authorities have already tried to support through unconventional fiscal stimulus that led to a rare mid-year revision to the government budget.

On the monetary policy side, the central bank’s options to help the economy are fairly limited given yuan weakness and pressures on capital outflows: Policymakers are expected to hold steady a key policy interest rate this week, though they may inject more cash into the financial system. They may also soon cut the amount of cash banks have to keep in reserve in a bid to keep liquidity ample.

China’s Consumer Spending Seen Rising on 2022 Comparisons

Industrial output growth likely flatlined in October as momentum weakened

Source: National Bureau of Statistics, Bloomberg

Note: No single month data for January. Jan.-Feb. data is combined by the NBS.

“The economy is stabilizing under the efforts from various policies, but economic data may still appear turbulent,” said Zhaopeng Xing, senior China strategist at Australia & New Zealand Banking Group Ltd. He said the base effects that are painting a better picture for the year-on-year data will likely boost those figures into January.

Earlier figures have already shown muted activity. Aside from weak manufacturing and export data, credit figures on Monday showed weak business and household borrowing, as well as a large contraction in shadow financing. US Treasury Secretary Janet Yellen said this week she discussed China’s growth slowdown with finance ministers from across the Pacific Rim as they met for the APEC summit in San Francisco, adding that they agreed the issue presented a “downside risk” to the region’s outlook.

Chinese Finance Minister Lan Fo’an, though, said at the ministers’ meeting that he expects the economy to maintain its momentum in the fourth quarter, according to a readout from his ministry.

The National Bureau of Statistics is expected to release October economic data Wednesday at 10 a.m. local time. Here’s what to watch:

Retail Sales

Retail sales are projected to have expanded 7% from October 2022, according to the Bloomberg survey — a notable pickup from the 5.5% year-on-year gain recorded in September.

That figure would be heavily skewed, though, by the comparison to last year. Covid outbreaks and lockdown measures led to a contraction in consumer spending in October 2022. This time around, an eight-day Golden Week holiday at the beginning of the month also likely helped the data as travel and spending surged.

That doesn’t necessarily mean consumption is on stable ground. Independent surveys and alternative data showed a slowdown in consumer demand for recreation and transport in October, along a drop in consumer sentiment. Official and private surveys have also suggested that grown in services activity was weak, while consumer prices dropped into deflation.

China’s Consumer Spending Seen Weakening in October

QuantCube indicator shows declines in recreation, transport demand

Source: QuantCube Technology

Note: Sectoral consumption leading indicator measures real-time year-over-year variation of consumption, computed over the last 30 days.

Goldman Sachs Group Inc. economists expect retail sales growth for October to imply a 0.5% drop in month-over-month annualized terms, adding in a recent research note that “growth appears to be hitting a soft patch.”

Industrial Production

Industrial output is estimated to have increased 4.5% in October from a year ago, a rate of expansion that would be unchanged from both September and August.

China’s factories have shown signs of trouble recently, with manufacturing activity unexpectedly contracting in official and private surveys. Exports also dropped more than expected in the month, suggesting that global demand for Chinese goods has struggled to gain traction.

“Judging from the disappointing October PMIs and soft export growth, we think October sequential activity growth likely slowed from September,” Goldman economists including Rina Jio wrote in a report.

Fixed-Asset Investment

Fixed-asset investment is forecast to have risen 3.1% in the first 10 months of the year from the same period in 2022. That would be flat with the growth rate from January through September.

A large chunk of the government bonds issued in the month was for refinancing “hidden debt” — or off-balance-sheet borrowing — held by local governments, rather than for financing new investment, according to the Goldman economists.

China’s Investment Expansion Pace Seen Little Changed

Real estate investment also projected to continue plunging in October

Source: National Bureau of Statistics, Bloomberg

Note: NBS only releases year-to-data figures for investment. No single month data for January.

Beijing at the end of October approved the issuance of an additional 1 trillion yuan ($137 billion) worth of sovereign bonds this year to fund projects geared toward disaster relief and climate. That will likely help investment in the coming months.

Policy Rate

The People’s Bank of China is expected to hold the rate on the medium-term lending facility at 2.5% on Wednesday, according to 12 of the 15 economists surveyed by Bloomberg. The rest see the central bank lowering the rate between five and 10 basis points.

The central bank is also projected to offer 950 billion yuan via the MLF, exceeding the 850 billion yuan maturing this month.

The PBOC is keeping monetary policy loose as it works to support growth, but its ability to cut rates has been restricted by external pressures. Lower rates would widen the gap between bond yields in China and the US, which has fueled capital outflows. China recorded the first drop on record in a measure of foreign direct investment in the third quarter, while the onshore yuan hit the weakest level since 2007 earlier this year.

“China is unlikely to cut the MLF rates as the yuan is still facing downward pressure amid expectations of ‘higher for longer’ US rates,” ING Groep NV economists including Robert Carnell wrote in a report published Thursday.

Money managers have more than quadrupled bearish bets on US oil in the past month as demand angst returns to markets.

Short-only positions rose by more than 20,000 contracts to 95,756 in the week ended Nov. 7, according to Commodity Futures Trading Commission data. Shorts are now the highest since July. At the same time, hedge funds slashed wagers on rising prices for the sixth straight week.

Sentiment has soured in recent weeks as a dimming global demand outlook and rising US supplies erased the risk premium from the Israel-Hamas war. US crude ended last week near July lows, before rebounding slightly Monday.

’Tis the Season…

So we’re not even halfway through November, and already the Christmas decorations are going up. It seems to happen earlier every year. The same is true of the season for major investment groups to publish massive outlook documents, crammed with research and predictions for the year ahead, even with six or seven weeks of 2023 to go.

At one level, this is silly. Viewing the world in calendar years can distort perception, and publishing this early means running massive event risk. My favorite example of that genre was the Economist’s “World in 1990” publication, which appeared in November. With reform sweeping the communist bloc, it rated that chances of change in what was still Czechoslovakia at 0 out of 10, and in Romania at -10 out of 10. Before 1990 had even started, the Velvet Revolution had swept the communists from power in Prague, while Romanian strongman Nicolae Ceausescu had been lined up against a wall and shot.

In the more mundane world of markets, there are well-known phenomena that cause prices to move as the year ends. Portfolio managers resort to “window dressing,” buying stocks that have been doing well to make their holdings look good. The need to manage capital gains taxes drives sales to maximize paper losses or limit gains. Some people dive to put money to work to take advantage of tax relief.

So, the whole exercise is a tad silly. However, like Christmas, it’s a seasonal ritual that serves a purpose. It’s good for analysts and researchers to escape the short-termism of weekly notes, step back, try to see a bigger picture, and work out dispassionately what their assumptions imply for the future. And a lot of the time, the year-ahead exercise allows them to publish niggling ideas that never quite find their way into the weekly download. Such ideas, if they’re right, are exactly the way to make money and beat the market.

So, in this spirit, here is a Points of Return look forward to the next main event for world markets, Tuesday’s publication of US consumer price inflation for October, in the context provided by the long-term outlook notes received so far.

Wait and CPI

When bonds have been so turbulent, there is always a chance that inflation numbers could cause a big move in one direction or another. But Bloomberg’s survey of economists’ predictions suggest that there is more consensus over the October numbers than there has been since the inflation survey got under way in earnest two years ago. All the estimates for core CPI (excluding food and fuel) are tightly bunched around an average that is exactly in line with the previous month. The good news is that economists are confident they have a handle on inflation now. The bad news is that they are not expecting the year-on-year rate to decline. If that turns out to be true, it would be the first time in a year that core CPI hasn’t fallen, at a level that remains too high for the Federal Reserve’s comfort:

Inflation’s Landing Path

Economists’ estimates are tightly grouped, and exclude a significant fall

Source: Bloomberg

In such circumstances, it doesn’t take much to move the market needle. If core does drop below 4%, we can expect another relief fall in bond yields, and more oomph for an end-of-year rally in stocks (which will automatically make predictions that have already been published for the S&P at the end of next year look more pessimistic). A significant rise would come as a big surprise, and it would create a mess — but that’s in large part because it seems very unlikely.

The critical component of inflation that will grab attention, and could create a reaction even if the overall numbers are in line with expectations, is the Fed’s favored “supercore” measure, its label for services inflation excluding shelter costs. This is a growing part of our expenditures, and it is particularly dependent on labor costs, which are a big part of service companies’ budgets.

There are good arguments about whether supercore should matter that much to the central bank, but it appears to be a fact that it does. Thus the fact that it jumped to its highest monthly increase of 2023 in September caused concern among investors. If October’s number confirms that it wasn’t a fluke, then that could do considerable damage to confidence that rate hikes are over, and certainly the belief that cuts will come soon. Also, the month-on-month rise in core CPI rose in both August and September; it would be an unpleasant surprise if that were to happen again.

Of Core and Supercore

Will the rise in non-shelter services inflation continue?

Source: Bloomberg

As for the underlying drivers of inflation, there’s an ongoing debate over whether expectations are central to pushing prices higher, by changing companies’ and consumers’ behavior, or incidental. There are plenty at the Fed who think they matter. The New York Fed’s own measure of consumer forecasts is due Monday, but the University of Michigan’s regular survey suggested a worrying development, with expectations for the period from five to 10 years from now reaching 3.2%. That’s above the Fed upper limit of 3%, and it’s the highest since the oil spike that preceded the Global Financial Crisis in the summer of 2008:

Well-Anchored?

Consumers’ medium-term inflation forecasts are moving upwards

Source: Bloomberg

The chart also shows the bond market’s version of the same forecast, known as the five year-five year breakeven. This has been relatively calm throughout the last few years, and it remains below 3% — but again, it’s tended to shift upward noticeably in the last few months.

How High Are Rates Really?

Broadening focus now, the global monetary authorities are still widely dispersed in the action they’ve taken. The following chart, from HSBC, shows a crude measure of real rates for each country, by subtracting the headline inflation rate from the official target policy. It’s startling how many still have negative real rates, and that the greatest rigor has been shown by Mexico, Brazil and Russia, none of them thought of as founts of monetary orthodoxy:

Is this the best way to measure real interest rates? Probably not. But it’s hard to find anything clearly better. In Morgan Stanley’s economic outlook for 2024, penned by Seth Carpenter and his team, we get a track of the fed funds rate after substituting the breakeven rate, and Michigan survey rates that were prevalent at the time, as well as an “ex post” measure that subtracts actual inflation. They’re all over the place, particularly so during the difficult months when the Fed was steadily raising rates:

If there is uncertainty about such basic building blocks of monetary policy, that’s because inflation hits different people differently. Carpenter says:

Although central banks refer to real interest rates all the time, the ability to measure real rates is limited and subject to uncertainty measured in percentage points [not basis points]. Consequently, policy will always have a backward-looking, data-dependent component as the effect of the stance of policy on the real economy is revealed over time.

Or in other words, don’t take anything for granted. The fog of the war on inflation hasn’t cleared.

Hard Labor

Then there is the issue of labor, for which a wide focus is very useful. Michael Hartnett of Bank of America Corp. has just published his annual “The Longest Pictures” chartbook, which aims to get us ready for 2024 by looking at current trends through a very long focus. And one key point is that the balance between labor and capital looks as though it’s turning, even though public support for unions in the US, and the share that wages take of the economy, have dipped back again since the pandemic shutdowns pushed them higher.

As it stands, unions are about as popular as they’ve been at any time in 50 years, and yet wages remain a lower share of the economy than they were then. It’s probably wise to assume that this number will increase (meaning more social harmony, though after industrial disruptions have run their course, but also more inflation):

With Hollywood actors the latest union to win a big victory over employers, it looks reasonable to expect labor to continue gaining strength. If it doesn’t get back to the power enjoyed in 1970, organized labor might still be able to scramble back to the kind of influence it had at the outset of Ronald Reagan’s presidency. That would certainly imply a need to get used to higher typical inflation rates, ideally with falling inequality.

Hartnett goes from this to suggest that the big trade is to buy what he calls “inflation assets,” while getting out of assets that benefit from deflation. The latter have had things all their own way with few interruptions since the early 1980s. Now, he says, it’s time for: commodities, real estate, inflation-linked bonds, US banks, value stocks, and cash:

He is not, presumably, suggesting that this will happen in a straight line, because markets and economies don’t work like that. But it seems a robust assumption. It gets further backing from the following piece of financial archaeology, which compares real assets to financial assets going back to 1925. Real assets are enjoying the beginning of a rally after falling to their worst relative low since the series started. There was another similar rise for real assets that started in the late 1990s, but it was snuffed out by the GFC:

If you think that a suggestive chart isn’t quite sufficient basis to bet on an economic sea change, BofA offers the following rationale:

Real assets are scarce, cheap (relative to financial assets close to 100-year lows), under-owned, a hedge against inflation, and diversify portfolios. All individual real assets are positively correlated with inflation since 1950… diamonds, US farmland and gold have the highest correlation between change in the price and the US CPI inflation rate

That argument should stay intact whatever we learn about US inflation on Tuesday.

Contrarian Forecasts

Two brief points to emerge. First, there’s quite a consensus that the US will manage to execute an economic “soft landing,” or in other words avoid a recession. The history on the aviation analogy doesn’t go back all that far, but the following beautiful piece of data-mining by Jeffrey Schulze, strategist at ClearBridge Investments, suggests that we shouldn’t find this too comforting.

Digging through company documents and filings going back to 1995, we find that mentions of a soft landing have spiked like this twice before — and on both occasions were followed by a recession. Covid might have scrambled perceptions, as this was one of the very rare examples of a true external shock forcing the world into recession almost instantaneously. Usually, recessions come on more gradually than that, and appear to be on course for a soft landing before hitting the ground hard:

If we get away without a recession, it’s going to be quite something. Meanwhile, it’s also a popular call that stocks, particularly the “Magnificent Seven” internet platforms that are dominating returns, will have a tough time. That’s reasonable, and stocks can go downward or sideways for a long time. In the very long term, they go up. This is how US large-cap stocks have performed over the last 200 years, on a log scale:

It’s too lazy just to rely on the long run to bail you out, and there is a need to look beyond stocks. But the weight of history does show that it’s very risky indeed to be out of stocks altogether. I often wonder whether we should have a health warning at the end of each newsletter. WARNING: YOU SHOULD BE IN THE STOCK MARKET MOST OF THE TIME; IT’S RISKY TO BE OUT OF IT.

Humanity largely agrees climate change is an existential threat to civilization. You can bet global leaders will harrumph as much again at the big United Nations climate confab in Dubai this winter. At the same time, these leaders also lavish roughly four times more on the fossil fuels heating the planet than they spend fighting the existential threat. Maybe our priorities are just a bit skewed?

Global investment in climate-related projects averaged nearly $1.3 trillion a year in 2021 and 2022, the nonprofit advisory group Climate Policy Initiative estimated recently, almost double the rate of such spending in 2019 and 2020.1Unfortunately, that’s about the extent of the happy takeaways from CPI’s report. (Full disclosure: CPI is partially funded by Bloomberg Philanthropies.)

Doubling Down

Global climate financing has accelerated in recent years. As impressive as $1.3 trillion might sound, it’s still far from the $8.6 trillion CPI estimates will be necessary every year between now and 2030, ramping up to $10 trillion annually through 2050, if we’re to limit global heating to 1.5C above pre-industrial averages and cope with the climate chaos already taking place. That’s a goal world leaders have set, and it’s our best hope of limiting the destruction and misery further heating will cause.

Unfortunately, though we’ve spent 2023 suffering from one climate-fueled disaster after another amid the hottest 12 months in recorded human history, we’re still not treating this as the emergency it is. Climate financing might climb to $1.8 trillion this year, the International Energy Agency estimates. That’s still not enough. Adjusted for inflation, it’s almost unchanged. It’s little more than 1% of global GDP.

When $1 Trillion Seems Tiny in Comparison

Global climate finance has roughly doubled in recent years, but still lags other public spending and is far from what is needed to limit global heating to 1.5C.

In contrast, the world’s governments lavished $7 trillion in implied and explicit subsidies on the fossil-fuel industry in 2022 alone, CPI notes, citing a recent International Monetary Fund study. They devoted $2.2 trillion to military spending that year. In another crisis, the Covid-19 pandemic, governments had little problem helicoptering $11.7 trillion to their citizens to keep them solvent.

Of course, maintaining that level of emergency spending year after year, for decades, is a far tougher political lift when hospitals aren’t overflowing and economies aren’t cratering. CPI estimates we’ll need to invest $266 trillion between now and 2050 to limit and adapt to climate change. That’s not too far from a $200 trillion estimate by Bloomberg NEF, Bloomberg’s clean-energy research team, or a $275 trillion estimate by the consulting firm McKinsey.

Such numbers are so huge they test the brain’s ability to process them. “Eleventy gazillion” sounds almost as believable. But they are pennies compared with the damage that will accumulate if we don’t make these investments. That could amount to $2.3 quadrillion by the end of the century, CPI points out, citing an estimate by the nonprofit group Central Banks and Supervisors Network for Greening the Financial System (another group partially funded by Bloomberg Philanthropies).

Investing Trillions to Save a Quadrillion

Climate change could cost the global economy quadrillions of dollars by the end of the century, making today’s climate spending a solid investment.Source: Climate Policy Initiative

And those quadrillions would just be the direct economic damage of such tangible climate effects as floods, wildfires, droughts, hurricanes, productivity loss and illnesses. They don’t include the destruction wrought by wars, forced migration or biodiversity loss. Hospitals filling and economies cratering could become routine events. Already people are having fewer children because of such worries, according to a new University College London study. Those are millions of workers and consumers who will never be born.

Still, this is not the time to despair about disappointing levels of climate investment but to crow early and often about the economic, social and humanitarian benefits more such investment will bring. The good news is that not all of the investment necessary to fend off a grim future has to be public. High interest rates and inflation have punished the capital-intensive renewable energy sector recently. That has led to selloffs in clean-energy stocks and probably scared away some private investors. But the US government will keep luring those dollars back with legislated incentives. China, the world’s biggest carbon polluter, is also the world’s biggest clean-energy investor.

Though wind and solar power, electric cars, heat pumps and the like have been around a long time, this is still a sector in an awkward adolescence. Such industries tend to travel along an S-shaped curve, meaning they start slowly but enjoy drastic leaps in growth, Sam Butler-Sloss and Kingsmill Bond of the nonprofit advocacy group RMI wrote recently. And it’s a good thing; with flowers blooming in Antarctica and ocean temperatures six standard deviations hotter than the norm, that growth needs to be exponential.

Morgan Stanley economists forecast the Federal Reserve to make deep interest-rate cuts over the next two years as inflation cools, while Goldman Sachs Group Inc. analysts expect fewer reductions and a later start.

The central bank will start cutting rates in June 2024, then again in September and every meeting from the fourth quarter onward, each in 25-basis point increments, Morgan Stanley researchers led by chief US economist Ellen Zentner said in their 2024 outlook on Sunday. That’ll take the policy rate down to 2.375% by the end of 2025, they said.

Goldman Sachs, meanwhile, sees the first 25-basis-point reduction in the fourth quarter of 2024, followed by one cut per quarter through mid-2026 — a total of 175 basis points, with rates settling at a 3.5%-3.75% target range. That’s according to a 2024 outlook from economist David Mericle, also published Sunday.

The Goldman Sachs forecasts are closer to the central bank’s. Fed projections from September show two quarter-point cuts penciled in for next year and the policy rate ending 2025 at 3.9%, according to the median estimates of policymakers. Fed governors and regional bank presidents will update their forecasts at next month’s meeting.

Morgan Stanley’s team sees a weaker economy that warrants a greater magnitude of easing, though no recession. They expect unemployment to peak at 4.3% in 2025, compared with the Fed’s 4.1% estimate. Growth and inflation will be slower than officials anticipate, too.

Metric Morgan Stanley Goldman Sachs Federal Reserve
Federal funds rate 2.375% 4.0%-4.25% 3.9%
Unemployment rate 4.3% 3.6% 4.1%
Change in real GDP 1.4% 1.9% 1.8%
Core PCE inflation 2.1% 2.2% 2.3%

“High rates for longer cause a persistent drag, more than offsetting the fiscal impulse and bringing growth sustainably below potential from 3Q24,” Zentner’s group said in their report. “We maintain our view that the Fed will achieve a soft landing, but weakening growth will keep recession fears alive.”

The US should avert a downturn as employers hold onto workers, even though hiring will slow, Morgan Stanley said. That will weigh on disposable income and therefore spending, they said.

The team also expects the central bank to start phasing out quantitative tightening next September until it ends in early 2025. They see the Fed reducing the runoff caps on Treasuries by $10 billion per month and continuing to reinvest mortgages into Treasuries.

Goldman Sachs expects the Fed to keep rates relatively high because of a higher equilibrium rate, as “post-financial crisis headwinds are behind us” and bigger budget deficits are likely to persist and boost demand.

“Our forecast could be thought of as a compromise between Fed officials who see little reason to keep the funds rate high once the inflation problem is solved and those who see little reason to stimulate an already-strong economy,” Goldman’s Mericle wrote.

A new complex maneuver that can help rescue companies in financial trouble is likely to gain steam as firms grapple with maturity walls and weaker earnings, according to Barclays Plc strategists.

The move, known as a “double-dip,” helps struggling firms raise cash by issuing debt out of an empty subsidiary, having the parent company guarantee that debt, and sending the proceeds from the debt deal back to the parent company via an inter-company loan, which then becomes another form of collateral for the obligation.

Struggling companies including chemical company Trinseo Plc, software maker Sabre Corp., and retailer At Home Group Inc., have deployed the strategy to raise money this year, opening the door for other companies to follow suit even though the deals haven’t yet been tested in court, strategists led by Bradley Rogoff wrote in a note Wednesday.

The strategists identified several companies that have potential to use double-dip financing if needed. Office supplies retailer Staples Inc. is one of them, and the strategists don’t see the company in a position to grow into or cut its debt load. Staples has $7.6 billion of debt outstanding, with its 7.5% notes due 2026 trading in the low 80s, according to Trace.

Mauser Packaging Solutions also has hefty obligations to address, with $3.5 billion of secured debt due by 2026. The company’s covenants are lenient enough to pull off a double-dip if needed, they wrote.

Representatives for Staples and Mauser didn’t immediately respond to requests for comment.

Creative and sometimes-controversial financing maneuvers have grown more common in recent years as rising interest rates have sent a new batch of companies into financial distress. Many of the companies have permissive debt documents that allow them leeway to take on new financing in an effort to stay afloat.

Double-dips can improve creditors’ prospects for recovery in a default by giving them more or different claims on a company’s assets, the strategists wrote. The maneuver differs from transactions like priming — which pushes existing creditors back in line for repayment — by allowing the existing creditors to participate in the deal. And unlike drop-down financings, where a company moves assets out of reach of some creditors, no assets are transferred.

The strategists noted that while “all credit documents have their idiosyncrasies,” a company generally needs to be permitted to incur additional secured debt, guarantee the new debt and take on an inter-company loan to pursue the double-dip strategy.

UBS Group AG posted its first quarterly loss in almost six years, as the ongoing integration of Credit Suisse drags on the Swiss lender’s performance.

The Zurich-based bank said it had a net loss of $785 million for the three months to September. The key wealth management unit saw pre-tax profit of $1.01 billion, lower than estimates.

UBS Chief Executive Officer Sergio Ermotti is seeking to chart a path through the biggest merger in finance in decades, cutting more than $10 billion in costs and readying the combined bank for a strategic revamp due to be announced in February. The bank’s shares have gained by about a third this year as investors back Ermotti’s plan to integrate Credit Suisse’s profitable businesses while winding down the rest.

Black Americans are twice as likely as their White counterparts to develop multiple myeloma, but their participation rate in clinical trials of treatments for the bone marrow cancer is a dismal 4.8%. Now drug giant Johnson & Johnson says it’s had success increasing that share by using an untraditional tool: artificial intelligence.

Algorithms helped J&J pinpoint community centers where Black patients with this cancer might seek treatment. That information helped lift the Black enrollment rate in five ongoing studies to about 10%, the company says. Prominent academic centers or clinics that have traditionally done trials are often not easily accessible by minority or low-income patients because of distance or cost.

J&J is now using AI to increase diversity in 50 trials and plans to take that number to 100 next year, says Najat Khan, chief data science officer of its pharmaceutical unit. One skin disease study that used cellphone snapshots and e-consent forms to enable patients to participate in the trial remotely managed to raise enrollment of people of color to about 50%, she says.

Johnson & Johnson headquarters in Brunswick, New Jersey
Johnson & Johnson headquarters in New Brunswick, New Jersey.Photographer: Mark Kauzlarich/Bloomberg

“You have claims data, connected to electronic health records data, connected to lab tests, and all of that de-identified and anonymized,” Khan says. “The machine-learning algorithm computes and creates a heat map for you as to where the patients eligible for that trial are.”

In recent decades, evidence has been growing that medicines don’t affect all people the same way. And the Covid-19 pandemic highlighted deep ethnic disparities in access to health care. In response, regulators and advocacy groups have been pressuring drugmakers around the world to include underrepresented racial and ethnic groups in new treatment trials, not only to improve biomedical knowledge but also to build trust in medical systems among minority groups. Many companies are turning to AI for help.

The industry could certainly use some. A recent analysis in the journal Health Affairs found that fewer than 20% of drugs approved in 2020 had data on treatment benefits or side effects for Black patients. Financially and socially, the lack of diversity in trials will cost the US “billions of dollars” over the next three decades, according to a 2022 report by the National Academies of Sciences, Engineering and Medicine, which pointed to factors such as premature deaths and a lack of effective medical intervention. The report also said trials that aren’t inclusive hinder innovation, fail because of low enrollment rates, undermine trust and worsen health disparities.

Regulators increasingly want drugmakers to consider such disparities when vetting new treatments. In 2014 the European Medicines Agency introduced guidance requiring drugmakers drugmakers to justify nonrepresentative clinical trials. Australia’s Therapeutic Goods Administration’s 2022 guidelines say drug study populations should represent the makeup of the broad population. And the US will soon require diversity action plans for clinical trials submitted to the Food and Drug Administration, a provision that was included in the 2023 government spending bill enacted in December.

Clinical trials are hard to run because they involve coordinating with multiple parties: patients, hospitals and contract research companies. So pharma companies have often simply relied on well-established academic medical centers, where populations may not be as diverse. But computer algorithms can help researchers quickly review vast troves of data on past medical studies, search through zillions of patient medical records from around the world and quickly assess the distribution of disease in a population. That data can help drugmakers find new networks of doctors and clinics with access to more diverse patients who fit into their clinical trials more easily—sometimes months faster and much more cheaply than if humans were reviewing the data.

“They [pharmaceutical companies] have to ask physicians to think about a patient when they see them and then think about ethnicity and race—it’s just making a difficult task even more difficult,” says Wout Brusselaers, founder of Deep 6 AI, a startup that sells AI-powered software that matches patients and trials.

AI poses new challenges for drugmakers, though, because the technology carries the risk of making things worse than they already are by introducing what’s known as algorithmic bias.

In 2019, for instance, academics said they uncovered unintentional racial bias in one software product sold by Optum Inc., a major health services company, which health centers across the country used to predict which patients needed high-risk care. The algorithm based its predictions on patients’ health-care spending, rather than the severity or the needs of their illness. Only 18% of Black patients ended up getting additional help, rather than the 47% who needed it, according to a study of the algorithm’s effects at one institution that was published in the journal Science. Its authors say that skew is typical of risk prediction tools that medical centers and government agencies use to service 200 million people nationwide, and that such bias likely operates in other software as well.

Optum, a unit of UnitedHealth Group Inc., says the rules-based algorithm is not racially biased. “The study in question mischaracterized a cost prediction algorithm used in a clinical analytics tool based on one health system’s incorrect use of it, which was inconsistent with any recommended use of the tool,” the company said in a response to questions.

The FDA is considering drafting recommendations for companies that are submitting AI applications for drug development to ensure their models don’t inadvertently discriminate against underserved patients.

“Additional regulatory clarity may be needed in the future, especially as we see the emergence of new AI technologies,” says Tala Fakhouri, associate director for policy analysis at the FDA. Such regulatory clarity would “take into consideration algorithmic bias.”

Some critics point out other problems. Running trials remotely or providing transportation or parking vouchers for participants would draw more minorities into trials than using AI, says Otis Brawley, a professor of oncology at Johns Hopkins University. Black populations in the US are disproportionately poor, and the hospitals looking after them often don’t have the bandwidth for extra projects such as clinical trials, he says.

“AI could do that, but I could do it, too, as long as I were allowed to pay for people’s parking—as long as I did it in resourced wealthy places,” says Brawley, who previously worked at Grady Memorial Hospital in Atlanta, where, he says, he didn’t have resources to run clinical trials. Even at Johns Hopkins, he loses minorities more so than Whites because of parking costs, he says.

Walgreens Boots Alliance Inc.—which began running clinical trials for drugmakers in 2022—has a different approach to encouraging equity in studies. It uses AI tools to locate eligible patients from diverse groups quickly, but it relies on local pharmacists at its almost 9,000 stores across the US to recruit individuals from underrepresented groups, says Ramita Tandon, who heads the clinical trial business at the pharmacy chain. “We have posters, flyers,” with information about trials, she says, or simply “pharmacists that are having the dialogue with the patients when they pick up their scripts.”

Walgreens store in Brooklyn, New York
A Walgreens store in Brooklyn, New York.Photographer: Stephanie Keith/Bloomberg

This method helped improve participation of Black patients in one cardiovascular study to 15%, Tandon says, a number that exceeds the percentage of Black people in the general population. The new FDA diversity requirements have generated lots of interest from large pharmaceutical companies in Walgreens’ clinical trials business, she says.

Elsewhere, the use of AI is going well beyond race and ethnicity. Japan’s Takeda Pharmaceutical Co. uses AI to help attract and retain diverse populations in its clinical trials, says Andrew Plump, the drugmaker’s head of research and development. AI has helped the company personalize complicated letters of consent to patients in minority groups such as in the LGBTQ community. Technology can adjust wording to correspond to how people identify themselves by gender and sexual orientation, which engenders greater trust in the process, he says.

New York-based H1, which uses generative AI to help match drugmakers with trial sites, says it’s working to remove bias from the data it collects. For example, its data on race and ethnicity can be derived from credit card and bank statements, which means it might not be capturing people who are less well off financially, says Ariel Katz, H1’s chief executive officer.

“We are doing a lot of work to make sure that we feel like our data sets are comprehensive, not biased, but there’s more work to do there,” he says.

J&J now has an AI ethics council, which includes input from academics, and it’s monitoring trials to remove data bias while increasing representation, Khan says. “We always have a human in the loop,” she says. “My team probably spends 60% or 70% of the time on this aspect versus anything else, which is making sure data is fit for purpose and appropriate and representative, and if not, procuring other data sets to make it more representative.”

Berkshire Hathaway Inc.’s cash pile scaled a fresh record at $157.2 billion, bolstered both by elevated interest rates and a dearth of meaningful deals where billionaire investor Warren Buffett could put his money to work.

The hoard — which Berkshire has largely parked in short-term Treasuries — surpassed the previous high set two years ago, the Omaha, Nebraska-based firm said on Saturday. The conglomerate also reported operating earnings of $10.76 billion, a jump on the prior year, as it benefited from the impact of elevated interest rates on the cash pile and gains at its insurance businesses.

Despite ramping up Berkshire’s acquisition machine in recent years, the company has still struggled to find many of the big-ticket deals that galvanized Buffett’s renown, leaving him with more cash than he and his investing deputies could quickly deploy. After hanging back during the pandemic, he’s since snapped up shares in Occidental Petroleum Corp. and struck a $11.6 billion deal to buy Alleghany Corp. Buffett has also leaned heavily on share repurchases amid the dearth of appealing alternatives, saying the measures benefit shareholders.

“Cash deployment is definitely slowing,” said Jim Shanahan, an analyst with Edward Jones. “Ultimately Berkshire’s going to start feeling some pressure to put cash to work.”

The deal drought hasn’t damped investor enthusiasm for the company. Its Class B shares crested a record high in September as investors sought out its diversified range of businesses as a hedge against deteriorating economic conditions. And while the shares pared some of those gains, the stock is still up almost 14% for the full year.

The firm also spent $1.1 billion on buybacks in the period, bringing the total for the first nine months of the year to about $7 billion. The conglomerate trimmed its overall equities portfolio in the quarter, making almost $15.7 billion on sales net of purchases.

Including investment and derivatives losses, Berkshire posted a loss for the quarter of almost $12.8 billion — wider than the year prior — primarily due to losses on its equities portfolio. Berkshire often recommends that investors look past investment gains or losses, which are tied to accounting rules, saying that can be misleading to investors.

Operating Units

The company operates and invests in all corners of the US economy, owning businesses including Geico, BNSF, Dairy Queen and See’s Candies, meaning investors view the company as a window into broader economic health.

Strength in the insurance unit — plus the inclusion of Pilot Flying J earnings which Berkshire did not include in results last year — helped drive profitability. Berkshire said its insurance businesses posted a profit of $2.42 billion versus a loss in the prior-year period, when the insurance industry was being pummeled by catastrophes.

The company’s Geico unit, which had struggled with unprofitability throughout 2022, also posted a profit compared to the same period a year ago, as it curtailed advertising expenses by 54% year-to-date. The improvement follows efforts by the division to overhaul underwriting after struggling with higher costs for replacing or repairing damaged vehicles. The effort cost it market share — raising the question if it will seek to reclaim that ground.

What Bloomberg Intelligence Says:

“Berkshire Hathaway’s results again demonstrated diversity of earnings power, boding well in uncertain macroeconomic conditions. Operating-company earnings of almost $10 billion were better than our core scenario as a rebound in Insurance, including favorable reserve trends and higher investment income, offset declining railroad earnings and energy litigation costs.”

Matthew Palazola, BI senior industry analyst, and Eric Bedell, BI associate analyst

Berkshire posted stronger operating earnings despite Buffett cautioning at its annual meeting in Omaha in May that earnings at the majority of its operating units could fall this year as an “incredible period” for the US economy draws to the end. Still, the Federal Reserve’s aggressive pace of rate hikes has helped the firm reap greater yield on the cash it stockpiles primarily in short-dated US Treasuries.

At the same time, those higher rates created headaches for some of Berkshire’s industrial businesses. The conglomerate’s building products businesses saw revenue slip 11% due to the run-up in mortgage rates.

“The effects of significant increases in home mortgage interest rates in the US over the past year has slowed demand for our home building businesses and our other building products businesses,” Berkshire said in a report detailing results. “We continue to anticipate certain of our businesses will experience weakening demand and declines in revenues and earnings into 2024.”

Inflation weighed on other segments of the conglomerate. Profit at BNSF, its railroad operations, fell 15% amid lower freight volumes and higher non-fuel operating costs.

If the oil market offers clues about the state of the economy, it’s through the prism of two petroleum products: diesel and naphtha. And in Europe, the news is bleak.

The former powers trucks, trains, ships and industries including farming and construction. The latter is used by the petrochemical sector to make everything from medical equipment to chewing gum. OECD Europe’s annual consumption of both is set to plunge this year, with naphtha hitting its lowest since 1975.

Europe’s weak economic growth has hit the manufacturing sector hard,” said Alan Gelder, vice president of refining, chemicals and oil markets at consultancy Wood Mackenzie Ltd. That’s reduced “demand for naphtha as a petrochemical feedstock and diesel for the manufacturing and movement of goods.”

The continent’s demand is still critically important even in a world where traders are intently focused on the potential for supply disruptions emanating from war in the Middle East. The expected consumption drop in the two fuel types this year is well over half a million barrels-a-day versus pre-pandemic levels — not far off a Belgium’s worth of overall oil usage.

As a major importer of diesel-type fuel from the Middle East, India and the US, and a regular exporter of naphtha to East Asia and Latin America, any significant drop in Europe’s usage is likely to have knock-on effects for economies and oil markets around the world.

Gasoil demand includes road diesel, heating oil and other non-road gasoil. The vast majority of naphtha demand is for use as a petrochemical feedstock; naphtha for gasoline blending not included in this data. Figures are for OECD Europe and are in million barrels a day.

Part of this year’s demand decline is due to long-term, structural trends. Buyers in the European Union have long been favoring gasoline-powered options over diesel, and electric car sales have also hit consumption.

But Europe’s economic malaise is a big factor too. Purchasing managers’ index data show ongoing contractions in the euro zone’s construction and manufacturing, while inflation remains above target. Germany’s economy, the European Union’s largest, shrank last quarter and is at risk of entering recession.

The numbers on naphtha are stark: consumption is set to fall more than a quarter this year versus 2021 to 844,000 barrels-a-day, the lowest it’s been in 48 years, according to Ciaran Healy, an oil market analyst at the International Energy Agency. While naphtha is also used in blending to make gasoline, the watchdog’s consumption measurement doesn’t include this uptake — instead, the vast majority is for use as a petrochemical feedstock.

Run rates at petrochemical steam crackers — huge units that convert naphtha and other feedstock into the industry’s basic chemical building blocks — have plunged, according to data from Argus Media Ltd. Producer OMV AG on Tuesday also dropped its forecast for European steam cracker utilization.

Petrochemical giant BASF SE meanwhile attributed slower European chemical production to “lower demand resulting from high inflation, increased interest rates, and a renewed rise in natural gas prices” on Tuesday.

Diesel Downtrend

In the continent’s top five economies — Germany, France, the UK, Italy and Spain — recent data all show contractions in demand for diesel-type fuel.

French road diesel sales fell by 13.4% versus a year earlier in September. In Germany, overall oil demand is expected to drop by about 90,000 barrels-a-day this year, more than any other country in the world — bar Pakistan.

Overall, OECD Europe’s diesel-type fuel demand is set to be down by about 380,000 barrels-a-day this year versus the 2019 pre-pandemic level, according to the IEA.

Mixed Picture

The global picture is more mixed. In China, demand is booming despite the travails of its property sector: during January-August of this year, diesel-type fuel was up by 40% versus the same period in 2019 and naphtha consumption has more than doubled in the corresponding period, according to JODI data.

China has seen massive investment in petrochemical capacity. A jump in production has pushed many of the industry’s products — such as ethylene, propylene and aromatics into oversupply — even as they’ve boosted the country’s attractiveness as a manufacturing hub, said Amber Liu, Asia head of petrochemical analytics for ICIS.

“China has some of the most efficient supply chains — after the petrochemicals expansions — so the prices of China’s finished products are extremely competitive compared to other countries,” said Liu.

In the US, implied demand for distillates — which include diesel and heating oil — has fallen below seasonal norms in the past few weeks.

Going forward, the nation’s distillates demand is expected to stay below that of year-ago levels in the fourth quarter before picking up early next year, according to government forecasts.

Still, the trucking industry is showing signs of nascent recovery, and rail freight is rising as well, analysts at JPMorgan said.

Naphtha is typically used to make gasoline in the US while cheaper natural gas liquids — a byproduct of drilling shale oil — have become the preferred feedstock for petrochemicals.

For Europe, “the outlook for 2024 remains weak for both products,” Gelder said.