Human history is replete with class oppression. In an unequal society the natural tendency is for those of superior wealth or power to maintain supremacy. This often requires some form of oppression.

Persuasion is greater than force. Efficient oppression involves convincing the oppressed that they are not oppressed or that their wealth and welfare are improving. Less efficient oppression is more overt and involves the use of force or law or artificial legitimacy, but is all ultimately backed by force.

The efficient oppressor addresses the welfare of the oppressed, aiming and working to continually improve welfare and standards of living, at least in absolute terms. The aim of oppression is to maintain relative supremacy and therefore it is necessary to ensure that the rates of growth experienced by the oppressed pale in comparison to the rates of growth of the oppressors. However, it is important to at least maintain a positive growth rate for the oppressed. 

When average growth rates are insufficiently high and rates of growth for the oppressed fall to negative levels, the risk of revolt rises. Moderately or temporary re-distributive policies can maintain the status quo which is preferable to regime change.

In the face of slow growth and high inequality, reluctance to adopt some re-distributive relief policies can lead to revolt and regression to oppression by force. This is inefficient.

The last decade is characterized precisely by slow growth and high inequality, conditions conducive to spontaneous revolt. Incidences of passive aggressive revolt and outright revolt have been rising. The ostensible catalysts appear unrelated, petrol taxes in France, extradition laws in Hong Kong, separatists in Catalunya, isolationism in the US and the rise of populists in Europe. The common thread is disenchantment with the status quo and the desire for any kind of change.

The enemy without has often been a convenient distraction for the enemy within. Could it be that the absence of an enemy without, a nemesis, has created a vacuum inducing an enemy within? Could the demise of communism have allowed capitalism to outgrow itself and transform the efficient oppressor into an inefficient one? Might capitalism balanced with communism have had to maintain some limits or moderation and avoided the extreme conditions that have emerged? Given current conditions, what can be done to prevent escalation?

Something to slow down the informational transmission of a society to increase informational efficiency. Since each node has an optimal rate of processing information, a network that transmits information too quickly is not efficient. Fools serve a useful purpose and should be valued.

The entire process of moving a drug from design to clinical trials takes 10 to 12 years on average.

Preclinical studies

Deciding whether a drug is ready for clinical trials (the so-called move from bench to bedside) involves extensive preclinical studies that yield preliminary efficacy, toxicity, pharmacokinetic and safety information. Wide doses of the drug are tested using in vitro (test tube or cell culture) and in vivo (animal) experiments, and it is also possible to perform in silico profiling using computer models of the drug–target interactions. As in clinical trials, there are certain types of trials that have to be done, such as toxicology studies in most cases, and other trials that are specific to the particular study compound or question.

Phase 0 clinical trial

Phase 0 involves exploratory, first-in-human (FIH) trials that are run according to FDA guidelines. Also called human microdose studies, they have single sub-therapeutic doses given to 10 to 15 subjects and yield pharmacokinetic data or help with imaging specific targets without introducing pharmacological effects. Pharmaceutical companies perform Phase 0 studies to decide which of their drug candidates has the best pharmacokinetic parameters in humans.

Phase I

Phase I trials are the first tests of a drug with a small number of healthy human subjects. Patients are generally only used if the mechanism of action of a drug indicates that it will not be tolerated in healthy people. They are primarily designed to assess the safety and tolerability of a drug, but the pharmacokinetics and, if possible, the pharmacodynamics are also measured. The typical Phase I trial has a single ascending dose (SAD) design, meaning that subjects are dosed in small groups called cohorts. Each member of a cohort might receive a single dose of the study drug or a placebo. A very low dose is used for the first cohort. The dose is then escalated in the next cohort if safety and tolerability allow. Dose escalation is stopped when maximum tolerability and/or maximum exposure is reached. SAD studies are usually followed by multiple ascending dose (MAD) studies, which have a very similar design, with cohorts and escalating doses. The only difference is that the subjects receive multiple doses of the study drug or placebo. While safety and tolerability are still important endpoints, the multiple dose setting often allows first investigations of the pharmacodynamic effects in addition to the pharmacokinetics. Depending on the risk potential and the safety and tolerability revealed by the SAD study, many MAD studies may already involve patients rather than healthy individuals. That said, it is important to enrol a relatively healthy patient population with as few complications and concomitant diseases as possible.

Phase II

Phase II trials are performed on larger groups of patients and are designed to assess the efficacy of the drug and to continue the Phase I safety assessments. Most importantly, Phase II clinical studies help to establish therapeutic doses for the large-scale Phase III studies.
Phase II studies are sometimes divided into Phases IIA and IIB. Phase IIA is designed to assess dosing requirements whereas Phase IIB focuses on drug efficacy. The exact design of Phase II studies depends heavily on the compound’s mechanism of action. A proof-of-concept study should be included in Phase II if it has not already been done during the MAD-study in Phase I. In addition, a treatment study with several different doses of the compound in comparison with a placebo and/or an active comparator over a treatment duration of 12 to 16 weeks is usually an essential part of the Phase II program.

Phase III

Phase III trials are randomized controlled multicentre trials and provide most of the long-term safety data. Phase III trials investigate the efficacy and safety of a new drug over 6 to 12 months or longer in a large patient population (several hundred patients or more) under conditions that reflect daily clinical life much more closely than the Phase I or II trials and allow evaluation of the overall benefit-risk relationship of the drug. These trials are usually conducted on an outpatient basis with no in-house days and include an active comparator, at least in the case of metabolic diseases, because exposing patients to several months of placebo treatment would not generally be ethical. Because of their size and comparatively long duration, Phase III trials are the most expensive, time-consuming and difficult trials to design and run, especially in therapies for chronic medical conditions. Therefore, drugs that do not show promising results in Phase II are often not pursued in phase III. In fact, only 25-30 % of drugs in Phase II proceed to Phase III. Phase IIIA studies are used for the approval of the drug from the appropriate regulatory agencies (known as Pivotal study). The results of these studies are included in the submission package to regulatory authorities. Between submission and approval, Phase IIIB studies are often performed to obtain additional safety data or to support publication, marketing claims (label extension) or to prepare launch for the drug.
Most drugs undergoing Phase III clinical trials can be marketed under FDA norms with proper recommendations and guidelines through a New Drug Application (NDA) containing all manufacturing, pre-clinical, and clinical data.
Drug-drug intervention (DDI) studies may be part of another large Phase 2 or Phase 3 study. However, the DDI program depends on DDI potential of the drug and should be discussed with appropriate authorities.

Phase IV

Phase IV trials are also known as post-marketing surveillance trials involving safety surveillance (pharmacovigilance) and ongoing technical support after approval. However, not all Phase IV studies are post-marketing surveillance studies. There are multiple observational designs and evaluation schemes that can be used in Phase IV studies to assess the effectiveness, cost-effectiveness, and safety of an intervention in real-world settings. Phase IV studies may be required by regulatory authorities (e.g. change in labelling, risk management/minimization action plan) or may be undertaken by the sponsoring company for competitive purposes or other reasons. This could entail the drug being tested in a certain new population (e.g. pregnant women). The safety surveillance is designed to detect any rare or long-term adverse effects over a much larger patient population and longer time period.

Equity markets have made new highs while bond markets have stalled. Economic data are mixed following months of signs of slowing. India’s economy has slowed drastically, China’s slowdown seems to have moderated, Europe still looks weak albeit the data seems to have stopped deteriorating and the US economy seems to have firmed from prior weakness. The overall picture still looks weak and the central banks have had to maintain or increase accommodation. While I was out, the Fed cut interest rates another 25 basis points and the probability that rates will not be cut further this year has risen from 60% to 80%.

Why are equities rising? The Fed continues to provide liquidity, cutting rates, and increasing repo operations as well as bond purchases, in a move it has declined to call QE, yet is practically identical to QE in form if not in detail. Share buybacks continue apace as cheap credit allows firms to raise debt to fund buybacks, increasing corporate leverage further. Bad for bond holders but good for shareholders. Lower interest rates also support higher valuations.

Why are bonds stagnating? The bond market is broader than the equity market. There are many corporate issuers without listed equity, there are mortgages, and other ABS. The weak economy is manifesting in this broad measure, while the equity market representation is shrinking.

The loan market has been an area of focus. Weaker covenants and documentation, collateral leakage, and falling short term interest rates have impacted this market. The fundamental reality is that if loans are in trouble, equities are in much worse trouble, since they are first loss. The practical reality is that technicals, that is demand from investors and ETFs, central bank liquidity, share buybacks, et al, support equity markets while falling interest rates make loans less attractive. Interest rates are an important driver of loan performance these past weeks as a comparison with HY bonds reveals. Spreads have not widened much for HY bonds, yet loan spreads have widened (suffered) more.

Where to from here? The Fed has signaled that it will be data dependent from here and has removed any language signaling a leaning towards raising or cutting rates. The momentum from the recent rate cut is still driving asset prices and the bond market but the transition from easy to neutral at the Fed is likely to take hold in the coming weeks.

Equity markets should continue to richen into the year end as central banks continue to support markets for risk assets. They will do so until they cannot and it could be some time before they run out of ammo. When they do, they will have raised valuations to even loftier levels and the correction will be steep. Until then, for the intrepid trader, momentum will carry the market.

Duration is hard to call. The Fed needed to get the inversion out of the front to 5 year end of the curve and it has nearly achieved that. Recessionary pressures from the yield curve are gone. But the curve is sufficiently flat that there is no room for flattening without inversion and recession, and there is little impetus for steepening while the Fed has resumed bond buying.\

As for EUR duration, Draghi’s swansong rate cut and QE resumption probably marked the end of the EUR duration trade for some time. Both Draghi’s and Lagarde’s concerted call for more fiscal support are a signal that either the ECB will not accelerate accommodation, or it cannot. And if fiscal support really comes, it would certainly push rates higher.

Readers of this blog will be aware that I have been bearish about global economic and political conditions for some time now. Yet I find things to buy. I leave for my vacation and will return in 2 weeks and will endeavor to monitor news and markets as little as possible. But befor e I go, a few thoughts.

I do think that the global situation is far from ideal. We are in a synchronized slow down, yet it is one that isn’t dangerously sharp. The risks are that central banks are not prepared to deal with it having never come out of emergency mode since the last crisis. Growth is slowing, but it should. In fact, what I object to is our continuing efforts to avert a slowdown at all costs, even a mild one.

The problems I see are deeply fundamental and will manifest over time with durable effects. The immediate impact will be difficult to distinguish from normal market volatility.

Finally I give you this. Investors are so focused on the global slowdown that they are unprepared for an adjustment in the business cycle. We saw the same in 2017 when a 5 year slowdown in trade and manufacturing reversed, primarily as a result of lag effects in capex and restructuring, and caught many bears off guard. Today, European PMIs are dismal, India’s growth is slipping, China’s economic data is awful, even the US is slowing down. Everything looks bad. But the nature of cycles is recovery and the current data are so bad that they are ripe for recovery. It is likely that the deterioration in manufacturing has peaked and that manufacturing and trade data will improve from here, and this is with or without a US trade deal. It is likely that a new capex cycle has begun, in part driven by the restructuring in global supply chains.

I don’t think it will all reverse in the 2 weeks I am off the grid, but it will happen gradually over the next few weeks and months, and it will catch the bears unawares. The longer term problems remain and that means the longer term prospects remain poor, but for traders (as opposed to investors) who are willing to gamble on a little decompression in the pessimism trade, there is some upside.

A hedge fund manager friend of mine sold me the doom and gloom scenario back in 2015, and I told him he was right but that central banks had rigged the market, and he’d better not short it too aggressively. Well he did and paid handsomely for it. The markets are still rigged and the central banks still have some funny money to print and if you couple that with some improvement in conditions, it could be a bit of a relief.