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Sunday, February 3, 2019

Why the Fed Made a U-Turn : Perceived Risks to Growth Shifted

The Federal Reserve reversed course earlier this past week when it put interest rate rises on hold, prompted by rising risks to U.S. growth in the months ahead, rather than any signs the economy’s health is faltering now.
Fed Chairman Jerome Powell signaled on Wednesday the central bank will move to the sidelines to see whether the threats — including from the slowing global economy, trade tensions and the effect of the Fed’s rate increases over the last two years — generate a sharper-than-anticipated slowdown for a U.S. economy that continues to look solid by most measures.
The Fed’s new stance marked a U-turn from six weeks earlier when it raised rates and penciled in two increases in 2019.
To understand what happened, consider the two risks officials have confronted over the past year.
One is the risk that inflation accelerates as economic slack disappears, forcing the Fed to raise rates rapidly. This framework is embodied by the Phillips curve, which holds that tighter labor markets will drive stronger wage growth and faster price increases. While this relationship has broken down in recent decades, it strongly animates thinking inside the Fed.
The second risk is that a world of slower growth and an excess of savings over investment means the economy can’t tolerate interest rates as high as they used to be. This is sometimes called “secular stagnation.” It is one reason Japan’s aborted efforts to raise interest rates in the 1990s and early 2000s kept throwing its economy into recession.
After many years of historically slow U.S. growth, the economy accelerated last year. Fed officials began worrying more about the inflation risk, which under the Phillips curve framework called for lifting rates to pre-empt those price pressures. For more than a year, the unemployment rate has been at or below the bottom of a range — from 4% to 4.6% — that Fed officials estimate is consistent with stable inflation.
In addition, tax cuts and federal spending increases last year provided new economic stimulus. A similar episode during a low-unemployment spell in the late 1960s led to high inflation.
But this time, inflation hasn’t taken off, and has instead stayed just below the Fed’s 2% target. With the economy facing new headwinds, Mr. Powell said Wednesday the inflation risks had diminished — and with it, the need for additional, pre-emptive rate rises.
“They have shifted to being more worried about secular stagnation than they are about the risk of late-’60s inflation,” said Lewis Alexander, chief U.S. economist at Nomura Securities.
While global growth had shown signs of stumbling last year, data for Europe and China turned worse last fall. One problem for the Fed is that its main macroeconomic model doesn’t neatly account for global economic and financial linkages that began buffeting markets last year, said Andrew Levin, a former Fed adviser who now teaches at Dartmouth College.
“You’re in an environment where U.S. rates seem low but they’re actually high” compared to other rich economies, said St. Louis Fed President James Bullard in an interview.
Meanwhile, the Fed’s moves to raise rates had started to bite. Steven Blitz, chief U.S. economist at TS Lombard, traces the market’s recent swoon and the ensuing Fed pivot to late September, when the central bank pushed interest rates above the inflation rate for the first time in a decade.
For investors, higher rates meant something they hadn’t seen in a while: the ability to earn money holding cash. The return of cash as a viable asset class contributed to the repricing that has taken hold across other investment classes, said Mr. Blitz.
Mr. Blitz said Mr. Powell’s background colors his perspective. Mr. Powell isn’t trained as an economist and spent part much of his career in finance. “He is a credit-markets guy and is reacting to this market swoon sooner than his predecessors would have to keep this expansion going,” said Mr. Blitz. “He has to battle the Fed-model view that money is still cheap to say, ‘No, actually, it’s not.'”
Officials in early December had begun thinking about slowing their rate increases in 2019 and how to communicate this shift publicly.
They raised rates at their Dec. 18-19 meeting and sought to signal this milder policy path, said Mr. Bullard.
Their projections charted a shallower path of future rate increases. Mr. Powell tried to signal greater uncertainty about that path at his press conference. And the Fed’s policy statement watered down its language signaling future rate increases.
“All of that was not enough,” said Mr. Bullard.
Markets were already nervous about slowing global growth, trade tensions and the Fed’s rate plans before the December meeting. Investors turned even gloomier when Mr. Powell sounded more committed to tighter policy than many thought was warranted by the gathering growth risks.
Market volatility in the following days fueled a sudden rise in borrowing costs for businesses and households and falling stock prices. Short-term bond yields began rising above longer-dated yields, a so-called inversion of the yield curve that often precedes recessions by a year or two.
Inverted yield curves can steer lenders away from long-term loans to more-profitable short-term debt, constraining the availability of credit.
These tighter financial conditions shifted the way Fed officials perceived the risks to their forecast, particularly because it looked like poor communication about their intentions might be responsible for the narrowing in bond-yield spreads.
Financial markets settled down on Jan. 4 after Mr. Powell signaled more strongly that rate increases would be on hold.
Fed officials are calculating the combined effects of tighter financial conditions and a slowdown in foreign economies could keep a lid on domestic inflation, even if U.S. economic growth remains solid this year.
“Inflation is not running away from us,” said Dallas Fed President Robert Kaplan in an interview Friday. “My base case for the next couple of quarters would be that we take no action.”

Junk bonds are back

Junk-rated bonds and loans are flying off the shelves again, easing recent worries that a credit-market freeze could harm the economy.
Since Jan. 10, companies with below-investment-grade ratings, including TransDigm Group Inc. and Dun & Bradstreet Corp., have sold around $50 billion of bonds and loans, breaking a dry spell that saw just $29 billion of speculative-grade debt sold in November and December, according to LCD, a unit of S&P Global Market Intelligence.
After hunkering down during the difficult final months of 2018, investors in January found themselves with ample amounts of cash to buy new bonds. In many cases, they have been lured by enticing offers from companies considered relatively creditworthy in the pantheon of junk debt.
Like other risky assets such stocks, junk-bond prices largely have moved in response to the shifting messages of Federal Reserve officials, potentially leaving the market vulnerable if there is another turn by the central bank.
Bond prices fell sharply in early October when Fed Chairman Jerome Powell suggested the Fed had a way to go before it was done raising interest rates. They then rebounded when Mr. Powell reversed course in early January and sent strong signals that the central bank was potentially finished with rate increases for the foreseeable future.
Mr. Powell’s remarks on Jan. 4 “laid to rest the concern that the Fed could make a policy error,” giving investors the green light to start taking risks again, said David Norris, head of U.S. credit at TwentyFour Asset Management.
The amount of junk-rated debt issuance at any time matters for the U.S. economy. While robust sales can saddle companies with unsustainable debt loads and pave the way for subsequent pullbacks, they generally contribute to economic growth by enabling companies to refinance debt and invest in people and equipment. A sharp slowdown in debt sales, as occurred in late November and December, can quickly translate to slower economic growth.
For Fed officials, the fickle nature of debt investors presents challenges. If rates stay low for too long, financial bubbles can form. If the Fed adopts a tougher stance, the risk of a recession is heightened.
While the appetite for junk-rated debt has rebounded in January, there are signs it hasn’t yet returned to the exuberance exhibited before October. Then, concerns were growing about escalating corporate leverage levels and deteriorating investor protections in new debt sales.
As companies sold a hefty amount of debt in recent weeks, they have been forced in several cases to lean on one particular kind of debt — secured bonds — which is garnering more investor interest than secured loans and unsecured bonds.
When TransDigm sought financing last week for its $4 billion purchase of rival aerospace-parts maker Esterline Technologies Corp., it initially sold $3.8 billion of first-lien secured bonds, a record sale for this type of debt, according to LCD. Meanwhile, it dropped a planned $1 billion sale of unsecured notes. Two days later, the company returned to the market to sell another $200 million of secured notes while also issuing $550 million of unsecured bonds.
Similarly, data and analytics company Dun & Bradstreet on Friday sold nearly $4 billion of bonds and loans to fund its leveraged buyout by a group of private-equity companies. But that was only after shifting $100 million each from loan and unsecured bond tranches to secured bonds. It also made several investor-friendly changes to its package of protections, or covenants, placing stricter limits on its ability to issue more debt or pay its owners dividends.
Secured bonds are in a sweet spot because the appeal of loans, which carry floating-rate coupons that fluctuate with short-term rates set by the Fed, has diminished as it appears the Fed is now on hold. Unsecured bonds, whose holders typically are the first among debt investors to take losses in a bankruptcy, have also lost some of their luster amid continued concerns that the U.S. economy is due for a downturn, investors say.
Mr. Powell, at a press conference Wednesday, said officials were paying close attention to financial conditions, including interest rates and yield premiums, “because they have important macroeconomic implications.” Despite easing in recent weeks, he said financial conditions remain “significantly tighter” than they were previously.
At the moment, “the market is very open to good deals,” said Marc Bushallow, managing director of fixed income at Manning & Napier.
Still, Mr. Bushallow said his team didn’t spend much time looking at Dun & Bradstreet’s bond sale because “at this point in the cycle, we’re not buying a highly levered LBO.”

Small Businesses Are Waving the Caution Flag

An Alabama welding supply company is delaying purchases of new gas cylinders. A men’s clothing store in Louisiana has trimmed fall orders for suits and high-end sportswear. An information technology consulting firm in California is holding back on planned hiring.
After a banner year, many small businesses are becoming more cautious about their investment and hiring plans. Some are responding to early signs of slowing sales, while others fear that tariffs, unstable financial markets, the aftereffects of the government shutdown and other headwinds could damp economic growth in 2019.
Economic confidence among small firms, which edged downward for much of 2018, in January reached its lowest level since President Trump’s election, according to a monthly survey of 765 small firms for The Wall Street Journal by Vistage Worldwide Inc. Just 14% of firms expect the economy to improve this year, while 36% expect it to get worse.
For the first time since the 2016 election, small firms were more pessimistic about their own financial prospects than they were a year earlier, including plans for hiring and investment, according to the survey, which was completed shortly before the 35-day federal shutdown ended.
“We could be at a turning point,” said Richard Curtin, a University of Michigan economist who analyzed the data. “Recessions are not made of one firm collapsing, but of many firms cutting back in marginal ways.”
The Labor Department on Friday said nonfarm payrolls rose by a healthy 304,000 in January, indicating that hiring in the broader economy continues apace despite the headwinds to growth.
Nearly one in four small firms surveyed by Vistage said the Trump administration had hurt the outlook for their business.
At Atlas Welding Supply Co. Inc. in Tuscaloosa, Ala., sales in 2018 grew at a 30% clip before flattening out in November and December. “People were inquiring a lot, but they didn’t pull the trigger, not nearly at the rate we saw a year earlier,” said Bill Visintainer, chief executive of the 28-person industrial gas and welding supply company. In the past 90 days, customers began taking longer to pay their bills, he said.
In response, Mr. Visintainer is being more cautious about his company’s spending. For example, he said he is delaying purchases of new high-pressure cylinders used to deliver gas until customers place orders, instead of steadily adding to his stock in anticipation of strong demand. “I hate to lower my expectations,” said Mr. Visintainer, who fears political turmoil and potential interest-rate hikes are making his customers nervous, increasing the chances the economy slides into a recession.
Many small firms remain confident. Southwest Geotechnical LLC, a 35-person engineering consulting firm in Las Vegas, plans to add about a dozen employees this year after hiring more than that in 2018. The firm, which serves mainly residential and commercial builders, also will spend about $150,000 on lab-testing equipment for the new hires.
“Business is rocking,” said company owner Justin Stratton. “I am being told by developers that they are looking for a banner year.”
Overall, 66% of small firms expect revenue to grow this year, according to the Vistage survey, down from 83% in January 2018.
In parts of the country, real-estate markets seem less robust. Latitude 38 Housing Services, which provides housing to students, technology workers and others seeking co-living spaces in the San Francisco area, is looking to pay down several million dollars of debt. It may sell one building to raise cash and is being more cautious about acquisitions and renovations.
“We definitely feel the market has peaked,” said Tony Brettkelly, chief executive of the 18-person company.
Some entrepreneurs say they are struggling to decipher the economic tea leaves. Kenny Rubenstein, the third-generation owner of Rubensteins, a 95-year-old New Orleans haberdashery, said sales of suits and sportswear were strong last year. But when Mr. Rubenstein recently placed his fall 2019 orders, he purchased just 75% of what internal reports suggested he buy.
“I’d rather play it safe at this point,” said Mr. Rubenstein, who has about 20 employees. “I’m divided right down the middle,” he added “Half of me is very positive. Half of me is very nervous.”
Alvarez Technology Group, Inc., an information technology consultant in Salinas, Calif., said its agribusiness customers have cut back on orders for software and hardware in response to tariffs and other economic uncertainties.
“The pipeline we have for projects and the pipeline we have for new clients willing to spend money with us, both of those have slowed,” said Luis Alvarez, the company’s chief executive. “We were projecting 15% to 20% year-over-year growth. We are not seeing that yet,” particularly in the agribusiness sector, he said. “Clients are not so much pessimistic as they are being cautious.”
The 38-person firm has delayed plans to add five new employees. It also has become more cautious about spending and made sure it has credit lines in place.
Gold Systems Inc., a government contractor in Salt Lake City that gets half its revenue from the Environmental Protection Agency and other federal agencies, expects to feel the aftereffects of the government shutdown through most of 2019, Chief Executive Dave Wilcox said.
The company has begun to receive payments on invoices that piled up during the shutdown, but even if Congress averts a second shutdown, Mr. Wilcox said, Gold Systems will “continue to be conservative in everything we do just knowing there may be some lasting impacts.”
Some business owners are looking to grow despite their concerns. Webfoot Painting Co., a carpentry and painting business in Bend, Ore., with 55 year-round employees, is expanding into Portland even though labor costs have increased and sales leads were down 5% in January.
To play it safe, Webfoot’s co-founders, Travis Ulrich and Gavin Hepp, didn’t take any quarterly distributions or annual bonuses for 2018. The company has stepped up marketing but is shopping for less costly software, and has done away with monthly crew and office team lunches, a $2,000 expense, Mr. Ulrich said.
“It’s batten down the hatches; hold on to your cash,” he said. “We are scared, but we are not playing scared. We are playing super-conservative with our cash.”

China unveils tax cuts for graduates, low-income workers in stimulus drive

China will introduce tax breaks for small businesses run by recent graduates and low-income workers, according to a joint ministry announcement, as the country looks to boost spending and offset an economic slowdown.

Earlier this month China’s state planner said it would prioritise graduates and migrant workers in efforts to combat unemployment, which rose in the December quarter amid shrinking factory orders and lower consumer spending.
The cuts will target university graduates, self-employed people and those who have been unemployed for more than six months, said the Ministry of Finance, State Administration of Taxation and other departments in a joint statement released on Saturday.
People who are eligible for the scheme can deduct a total of 12,000 yuan ($1,779.73) from the taxes of their household over three years. The cuts take effect from January 1 and run until the end of 2021.
Companies who hire people designated as “needy” will also qualify for a tax deduction of 6,000 yuan per person per year for three years.
China has said it will introduce new stimulus measures this year after the Sino-U.S. trade war took a heavy toll on the economy in 2018.
The Finance Ministry this month said it will implement larger tax and fee cuts, targeting small firms and manufacturers, while the county’s state planner has unveiled incentives to boost retail spending.

Biotech week ahead, Feb 4

The earnings season hasn’t panned out well for pharma companies, with Amgen, Inc. AMGN 0.02%Novartis AG NVS 0.16% and Illumina, Inc. ILMN 1.08% reporting either disappointing results or a bleak guidance.
Even as the earnings news flow picks up pace, here are a few catalysts a biotech investor should focus on in the unfolding week.

Conferences

  • 15th Annual WORLDSymposium – Feb. 4–8, in Orlando, Florida
  • 12th annual Congress of the European Association For Hemophilia and Allied Disorders (EAHAD) – Feb. 6-8, in Prague, Czech Republic

Clinical Trial Results

Sienna Biopharmaceuticals Inc SNNA 4.85% is due to release Phase 3 data for SNA-001, its investigational therapy used for the reduction of light-pigmented hair in early February.
Avrobio Inc AVRO 7.95% is scheduled to release an update on Phase 1 study and two-year data for first patient treated with Fabry disease candidate AVR-RD-01 at the WORLDSymposium Wednesday, Feb. 6.
Protalix Biotherapeutics Inc PLX 13.85% will release Phase 3 pharmacokinetic data for Pegunigalsidase alfa, its Fabry disease treatment candidate, at the WORLDSymposium Thursday, Feb. 7
Sangamo Therapeutics Inc SGMO 6.67% is set to release Phase 1/2 preliminary safety and biochemical measurements for SB-318, its treatment candidate for MPS Type 1, at the WORLDSymposium Thursday, Feb. 7. The company will also release biochemical and safety data for SB-913, its MPS Type 2 treatment candidate, at the symposium the same day.
Catalyst Biosciences Inc CBIO 4.78% is due to present Phase 2 data for its hemophilia treatment candidate Marzeptacog alfa at the EAHAD annual Congress to be held between Feb. 6 and Feb. 8.

Earnings

Monday, Feb. 4
  • Alexion Pharmaceuticals, Inc. ALXN 2.7% (before the market open)
  • Gilead Sciences, Inc. GILD 0.07% (after the market close)
Tuesday, Feb. 5
Wednesday, Feb. 6
  • Boston Scientific Corporation BSX 0.52% (before the market open)
  • Regeneron Pharmaceuticals Inc REGN 0.24% (before the market open)
  • Enanta Pharmaceuticals Inc ENTA 3.1% (after the close)
Thursday, Feb. 7
  • Arrowhead Pharmaceuticals Inc ARWR 1.2% (after the close)
  • Twist Bioscience Corp TWST 0.56% (after the close)
  • Organovo Holdings Inc ONVO 0.99% (after the close)
  • Seattle Genetics, Inc. SGEN 0.77% (after the close)
  • Ligand Pharmaceuticals Inc. LGND 1.89% (after the close)
Friday. Feb. 8
  • ImmunoGen, Inc. IMGN (before the market open)

IPO

California-based clinical-stage biotech Alector, which develops treatments for neurodegeneration, is set to offer 9.25 million shares in an IPO, to be priced between $18 and $20. The company intends to list the shares on the Nasdaq under the ticker symbol ALEC.
Harpoon Therapeutics, an immuno-oncology company, plans to offer 5.4 million shares in an IPO, with the shares to be priced in the $13-$15 range. The shares will be listed om the Nasdaq under the ticker symbol HARP.
Gossamer Bio is planning to offer 14.38 million shares in an IPO. The company that develops therapeutics for immunology, cancer and inflammation is likely to price the shares at $16. The shares will be listed om the Nasdaq under the ticker symbol GOSS.

Doctors-in-training need better nutritional education

Obesity is a global epidemic, and its prevalence is increasing in every part of the world. While we have new medications and complex surgical techniques that promote weight loss, the awareness of healthy eating habits and dietary education are still the most important factors in helping control body weight.
Unfortunately, nutrition knowledge appears confined largely to books and exams; as the doctors barely engage in nutrition counseling with patients. In teaching hospitals, where residents work closely with patients, it is important that the residents develop a comprehensive knowledge of nutrition science and apply that knowledge to clinical practice. But they are under the misconception that nutrition counseling is not their role, it is rather the function of dieticians. Inadequate knowledge of nutrition or not feeling competent enough to address nutritional concerns is also commonly seen among health care providers.
However, this brings up an interesting point: Are physicians themselves (including residents) healthy enough to provide this counseling? Are they, in fact, the models of healthy living their patients believe them to be? It is a well-known fact that physicians’ attitudes and personal habits may have a significant impact on their practice of nutrition and lifestyle counseling. If the physicians are consuming a high-calorie diet, eating fast food, avoiding home cooked meals due to busy schedules (while having time to go out and eat) and simply unable to differentiate between real food and “food-like substances,” can they provide proper nutrition education to their patients?
As health care providers, we encounter patients almost every day who are paying the price of their poor eating habits. Acute conditions are treated in the inpatient setting, where abnormal lab values are fixed, and the patient is discharged with recommended follow-up with primary care. In the outpatient setting, the discharge notes are reviewed, medication refills provided, and referrals made. However, in most cases, other than questioning the restricted elements of a diet such as sodium or fluid intake, inquiry of the patient’s daily eating habits — availability of food, affordability of fresh produce, meal preparation at home versus consuming fast food — is largely overlooked by physicians. This is regretful because, as the literature supports, patients consider clinic physicians to be the credible source of nutrition and desire to discuss their dietary plans with their primary provider.
There is an urgent need for nutritional knowledge among young physicians-in-training and a more urgent need for physicians to promote healthy eating habits to their patients. Encouraging healthy eating choices among residents will, in turn, foster the importance of educating patients regarding lifestyle changes. Rather than going out and having pizza and drinks, residents can also have fun gathering at one place and prepare meals and enjoy doing it all together. Residency programs can have healthy meals during the noon conferences and lectures to promote healthy eating behaviors among the physicians-in-training.

The Science Behind Ketogenic Diets, Or Why We Get Fat And What To Do About It

The internet is abuzz with anecdotes telling of the amazing benefits of a ketogenic (or “keto”) diet. Nothing new there, then, as every year is marked by the rise and fall of a new diet fad – most amplified by the social media echo-chamber but with little to commend them.
This time, though, it caught my attention.  Not just because I am a modestly overweight 52 year old whose love for food and drink is slightly stronger than my desire to be skinny, and as a result someone who has been on a diet every January for at least 20 years and now knows he needs he miracle.  But because of the science behind it.
For a start, I first began reading about ketogenic diets thanks to Ethan Weiss, M.D., a prominent UCSF cardiologist on Twitter, whose scientific acumen I respect.  If he believes in the benefits of ketosis, then I should definitely look a little closer.  After 20 years of January diets, my own experience suggested that nothing made any difference: you only lost weight if you took in less calories than you used, and if you took in less calories than you used then you were hungry. Simple as that.  Could it be that a ketogenic diet really was different?
Well, the principle makes sense.  Bizarrely named “ketone bodies” are actually molecules that act as the body’s natural back-up fuel supply when glucose is scarce.  Normally, we only enter ketosis (where ketone bodies accumulate in the blood) when we starve ourselves – not just overnight or by missing a meal, but for several days at time.  Our metabolism then switches to fat-burning, and converts stored fat molecules into ketone bodies that can power our muscles and brain because the glucose has run out. Being in ketosis, then, does sound like a great way to burn off the fat.  On the other hand, not eating for days doesn’t sound much fun.
But it turns out you don’t need to starve yourself to get into ketosis.  All you need to do is remove carbohydrate from the diet (not just refined carbs, such as sucrose or high fructose corn syrup, but all carbs, including complex carbs and starches too).  Once the body has no source of glucose, it has to switch to ketosis because the brain needs either glucose or ketone bodies to survive.  So no matter how much protein or fat you eat, the body still has to break down fat to ketone bodies to keep you going.
A ketogenic diet, then, is any diet that switches your metabolism to ketosis.  And the ones doing the rounds at the moment aren’t the first or the only diets to do that.  It is several decades since the Atkins Diet rose to prominence – and I witnessed first-hand the weight loss some friends achieved on Atkins.  The Atkins diet is a ketogenic diet, because it removes carbs from the diet and replaces them with protein.  The surprising finding was that Atkins followers discovered they were much less hungry than they expected, suggesting that calories from protein made you feel more satisfied for longer.  Feeling fuller translates to willingly eating less, and in the end impressive weight loss.
In dieting, though, there is no such thing as a free lunch (or so I thought).  Adherence to the Atkins diet has side-effects, and most worrying is the impact on nitrogen balance from taking in so much protein. There is a very real risk of dehydration, and over the longer term, kidney stones from the need to excrete so much excess nitrogen as urea.
So what about the 21st century version? Keto today replaces the carbs with fats rather than protein.  A typical Atkins regimen had 75% of calories from protein, 25% from fat and <5% from carbs.  By contrast, today’s keto diets advocate 75% of calories from fat, 25% from protein and <5% from carbs.  As protein intake isn’t changed from a typical “balanced” diet, any side-effects from nitrogen imbalance are neatly side-stepped.
But what about all that fat? Surely that’s got to be unhealthy? Well, no. Most instructive are the lipid profiles of Antarctic explorers who have crossed the continent on foot, dragging their own food on sledges.  That’s only possible with food that has the highest possible calorie to weight ratio – which means eating essentially nothing but butter.  And after months on an all-butter diet the level of LDL-cholesterol (often called “bad cholesterol”) actually declines significantly.  That isn’t as surprising as it sounds – while in ketosis, fats are being moved from stores towards the liver (where the ketone bodies are made) and that’s the job of HDL-cholesterol.  LDL-cholesterol typically moves excess fat from the liver to the stores in the rest of the body (hence in the opposite direction).  So in ketosis, you would expect a lipid profile normally considered healthier (higher HDL and lower LDL) no matter how much fat was being consumed.
But if the benefits of Atkins on weight came from the reduced hunger thanks to the sustaining properties of protein, then you shouldn’t get that unless you bulk up the protein component of the diet. It turns out, though, that the reduced hunger results from the state of ketosis itself.  How you achieve it doesn’t really matter.
So the science stacks up – theoretically, at least, I couldn’t find a flaw in the modern ketogenic diet.  So I gave it a try in place of my usual “low-everything” calorie restricted January diet.
On 1st January, I weighed in at a portly 196lbs, which on my 5’9” frame amounts to a BMI between 29 and 30 (so only a smidgeon under “obese”).  The “Deliciously Keto Cookbook” by Molly Pearl & Kelly Roehl duly arrived from Amazon, and my carb intake immediately fell below 5%.  As I sat eating rib-eye steak for breakfast, topped with chili-butter, along with scrambled eggs and cheese, it was hard to believe I was on any kind of diet.  If, like me, you think food needs to have fat in to taste good then you are going to find keto one easy regimen to follow.
I typically work-out every day for 30minutes, on a Concept 2 indoor rowing machine, and to help the diet along, I increased that to 45minutes, allowing me to row 10km (without leaving the comfort of the gym).  That exercise probably helped rid my body of stored carbohydrate (your liver stores quite a lot of carbohydrate as glycogen, ready for quick release to power your muscles) quicker than normal, and within 48 hours I had achieved Nirvana (well, ketosis anyway).  Using urine dipsticks, my ketone body level was sustained above 6 mmoles/litre, equivalent to a “deep” ketosis.
And there it has stayed for a month, while I enjoyed the delights of burgers topped with brie, jumbo prawn salads with avocado and sour cream dressings and creamy pork stroganoff with zucchini ribbons.  Three fat-laden meals every single day.
First the benefits: once ketosis was well-established three days in, I found I was never hungry.  I had no desire whatsoever to snack between meals (usually a big weakness), and gradually over a month I found myself thinking less and less about food – to the point missing lunch altogether was something that could happen “by accident”.
I also found my concentration and focus dramatically improving.  I had never had so much energy, and productivity went through the roof. Running on the back-up batteries (the ketone bodies) is so much better than fuelling yourself with carbs.  Why was that? Quite simply because the levels never decline (at least for a chubby person like me, with a boundless supply of internal fat stores to burn).  By contrast, when you eat carbs, the excess is immediately squirreled away as fat (for a rainy day) so that blood glucose levels fall a few hours after eating and that triggers the urge to eat again, but also a feeling of declining energy and concentration (that “late afternoon dip” us ‘carbavores’ recognise only too well).
And eating less did indeed translate into impressive weight loss (14lbs gone in under a month), mostly from the unsightly and unhealthy abdominal fat deposits, so my waistline shrunk two notches on my belt too.  That’s about twice as much weight-loss as my usual miserable January diet can achieve by making me constantly hungry.
There were even some unexpected benefits I noticed.  For example, the amount of plaque on my teeth reduced to almost zero (presumably because the plaque bacteria need the dietary carbs to feed off).
To be honest, I feel like a teenager again.
What about the downsides? Aside from annoying my friends with constant tales of the benefits of a ketogenic diet (the newly converted are always the noisiest proselytizers), there were only two downsides I could think of.
The first is simply practical.  Keeping carbs below 5% of total calories is a challenge.  You have to check the carbohydrate content of everything that you eat, and you find sneaky carbs hiding in almost everything pre-prepared. Eating out at restaurants becomes a challenge, and as a guest with friends and family almost impossible (unless they are also on a ketogenic diet or are incredibly accommodating).  As a result, planning and preparing food becomes a significantly greater demand on your time and resources than it was before.
On the same lines, you do have to exert accurate portion control too – as the meals, high in fat, have a high calorie density, you can unintentionally eat too many calories.  And even the keto diet can’t break the physical laws of the universe such as the conservation of energy – to lose weight you have to eat less calories than you need.  It just means you feel great while doing it.
The second downside was simpler to avoid – but I had been slow to heed the warnings I had been given. It is hard to get enough fibre while following a ketogenic diet, principally because most natural fibre sources also contain too much available carbohydrate (fibre is typically an insoluble or indigestible carbohydrate polymer, so its unsurprising it naturally co-exists with digestible carbs).  The solution is simple: take a fibre supplement – for me, I need 7 or 8 grams a day – from the first day you switch to a ketogenic diet.
At the end of my experiment, I decided to observe the impact of eating some carbohydrate after almost a month being essentially carb-free.  Just 50g of carbs in one sitting (equivalent to a very small baked potato) immediately killed ketosis.  Within 3 hours, urinary ketone body levels had fallen to essentially undetectable – hunger returned and the “mental fog” started to descend.
Of course, it then took almost 72 hours to re-establish “deep” ketosis after just one (in my case deliberate) moment of weakness.  Three days of feeling a bit rubbish, lacking in energy, because I was denying my body its usual glucose fuel and the back-up batteries, the ketone bodies, were yet to cut in.  Success on a ketogenic diet, therefore, clearly requires the kind of discipline typically associated with a Zen master.
This experiment illustrates very nicely the problem a “balanced” diet causes for the metabolism of a modern human.  Ketosis is slow to establish but very quick to turn off – a phenomenon scientists call hysteresis.  And there are very good evolutionary reasons for this set up: while a good fuel, glucose and other carbohydrates can damage the proteins that make up your cells and tissues.  If glucose levels are allowed to get too high, the damage may be irreparable (as can happen in diabetes).  To avoid that, at least in healthy people, the body makes insulin as soon as blood glucose levels start to rise – and insulin caps the level of glucose in the blood by instructing the liver to convert the excess into fat.  At the same time, however, that insulin turns of ketosis (which is why ketosis ended so quickly after I ate a baked potato). That ensures you are not laying down fat and burning fat at the same time (which would be a highly inefficient use of food resources).
In prehistory, evolution tuned our metabolism so we didn’t immediately start tucking in to our fat stores the moment food became scare.  Individuals who did that would find that when a potentially catastrophic food shortage occurred they would have less fat stored and so be the first to succumb. Of course, today, when for most people in developed countries, availability of calories is unlimited this hysteresis that once made us efficient now makes us fat.  Every ounce of excess carbohydrate is stored away as fat, but those stores are not re-accessed as soon as your glucose is depleted.  Instead you are left feeling hungry and lacking in energy for a while – and with fast-food fries within easy reach it’s just too tempting to re-fuel with carbs again.
Ketosis was, once upon a time, key to giving humans a survival advantage.  The science, and my personal experience, suggests it can indeed do the same for individuals today.  If you havent tried it yet, maybe you should.