Month: August 2023

Apollo Global Management is being sued by shareholders over an ‘improper’ distribution to executives of roughly $570 million to cover tax obligations.

Recall that Apollo founder Leon Black was forced out over revelations that he had paid $158 million for tax advice and other professional services from dead sex offender pedophile Jeffrey Epstein. According to the lawsuit reported by the Financial Times, Black is in line to receive roughly $276 million from Apollo coffers.

This is not just any lawsuit. This is a derivative lawsuit filed by the Anguilla Social Security Board on behalf of Apollo itself. Translation: Even shareholders think Apollo’s board is too morally compromised to act in the company’s best interests.

Few things are funnier than Apollo founder Leon Black paying Jeffrey Epstein $158 million for “tax work”

— zerohedge (@zerohedge) August 16, 2023

The lawsuit shines a light on what it claims was an extremely hasty approval process conducted by a “conflicts committee” made up of close friends and business associates of Apollo’s co-founders, Leon Black, Marc Rowan, and Josh Harris. The committee allegedly approved hundreds of pages of complex documents within hours, conveniently without keeping minutes for most of its meetings.

According to the complaint, the three founders allegedly “concocted a series of untenable justifications” for the $570 million payout after realizing they might face hefty tax bills if they followed through with an investor-friendly proposal to nuke the firm’s dual-class share structure which gave them control.

But according to a complaint filed in Delaware Chancery Court on Wednesday, “there was no legitimate reason to pay the founders’ personal taxes”, and an aggrieved Apollo shareholder, the Anguilla Social Security Board, has alleged that the Apollo board breached its fiduciary duties and it has demanded that the money be returned to the company.

…

Drawing on emails and internal documents given to the Anguilla board under a court order prompted by earlier litigation, the lawsuit makes claims about the final days of a decades-long compact between three men who built one of the most lucrative groups on Wall Street. -FT

After Black was pushed out in a leadership scuffle which he blamed on Harris, the lawsuit claims that the three billionaires coordinated on a series of proposals which would make them even wealthier.

One of the proposals allegedly included payment from Apollo in exchange for eliminating a “tax receivable agreement” that controlled what would happen if the three gave up the private partnership units in which their Apollo stakes were held – and would instead award them with the company’s publicly traded shares.

While normally such “taxable exchanges” would have cost the founders, it would, in theory, result in a tax-deductible expense for Apollo. As part of the agreement, the group agreed to pay 85% of this tax savings back to the founders – who argued they should be compensated for giving up that agreement, according to internal documents cited in the plaintiffs’ suit.

he complaint goes on to criticize close ties between Apollo executives and the so-called independent directors, noting one director’s not-so-subtle email asking for help to get his son into Harvard “without creating a…Varsity Blue taint.”

Last week former Apollo director – a former investment banker and Microsoft dealmaker, Richard Emerson, resigned last week. Shortly after his 2021 appointment, Emerson wrote to Harris – who has since left Apollo – asking for the Harvard hookup.

Authored by Simon White, Bloomberg macro strategist,

Pharmaceutical company Mallinckrodt plans to file for Chapter 11 bankruptcy today. It’s a reminder, though, that bankruptcy filings in the US remain high.

Subdued credit spreads fail to reflect the rising incidence of corporate distress.

The Mallinckrodt news prompted me to refresh my chart on credit spreads with Bloomberg-compiled US bankruptcy filings. Filings remain elevated, and are higher than they have been in almost 25 years outside of 2008 and 2020. Filings typically to lead to a rise in the official number of Chapter 11 cases.

As the chart shows, it’s unusual for credit spreads to remain so muted when filings are so high.

Private credit is perhaps stifling price discovery in the traded credit markets.

Its size, now in the region of $1.5 trillion, has ballooned in recent years.

With the price and performance of transactions opaque, it will take longer for the market to become more broadly aware of lenders in trouble.

Credit spreads are therefore less likely to be a true reflection of underlying conditions; they are thus prone to an abrupt repricing when they do.

Boeing has identified a manufacturing problem in the aft pressure bulkhead on specific 737 Max jets, which helps maintain cabin pressure. The new issue could derail delivery targets for Boeing’s cash-cow jet. 

“During factory inspections, we identified fastener holes that did not conform to our specifications in the aft pressure bulkhead on certain 737 airplanes,” Boeing told Bloomberg via email. 

Boeing acknowledged the problem and announced they had finished a technical evaluation: “We understand the issue and required fix,” it told publication The Air Current, stressing that they don’t see it as an immediate threat to flight safety of operating 737 Max jets.

The production issue stems from supplier Spirit AeroSystems, which builds 70% of the narrowbody jet frames. It said, “Spirit uses multiple suppliers for the aft pressure bulkhead, only some units are affected. Spirit will continue to deliver units to Boeing.” 

The supplier added, “Spirit has implemented changes to its manufacturing process to address this issue.” 

The Air Current pointed out that “near-term delivery delays for some 737 Max aircraft” are likely, ” making the latest quality issue another in an extended string of headaches that the plane maker and its most important supplier have endured as they work to find a stable production tempo.” 

Here’s how Wall Street analysts reacted to the news (list courtesy of Bloomberg): 

Jefferies (buy, PT $275) 

• Analyst Sheila Kahyaoglu says that while Boeing will continue to ramp up production of the Max to 38 per month, near-term delays are likely to prolong the time before it achieves that rate of output

• Notes that Spirit flagged a quality issue involving certain 737 Max models; issue affects some Max-8 models, and Kahyaoglu estimates that each one-month delay of Max-8 deliveries could result in a $300 million free cash flow impact, at around $10 million per Max

Citi (buy, PT $285)

• It’s early days on both the near and long-term financial impacts of the issue, but it appears the fix is likely to take several weeks for completed aircraft, which likely puts pressure on Boeing’s delivery forecast for the year, analyst Jason Gursky says 

• Notes that Spirit, the supplier that builds most of the jet frames, will technically be on the hook for the cost of the inspections and repairs of in-production aircraft as well as the installed fleet

Shares of Boeing fell 2% in New York’s premarket trading, while Spirit dropped 6.5%.

The latest issue might impact near-term deliveries and cause Boeing to miss annual delivery targets. Add this to the problems the jet has experienced over the years, including when it was grounded after deadly crashes in Indonesia and Ethiopia. 

Authored by Naveen Athrappully via The Epoch Times (emphasis ours),

The Fulton County Sheriff claimed that Donald Trump will be treated like local inmates during the booking process, with no special accommodations accorded to the former U.S. president.

“If you’re indicted, then we’re going to treat you as though you’re indicted here locally, and so we’ll consider you to do fingerprints, mugshots, etc.” said Sheriff Patrick Labatt to CNN.

Charles Rambo, a retired lieutenant of the sheriff’s office, said to the media outlet that once inside “they would be pat down, led to the booking office in the rear. From there, they probably have to have ties and shoe strings and all those types of things taken. Then, from there the persons would be fingerprinted, given a booking photo.”

President Trump along with the other defendants are expected to be photographed for mugshots. It is unclear whether Trump or any of the high-profile co-defendants would go through all steps typically taken by a prisoner at the facility.

“I don’t expect Trump to spend hours in this jail because the longer he is, it’s a pain. It’s going to be a hassle for the entire sheriff’s department or at least those who are at the jail when the president’s there. It’s going to be a circus,” said Chris Timmons, former Georgia prosecutor to CNN. “The ‘Rice Street’ jail is not a pleasant place. It’s dirty, it’s scary.”

In July, the Department of Justice (DoJ) launched a civil rights investigation into the Fulton County jail.

Charges Against Trump and Co-defendants

President Trump and 18 other individuals were indicted Aug. 14 by a grand jury in Georgia for alleged attempts to overturn the results of the 2020 election.

The Georgia indictment charged President Trump with 13 counts, including violation of the state’s RICO act, conspiracy to commit forgery in the first degree, filing false documents, and solicitation of violation of oath by a public office among others.

If convicted and slapped with a maximum sentence on all 13 counts, President Trump will be looking at up to 76.5 years in prison.

The co-defendants, who must voluntarily surrender by Aug. 25 at noon, according to Ms. Willis, are listed as follows: President Trump’s former attorney Rudy Giuliani, former White House chief of staff Mark Meadows—who, aside from President Trump, is the highest-ranking White House official to be charged in the indictment—former Justice Department attorney Jeffrey Clark, GOP strategist Michael Roman, and attorneys John Eastman, Kenneth Chesebro, Ray Smith III, Robert Cheeley, Jenna Ellis, and Sidney Powell.

Georgia Republican Shawn Still, alternative elector Cathleen Latham, former head of the Georgia Republican Party David Shafer, Illinois pastor Stephen Lee, vice president for the Black Conservative Federation who is also involved in “Black Voices for Trump” Harrison Floyd, former publicist for Kanye West Trevian Kutti, Scott Hall, and Misty Hampton are also named in the indictment.

An ‘Unsafe, Unsanitary’ Jail

The DoJ opened an investigation into the conditions at the Fulton County Jail on July 13, 2023.

This was following the death of an inmate who died “covered in insects and filth,” said the department. Moreover, there are “credible allegations” that “the Fulton County Jail is structurally unsafe, that prevalent violence has resulted in serious injuries and homicides, and that officers are being prosecuted for using excessive force.”

“People in prisons and jails are entitled to basic protections of their civil rights,” said Attorney General Merrick B. Garland. “We launched this investigation into the Fulton County Jail based on serious allegations of unsafe, unsanitary living conditions at the jail, excessive force and violence within the jail, discrimination against incarcerated individuals with mental health issues, and failure to provide adequate medical care to incarcerated individuals.

“The recent allegations of filthy housing teeming with insects, rampant violence resulting in death and injuries, and officers using excessive force are cause for grave concern and warrant a thorough investigation,” said U.S. Attorney Ryan K. Buchanan for the Northern District of Georgia. “This investigation is part of our ongoing efforts to ensure that citizens are safe, and their constitutional rights protected, even while they are in custody.”

asdf

The justice department’s investigation followed the 2022 death of an inmate who was allegedly “eaten alive” by insects in the jail.

Arrested for misdemeanor simple battery, LaShawn Thompson, 35, was placed in the psychiatric wing after being declared mentally unfit.

On Sept. 19, Mr. Thompson was found unresponsive in his jail cell, and pronounced dead soon after.

“Mr. Thompson was found dead in a filthy jail cell after being eaten alive by insects and bed bugs,” his family’s Atlanta-based lawyer, Michael D. Harper said in April to USA Today. “We’re asking for a criminal investigation into the matter and (major) changes at the jail.“

Two of the co-defendants—lawyer John Eastman and bail bondsman Scott Hall—surrendered at the Fulton County jail on Tuesday.

They were given an inmate identification number and released after spending roughly an hour at the premises.

President Trump, after agreeing to a $200,000 bond, is expected to surrender at the Fulton County jail Thursday.

At a moment China and Russia have envisioned the future of BRICS as fundamentally an anti-Western bloc of developing nations, the Gulf oil powers Saudi Arabia and the United Arab Emirates have been formally invited to become members, which marks the bloc’s first expansion in over a decade. 

“The membership will take effect from the first of January, 2024,” South African President Cyril Ramaphosa said, adding that additionally Argentina, Egypt, Ethiopia and Iran will be added to the fold next year. 

China’s President Xi Jinping hailed the rare expansion, beyond the current large economies of China, Russia, Brazil India, China and South Africa as “historic”. He said it will “inject new impetus into the BRICS cooperation mechanism and further strengthen the power of world peace and development.”

President Putin too congratulated the soon to be newest members, saying in a video message, “I would like to congratulate the new members who will work in a full-scale format next year.”

“And I would like to assure all our colleagues that we will continue the work that we started today on expanding the influence of BRICS in the world,” the Russian leader added. Indian Prime Minister Narendra Modi also hailed the expansion which he said will strengthen the bloc.

Saudi Foreign Minister Prince Faisal bin Farhan’s statement said, “the special, strategic relations with the BRICS nations promotes common principles, most importantly the firm belief in the principle of respect for sovereignty, independence and non-interference in internal affairs.”

He vowed in words before the BRICS conference on Thursday that the kingdom will be a “secure and reliable energy provider,” and noted that total bilateral trade between Riyadh and BRICS countries exceeded $160 billion in 2022, the Saudi foreign minister said.

The BRICS countries have reached an agreement on the expansion of the union. pic.twitter.com/QsyYneEOb1

— Sprinter (@Sprinter99800) August 23, 2023

Set up in 2009, the BRICS nations represent some 40% of the world’s population and significantly over a quarter of the world’s GDP. And now with Saudi Arabia, the UAE and Iran set to enter the fold, it will have three of the world’s biggest oil producers. 

As for Iran’s statement on it’s upcoming entry into the bloc:

Mohammad Jamshidi, the political deputy of Iran’s President Ebrahim Raisi, called the decision to add his country “a historic move.”

“A strategic victory for Iran’s foreign policy,” Jamshidi wrote on X, the website formerly known as Twitter. “Felicitations to the Supreme Leader of Islamic Revolution and great nation of Iran.”

In Putin’s virtual address the day prior, he emphasized that de-dollarization is “gaining momentum”. He said the dollar’s receding global centrality is an “objective and irreversible” process. 

* * *

As Statista observes it fresh recent analysis, Despite the aforementioned three failing to pull their expected weight, the five BRICS nations surpassed the G7 in terms of their combined GDP in 2020. That is when measured at purchasing power parity, i.e. adjusted for differences in buying power. According to the IMF, the bloc will collectively account for 32.1 percent of global GDP this year. That’s up from just 16.9 percent in 1995 and more than the G7’s share of 29.9 percent.

You will find more infographics at Statista

The rise of the BRICS nations, while not without challenges and disparities within the group, has led to increased calls for more inclusive and representative global governance, adding more weight to voices that deviate from the policies shaped by the Western-led G7. Nowhere has that deviation been more apparent than in the response to Russia’s invasion of Ukraine. While the G7 condemned the attack and imposed strict sanctions on Russia, none of the BRICS members have denounced Russia’s actions or joined in on the sanctions.

Authored by Jack Phillips via The Epoch Times,

The U.S. Centers for Disease Control and Prevention (CDC) stated Wednesday the new BA.2.86 COVID-19 lineage may cause infection in people who received vaccines or previously had the virus.

The CDC said it is too soon to know whether this might cause more severe illness compared with previous variants. But due to the high number of mutations detected in this lineage, there were concerns about its impact on immunity from vaccines and previous infections, the agency said.

“The large number of mutations in this variant raises concerns of greater escape from existing immunity from vaccines and previous infections compared with other recent variants,” the CDC stated in its assessment.

“For example, one analysis of mutations suggests the difference may be as large as or greater than that between BA.2 and XBB.1.5, which circulated nearly a year apart.”

But it said that “virus samples are not yet broadly available for more reliable laboratory testing of antibodies, and it is too soon to know the real-world impacts on immunity.”

The agency added that it detected at least two cases with the BA.2.86 variant in the United States, although few other details were provided. It was also found in Israel, the United Kingdom, South Africa, and Denmark, the agency said.

One of the BA.2.86 cases was found in a person detected via the CDC’s traveler surveillance system, while it added that cases being found in several countries is evidence of international transmission.

“Notably, the amount of genomic sequencing of SARS-CoV-2 globally has declined substantially from previous years, meaning more variants may emerge and spread undetected for longer periods of time,” according to the assessment.

“It is also important to note that the current increase in hospitalizations in the United States is not likely driven by the BA.2.86 variant. This assessment may change as additional data become available.”

The CDC noted that most of the U.S. population has COVID-19 antibodies from a previous infection, vaccination, or both. It’s likely that the antibodies will provide some protection against the variant, said the CDC.

The CDC said on Wednesday the slight recent increase in hospitalizations in the United States is not likely driven by the BA.2.86 lineage.

Based on an analysis of the mutations to the new virus, the CDC stated that COVID-19 tests and antiviral drugs are likely still going to work against it. “At this time, we don’t know how well this variant spreads, but we know that it spreads in the same way as other variants,” the CDC said.

A top official with the World Health Organization, meanwhile, has designated the BA.2.86 as a “variant under monitoring,” noting that there is “limited” information about the variant.

A medical worker prepares the COVID-19 vaccination after the thawing stage outside of UCI Medical Center, in Orange, Calif., on Dec. 16, 2020. (John Fredricks/The Epoch Times)

But some scientists warned that people shouldn’t jump to conclusions about the variant.

“Intrinsic severity of a virus is a byproduct of many traits, a product of selection on other features. Any attempt to guess the intrinsic severity of BA.2.86 (within reasonable parameters) is just that—a guess,” Aris Katzourakis, a biologist with the University of Oxford, wrote on social media.

“It is far, far too early to evaluate the potential of this variant.”

Michael Osterholm, the head of the University of Minnesota’s Center for Infectious Disease Research and Policy, told Stat News that the new subvariant should be monitored closely but he noted that a large number of subvariants and variants of COVID-19 didn’t take off.

“I assume that all are innocent until proven guilty,” he said,

And based on the evidence so far, the threat of BA.2.86 isn’t clear, said a CDC spokesperson. “We do not yet know what risks, if any, this may pose to the public’s health beyond what has been seen with other currently circulating lineages,” the spokesperson told EveryDay Health.

The CDC statement comes as Moderna, Pfizer, and Novavax are slated to release updated COVID-19 vaccines this fall, again possibly making them available for all ages. There is anticipation that the U.S. Food and Drug Administration will authorize the booster shots in the coming weeks.

It also comes as a small number businesses, schools, offices, and hospitals in recent days opted to re-implement mask mandates. A college in Atlanta, Hollywood studio Lionsgate, several hospitals, and others recently made masks mandatory, sparking concerns among some social media users that a broader attempt to re-instate mandates might be coming to the United States in the fall or winter.

“Employees must wear a medical grade face covering (surgical mask, KN95 or N95) when indoors except when alone in an office with the door closed, actively eating, actively drinking at their desk or workstation, or if they are the only individual present in a large open workspace,” a Lionsgate manager wrote in a memo, according to Deadline Hollywood.

The mandate was implemented even as the local Los Angeles County Department of Public Health reported that for COVID-19, “overall metrics remain at a low level of concern.”

The economic freakshow that is Erdoganomics is dead, if only for a few months…

The Turkish lira, which until today was the worst performing currency of 2023, exploded higher amid a massive short squeeze, after the Turkish central bank unexpectedly raised its benchmark interest rate much more than expected, in the first sign that a new lineup of monetary officials favors more aggressive moves to curb inflation running near 50%, and a stern rebuke to Erdogan’s long-running bizarro conviction that Turkey will keep rates lower in a bid to contain inflation (also known as Erdoganomics).

The Monetary Policy Committee, under new Governor Hafize Gaye Erkan, who previously was a co-CEO of the failed First Republic bank, raised the rate to 25%, up from 17.5% and far above survey expectations of a 20% hike. It was the MPC’s first decision since three new deputy governors were appointed late last month. They included a former adviser to the Federal Reserve Bank of New York and the ex-chief economist at one of Turkey’s biggest private lenders.

Erkan, appointed in June, has begun to end Turkey’s era of ultra-low borrowing costs previously favored by Erdogan (and to be favored again after the economy craters as a result of the sharply higher rates which will crush growth again).

While the rate remains well below the level of (hyper)inflation in Turkey, it’s the third straight hike since President Recep Tayyip Erdogan won reelection in May and pledged more orthodox policies for an economy foreign investors have fled in recent years.

Even with the recent hikes, many investors still think the central bank is still being too timid. They cite the fact inflation-adjusted interest rates remain well in negative territory as evidence of that. Turkey’s real rates are among the lowest in the world.

“The pace of policy tightening over recent months has disappointed market expectations,” ING Bank NV said ahead of Thursday’s decision, although today’s move may suggest the central bank is finally trying to catch up to real rates.

According to Bloomberg, Erkan’s approach poses significant risks for the credibility of the central bank, especially after it sharply raised its own inflation forecasts last month. The governor said price growth won’t peak until the second quarter of next year, but showed little willingness to raise policy rates much faster.

While Turkish rates should be much higher, the central bank’s latest regulation took aim at a government-backed savings program that protects account holders from any weakening of the lira. Officials now want them to convert to normal lira accounts. The new rules amount to a “stealth rate hike” and follow an earlier decision to raise banks’ reserve requirements that could in effect mean an additional 40 basis points of tightening, according to Bloomberg Economics.

On Sunday, the central bank began rolling the growing and costly scheme that protects lira deposits from FX depreciation, marking another move toward more orthodox policies following a shift toward interest rate hikes. The central bank said in the early hours on Sunday that it lifted targets applied to banks for certain levels of conversions of foreign-exchange deposits to the lira-protection scheme, known as KKM.

“The new measures will likely lead to higher rates on lira deposits,” Goldman Sachs Group Inc. analysts Clemens Grafe and Basak Edizgil said in a report. But “with the gap between deposit rates and the policy rate widening again, there is a risk of renewed dollarization or funds being withdrawn.”

In a reversal, the central bank now wants lenders to set a new goal of transitioning KKM accounts into regular lira accounts, in part by dissuading companies and individuals from renewing the KKM accounts.

According to a separate decree in the Official Gazette, the central bank also raised lenders’ reserve requirement ratios for FX deposits, further nudging customers into regular lira accounts.

Ahead of the rate decision, Citigroup cut the lira in its model portfolio after the government’s steps to reduce the size of foreign currency protected deposits. Citi said to go long USDTRY at 27.16 (via 3m forwards), with a target 32, stop 25.

“In light of the macro prudential measures taken by the CBT over the weekend to reduce the size of currency protected deposits, we think the timing is now suitable for re-entering this trade,” strategists Bhumika Gupta and Luis E Costa wrote in a note.

“MPC is also scheduled this week, and the consensus expectation is for a hike to 20% policy rate, from the current 17.5%. We see some risk that markets may be disappointed again, given the new Governor’s track record so far with respect to the magnitude of rate increases” Citi added.

In the end, she did indeed surprise, but on the other side, with a rate hike that was bigger than expected. The problem, of course, is that this has been tried before in Turkey, and every time there is a sharp rate hike, the economy eventually grinds to a halt, culminating with Erdogan firing the central bank head and appointing another puppet. To be sure, this time will be no different, but for now at least, the Lira is enjoying a huge short squeeze, with the USDTRY tumbling as much as 6%…

… the currency’s second largest squeeze in history, second only to the Dec 20, 2021 short massacre, when Erdogan fired a bazooka at lira shorts.

The move lasted a few months before the currency tumbled to new all time lows.

As for today’s historic surge in the lira, enjoy it while it lasts, because it won’t: with rates once again soaring Erdogan will keep his mouth shut for a few months (weeks) until the wheels fall off the economy again, at which point he will once again terminate all the central bankers and appoint a new set of puppets who resume easing because rinse, repeat, and yet somehow the market is surprised every single time we get a rerun of this exact same script.

Authored by Simon White, Bloomberg macro strategist,

Federal Reserve Chair Jay Powell’s speech at Jackson Hole this week promises to give stocks a boost. But it’s likely to be short lived as the liquidity outlook soon worsens.

After months of rising almost uninterruptedly, stocks finally hit resistance as longer-term real yields rose to a 15-year high. The main driver though – a belief that the Fed will up its estimate of the neutral rate at Jackson Hole – is likely to come unstuck, prompting a relief rally in stocks.

But this is a trade rather than an investment, as real-yield curve dynamics point to less supportive liquidity conditions on their way soon, turning what was a tailwind for stocks and other risk assets into a headwind.

What is the US? Or Russia? Or the dollar, or Christianity, or Apple? These are not glib questions. They are what the historian Yuval Noah Harari refers to as “intra-subjective beliefs,” concepts that have meaning and utility because many people believe in them.

To the list we could add the neutral rate of interest. Normally such an abstraction would not have a real market impact. But given the market’s recent focus on it, it appears to have had just that.

Longer-term real yields began to rise in late July. It’s not a fait accompli, however, that this was driven by the neutral rate. The yield on a TIPS bond is the “actual” real yield + the TIPS liquidity premium. Often a rise in the real yield is driven by a rise in the liquidity premium as TIPS are sold.

But in these situations, breakevens typically fall too. The fact that they have remained steady shows that the rise in real yields was principally driven by the “actual” long-term real yield, i.e. by the neutral rate.

But that leaves the real yield open to disappointment. Powell is expected to up the Fed’s estimate of neutral at his Jackson Hole speech on Friday. Even if he does (although it’s unlikely he would want to unnecessarily tie the Fed down), there is a lot already in the real yield’s level, leaving it prone to reversing (after peaking at 2%, 10y real rates are now at 1.84%, still about 36 bps above where they were a few weeks ago).

The initial reaction would likely be a boost for stocks and other risk assets. Stocks started to sell off when 10y real yields began to rise in late July; a fall is likely to bring some relief to the equity market.

But the real information content comes from looking at the real-yield curve and its relationship with excess liquidity and the dollar. I discussed the mechanics fully here, but the TikTok version is that a flatter real-yield curve has led to a weaker dollar, and that has been the main driver of this year’s boost to global excess liquidity: the difference between real global money growth and economic growth, denominated in USD.

The flattening real-yield curve has thus signaled positive conditions for real assets through rising excess liquidity.

We saw this in reverse over the last few weeks: 10y real yields rose, the real-yield curve steepened, the dollar rallied and stocks sold off.

We now have a clearer idea of exactly why a fall in longer-term reals should trigger a rally in stocks. But it also tells us that any rally is fated not to last long. That’s because it is very unusual for the real-yield curve to flatten as 10-year real yields drop, i.e. a bull-flattening.

The chart below shows the 2s10s real-yield curve color-coded for different curve moves (over rolling six-month periods). Bull-flattenings only occur about 7% of the time (going back to 2004).

Much more common are bear-flattenings (brown color in the chart above), when two-year real yields rise more than 10-year reals. But two-year reals are already nudging 20-year highs (excepting their GFC spike). It will be difficult for them to push much higher, especially with the Fed near-done or done raising rates, and the likelihood inflation starts rising again.

Also a negative influence for short-term real yields would be the Fed raising its inflation target. Whether it eventually happens or not (and there is a lot to discuss on the topic), it is something we are likely to hear increasingly more about.

Either way, the real-yield curve is poised to soon begin steepening again (chiming with expectations the nominal curve also continues to steepen), meaning what is currently a tailwind for risk assets in buoyant excess liquidity is soon set to turn.

To recap, a rise in expectations of the neutral rate likely drove the real yield higher. Stocks are poised for a relief rally as these expectations are disappointed, but it’s likely to be short-lived as the real-yield curve starts to re-steepen, pointing to a fall in excess liquidity.

This might seem a lot of convolution when one could simply point to the rise in nominal yields over the last month being the culprit for the stock selloff. But well over half of the time (59%, going back to 1962) when yields are up over the previous month, stocks are up too.

Such a rule-of-thumb is thus very misleading. The truth, as Oscar Wilde said, is rarely pure and never simple.