The Macro Unicorn

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Hi everyone - this is Alf. I hope you're having a great day.‘’There are decades where nothing happens; and there are weeks where decades happen’’ – Vladimir Lenin.Markets were sleepwalking into April 2nd before we had a decent sell-off in US stock markets on Friday.But the size of the YTD sell-off (a mere 5%) masks a very interesting pattern happening below the surface.For the first time since the first half of 2008, we are observing a rare macro pattern – almost a unicorn.The S&P 500 and the US Dollar are going down at the same time:The chart at page 1 shows the 3-month rolling returns for the US Dollar Index (DXY) and the S&P 500.Historically, large SPX drawdown (left part of the scatter) tend to see the USD rallying heavily: the most convex USD appreciation (upper side of scatter) tends to coincide with bad equity drawdowns.This also implies that the upper-left quadrant (SPX down a lot, USD up a lot) experiences the most elongated tail of all the quadrants.The ‘’Macro Unicorn’’ bottom-left quadrant with SPX drawdowns happening alongside a weak USD is not very populated. It’s crucial to remember the last Macro Unicorn dot goes back to July 2008.Why was it so hard for the USD to weaken while the S&P 500 was going down?This is because of three reasons:1) After 2008, the Eurodollar system blew up in size and never looked back;2) The US aggressively swallowed global trade surpluses, and in exchange became the epicenter of all global financial flows into Treasuries and US stock markets;3) Policymakers applied growth-friendly disinflationary policies and politicians postured to…