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Here’s a flashback to 1987 and some wise words from Bruce Kovner.
This morning we have some real panicky moves in bonds. This sort of increase in volatility with ugly flattening is ominous, and I continue to be concerned about risk assets.
If we get a really bad risk-off move, I know the initial knee jerk reaction will be to buy US dollars. I get it. I understand the rationale. However, I want to remind you of Bruce Kovner’s Market Wizards recount of the 1987 equity crash:
And here is the chart of the S&P 500 (white bars) with DXY (orange line) during the 1987 crash. (notice the slight uptick on the day after the crash):
I am not saying we are going to have a 1987 style crash (although I am worried about equities here). And I am not saying the US dollar is about to go down (although I do believe the long USD position is crowded).
My only purpose is to remind you that if things get really hairy, eventually the US dollar needs to become the world economic lubricant. If the sh*t hits the fan, at some point, I want to be short USD, not long, but in the meantime, I still think FX vol is dirt cheap.