Beware of the Hyperthyroid Market?
The Dow Jones Industrial average fell 204 points Thursday in its first drop of that point magnitude or greater since a 373-point shellacking in May. Before that, the benchmark had only fallen more than 200 points one other time this year, a 238-point drubbing on March 21.In my last comment looking at when the tech bubble will burst, I stated are two big risks in the market right now:
This has been such a calm bull market that there's been only five single-day declines greater than 200 points by the Dow in the last 12 months.
Using hedge fund analytics tool Kensho, CNBC looked at what happened during the day and week following those five sell-offs. Here is what the Dow did the next day, on average, and its top winners and losers (click on image):
Here's its average performance one week out and top winners and losers (click on image):
The Dow was up 100 percent of the time one week out. (And note Apple leading the bounce again.)
So this "buy-the-dip" market has earned that mantra.
But some investors who have "bought the dip" recently are changing their tune this week because of new factors like over-the-top bullishness and the North Korea war of words initiated this week by President Donald Trump.
Doug Ramsey of The Leuthold Group believes a sell-off amounting to about 8 percent is ahead, citing seasonal weakness that typically comes around this time and an irrational surge in bullish sentiment.
"Conditions have slipped into place for at least a short-term correction," said Ramsey, the CIO of the firm.
Jonathan Krinsky, chief market technician at MKM Partners, wrote in a note to clients Thursday morning that, "While the major indices continue to give a sense of calm above the surface, there is a growing list of negative divergences."
And he cited the seasonal weakness as well, displaying this chart in his note (click on image):
Source: MKM Partners, Bloomberg
So some investors and market observers believe this could be the end of that buy-the-dip mentality.
- A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
- A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher mutltipes or risk severe underperformance.
Since writing that comment, stocks and other risk assets got whacked mostly owing to geopolitical jitters due to tensions with North Korea, driving US long bond yields lower (and prices higher), but my bearish views had nothing to do with geopolitics, it was all about my macro views where I see a US slowdown followed by a global slowdown.
I didn't mean to scare people with my cataclysmic views but I think it's really important to properly understand the macro risks going forward because if you get it wrong, you're dead. And buying the dip in this market isn't as simple as before because the macro winds have shifted abruptly.
On Thursday, Bridgewater's Chairman and CEO Ray Dalio posted a comment on LinkedIn, Risks Are Rising While Low Risks Are Discounted:
There are returns, and there are risks. We think of them individually, and then we combine them into a portfolio. We think of returns and opportunities as coming from those things we’d bet on, and we think of risks as the adverse market consequences of us being wrong due to our being out of balance. We start with our balanced beta portfolio—i.e., that portfolio that would most certainly fund our intended uses of the money. Everyone should have their own based on their own projected uses of money, though more generally, it’s our All Weather portfolio. We then create a balanced portfolio of opportunity/alpha bets based on what we think is likely to happen. We then combine them.I looked at the five-year weekly chart of the S&P Gold Trust ETF (GLD) and see it looks ready to climb higher here (click on image):
We bet on the events/outcomes that we think we have an edge in understanding. For events/outcomes where we don’t think we have a particular edge—e.g., political events—we aim to construct our portfolio to be relatively neutral or balanced to those risks.
Risk and Volatility
As a rule, periods of lower risk/volatility tend to lead to periods of greater risk/volatility. That is reflected in our aggregate market volatility gauge (see below), and markets are pricing in volatility to remain low next year too (click on image).
As a related rule, people adapt to the circumstances they have experienced and are then surprised when the future is different than the past. In other words, most people are inclined to assume that the circumstances they have recently encountered will persist, which leads them to change what they are doing to be consistent with that recently experienced environment. For example, low-volatility periods in which credit is readily available tend to lead people to assume that it’s safe to borrow more, which leads them to lever up their positions, which contributes to greater volatility and hurts them when things change.
That appears to be the case now—i.e., prospective risks are now rising and do not appear appropriately priced in because of a) a backward looking at risk and b) corporate leveraging up has been high because interest rates are low relative to many companies’ projected ROEs and because past risks have been low. The emerging risks appear more political than economic, which makes them especially challenging to price in. Most immediately, during the calm of the August vacation season, we are seeing 1) two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war, and 2) the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising. It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities.
When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on. Most importantly, we aim to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. We like to hedge our bets, though we are never completely hedged. We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest that you relook at this. Don’t let traditional biases, rather than an excellent analysis, stand in the way of you doing this (and if you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you sharing it with us).
But given my deflationary views, I'm bullish on US bonds (TLT) and the US dollar (UUP) here which is why I would avoid gold altogether in a deflationary world (unless there is a major crisis of confidence in the future but we're not there yet).
In fact, I even posted a comment on LinkedIn in response to Ray's comment which you can read below (click on image):
If you can't read it, I posted this:
Ray, back in 2004, I warned you global deflation is coming and you rightly asked me "what's your track record?". Thirteen years later, I'm still beating the global deflation drum. I don't like gold because I see a deflationary meltdown ahead, so I put all my money in US long bonds (TLT) two weeks ago, stopped trading biotechs (XBI), and been sleeping like a baby ever since. I suggest everyone else reading this comment follow my lead.One of my great highlights of my short pension career was meeting Ray Dalio. He's imposing, tough, very sharp and he can be very abrasive but that's ok because while he sent me on my way with my balls in my mouth, at least I can say I met Ray Dalio and got under his skin (only got to meet Ray because Gordon Fyfe accompanied me on that meeting. I tend to irritate a lot of people, just ask Gordon.)
I also lied to you when I told you I've been sleeping like a baby lately after I recently put all my money in US long bonds (TLT) and stopped trading biotech (XBI) stocks.
You see, I haven't been feeling well all summer. I lost close to 30 lbs in a couple of months, had night sweats, heat intolerance, been more irritable than normal, extremely weak and haven't been able to sleep well at all.
Now, I was diagnosed with Mutltiple Sclerosis 20 years ago, so intitially I thought my MS was getting worse, but when I was losing weight rapidly and had night sweats, I freaked and was worried I had Lymphoma, so I went to do a battery of tests.
My blood tests showed I have hyperthyroidism (overactive thyroid) which is a condition in which your thyroid gland produces too much of the hormone thyroxine. The classic symptoms are the following:
- Rapid heart rate and palpitations
- Shortness of breath
- Goiter (swelling of the thyroid gland)
- Moist skin and increased perspiration
- Shakiness and tremors
- Anxiety
- Heat intolerance and sweating
- Increased appetite accompanied by weight loss
- Insomnia
- Irritability
- Swollen, reddened, and bulging eyes (in Graves disease)
- Occasionally, raised, thickened skin over the shins, back of feet, back, hands, or even face
- In crisis: fever, very rapid pulse, agitation, and possibly delirium
- Changes in menstrual periods
- Difficulty concentrating
The image below shows you the symptoms of Grave's disease, an autoimmune condition which affects your thyroid, making it more active (click on image)
It's also important to note that hyperthyroidism is a lot less common than hypothyroidism which has the following symptoms:
- Unexplained weight gain (even if you eat well and exercise)
- Fatigue
- Cold temperature intolerance
- Muscle weakness, aches or stiffness
- Joint pain or stiffness
- Constipation
- Dry skin
- Thinning hair
- Decreased heart rate
- Depression
- Memory loss
[Note: Grave's disease is the autoimmune disease typically associated with hyperthyroidism and Hashimoto's disease is an autoimmune disease typically associated with hypothyroidism. It's tricky but your thyroid has to produce just enough thyroxine. Too much or too little leads to major health issues. Read about Hashimoto's thyroiditis here.]
I believe I have suffered from periods of both hypothyroidism and hyperthyroidism for a very long time (it alternates but now it's classic hyper) and because I have MS, I always chalked these symptoms up to MS. And I come from a family of doctors and all my friends are doctors and they too were surprised to hear I have an overactive thyroid.
It's not their fault, doctors often miss thyroid problems. Luckily, both thyroid conditions (hypo and hyper) can be treated by seeing an endocrinologist which is my next step. Left untreated, hyperthyroidism can bring about debilitating long-term effects, including osteoporosis and even blindness.
Bottom line: Always check your thyroid even if you have another condition, it can wreak havoc on your health and well-being.
As far as these markets, they too suffer from hyperthyroidism but they don't know it yet. And there is no endocrinologist in the world that can save these markets from global deflation, and the long-term effects will be equally devastating.
Hope you enjoyed this comment. If you know someone who has these symptoms I described above, or if you have them, please check your thyroid and get the necessary treatment.
I've been busy going to hospitals doing tests and I need to treat this as soon as possible so forgive me if I haven't been publishing my usual daily comments, I am wiped and don't feel well. Hopefully, once I get my thyroid under control, I will be back to my normal (less irritable) self.
I thank those of you who checked in on me and especially thank those of you who continue to support my blog through donations and subscriptions. I need to think about my next steps because blogging is a lot of work which is grossly underpaid and once I get my health under control, I am ready to do something else.
I have contacted a few organizations in Montreal and I would appreciate your help.
That's all from me, remember to always check your thyroid, and always take care of your health first and foremost.
Below, Barry James warns a correction is 'inevitable', even as the market looks happy on its surface. A 'herd mentality' has driven up valuations, and he warns there’s a 'supervolcano' waiting to erupt beneath a seemingly 'beautiful' market.
Also, I embedded a clip where a registered nurse discusses the differences between hypothyroidism and hyperthyroidism, including the causes, signs and symptoms, and treatments. Once again, if you think you have thyroid issues, get a blood test to be sure and get treated for it as soon as possible.
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