The Mother of All Hooks

ilene's picture

The Mother of All Hooks

Courtesy of Russ Winter of Winter Watch at Wall Street Examiner

Over the course of my thirty five year investing life I have noticed that markets often trade on hooks. A hook is when most participants develop a preconceived notion about “how things work.” Then trading follows a pattern, drawing more in. In the past, hooks were relatively harmless and when they came undone, they had little lasting overall economic impact. However, in today’s brave new world, undone hooks will severely and I think critically damage the system. At present the hook is a doozy. It is that central banks have given speculators a put that will somehow not only save both the system and their bets,  but make them profitable, even in the face of too big to save insolvencies. I hold that this hook is at peak absurdity.

In developing a further understanding of how hooks work today, I would highly recommend a reading of “Boomerang,” by Michael Lewis. Lewis describes the crazy wild-man betting that goes hand in hand with so called, and dubious, central bank puts,  leverage, and financialization. ZIRP all but guarantees this. This goes far beyond infecting and wrecking capital markets. This infects whole countries, and in his opening chapter Lewis gives the recent financial history of Iceland as an example. Iceland was sold the bill of goods that being a hedge fund was much more satisfying than actually producing useful goods and services. Like all crazy-ass betting parlors, the Iceland story ended in disaster. Iceland was a microcosm of a much larger “sistema” (Portuguese) in place today. It also shouldn’t be ignored that, just like in 2007-2009,  some large hedge funds are also making “big short” bets against the current hook.

A thinking person (I would imagine many of my readers) going through the revealing Lewis book would easily come to the conclusion that in bubble financial systems,  gamblers learn no lessons, and given the opportunity will return to the tables for more crazy bets. The aspect that should be apparent is that the players take no heed of clear and present danger.  As such, they distort markets severely and wreck the price signals of markets. This is not capitalism, not in the slightest. Even terms like “moral hazard” don’t do this justice.  It doesn’t help matters that central banks have joined in on the wild-ass betting. "Providing liquidity” is Ministry of Truth (MoT) spin language for paying stupid prices for fictitious capital or lending against shakier and shadier collateral. This is the mother of all wild-ass hook betting. When Greece re-defaults in June, we will  get a revealing test, as the final bill will be sent to the official sector.

In 2007-2008 the markets entered a period when certain investment gambling houses took on the silly season stupid positions of the day in the markets.  It is the marginal buyer who determines prices. That is especially true today, because markets are thinned out. My suspicion is that the new AIGs, Bear Stearnses and Lehmans of 2012 are even larger,  too big to save institutions and are making stupider bets than ever, mostly around mother-of-all- hook trades. And they are backstopped by too big to save countries who serve as foils.  And that is the rub.

Trading in markets dominated by the Icelands and AIGs of 2012 can be very challenging. This is the reason that reactions to nasty events seem so odd. The Icelands of 2012 don’t care one iota because they are bound to drive off cliffs, Wile E Coyote style. Michael Lewis describes the incentives well: no claw-backs, and no criminal prosecution, just gamble and collect when there are winnings, and walk away when it blows up. I have mentioned numerous trigger points that will blow the sistema up, but a too big to save failure of a financial institution (or several) combined with a too big to save sovereign defacto default (or several) has as good a chance as any of being the mother of all game changers.


For additional analysis on this topic and related trades subscribe to Russ Winter’s Actionable – risk free for 30 days.  The subscription fee is $69 per quarter and helps support Russ’s work on your behalf.  Click here for more information.  

Copyright © 2012 The Wall Street Examiner. All Rights Reserved. The above may be reposted with attribution and a prominent link to the The Wall Street Examiner.

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Nachdenken's picture

"Collect the winnings, walk away when it blows"  add the taxpayer clears up and carries the losses.

All said.  The systems will reset only when they crash irrevocably.  That is not this year. 

q99x2's picture

I don't know bonds so I'm not sure if I'm reading Hedry right. But I think in this article. HERE.

He believes that:

'the threat of debt and deflation'

is over.


it might:

'prove rewarding to short the government bond market and embrace what may turn out to be a much promised once in a lifetime buying opportunity for risk assets'

Say it ain't so.

Golden monkey's picture

" gamblers learn no lessons, and given the opportunity will return to the tables for more crazy bets. "

On a long enough timeline, the hook will be completely done. Derivatives failure, combined with massive ass kissing from Secret Service agents.

Got physical? Time is short player 


masterinchancery's picture

There is no reason to learn any lessons when you can dump your losses on the taxpayers.

ghenny's picture

Every system seems to produce dysfunctional behavior sooner or later.  In some ways its a jungle out there.  You can create Islands of safety and stability for awhile - like our parents did after WW2 - but life never allows them to persist.  Its the nature of things to evolve and change, to become disturbed and dismembered and hopefully renewed.  All we can hope for as individuals is that we live in a time of peace and plenty or have strong coping and adapting skillss if we don't or it goes away.  I am grateful I have lived in the golden years from 1950 to today. Although things have not always been terrific they have mostly been good.  I think we are about to enter another time of chaos and trouble like the pre WW2 decade, although technological change at the rate we are producing it is a wild card.  If things go badly for me at least I will have had a pretty good 62 year run.  I pray that my kids and grand kids get their chance at a decent life and yet I worry they will be severly challenged.  That can be a good thing but it can also be very scarry.  I would like to control the outcome for them but I can't.  I suspect a lot of people in my age cohort feel as I do and maybe we feel that way because we are aging.  In some ways we have been a very selfish generation and very lucky.  Maybe its payback time.  Good luck to us all and God protect the kids.

Setarcos's picture

@ ghenny.  Exactly.  Quite a lot of my 69 years has been shit, frankly, but I've lived during such times as one could fairly easily recover, from whatever, and move on ... such as with a different job, or with a health problem fixed.

I don't like now being old and quite badly disabled, but there is no way I'd want to be just starting out, or even still in my more able 50s.  I don't know what else to add to your comments.

EFNuttin's picture

This "hook" article is interesting and makes me wonder.  A lot of ZHers believe this whole financial markets system is a complete sham arranged to help the rich get richer, and there is a LOT of truth to that.  However, throw in politicians, national governments, competing publics, armed forces, and so on, and the system gets extremely compex and difficult for any cabal to attempt to control, especially since the cabal members must live by the truth that "there is no honor among thieves".  If this is the case, then perhaps we have gone from the old days where individual nations went through boom and bust cycles as bubbles formed and then popped, to a much larger cycle with multiple continents joining hands via central bank collusions and puffing up a mega-bubble.  If this is the case, then just like "investors" in 2000 growing skeptical that a dot-com with a massive imbalance of income to obligations could ever increase revenues and/or lower expenses sufficiently to meet those obligations, these nation-states will eventually be undone by a sudden turn in the bond market.  The PIIGS are the shape of things to come, I'm afraid.  We are all Greeks now.  You can quibble about the details, but unfunded future obligations leave few pleasant options for policy makers or those who must live with the policies.  As Rush (and some philosopher before them) put it, "If you choose not to decide, you still have made a choice."  Thus the politicians and the citizens have been kicking the can down the road while propped up by lenders crazy enough to loan money at a sub 2 percent return for 10 years while inflation runs amok in the here and now.  When will this game end?  When does the hook turn?

sgt_doom's picture

Sorry, have to take exception to this as Michael Lewis is one of those typical misdirector types, subtle, but still in the misdirection game, just like Harvard's Niall Ferguson and Lawrence Lessig, going around the country giving talks as apologists for Wall Street, etc.

My Book List (please note no Michael Lewis):

Wall Street Capitalism: The Theory of the Bondholding Class, by E. Ray Canterbery
Billionaires' Ball, by Linda McQuaig and Neil Brooks
Extreme Money, by Satyajit Das
Treasure Islands, by Nicholas Shaxson
Debt:  the first 5,000 years, by David Graeber
Retirement Heist, by Ellen Schultz
Other People's Money, by Nomi Prins
The Spirit Level, by Kate Pickett and Richard Wilkinson
Trade, Development and Foreign Debt, by Michael Hudson
The Rich and the Super-Rich, by Ferdinand Lundberg

(And if you're interesting in the education front of the econo-wars)

The Unmaking of the Public University, by Christopher Newfield

sof_hannibal's picture

sgt, strong list... you can't blame M. Lewis for trying though... Money Ball was a good movie, didn't read the book though... oh, you mean the big short, etc. I say stick to that list you provide!!! Operation Anaconda

lasvegaspersona's picture

Right author (Lewis) wrong book. Iceland was in his latest....Boomerang.

russwinter's picture

Correct, this Boomerang- Big Short typo was corrected in the orginial article. Boomerang is the book I recommend.