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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
May 17, 2012
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Along the lines of happenings in the periphery country Greece, things are also going from bad to worse at a European core country, Spain.  After promising that no additional public money would be used to bailout Spain’s troubled banks, Prime Minister Rajoy was forced to backtrack this week with the nationalization of the fourth largest Spanish bank, Bankia.  And today’s widely anticipated announcement of plans for addressing banking system issues was less than confidence inspiring. 

Saddled with enormous real estate loan portfolios, confidence in the Spanish banking system is quickly evaporating.  Analysts talk of the need for a massive (Irish-style) recapitalization program ($150bn-$200bn), an enormous sum for an already troubled sovereign borrower.  Spain’s Credit default swap prices jumped another 36 bps this week to a record 517 bps.  This week provided added confirmation that the European crisis has decisively infiltrated the “core.” 

In discussing Credit insurance and derivative markets over the years, I’ve invoked an analogy of writing flood insurance during a drought.  It’s a truly wonderful business – that is until torrential rains arrive and the complacent community of highly-speculative (and thinly-capitalized) insurers flood the insurance market as they desperately attempt to offload (“reinsure”) the risk they accumulated during the profitable drought-period boom.  Those seeking long-term survival (as opposed to the crowd trying to make a quick buck) better have a superior ability to discern weather patterns.

If I were JPMorgan top management, I’d surely be moving today to reduce the company’s risk profile – especially with respect to myriad global market risks.  The clouds are darkening and much better to move before the heavy downpours commence (and buyers, along with their liquidity, run for the hills).  While I will give no Credit for their self-serving self-flagellation, they are a savvy group that has demonstrated their ability to manage through crises.  Certainly, writing Credit and market risk insurance has, again, become a risky proposition.  And I’ll assume that JPMorgan’s market-making operations will be reined in throughout various risk insurance markets – and I’ll assume a similar change in tack will be afoot by the cadre of major derivatives operators.  Importantly, this equates to less liquidity and more expensive market insurance.  A less favorable insurance market equates to more restraint in risk-taking and an attendant tightening of financial conditions.  As such, I would not be surprised if this week proves a major inflection point for global risk markets - and a major coup for “risk off.”