Within weeks of the early departure of the Bank of Spain’s governor, the deputy governor of that institution also calls it quits. The ex-chief of the Hong Kong Monetary Authority says in a report that the city should take a close look at whether its currency is really doing the job that it should; reactions range from surprised to annoyed.  The ECB wants Spain to hurry up and finish its plans for how to divide up wounded banks into “okay” and “broken” versions.  Today’s newsletter features commentary from Doug Ashburn, who draws an unpleasantly accurate parallel between the minds of financial reformers, and the stomach of an early 20th century cartoon character.

Commentary and Insight

The Wimpy Solution
by Douglas Ashburn

The message came through loud and clear last week – the world economy is slowing down.

In the U.S., last week’s paltry payroll number of 69,000 really deflated the recovery party balloon. Since then, several regional Federal Reserve Bank presidents have been making the rounds, dropping hints about further Fed action when Operation Twist runs its course at month’s end.

In the eurozone, the hits keep on coming. After weeks of denials, Spain finally acknowledged that its banking sector needed help. On Saturday, help came, to the tune of about $125 billion. According to the announcement, the European bailout loan is being made directly to Spanish banks, and thus should not affect the nation’s fiscal viability. Of course, as we have seen throughout the eurozone crisis, the difference between bank failure and a country’s implosion can be measured in months. As Charles Bronson used to say, “Dis ain’t over.”

Emerging markets such as China, India and Brazil proved that, in the era of globalization, there is no such thing as “decoupling.” All three nations cut rates last week; China for the first time since 2008. As goes the West, so go the BRICs.

For five solid years now, ever since the subprime meltdown in the U.S., the answer has come in “bold” proclamations and programs. I would use a different term to describe them, though – “Wimpy.”

I do not mean “wimpy” as in “not bold enough” but rather “Wimpy” as in J. Wellington Wimpy, the lovably lazy scam artist from the Popeye comic strip. For readers not familiar with Wimpy, suffice it to say that, while he was intelligent and industrious, he was also gluttonous, shiftless, and had a penchant for the bait-and-switch. His catchphrase, “I will gladly pay you Tuesday for a hamburger today,” pretty much summed up his life.

Now, whenever I read of another fiscal fix, program or solution to a slowing economy, all I see is “Wimpy.”

In last week’s Congressional testimony, Fed Chairman Ben Bernanke said the central bank “is ready to take action if conditions deteriorate.” He also expressed concerns about fiscal policy, calling for Congress to work toward long-term fiscal stability, but without “impeding the current economic recovery.”

Translation: “Congress should cut its deficit Tuesday after added stimulus today.”

As European leaders were putting the finishing touches on the Spain bailout, Nouriel Roubini and Niall Ferguson, two of the most respected economists in the world, were submitting a commentary on Europe’s prognosis. Their solution:

“Structural reforms that boost productivity growth should be accelerated. And economic growth needs to be jump-started. The policies to achieve this include further monetary easing by the ECB, a weaker euro, some fiscal stimulus in the core, more bottleneck-reducing and supply-stimulating infrastructure spending in the periphery (preferably with some kind of “golden rule” for public investment), and wage increases above productivity in the core to boost income and consumption. Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualisation.”
Regarding Germany’s fears of inflation and moral hazard, and demand for austerity as a condition of bailout, Roubini and Ferguson say that structural reforms are “bound to take time,” but that the banking crisis is immediate and “could escalate in days.”

Translation: “Europe’s periphery will gladly reform its bloated public sectors Tuesday for a bailout and Eurobond program today.”

And so on.

As the world economy sputters, the calls for currency debasement, fiscal stimulus, debt forgiveness and transfers of wealth from savers to borrowers become more frequent and shrill. Implement the solutions and everything will be fine.

Until Tuesday, that is.

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FX Workshop: Trading in the $5 Trillion/Day Market
Wednesday, June 13, 2012 … 3:00 – 8:00 PM
THE WESTIN MICHIGAN AVENUE; CHICAGO BALLROOM, 909 North Michigan Avenue, Chicago

Profit & Loss is hosting this special afternoon workshop for those interested in trading FX as an asset class – including a look at platforms available, cost factors and whether there is a regulatory challenge in the pipeline for FX or if it will remain an easy game to participate in.

This workshop is free to attend for individuals interested in trading and investing in FX. Please note that a fee of USD1,000 applies to non-qualifying participants.

For complete details, visit
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***JM: Doug Ashburn tells me he’ll be attending this workshop – say hi if you see him there!

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UBS: We Are In The Eye Of The Foreign Exchange Hurricane
Business Insider
UBS analyst Syed Mansoor Mohi-uddin says that the current calm in the forex markets will be short-lived.
http://jlne.ws/LQqaOY

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Merkel faces tough sell at home over Spanish aid
Reuters via Yahoo! News
Angela Merkel’s government was forced to defend an EU rescue for Spain’s indebted banks on Monday, with many Germans convinced their generosity is being abused and skeptics warning that promising aid without tough conditions sets a risky precedent.
http://jlne.ws/LqZIMa

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Fed: Recession set household wealth back nearly 20 years
CBS News
Federal Reserve survey finds the Great Recession shrank Americans’ wealth so much that in 2010 median family net worth equal to 1992 level
http://jlne.ws/LQqdu0

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Why the Bailout in Spain Won’t Work
By ANDREW ROSS SORKIN – NY Times
It now appears that the $125 billion bailout of Spain’s banks could make things there worse, not better. And market indicators for the next domino in line for a bailout, Italy, point in the wrong direction.
http://jlne.ws/LqZHYE

***JM: Would have given this article a gold star if it had been written on Friday morning, not Monday afternoon…

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How Not to Solve a Crisis
By JOE NOCERA – NY Times
Wasn’t Europe paying attention when Lehman Brothers imploded? The response to the euro-zone crisis makes you wonder.
http://jlne.ws/LqZHIh

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            FX One Month Implied Volatility Data

**Data provided by www.OptionWorks.com

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Lead Stories

Bank of Spain deputy governor Aríztegui resigns
Market Watch
The Bank of Spain announced Monday that Deputy Governor Javier Aríztegui will step down, with Fernando Restoy Lozano nominated to take his place. The resignation of Ariztegui comes weeks after Bank of Spain Governor Miguel Angel Fernandez Ordonez quit ahead of the expiration of his normal term.
http://jlne.ws/LQqduf

Former HKMA Chief Calls for Review of Hong Kong Dollar Peg
By Fion Li and Simon Lee – Bloomberg
Joseph Yam, the former Hong Kong monetary chief who helped introduce a dollar peg in 1983 and defended it against speculators during the Asian financial crisis, said the city should review its currency policy.
http://jlne.ws/LQqblT

ECB says Spain should step up “bad bank” plans
Reuters via Yahoo! News
The European Central Bank has asked Spain to review and strengthen its plans to create “bad banks” where the lenders would park their toxic real estate assets to later sell them off, an ECB document showed on Monday.
http://jlne.ws/LQqdKy

IMF Says Yen Is Overvalued and BOJ Should Add Stimulus: Economy
Bloomberg
The International Monetary Fund said Japan’s currency is overvalued and the central bank should consider further monetary stimulus, including longer-dated government bonds and private securities.
http://jlne.ws/LQqbm1

China Policy Bank Dim Sum Sales Soar as Lenders Seek Export Debt
Bloomberg
Sales of yuan-denominated bonds in Hong Kong by China’s policy banks jumped 187 percent this year as the government moves to arrest stalling growth and the lenders seek funds to help boost exports.
http://jlne.ws/LQqbm6

IMF seeks ‘powerful’ easing from Bank of Japan
By Chris Oliver, MarketWatch
The International Monetary Fund said Tuesday the Bank of Japan should pursue “powerful monetary easing” to increase the chance of meeting its 1% inflation goal by 2014, according to a statement published on the website of the Washington-based agency.
http://jlne.ws/LQqbCk

Company News

FXCM is number 1 Forex broker in France
Business Wire via Yahoo! Finance
FXCM France, has been recognised as the biggest Forex broker in France in terms of volume and number of clients by the Investment Trends survey.The results are drawn from a survey conducted in February 2012, which found there are 20,000 individual investors trading CFDs and/or Forex in France.
http://jlne.ws/LQqe16

Central Banks

Russian central bank rides to the rescue of the ruble
Nasdaq
Intervention by the Central Bank of Russia (CBR) reversed the slide in the ruble’s value against the dollar last week, after the currency lost 12% of its value in May.
http://jlne.ws/LQqbCu

Bank of France says fiscal rectitude not growth’s enemy
Reuters via Yahoo! News
Strong fiscal discipline remains critical for euro area countries and should not be seen as the enemy of growth, Bank of France Governor Christian Noyer said on Monday.
http://jlne.ws/LQqbCA

China bank lending accelerates in May
By Chris Oliver, MarketWatch
China’s bank lending and the money supply expanded more than expected in May, with households and corporations showing a strong appetite for loans of medium and longer-term duration, indicating that Beijing’s policy easing was beginning to find traction.
http://jlne.ws/LQqehz

Brazil’s Central Bank Sells $400 Million in Dollar-Swap Auction
Dow Jones
Brazil’s central bank Monday sold less than half of the $1 billion in dollar-swap contracts it was prepared to sell, halting only temporarily the continued weakness in the country’s currency.
http://jlne.ws/LQqbT0

Global Economy

Exclusive: Euro zone discussed capital controls if Greek exits euro: sources
Reuters via Yahoo! News
European finance officials have discussed limiting the size of withdrawals from ATM machines, imposing border checks and introducing euro zone capital controls as a worst-case scenario should Athens decide to leave the euro.
http://jlne.ws/LQqehN

Bundesbank warns on EU banking union
By James Wilson in Frankfurt – Financial Times
Germany’s Bundesbank has warned of possible risks from banking union in the EU, saying it would be tantamount to a back-door pooling of sovereign debt, unless accompanied by fiscal union that allowed control over national budgets.
http://jlne.ws/LqZIMj

Markets and Price Risk

FTSE And Curex Group Announce Global Partnership And The Launch Of Independently Calculated, 24/5 Real-Time Executable Benchmarks For Spot FX
FTSE, the award winning global index provider, and Cürex Group, a leading developer of intellectual property and technologies that link institutional foreign exchange with global capital markets, today announced their worldwide partnership and the launch of the FTSE Cürex FX Index Series – a new range of independently calculated, 24/5 streaming, executable spot FX benchmark FIX for currency pairs and currency baskets.
http://jlne.ws/LQqey6

Yen Gains Versus Peers Before Italy Debt Sale, Greek Vote
Bloomberg
The yen climbed against all of its 16 major counterparts amid concern the bailout of Spain’s banks will move Italy to the forefront of the debt crisis, spurring demand for the Japanese currency as a haven.
http://jlne.ws/LQqey9

[Video] RBS’s Sinche on Gold Prices and Currencies
Bloomberg
Robert Sinche, global head of currency strategy at Royal Bank of Scotland Plc, talks about the outlook for gold prices and currency markets.
http://jlne.ws/LQjX5J