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GOLDMAN: The Next 24 Hours Will Be Critical For The Global Economy

Joe Weisenthal

Goldman’s Dominic Wilson is out with a new note offering guidance to investors on whether to finally jump off the stockmarket, and get more bearish.

Here’s the key threshold:

We think that risk assets are likely to move higher as long as US data remain consistent with GDP growth of somewhat more than 2%.

The next several hours may be decisive…

Given more mixed news in March, and the likelihood that weather-related boosts will fade in the month or two ahead, the stakes have been raised for the releases over the next 24 hours. At the risk of oversimplification, if the ISM and global PMIs bounce convincingly, we think the market is likely to be able to make fresh highs. If instead we see a second month of declines, we are likely to turn more cautious.

So basically, huge hours ahead, starting with the Chinese PMI today, and ending with US ISM numbers tomorrow morning.

UPDATE: The official Chinese PMI reading has bounced back nicely.

European PMI data will come out super-early on Monday.

Read the rest here.

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Will $1 Trillion Be Enough for Europe’s Woes ?

“A core piece of last week’s European newsflow was that following much pushback, Angela Merkel, who understands the underlying math all too well, finally dropped her opposition to expanding the European “firewall” in the form of a combined EFSF and ESM rescue mechanisms, to bring the total “firepower” to €800 billion (ignoring for a moment that when the true dry powder of the combined vehicle is just about €500 billion net as explained here, hardly enough to rescue Spain, let alone Italy). Yet as has been explained here repeatedly, and as Merkel has figured out, this is easily the most symbolic expansion of a rescue facility ever. Because while the ECB’s agreement to allow Eurobanks to abuse its €1 trillion discount window for three years (which is what the LTRO is), following the replacement of JC Trichet with a Goldman apparatchik, at least infused the system with $1.3 trillion in new fungible liquidity (and resulted in a stock market performance boost for the ages, one which is now unwinding), the ‘firewall” does not represent new money, nor is a “firewall” to begin with – it is merely one massive contingent liability which will remain unfunded in perpetuity. Slowly the German media is waking up, and in an article in Der Spiegel, the authors observe that “Even a 1-Trillion Euro Firewall wouldn’t be enough.” And they are correct, because the size of the firewall is completely irrelevant….”

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Apple Supplier Foxconn Cuts Working Hours, Workers Ask Why

(Reuters) – When Chinese worker Wu Jun heard that her employer, the giant electronics assembly company Foxconn, had given employees landmark concessions her reaction was worry, not elation.

Wu, 23, is one of tens of thousands of migrants from the poor countryside who staff the production lines of Foxconn’s plant in Longhua, in southern China, which spits out made-to-order products for Apple Inc (AAPL.O) and other multinationals.

Foxconn’s concessions, including cutting overtime for its 1.2 million mainland Chinese workers while promising compensation that protects them against losing income, were backed by Apple, which has faced criticism and media scrutiny for worker safety lapses and for using relatively low-paid employees to make high-cost phones, computers and other gadgets.

But at the Foxconn factory gates, many workers seemed unconvinced that their pay wouldn’t be cut along with their hours. For some Chinese factory workers – who make much of their income from long hours of overtime – the idea of less work for the same pay could take getting used to.

“We are worried we will have less money to spend. Of course, if we work less overtime, it would mean less money,” said Wu, a 23-year-old employee from Hunan province in south China.

Foxconn said it will reduce working hours to 49 per week, including overtime.

“We are here to work and not to play, so our income is very important,” said Chen Yamei, 25, a Foxconn worker from Hunan who said she had worked at the factory for four years.

“We have just been told that we can only work a maximum of 36 hours a month of overtime. I tell you, a lot of us are unhappy with this. We think that 60 hours of overtime a month would be reasonable and that 36 hours would be too little,” she added. Chen said she now earned a bit over 4,000 yuan a month ($634).

Foxconn is one the biggest employers of China’s 153 million rural migrants working outside their hometowns. Compared to smaller, mainland-owned factories, workers said, its vast plants are cleaner and safer, and offer more recreation sites.

Read the rest here.

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Not Surprised: Former Pentagon Official Says All Chinese Electronics In The US Could Have Built-In Trapdoors

“Richard Clarke Has another disturbing prediction for America.

Clarke worked with four White House administrations during 30 years of government service before opening his own cybersecurity firm in the corridors of Arlington, Va  outside the nation’s capital.

He was at the State Department, the Department of Defense, has a master’s Degree from MIT and was the Bush counter-terrorism guy who told the White House that al Qaeda was plotting a grand attack on American soil in the weeks leading up to 9/11.

After the attack, Clarke sat before the 9/11 commission and told them directly: “Your government failed you.”

Clarke recently spoke to Ron Rosenbaum at Smithsonian Magazine and told him the government is slipping up again, that while we now have the ability to coordinate a successful cyberwar, like slipping the Stuxnet virus into Iran’s nuclear system, the U.S. has absolutely no cyber defenses.

Which is a bad thing for a superpower that gets the lionshare of its electronic components, both civilian and military from China, one of its biggest global adversaries….”

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Europe Increases Bailout Funds to Further Enhance the Firewall Around Spain and Italy

“European governments moved to bolster their rescue funds, seeking to shield Spain and Italyfrom the fallout of the debt crisis without alienating bailout- weary voters in wealthy countries.

Finance ministers neared an agreement to run the temporary and permanent funds in parallel until mid-2013, potentially raising the upper limit on emergency lending to 940 billion euros ($1.3 trillion). Amounts immediately available would range between 340 billion euros and 640 billion euros.

“I can imagine that both instruments run in parallel so that automatically we have a higher sum overall,” Austrian Finance Minister Maria Fekter told reporters before a meeting of European finance ministers in Copenhagen today.

European policy makers are trying to strike a balance between meeting international demands for a more powerful war chest and opposition in donor countries led by Germany to providing additional aid for underperforming economies on the region’s fringes.

Today’s step will lift the maximum aid sum from 500 billion euros. It involves running the 500 billion-euro permanent European Stability Mechanism alongside the 200 billion euros committed by the temporary fund to Greece, Ireland andPortugal, according to a draft statement prepared for the meeting….”

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Greek Central Bank Continues to See a Deposit Run


The Greek central bank – whatever that is: some local subsidiary of the ECB? – released February corporate and household deposit data. The chart below explains it all: back to May 2006 levels and the run shows no sign of abating And remember Venizelos’ sage February words of advice?VENIZELOS SAYS NOW IS THE TIME FOR DEPOSITS TO RETURN TO BANKS“… that didn’t work too well.

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BRICS Seek More Decision Making While Scorning the West for Monetary Policy


“(Reuters) – Leaders of the BRICS group of emerging market nations pressed Western powers to cede more voting rights at the IMF this year and flayed the rich world’s reflationary monetary policies for putting global economic stability in jeopardy.

“This dynamic process of reform is necessary to ensure the legitimacy and effectiveness of the Fund,” Brazil, Russia, India, China and South Africa said in a joint declaration after their one-day summit in New Delhi.

“We stress that the ongoing effort to increase the lending capacity of the IMF will only be successful if there is confidence that the entire membership of the institution is truly committed to implement the 2010 Reform faithfully.”

Promised changes to voting rights at the IMF have yet to be ratified by the United States, adding to frustration over reform of the G7 and the U.N. Security Council, where India and Brazil have been angling for years for permanent seats.

The BRICS leaders also accused rich countries of destabilizing the world economy five years into the global financial crisis.

“It is critical for advanced economies to adopt responsible macroeconomic and financial policies, avoid creating excessive global liquidity and undertake structural reforms to lift growth that create jobs,” they said in a joint declaration.

The rich world’s monetary policy “brings enormous trade advantages to developed countries, and results in unfair obstacles for other countries,” Brazil’s President Dilma Rousseff said at the summit.”

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MORGAN STANLEY: China Is Growing A Lot Faster Than We Thought


“Morgan Stanley’s economics team led by Joachim Fels just raised its estimate for 2012 global GDP growth to 3.7 percent from 3.5 percent.

The primary reason for this was a huge upward revision in their China GDP estimate.

From their note to clients:

In China, where our previous above-consensus forecast of 8.4% 2012 GDP growth had become (published) consensus in recent months, we raise our forecast to 9.0%, one of the highest in the Street. As Helen Qiao and her China team explain in more detail in a companion note, this is essentially a call on additional macro stimulus being implemented in the very near term in response to somewhat disappointing results during the first few months of the year. In addition to further RRR cuts, OMO and window guidance intensification, we expect the government to support loan demand by lowering the benchmark interest rate by 25bp at least once, resuming infrastructure investment projects, as well as promoting first-time home purchase and developers’ ‘regular commodity housing’ construction to smooth the cycle.

Fels says that Morgan Stanley also upped its growth estimate for Japan.

In Japan, the upward revision from 1.1% to 1.8% largely reflects a better-than- expected ramp into the year and stronger capex assumptions.

But things aren’t completely rosy.  Fels warns that risks are heavily skewed to the down side.

Risks remain skewed to the downside… with old (potential political gridlock leading to fiscal tightening next year in the US, or a euro crisis) and new (oil price) hazards each being serious enough to potentially derail the recovery: the distance between our bear case and our base case for global growth is 1pp, twice the distance between base and bull.”

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New Research Suggests China Really is in the Year of the Dragon That Breathes Fire Upon Growth


“The data so far from China in 2012 has been a major disappointment for the global economy.

One thought we had was that the typical January-February Lunar New Year slowdown was exaggerated thanks to it being the Year Of The Dragon, and that because of that the rebound would come harder/sooner than people expected.

But so far that theory isn’t being born out.

Barclays analyst Gayle Berry recently visited China, and met with various industrial firms, and came back with some grim news: Things are weak, and it’s not just a matter of the Lunar New Year.

Here is our summary of Berry’s key points:

  • Demand for copper in China remains weak, and the outlook for the rest of the year doesn’t look so great.
  • Some manufacturers cranked up production in January/February in anticipation of a rebound in Q2, but “demand has been softer than they expected.”
  • Appliance demand is weak thanks to slow construction and poor real estate sales.
  • Copper inventories are rising.

Bottom line:

Overall, we believe Chinese demand in the short term is likely to disappoint before beginning on a recovery trajectory later in Q2. Subsequently, we think that imports will weaken until bonded stocks are run down to more normal levels, possibly in Q3 12. With the market already expecting a drop in Chinese imports, we doubt this alone would have a significant negative impact on LME prices. That’s more likely to be determined by the market’s evaluation of how long imports will weaken for and whether it’s the result of short-term dislocation or longer lasting core weakness. The LME backwardation meanwhile is likely to continue unless Chinese exports are big enough to begin offsetting the draws in LME inventories, in our view.

So there you go.”

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The Bank of England Will Seek More Control Over the Flow of Liquidity in the Banking System

“The Bank of England’s Financial Policy Committee said it may seek powers over liquidity buffers to manage risks across the banking system.

“A key risk faced by many financial institutions, and banks in particular, derives from the fact that they typically borrow funds on a short-term basis and lend over a longer term,” the FPC said in the record of its March 16 meeting, published in London today. It was “likely to be desirable, in due course, for the statutory FPC to have powers of direction over a liquidity instrument that would tackle the build up of such vulnerabilities.”

The FPC said it held off seeking such a power at the meeting as there is no “commonly accepted regulatory liquidity standard.” It will return to the liquidity issue once international standards have been agreed, it said.

The panel recommended earlier this month that Parliament give it tools in three areas. It requested powers of direction over countercyclical capital buffers, sectoral capital requirementsand leverage ratios. The U.K. Treasury had sought guidance from the FPC on the tools it would need as the government overhauls regulation of lenders after the financial crisis.

The FPC expressed concern in today’s statement about the “lack of consistency across banks’ internal assessments of the riskiness of various categories of exposures.” It said control over a leverage ratio could be “an effective way of counteracting problems with mis-calibrated risks weights.”

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Arab Spring Leads to Economic Winter

“Amir Mohammed has been sleeping outside the Libyan Embassy in Cairo awaiting a visa for a week, his bed a layer of cardboard on the sidewalk. He has given up on finding a job in Egyptand is looking for a way out.

“I’m trying to just eke out an existence in my own country, but I can’t,” the 30-year-old hairdresser said. “There’s no work. Why did we have a revolution? We wanted better living standards, social justice and freedom. Instead, we’re suffering.”

The world’s highest youth jobless rate left the Middle Eastvulnerable to the uprisings that ousted Egypt’s Hosni Mubarakand three other leaders in the past year. It has got worse since then. About 1 million Egyptians lost their jobs in 2011 as the economy shrank for the first time in decades. Unemployment in Tunisia, where the revolts began, climbed above 18 percent, the central bank said in January. It was 13 percent in 2010, International Monetary Fund data show.

Finding work for people like Mohammed will be the biggest challenge for newly elected governments, highlighting the rift between soaring expectations unleashed by the revolts and the reality of economies struggling to escape recession. Failure risks another wave of unrest in a region that holds more than half the world’s oil.

‘High Hopes’

“The advent of democracy brought with it high, high hopes,” said Raza Agha, London-based senior economist at the Royal Bank of Scotland Group Plc. “Expectations are that new governments will bring prosperity, but when you look at the fundamentals, this does not appear to be the case.”

Full article

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Portugal Gets No Love; Tick Tock Runs the Debt Clock…

“Stuffed into a time capsule, this ancient university town’s local newspaper would give future historians a good idea of the pain that Europe’s first financial crisis of the century inflicted on Portugal.

David Dear | Photographer’s Choice | Getty Images

The Diario de Coimbra reported on its front page last Thursday how bankers had called in a loan on a local sports stadium. A piece on the back page asked whether a rise in suicide rates was linked to the deepening economic downturn.

A bank advertised the auction of 38 foreclosed properties. Other ads promoted some of the many gold and silver dealerships that have sprung up since the onset of the crisis for people forced to sell the family jewels.

Burdened with public debt that will approach 120 percent of national output this year, Portugal is suffering so badly that many in the market wonder whether, along with Greece, it can escape its debt trap without abandoning Europe’s single currency.

The economy is contracting sharply due to tax increases and spending cuts demanded last May by the International Monetary Fund [cnbc explains] , the European Union and the European Central Bank in return for an emergency78 billion euro loan.

Output is projected to shrivel 3.3 percent this year, after a fall of 1.6 percent in 2011. With tax revenues withering, the government’s core budget deficit nearly tripled in January and February. Unemployment jumped to 14 percent in the fourth quarter of 2011 as slumping domestic demand was compounded by a dearth of credit, forcing small and medium-sized enterprises to shed labour.

“The financial sector just isn’t injecting money into the economy,” said the president of Centro region’s chamber of commerce, Jose Couto. Coimbra, two hours north of Lisbon by train, is Centro’s largest city. “It’s got to the point where even viable export companies are having problems managing their cash flow.”

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The OECD Proposes a $1.3 Trillion Eurozone Crisis Fund

“BRUSSELS (AP) — The 17 countries that use the euro need to build a €1 trillion ($1.3 trillion) firewall to help the struggling currency union return to growth, the head of the Organization for Economic Cooperation and Development said Tuesday.

Angel Gurria, the secretary-general of the Paris-based international development body, said existing plans for a €500 billion ($664 billion) European rescue fund were not enough to restore market confidence in the eurozone.

“The mother of all firewalls should be in place,” Gurria he told a told a news conference in Brussels, where he was flanked by Olli Rehn, the EU’s economic affairs commissioner, who has also been pushing for a larger bailout fund.

A permanent bailout fund of at least €1 trillion would give governments the breathing space to focus on kickstarting growth and restoring the competitiveness of their economies, Gurria added.

As well as shoring up the financial defenses, the OECD chief pointed to a raft of economic reforms that individual countries should enact. According to the organization’s annual report for the eurozone, which was released Tuesday, vulnerable states may need more than €1 trillion in aid over the coming two years and Gurria said eurozone finance ministers should take a decision to boost their bailout funds at their meeting in Copenhagen on Friday.

Germany, the bloc’s largest economy, signaled on Monday that it would support an increase to around €700 billion ($929 billion), but only until some €200 billion in loans already promised to Greece, Ireland and Portugal have been paid back….”

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