Countries in the European Union with “AAA”
Credit Rating Starting to Crack

Italy’s economic contraction deepened, as its GDP fell 0.7% in the second quarter of this year. What is more disconcerting is that, year-over-year, in the first quarter of 2012, GDP contracted 1.4%; while, in the second quarter, the economic contraction worsened, as GDP shrunk by 2.5%.

Italy’s Retail Confederation predicted last week that consumer spending would fall by the most in 2012 since WWII!

In Spain, the economic contraction continues unabated as well. What this means, dear reader, is that these countries will require help from the stronger nations of the European Union.

The problem is that the AAA countries of the European Union—Germany, Austria, and the Netherlands—are starting to show evidence of economic contraction within their countries and could follow their weaker counterparts into recession!

Austria’s manufacturing contracted in July and the country’s new orders—a gauge of future demand—fell at the fastest pace in eight months. (Source: Markit Economics.) Manufacturers cut jobs for the second straight month in Austria and the economic contraction is worsening, as the number of jobs being lost has accelerated to levels not seen since 2010!

The Netherlands experienced a continued decline in manufacturing, with new orders falling for five straight months. The economic contraction continued to worsen, as job cuts took place for the fourth consecutive month.

Finally, there is Germany. With 60% of its exports making their way to the European Union, the most important AAA country of the European Union is showing signs of renewed economic contraction, which has German leaders talking about a possible recession in the second half of this year. (Source: Reuters, Aug. 10, 2012.)

It is not only the persistent declines in manufacturing, imports and exports; the largest companies within Germany are set to lay off thousands of workers, as the economic contraction throughout the European Union leaves them with little choice.

When Greece first imploded, the stronger European Union countries helped Greece, but their economies were not experiencing the economic contraction they are now. Greece is a small economy, but Spain and Italy are some of the largest economies within the European Union.

Now that Spain and Italy need help, how likely are the people of Austria, the Netherlands and Germany to help them when they are going through their own economic contractions that could very well lead to a recession? Furthermore, these countries may blame Greece, Spain and Italy for overspending and causing the crisis in the first place, which has led to the severe economic contraction their countries are now facing.

Be very careful. The crisis in the European Union is far from over and could possibly lead to a breakup. The implications of the decisions made will have far-reaching effects, including on the U.S. stock market.

Where the Market Stands; Where It’s Headed:

We are in a bear market rally in stocks that started in March of 2009. Technically, a firm head-and-shoulders pattern has been completed by the Dow Jones Industrial Average. But the Fed tells us it has more ammunition up its sleeve. We are patiently waiting for the market to deteriorate, at which time we believe a form of QE3 will be released to support the market. After that, all bets are off.

What He Said:

“As investors, we need to take a serious look at our investment portfolios and ask, ‘How will my investments be affected by an American-grown recession?’ You should take what precautionary steps you can right now to protect yourself from a recession in 2007. Maybe you need to cut your own spending or maybe you need to sell some stocks that will take a beating during a recession. You know what tidying up you need to do. Don’t procrastinate…get to it now. And please remember: recessions can happen quickly, stock markets don’t go up during recessions, and the longer the boom before the recession, the longer the recession. Just based on my last point, we have plenty to worry about in 2007.” Michael Lombardi in Profit Confidential, November 13, 2006. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.