I’m going to be the first to make the call…
The eurozone is in recession.
The “official” number won’t reflect this for another three to six months, but I believe the eurozone has already entered a recession.
Total GDP of the 17-member eurozone is about $12.5 trillion, with Germany accounting for about 26.4% of that number, Italy 16.9% and Spain 9.7% (Source: Lombardi Financial). The economies of Italy and Spain combined are just slightly larger than the economy of Germany. As I wrote yesterday, the respective third and fourth largest economies in the eurozone, Italy and Spain, are already in recession (See: Two Major Eurozone Countries to Fall Back into Recession in 2012.)
Germany’s economy, clearly, is the sole growth engine in the eurozone. But Germany’s economy alone will not be able to save the eurozone.
What we have is a spiral effect. The eurozone countries like Greece, Italy and Spain introduce severe austerity measures to reduce the amount of money they need to borrow. Austerity measures result in citizens spending less money, which in turn reduces economic growth. History has proven that the greater the austerity measures; the more consumers tighten their belts and close their wallets.
As Greece, Italy and Spain pay higher interest rates on their debt, several things happen: (1) each country’s debt becomes greater; (2) the austerity measures savings have less effect on the national debt; and (3) the risk to other eurozone banks that bought the debt (banks in France have large exposure to Italy and Spain) becomes greater. It’s a domino effect on the eurozone.
Will Germany finally give in and allow the European Central Bank to really turn on the money printing press? We know such action would be inflationary for the eurozone, hence, why Germany is saying no to more money printing. The other alternative is either abandonment of the euro or a two-tier system where the weaker countries have a secondary euro monetary system (a cheaper euro).
Either way, 2012 will prove to be a very difficult year for the eurozone. So much so that I already believe the eurozone is in recession.
Where the Market Stands; Where it’s Headed:
On March 9, 2012, the bear market rally will celebrate its third anniversary—a 36-month-long bear market rally. Yes, dear reader, this has been a long rally. But, remember, the government (by taking on so much debt) and the Federal Reserve (by making monetary policy so accommodative) have fought the bear “tooth and nail,” as they say.
But no matter how much the government and Fed both try to fight the bear, the natural forces of bear market will eventually play themselves out. Enjoy the bear market rally while it lasts, because it won’t last forever.
Only two trading days into 2012 and the Dow Jones Industrial Average is up 1.6% so far for 2012.
What He Said:
“I’ve been writing to my readers for the past two years claiming that the decline in the U.S. property market would not be the soft landing most analysts were expecting, but rather a hard landing. My view remains unchanged. The U.S. housing bust will be cut deeper and harder than most may realize today.” Michael Lombardi in PROFIT CONFIDENTIAL, June 13, 2007. While the popular media was predicting a bottoming of the real estate market in 2007, Michael was preparing his readers for worse times ahead.