December 05, 2012 at 01:52 AM EST
The Trouble Still Ahead for the Eurozone

John, a friend of mine who is also an economist, believes the worst is behind for the eurozone crisis. He’s definitely not the only one with this opinion. John told me, “The European Central Bank has been very reactive to the sovereign debt situation and now, with Greece planning to buy back some of its debt, optimism will pour into the markets.”

Unfortunately, what John doesn’t see is the trouble still ahead for the eurozone. Think of it this way: it’s easy to go down the hill, but it takes a lot of courage and stamina to get back to the top of the hill from the bottom.

The eurozone is in a very similar situation. I think the region is experiencing a deepening economic contraction. It’s still falling down the hill and hasn’t reached the bottom yet.

Sure, it’s easy to listen to the politicians and almost believe them. But the truth of the matter is that the fundamental data are getting worse in the eurozone.

The eurozone unemployment rate reached a new record high of 11.7% in October, up from 11.6% in September. There are 18.7 million people unemployed in the region, with the Spain and Greece unemployment rates both exceeding 25%. (Source: Eurostat, November 30, 2012.)

Recent reports show that manufacturing in the eurozone nations has taken a nose dive, deteriorating now for 16 consecutive months. In November, the Purchasing Managers’ Index (PMI) was observed at 46.2—any reading below 50 represents an economic contraction. (Source: Markit, December 3, 2012.) Companies in the eurozone are struggling to find new work, and demand in the region is dismal.

Now, for those who believe it’s only Greece driving the crisis to its peak, economic contraction in the eurozone is widespread. For example, since 2010, about 450,000 businesses have closed in Italy! (Source: La Stampa, November 21, 2012.)

People like my dear friend John may hope the eurozone will recover soon and the economic contraction there will come to a halt. But, what needs to be understood is that history has proven how difficult it is for countries to recover from severe economic contractions like the one the eurozone is going through now. Just look at the Japanese economy and the U.S. economy; the latter has been struggling since the financial crisis, and it is still looking for growth.

The eurozone crisis is far from over, in my humble opinion. What you can expect to see is the region continuing to fall into and out of recession over the next two to three years unless, and until, countries start to leave the euro currency union.

Where the Market Stands; Where it’s Headed:

We’re almost there, dear reader…

The bear market rally in stocks that started in March of 2009 is losing steam. I would have thrown the towel in on the market long ago. But we had the U.S. election to deal with and now we have the “fiscal cliff” to deal with—both of which could be responsible for big market gyrations.

Come 2013, there are no extraordinary events, just deteriorating corporate earnings. Write it down: 2013—the turning point for the stock market trend.

What He Said:

“When I look around today, I see falling stock prices…I see falling house prices…and prices for retail goods stores declining. The media has it all wrong blaming (worrying about) inflation. In my opinion, the single biggest threat to the U.S. economy and to the Fed in 2008 is deflation. You can bet the Fed will expand the money supply and drop interest rates aggressively as deflation starts to rear its ugly head.” Michael Lombardi in Profit Confidential, December 17, 2007. Michael was one of the first to warn of deflation. By late 2008, world economies were embedded in their worst state of deflation since the Great Depression.

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