When America Sneezes

Remember the old truism, "When America sneezes, the rest of the world catches a cold"? Well, if official data is anything to go by, we may need to flip it on its head.

Let's take a look at two titan economies that have a combined Gross Domestic Product (GDP) of 8.5 trillion US dollars, in 2013, they are of course Germany and Japan, which represent about half that of the US's GDP, in the same period.

Nevertheless, if these two industrial powerhouses stagnate, then it is also likely to act as a drag on the US economy. But could a financial collapse in either of these countries be the catalyst that sets off the financial dominoes across the globe?

In Europe's industrial powerhouse things are starting to look bad.

German stocks have declined 10 percent since July, which is putting them in "correction" territory. Meanwhile, In Japan, the economy is looking like a basket case. According to figures that were recently released, Japanese GDP contracted at a 7.1 percent annualized rate during the second quarter and private consumption contracted at a 19 percent annualized rate.

Around a fortnight ago the markets were rattled by the worst German industrial production figure since 2009. Germany is considered the industrial powerhouse of Europe, but the engine is now starting to stumble. There's no doubt that there are a number of new external risks, that didn't exist a year ago, that have emerged and they are beginning to take their toll on the economy. The civil war in the Ukraine is a drag on the German economy and the Ebola crisis is another factor that is likely to have a negative impact on the economy. All this is making German investors jittery, with 10 percent declines in the Dax since July. Moreover, recent data indicate that the German economy has ground to a halt, the economic sanctions levied on its major trading partner, Russia, by the U.S. and European Union with the aim of getting Moscow to stop meddling in its former colony, the Ukraine, is also having a dent on German GDP.

There's no boost from Germany's other trading partners, France`s economy is stagnating, Italy's is contracting, Greece has been downgraded to emerging market status and Portugal's main bank recently had insolvency problems. Spain's economy showed signs of a slight improvement, but it is likely to be a temporary blip. Bearing in mind that tourism accounts for 12 percent of the Spanish economy the ebola outbreak, now 40 or is it 50 people have been quarantined and there seems to be mixed information coming out of the ministry nobody quite knows the true situation, is likely to be a serious drag on the economy. And when you look at some of the biggest corporate names in Germany, things look even more dramatic. The hardest hit sectors have been retailers, industrials and leisure stocks with sports clothing giant Adidas down 37.7percent for the year, airline Lufthansa down 27percent, car group Volkswagen sliding 23.6 percent and Deutchse Bank falling 20.2 percent so far this year.

So much for Abenomics in Japan, things are going from bad to worse.

The government of Japan has piled on the debt like a sumowresler carrying more than a quadrillion yen in debt and it has been furiously pumping its monetary system with money, result being to devalue the yen in a desperate attempt to crank start the Japanese economy back to life. Regretfully, for the Japanese it just isn't working

The following extract comes from a Japanese news source;.

On an annualized basis, the GDP contraction was 7.1 percent, compared with 6.8 percent in the preliminary estimate. That makes it the worst performance since early 2009, at the height of the global financial crisis.The blow from the first stage of the sales tax hike in April extended into this quarter, with retail sales and household spending falling in July. The administration signaled last week that it is prepared to boost stimulus to help weather a second stage of the levy scheduled for October 2015. Corporate capital investment dropped 5.1 percent from the previous quarter, more than double the initial estimate of 2.5 percent. Private consumption was meanwhile revised to a 5.1 percent drop from the initial reading of 5 percent, meaning it sank 19 percent on an annualized basis from the previous quarter, rather than the initial estimate of 18.7 percent, Monday’s report said.

The true picture in the US regretfully doesn't look that good either.

The UK economy is also likely to catch the contagion and fall back into a decline. Furthermore, public debt keeps escalating.

So if we are seeing the end of this five and half year secular bull market,then the big question on every traders mind is how hard is this market going to fall?

“I view the stock market as likely to lose more than half of its value from its recent high to its ultimate low in this market cycle. In my view, speculators are dancing without a floor.” wrote John Hussman, stock market analyst and mutual fund owner.

No doubt there are other views and as they say, time will tell. But as you will note from my writings I too share the pessimism.