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« Fed Action Will Decide Next Major Move For Gold | Main | SK OptionTrader Subscribers Enjoy 71.58% Profits in 43 Days »

Europe's Debt at Bursting Point?


Four years ago we were domicile in the UK, just a few miles south of London, when it began to dawn on us that the outlook for Europe in general wasn't as bright as it could be. The public sector was growing faster than the speed of light and the private sector was struggling under the burden of increasing taxation and regulation. In the strategy sessions that followed our team decided to re-locate to another playing field. The chart at the top of the page goes some way to vindicating our concerns and our decision to exit the UK.

From Charlemagne's notebook in The Economist: This grotesque map of the world, depicting Europe as a bloated balloon, caught my eye this week, and powerfully illustrates one of the factors in Europe's debt crisis. It depicts the countries of the world sized according to the amount of government spending*. that they spend on social protection, from pensions to health, education and unemployment benefits.

In the words of the World Bank, which published it in a report issued this week ("Golden Growth: Restoring the lustre of the European Economic model", here), Europe is the world's “lifestyle superpower”. As opposed to America, which spends almost as much as the rest of the world put together on defence, Europe spends more than the rest of the globe combined on social policies.

In many ways this is an admirable aspect of Europe's economic model, which combines high living standards with high standards of social welfare. The trouble is, such spending is helping to bankrupt governments—not least because those very same caring policies ensure that Europeans live longer, requiring more expenditure on health care and the payment of pensions for more years.

Anybody who wants to understand the strengths and weaknesses of European economies in this time of crisis would do well to read the report (the overview is here).

First the strengths. Europe, say the authors, invented a unique “convergence machine” by admitting successive waves of poorer countries and quickly raising their standards of living. Convergence has been accelerated by the free flow of trade and capital within the European Union. As the report puts it:


Between 1950 and 1973, Western European incomes converged quickly towards those in the United States. Then, until the early 1990s, the incomes of more than 100 million people in the poorer southern periphery—Greece, southern Italy, Portugal, and Spain—grew closer to those in advanced Europe. With the first association agreements with Hungary and Poland in 1994, another 100 million people in Central and Eastern Europe were absorbed into the European Union, and their incomes increased quickly. Another 100 million in the candidate countries in Southeastern Europe are already benefiting from the same aspirations and similar institutions that have helped almost half a billion people achieve the highest standards of living on the planet. If European integration continues, the 75 million people in the eastern partnership will profit in ways that are similar in scope and speed.

Yet this convergence machine is spluttering, and deep reforms are needed. Much effort has been expended on explaining the nature of the financial crisis of the past two years. The sharpest and most concise analysis I know of is a recent policy brief by Jean Pisani-Ferry, director of the Bruegel think-tank in Brussels ("The euro crisis and the new impossible trinity", here). This argues that the problems are deeper than a lack of fiscal discipline: there is a flaw in the way the euro zone was designed, without a lender of last resort, without joint bonds and with a vicious feedback loop that weakens both sovereigns and their banks. There is a tendency in Brussels to think that, if only the euro zone were to make the leap to federalism, all would be solved. Far from it.

Please click here if you want to go on feeling depressed.

On a happier note, over in the options pit are off to a good start with our three positions showing profits of 62%, 26% and 2% on Wednesday, moving higher on Thursday to show profits of 67%, 30% and 6% respectively.

So on Friday we closed two of these trades, the first gave us a profit of 71.58% and the second gave us a profit of 33.97%.

Its nice to bag a couple of winners before January is out and hopefully 2012 will continue in a successful manner. We do have a number of ideas on the drawing board which we are looking to execute shortly, but only when the risk/reward environment is firmly in our favour.

Please be aware that discussions are taking place regarding an increase in the price for this service for new members, so if you are thinking about joining us, then do it sooner rather later in order to avoid this additional expense. This price increase will not affect the current subscribers whose subscription will remain unchanged.

Our performance stats have now been updated as follows:

Our model portfolio is up 446.55% since inception

An annualized return of 98.38%

Average return per trade of 36.68%

96 completed trades, 88 closed at a profit

A success rate of 91.67%

Average trade open for 50.48 days


Also many thanks to those of you who have already joined us and for the very kind words  that you sent us regarding the service so far, we hope that we can continue to put a smile on your faces.

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