Europe is by far the largest economy in the world with just about €13 trillion or $18 trillion in Gross Domestic Product (GDP). The US is second with $15 trillion or €11.5 trillion in GDP. While the argument with Europe is that there are 27 independent nations with very separate political and economic differences, the same argument can be made with the US, as there are 50 independent states each with their own government and economies.
Much is misunderstood by both about the other. If someone tries to compare the two, both become defensive, staunchly stating that they are very different. A great deal of business is transacted between the EU and the US but little attention is paid to the subtle similarities that create that business with a fairly strong political bond.
Understanding these similarities can help us to see clearer the many untapped opportunities that exist between the two.
Individual countries within the EU have seriously large debt issues. The US has a huge amount of debt that when combined with its states’ debts engulfs the GDP of the US and a good portion of the EU’s GDP.
In the EU financially stable countries are very rigid, not allowing acceptance of reforms for many indebted EU nations. In the US, Congressional leaders refuse to accept budgetary changes that would ease the country’s debt burden.
In the US the Federal Reserve has pumped trillions into the economy in the form of quantitative easing. In the EU the ECB has also pumped trillions in the economy by way of their Long-Term Refinancing Operation (LTRO), also a form of quantitative easing.
This past week German Chancellor Merkel softened her stance on a Greek debt haircut, stating that if all went well past 2014 the possibility would be available. In the US, some Republican leaders started to back off their stubbornness to not raise taxes in order to find resolution to the US fiscal cliff negotiations.
While the vast majority of analysts and money managers focus on key differences driving economic fortitude between the US and the EU, few see the exchange opportunities from which to profit.
Investing over the past five years has changed dramatically. Every week more hedge funds declare that they are closing and returning all monies to their investors, they simply cannot find viable investment opportunities that will give them the high returns expected by their investors.
We all become used to doing business a certain way and when times change it becomes hard for people to change their way of doing business. Instead of being creative and finding solutions to these challenges many people just quit.
Technology has sped up everything, most notably communication. Something happens in China and there is an immediate reaction around the world. Doing business the usual way fails if you do not keep up with new advances in technology: If you are not moving ahead, you are falling behind.
Accepting and adapting to changes in technology and social events, mixed with the ability to throw away old investment philosophies, are key to being successful in this changing world.
The glue that makes trade between the US and the EU possible is the exchange rate. And while the differences between the two economies get the attention, short term trading the similarities can provide the profits that are eluding many investors.
The old stigma of buy and hold, while not dead, has changed its time frame. Instead of buying an investment for a holding period of years, changes in technology can now express long term investing over days instead of years.
Finding common ground
By understanding the social and economic similarities between the US and the EU one can profit by investing over a few days period of time instead of a few years. Market reactions to political and economic news events become easier to accept. Investment vehicles such as futures, Forex, swaps and swaptions have taken on a whole new light as investing in these instruments has become more mainstream and embraced by institutions as well as individual investors.
For many years these investment instruments were chastised as high risk. Sophisticated money managers stated that futures, Forex and swaps were not investments but vehicles for market gambling. Changes in technology now provides complex risk calculations on an ever increasing set of trading platforms that assist in negating many of the risks associated with these highly leveraged investment vehicles. Seizing many short term opportunities to profit small amounts adds up over time and it is that adding up that “smart money” investors are now looking to use to enhance their stagnant portfolios.
It is easy to understand similarities because in our simplest form we as humans are all the same. Understanding differences becomes the challenge. The US and the EU grow more alike every day. Instead of trying to fight the differences from which to profit, many investors would do better by embracing the similarities.