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From a big-picture perspective, Europe has become a region without a defined political or economic identity. For more than 60 years in Western Europe and 20 years in Eastern Europe, elected leaders have been given the charge to govern their respective nations in a form of democracy built upon a foundation of socialized programs.

The status quo is quickly morphing into something entirely new and unexpected. I call it the rise of the financial markets. Financial markets have more clout than voters and more power than prime ministers. And to think...all those science fiction movies spent their time fretting over apes, aliens and machines. Turns out that financial markets end up ruling us all.

Greece and Italy have already been forced to remove their elected leaders and have appointed unelected technocrats to clean up the debt mess. The new leaders are tough, smart, economically literate and internationally respected, but as Jonathan Braude in The Deal magazine puts it, “Suddenly politics has been given a time-out.”

It was the financial markets that decided Greek and Italian democracy wasn’t getting the job done. Braude continues, “Financial markets have forced governments to change tack before, although the sustained attack on Europe over the past few months seems to take the monstering to new, unprecedented levels. The markets have shown no mercy.”

It’s obvious that German Chancellor Angela Merkel has emerged as the undisputed leader of Europe. Why? Because Germany’s economic strength has granted it. Germany now rules the continent not by guns, but by money. If peripheral nations threaten the stability of the whole, Germany is able to orchestrate political maneuvers to overcome the voting processes of the localized electorate. Italians and Greeks are at the mercy of German voters.

What we are witnessing is the unintended consequences of a world that activist hedge fund legends like George Soros, Steven Cohen, Carl Icahn, Jesse Livermore and Bernard Baruch helped to create. Funds like Renaissance, Citadel, Fortress, SAC, Appaloosa, Greenlight, Bridgewater, Man Group, Paulson & Co, Brevan Howard and Och-Ziff now manage approximately $2 trillion in assets, with the largest 225 hedge funds in the United States holding almost $1.3 trillion.

Their basic purpose is to generate returns greater than the market index. In their pursuit of profits they crave momentum, bubbles, and crisis...or in other words, volatility. These guys smell blood at the slightest weakness and seek to exploit. Although hedge funds only account for 1.1% of total financial institution assets, the daily market trading volume by hedge funds is estimated to to be higher than 50% of market volume.

According to the FBI website, the exact number of hedge funds is difficult to quantify, but it is clear that these funds have grown exponentially in the last ten years as the number of funds has at least quadrupled. The snowball effect initiated by this group of money managers is capable of destroying banks, collapsing economic systems, terrorizing citizens and taking down governments. We’re seeing it happen before our very eyes.

I was just as appalled as everyone else to hear the news this week that former U.S. Treasury Secretary Hank Paulson held closed door meetings with a group of a dozen or so hedge fund managers and Wall Street executives on July 21, 2008 before the financial crisis reached its peak.

The purpose of the meeting? Apparently Paulson told these money managers that he was planning a government seizure of Freddie Mac and Fannie Mae that would effectively take the common and preferred stock of Fannie and Freddie to zero. The managers in the room were thus given the opportunity to trade on that insider information which resulted in a self-fulfilling prophesy. There is no evidence of who actually profited from this information, because tracking firm specific short stock sales isn’t possible using public documents. Hank Paulson single-handedly decided who survived and who collapsed during the crisis.

To find out that he was operating the United States Treasury with conflicting financial market interests is the most troubling political commentary that I have ever heard. There were multiple times during the crisis when I observed that our Congressional leaders felt no pain for the damage that was occurring; now I know why. They were probably profiting in their own stock trading accounts as American’s were simultaneously losing wealth. 60 Minutes recently brought to light the profitable insider stock trades of former House Speaker Nancy Pelosi that were legally executed during her tenure. Financial markets are destroying the ethics of government officials.

I can only imagine the kind of financial market manipulation and insider government trading that is happening among European officials during this debt crisis. If it happened in the United States, I’m convinced that it’s happening in Europe. If my hypothesis is correct, and it turns out that financial markets have become a more powerful institution that politics or economics, then we should assume that European turmoil will continue until shock and awe policies are forced into place.

Any hope that this crisis will turn into a gradual recovery fails to take into consideration the hedge fund variable. Yes, Merkel is focused on long term success through the implementation of new treaties designed for fiscal responsibility but even she has admitted there is no short-term solution in sight. In a stable world that kind of solution would work just fine, however, in a world of financial market volatility, time may run out on European Union citizens while hedge funds and government officials profit from the downfall.

As an investor in this climate, it can be frustrating to reconcile Europe’s situation with an improving U.S. economy. A market that is supposed to be rooted in corporate earnings should be roaring with the latest consumer data showing the first full weekend of holiday shopping was up an astounding 16.4% year over year according to the National Retail Federation. Another sales tracking agency, IBM Benchmark, is reporting that Cyber Monday sales were up an amazing 33% year over year.

Collectively, the iPhone and iPad were responsible for 7.4% of all online retail traffic on Cyber Monday, and 10.2% of traffic on Black Friday. PayPal reported a 552% increase in global mobile payments this Cyber Monday over last year. These record-breaking sales numbers represent a stark contrast to the financial market crisis in Europe. How can you trade the disconnect?

Apple was a drag on Tuesday’s market after a strong Monday. Why? Because there was yet another EU finance minister meeting. We’re starting to see a trend that Apple cannot rally when European leaders are meeting as investors see little upside from the talks. The calendar based timing of Apple stock runs has been difficult to forecast in 2011 because of European uncertainty; instead, a better indicator has been price level.

Buy Apple at lows, and sell it when it reaches new highs. We had hoped that Apple might give us two runs between the November lows and the January earnings report, and it could still happen, but we need a series of trading days without Europe in the headlines to make it happen. We remain confident that a run from the $370 level will produce a triple in option profits, so we are content to hold. Any dips that are caused by Europe, as this one has been, should be bought and held.

Remember to make sure you have ample cash as well as hedge allocations, because Europe isn’t going to exit its crisis situation anytime soon. The conflict of interest that exists between financial markets and political leaders provides too much incentive for continued weakness. Until we get a Federal Reserve-esque ECB, until we get eurobonds, and until we get a European TARP, we will be relegated to buying Apple dips and selling quick rips.

Disclosure: I am long AAPL.

Source: The Rise Of Financial Terrorism, Part II