How to Make a Killing on the Euro Crash
It's an axiom of modern capitalism, almost as certain as death and taxes: No matter how bad an economic crisis gets, someone is bound to get rich from it.
During the 2008-2009 financial meltdown, Goldman Sachs and hedge fund tycoon John Paulson hauled in billions betting against mortgage-backed securities. Likewise, the financial nerds profiled in Michael Lewis' "The Big Short" cashed in, big time.
And this is nothing new.
Before the UK's 1994 Black Monday crash, financier-philanthropist George Soros, sensing central bankers with their heads in the sand, made billions shorting the pound sterling — essentially borrowing the currency, selling it, and later paying back his creditors when he could buy it cheaper. He successfully repeated this trick as Southeast Asia went into crisis in 1997.
Now, the euro zone increasingly appears to be in a terminal mess. Growth has stagnated. Debt is out of control. In vulnerable countries like Spain, interest rates are veering toward usury. Governments are bailing out banks. And Greece has imploded, both politically and economically; this week, citizens have been emptying their bank accounts, always a grim sign that economic Armageddon looms.
It’s time for the average person to worry yet again about his job or her disintegrating retirement account. But for the crafty and courageous, opportunity beckons.
So, what investments are they salivating over?
One obvious option would be to shop for cheap stocks on European exchanges. This "value" approach is a time-honored strategy. It’s used by moguls such as Warren Buffet, who advised in the bleakest days of the 2008 mortgage meltdown: “Be fearful when others are greedy, and be greedy when others are fearful.”
Anyone who took Buffet’s adviceand bought US stocks at the nadir of the financial crisis could have nearly doubled their money by now. Bargain hunting is particularly tempting for individual investors, who could shift 401K allocations into mutual funds or exchange traded funds (ETFs) with, say, exposure to Spain or Portugal, whose markets are trading at lows not reached in years.
But it's not yet time to pursue this strategy, insists David Twibell, president of Denver-based Custom Portfolio Group. "Europe is a slow-motion train wreck ... stuck with an unsustainable fiscal mess," he says. "There’s often a fine line between courage and stupidity, and I would say investing in Europe right now comes dangerously close to the latter."
One critical risk factor: If the euro zone does indeed break apart, you may end up holding investments in national currencies that could plummet in relation to the dollar, wiping out any gains from stock appreciation.