Courtesy of John Nyaradi
Minute by minute, it’s becoming more clear that a meltdown in Europe is the most likely outcome, and investors around the world need to prepare for what I call Lehman 2.0 .
There is little question that a Greek default, which now seems quite likley and imminent, will be a Lehman-like event with the potential for spreading across Europe.
The initial fallout is predictable which will be a major “haircut” for big banks, so big that it was reported last week that the German government is completing contingency plans to recapitalize the country’s banks which could take as much as a 50% hit on their Greek bond holdings. This event could easily lead to a credit crunch across Europe, banks failures/restructurings, that could lead to an even broader financial panic in Europe and even around the world.
Perhaps even more worrisome, is the potential for the so-called “contagion” effect, wherein Greece sets off a series of falling dominoes that could include Portugal, Ireland, Italy and even Spain as investors flee the region for safety. This could become a fast moving brush fire that could quickly spread to Asia and the United States and set up conditions for a global credit crunch like the collapse of Lehman Brothers only on a global scale.
So how can investors protect themselves and profit from a global ”Lehman event?”
1. “Short” Europe. ETFs provide lots of different ways to do this. One could short regional ETFs like (EWG) iShares Germany Index or (EFA) iShares MSCI Index Fund which tracks major stocks in the European, Australasia and Far Eastern markets.
As the situation in Europe deteriorates, there will be many losers, but there will also be winners and those will be the investors/traders who know who to take advantage of the power of ETFs to seek profits in both up and down markets.
Every problem presents an equal opportunity and the coming meltdown in Europe is a gigantic problem and so a gigantic opportunity.
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