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Positioning Yourself for the Devolution of the Euro

Tuesday, September 20, 2011, 8:37 AM
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Positioning Yourself for the Devolution of the Euro

Tuesday, September 20, 2011

Executive Summary

  • Expect dramatic downward volatility as the crisis worsens this year, forcing new and more dramatic 'fixes.'
  • What the best options are for capital when seeking to avoid a euro devaluation.
  • An interim period of stabilization is likely, as markets digest the impact of these 'fixes.'
  • Further downward movement is then anticipated if fundamental issues aren't addressed (which they likely won't be).
  • Why timing and vigilance are everything for the attentive investor.

Part I - The Fatal Flaws in the Eurozone and What They Mean for You

If you have not yet read Part I, available free to all readers, please click here to read it first.

Part II - Positioning Yourself for the Devolution of the Euro

One of the clichés of investing is, “There is no bad investment; there is only bad timing.” While we all know there are indeed bad investments, the point about timing is still valid: In certain situations, timing is the difference between a good and bad investment.

The European crisis may well be just such a situation. Until the structural imbalances are truly resolved and not simply papered over for purposes of perception management, then investments denominated in euros will remain at risk.

If the systemic flaws are not resolved, a risky investment (i.e., assets held in euros) could become a disastrous one. If the imbalances are eventually addressed on a structural level, assets denominated in euros or the follow-on currencies may become relatively attractive.

For investors, the key characteristic of the Eurozone crisis is its unpredictability. Anyone claiming there is “zero probability” of a Eurozone breakup is indulging in false precision. Nobody knows what will happen, as the E.U. and the euro are unique experiments without easy historical precedents. All that can be said with any certainty is that toothless reforms, empty compromises, and ballooning bailouts cannot fix structural flaws, and those are essentially all that’s been offered to date.

Despite the unpredictability of the Eurozone’s debt and currency crises, we can sketch out one potential timeline which would suggest an evolving, flexible investment strategy.

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