Greece is Doomed. Here's What Investors Should do NOW


It's never prudent to cause undue alarm. This is why European policy makers continue to speak of tactics and strategies to help Greece avoid any economic meltdown that would lead to bond defaults and a departure from the euro. To speak publicly of these outcomes would jeopardize the ongoing dicey talks aiming to keep all the stakeholders at the table.

But the writing is on the wall. Simply put, it's impossible to see how loans on top of more loans are going to create a long-term solution for Greece. Instead, the odds are rising quickly that Greece will need to do what Argentina did a decade ago. Back then, Argentina's currency was tied to the U.S. dollar, making itseconomy uncompetitive with neighboring countries such as Brazil. Argentina eventually broke with the U.S. dollar and let its currency fall by more than half. Within a few short years, the Argentinean economy was back on its feet, led by a surge in exports. Right about now, Greek citizens would welcome that move, even if major banks on the hook for billions in loans would not. "Tough luck," said Argentina to the banks, and soon, so will Greece.

Nearly two years after a rescue package was first developed for Greece, its economy continues to shrink. Citizens have been loath to make major labor and retirement concessions, and they scoff at the notion that selling off nationalized industries will do any good. The clear path is to make Greece a bargain by going back to the (presumably much cheaper) drachma, the country's currency that had been in circulation for centuries. This will attract tourists and also boost Greece's standing in export markets.

What does this mean for you as an investor? Plenty. Note that the broader European economy represents a trading bloc as large as the United States, and the region represents our largest trading partner. In the past decade, a unified currency and the elimination of national border crossings have enabled a lower the cost of doing business many European countries, making them very competitive on global markets. The troubles in Greece threaten to undermine many of those gains.

Let's assume Greece indeed leaves the European Monetary Union by re-instating its own currency. Quite quickly, other struggling countries such as Ireland, Portugal and perhaps Spain would see the benefits that such a move brings.

Without those members, the euro would quickly strengthen. Remaining strong members such as Germany and France would be seen by investors as less risky without the need to support weaker states. Indeed, the Swiss Franc has been at record highs in recent years simply because of a strong economy and solid government finances.

And a stronger euro is great for American companies, making them more competitive against European importers on the home turf and more competitive against these rivals in foreign markets as well.

A stronger euro also threatens to sharply increase global trade tensions -- especially with China. The Chinese yuan has lost ground against the euro in recent years and would lose even more ground against a rallying euro. A wide range of European manufacturers are already incensed at the persistent trade deficits with China and increasingly look set to take retaliatory action. One of those moves may involve a decision to shift jobs from China to Eastern Europe, which also has low costs in addition to geographic proximity.

Lastly, you can't ignore the potential distress on major European banks that dread the day when they need to sharply write down their loans to Greece (and perhaps Portugal and Ireland as well).

Action to Take --> There are several takeaways from a possible major move by Greece. First, expect to see long-term gains accrue to U.S. manufacturers such as automakers Ford Motor (NYSE: F ) and GM (NYSE: GM ) as well as traditional industrial firms such as Honeywell (NYSE: HON ) and Johnson Controls (NYSE: JCI ) , which my colleague Tim Begany profiled recently .

Second, look for an investment surge in places like Hungary, the Czech Republic and Poland, thanks to their low-cost manufacturing bases. Country-specific exchange-traded funds (ETFs) may be the way to play that trend.

Third, you should review any European mutual funds you own. If they hold lots of stock in European banks, major asset write-downs would likely put ample pressure on those bank stocks. Finally, if there is any Greece-induced panic in global markets that sends the U.S. market down in sympathy, you may want to look at this as a buying opportunity. Our economy and its leading banks are unlikely to feel much pain from Greece's moves.

-- David Sterman

P.S. -- We've just identified six surprising events that could break your portfolio wide open in 2011. Knowing these pivot points in advance lets you focus your investing strategy like a beam of light in the dark... and make a lot of money in a hurry. Get them free by simply watching this video presentation.

Disclosure: Neither David Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , ETFs , International

Referenced Stocks: F , GM , HON , JCI

David Sterman

David Sterman

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