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What Happens If the Euro Dies?

Not the likeliest scenario, but if it happens, watch out

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4. U.S. stocks wouldn’t fare much better. As we saw in 2008, national boundaries mean very little during a panic. Correlations among normally diverse asset classes converge to 1.

Looking at the fundamentals, U.S. companies would be facing nightmares of their own. Let’s throw out a couple examples. Coca-Cola Enterprises (NYSE:CCE) gets nearly two-thirds of its revenues from Europe, and Philip Morris International (NYSE:PM) roughly a third. Across the broader S&P 500, nearly 15% of revenues come from Europe.

5. In past currency crises, the countries affected eventually benefited from having a lower currency through more competitive exports. This would not be the case in Europe, at least not for a long time.

Think about it. Who are they going to export to? Europe’s export partners depend on European demand for their own exports. The EU is China’s biggest trading partner. But what condition is China’s economy going to be in if European demand grinds to a halt?

And the United States? The U.S. economy already is fragile; expecting robust American demand to boost European exports is simply not realistic.

6. What about commodities? Think back to 2008. What happened to most commodities then? When the markets went into “risk-off” mode, the raging commodities bull market went into a stark reverse.

When priced in the new European currencies, commodities actually might rise. That’s what happens in a hyperinflationary meltdown. But in terms of dollars and other non-European currencies, you would be looking at a major, multiyear bear market.

7. What about gold?

I could see gold going either way. I would prefer to hold gold rather than the new European currencies, of course, but I couldn’t say with any certainty whether gold would be a better haven than the U.S. dollar. Consider that gold’s 2012 price declines have come even as the eurozone roils in crisis, and you’ll get my point. Gold is a great crisis hedge … sometimes. At other times, it’s no hedge at all and falls in sync with everything else.

I’ll repeat again, I do not see the eurozone splitting apart, aside from a possible Greek ejection. But if it were to happen, you would want to be prepared. You wouldn’t want to own anything from the European continent save maybe Swiss francs or British pounds.

Love it or hate it, the U.S. dollar likely would be your best option as a safe haven. Though canned goods and shotgun shells might not be such a bad idea either.


(Sort of.)

Charles Lewis Sizemore, CFA, is the editor of the Sizemore Investment Letter, and the chief investment officer of investments firm Sizemore Capital Management. As of this writing, Sizemore Capital was long PM — and quite a few European stocks as well. Sign up for a FREE copy of his new special report: “Top 3 ETFs for Dividend-Hungry Investors.”

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