Euro breakup can be profitable for investors

In the last few weeks, Greece has changed all that. New York-based investment bank Morgan Stanley is among those saying the possibility of a euro collapse has to be considered.

Next to the demise of the euro, the implosion of Lehman Brothers Holdings Inc. would look like a fairly trivial event. Of course, we shouldn't overestimate the likelihood. The deal cobbled together by the European Union and the International Monetary Fund may be enough to keep the Greek trade unions, the German taxpayer, and the hedge funds speculating in the bonds, all happy. Miracles happen — just not that often.

The Greeks don't appear to be in any mood for the years of grinding austerity that their economy will need. Nor do the Germans seem willing to help out what they see as a bunch of Mediterranean layabouts. When a relationship is that fundamentally incompatible, even the most skillful marriage counselor might think it was about time to start talking about how to divide up the assets and calling it a day.

So, if the euro might not be around in 2020, here are seven trades to start thinking about.

Sound Money

One: Buy German bonds, and sell the DAX index. Germany is one of the most creditworthy countries in the world: It hates budget deficits, runs a big trade surplus, and believes in sound money. But it is being dragged down by spendthrift neighbors that hitched a ride on the currency-union bandwagon. Outside of the euro, German bonds would soar. But so would the “new deutsche mark,” hurting the exporters that dominate the DAX.

Two: Buy the dollar. Sure, it has its own problems. The U.S. budget and trade deficits are huge. Wall Street is under attack from populist, crusading politicians. Its share of the global economy is in long-term decline. But with the euro gone, it would be the only serious reserve currency — at least until China decides to take on that role. Without any competition, the dollar would only strengthen.

Three: Buy Italian shares. Italy has been the big loser from the euro. Spain, Ireland and Greece all rode a bubble created by cheap money. The crash might be nasty, but at least there was some fun before the party ended.

Currency Devaluation

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