How to make money from a downward European market?

Question

The trader Alessio Rastani speaks in a BBC interview about the development of the Euro zone and his predictions are quite severe. He predicts a crash within the next 12 months but is also telling people that this can be an opportunity for those who are prepared.

Please take a look at the video before answering. I also transcribed those parts who seemed most important to me:

I am fairly confident the Euro is going to crash and it's going to fall pretty hard <...> What I would say to everybody is - get prepared! <...> People can make money from this, not just traders. What they need to do is learn how to make money from a downward market. The first thing people should do is protect their assets, protect what they have. <...> The biggest risk people can take right now is not acting.

He says that people need to learn how to make money from a downward market and protect their assets. What does he mean by that? How can common people like me, living in Europe, benefit from such a scenario. He mentioned hedging strategies and treasury bonds. Is this the way to go?

P.S.: My favorite quote: "The governments don't rule the world, Goldman Sachs rules the world."

Important Edit: The guy in the interview seems to be an impostor as DumbCoder pointed out. This changes how serious you should take this interview. The main question still stands - if you think the described scenario still comes true, how do you prepare? Is he right when he says that you can actually benefit from a downward European market?

Answer 1

If you want to make money while European equities markets are crashing and the Euro itself is devaluing:

• Own US Treasury bonds. It is likely that during a Euro crash, capital will flee to "traditional safe havens" like US government debt. This will cause the price of these bonds to increase. To actually make money here, you'd need to be prepared to sell in the middle of the crisis.
• Hold foreign currency -- probably USD, GBP, CHF and/or other European currencies. If the Euro crashes, again capital will flee to other strong currencies, causing the prices of those to go up. Again, you will need to be able to convert -- during the crisis -- from USD/GBP/etc to a currency that you can actually spend where you live. Otherwise you have a bunch of paper (or ink on a bank statement) that doesn't allow you to eat or pay your mortgage.
• Sell equities short. In a nutshell: this involves borrowing the securities, selling them on the market, and hoping the price goes down so that you can buy them back for less money and return them to the lender. You're exposed to unlimited risk (you can lose more than you start with), but if you get the timing and equity selection right you can make a lot of money.
• Various options strategies. There are a number of ways you can use options to make profit when equity prices go down.
  • In what's probably the simplest form, you can buy "puts" on an index ETF. This means you purchase a contract that allows you to sell shares of that ETF at a given price -- so if the ETF price drops by a large amount, you could buy those cheap shares and then sell them for the higher price. (In practice, the price of the options contract would go up by a lot and it would be easier for you to just sell the option for a profit.)
  • You could also buy puts on individual equities (e.g. maybe there's some German bank you think will fail if a crash occurs). Some options strategies have unlimited risk -- similar to shorting above -- and some are limited to the loss of all of your capital. Some are very complex.

None of these strategies are to be taken lightly. All involve risk. There are probably numerous ways that you can lose even though it seems like you should win. Transaction fees could eat your profits, especially if you have only a small amount of capital to invest with.

The worst part is that they all involve timing. If you think the crash is coming next week, you could, say, buy a bunch of puts. But if the crash doesn't come for another 6 months, all of your puts are going to expire worthless and you've lost all of your capital. Even worse, if you sell short an index ETF this week in advance of next week's impending crash, and some rescue package arrives over the weekend, equity prices could spike at the beginning of the week and you'd be screwed.

Answer 2

Not a day goes by that someone isn't forecasting a collapse or meteoric rise.
Have you read Ravi Batra's The Great Depression of 1990? The '90s went on to return an amazing 18.3%/yr compound growth rate for the decade. (The book sells for just over $3 with free Amazon shipping.)

In 1987, Elaine Garzarelli predicted the crash. But went years after to produce unremarkable results. Me? I saw that 1987 was up 5% or so year on year (in hindsight , of course), and by just staying invested, I added deposits throughout the year, and saw that 5% return. What crash? Looking back now, it was a tiny blip.

You need to be diversified in a way that one segment of the market falling won't ruin you. If you think the world is ending, you should make peace with your loved ones and your God, no investment advice will be of any value. (Nor will gold for that matter.)

Answer 3

What you do is you create an infomercial where you sell a booklet about junk investments that you are absolutely certian may survive an end of the world scenerio. Then you sell that booklet to people who fear for their family. It is basically a tax on stupidity but works because it prays on the fears of the stupid. It requires moral bankruptcy, but you can end up with quite a bit of money... of course if the Euro does crash then you have a lot of worthless money.

Answer 4

Invest in solid companies, not in esoteric products built on sand.

The problem is with finance, not with real economy: oil companies make money, mobile phone companies make money, airlines make money...

Answer 5

Trying to make money on something going down is inherently more complicated, risky and speculative than making money on it going up. Selling short allows for unlimited losses. Put options expire and have to be rebought if you want to keep playing that game.

If you are that confident that the European market will completely crash (I'm not, but then again, I tend to be fairly contrarian) I'd recommend just sitting it out in cash (possibly something other than the Euro) and waiting until it gets so ridiculously cheap due to panic selling that it defies all common sense. For example, when companies that aren't completely falling apart are selling for less than book value and/or less than five times prior peak earnings that's a good sign. Another indicator is when you hear absolutely nothing other than doom-and-gloom and people swearing they'll never buy another stock as long as they live. Then buy at these depressed prices and when all the panic sellers realize that the world didn't end, it will go back up.

Answer 6

The best way to make money on a downward market is to buy at the bottom, sell at the top.

Lather, rinse, repeat.

Answer 7

If you are interested in short term trading and live in the UK you can do some Spread Betting. If you know what you are doing you can make money no matter which way the market is moving.

Note that most people don't know what they are doing and lose their money pretty quickly.