Brexit: Buy The Rumor, Sell The Fact
Keith Fitz-Gerald | Jun 16, 2016 01:25AM ET
The now-legendary George Soros made his mark on history by "breaking" the Bank of England and walking away with a cool $1.5 billion dollars as a hard-nosed hedge fund trader back in September 1992.
He did it by shorting the pound sterling in a move that ultimately cost the UK treasury more than £3.4 billion and threw global markets into complete chaos. But that's nothing compared to the situation this time around and the opportunity we have on our hands.
This time, the Bank of England is about to break itself.
Here's how to position your money to take advantage of the situation.
h2 There's Always Profit Potential in Chaos of this Caliber/h2Chances are good you've heard the term "Brexit " by now.
Brexit is shorthand for a referendum slated for Thursday, June 23, that will decide whether Britain will stay in the EU or make an unceremonious exit – hence the term – Britain + Exit = Brexit.
Those who favor staying argue that doing so gives Britain a big advantage when it comes to things like economic growth and public services, which are paid for largely by trade and export. Those who want to leave argue that the EU has too much control over Britain and that the billions paid each year to secure membership could be better spent at home. The "free movement" of migrants overwhelming the country currently and lack of visas has become a central rally point.
What it really comes down to, though, is something far simpler – whether continued membership at a time when Europe is changing rapidly ensures prosperity or condemns Britain to economic devastation.
With only 8 days to go until the referendum that decides whether or not Britain leaves the EU, the polls have swung in favor of those who want to leave (43%) versus those who want to stay (42%).
Those with plenty to defend – meaning the status quo – have gone bananas, and the headlines reflect the increasingly stark divide.
"Cam's Great EU Gamble" – Daily Mirror
"Brexit Will Raise Risk of World War" – The Times
"Brexit Would Put a Bomb Under Our Economy" – USA Today
They embody the Total Wealth Principle of Divisiveness that we talked about last week, and that means there's a terrific opportunity at hand.
But it's not on the front page like everybody thinks. To really strike it big, you've got to look at what's on the back page because that's the information that can make you a millionaire.
Get The News You Want
The "back pages" are where you'll find charts like this one.
The critical takeaway here is not the emotional baggage associated with staying, nor with a departure like most people think.
What you need to key in on is that volatility is rising dramatically as the vote draws near.
What this chart is really telling you is that those who have a vested interest in things staying the way they are may actually lose the battle. Put another way, the push to leave is so strong that billions of dollars have already been spent on the assumption that it will happen.
That's your entry.
Now, take what you know and play that out logically to find your trade.
If Britain stays, the pound remains relatively consistent because things don't change much. It'll be more of the same… politics… immigration… economic doldrums. Volatility drops.
If Britain leaves, the pound drops because people are worried about British isolation and all that comes with it. Volatility skyrockets. And, as is the case so often when the stuff hits the proverbial fan, the dollar rises because it's the only currency liquid enough to absorb the risk as traders run for the hills.
Even Janet Yellen can't sugarcoat the possibility. During her speech earlier this week, the U.S. Federal Reserve chair told listeners, "…a UK vote to exit the European Union could have significant economic repercussions."
…no kidding. That's Fedspeak for "buckle up."
As I write this, the pound is sitting nearly 20% lower than its 2014 highs, and the lowest it's been in three weeks.
Should the June 23 referendum lead to Britain's split from the EU, experts (including the head of the Bank of England) are calling for a further 10%, or possibly 15%, drop in the pound.
I think 20% is more likely because leaving the EU is a much bigger deal financially than most people realize, and volatility reflects that even though the headlines don't… yet.
h2 Two Easy Ways to Play the "Brexit"/h2The most defensive "offensive" position is to go long the U.S. dollar with an exchange-traded fund (ETF) like the PowerShares DB US Dollar Bullish (NYSE:UUP). That way you'll benefit from global traders who seek the relative safety of the dollar should Britain head off on its own even if the pound doesn't move all that much itself.
The U.S. dollar has the added benefit of being the go-to for other currencies that will weaken at the same time, so it's really the choice to play a knee-jerk reaction that will be global in nature, even though it's Britain that we're focused on today.
If you want more direct exposure to the British pound, consider buying the ETFS Short GBP Long USD (LON:SGBP). It's traded on the London Exchange, so you'll need to check with your broker for access. This way you'll benefit from a potential breakdown in the pound itself specifically as it trades against the U.S. dollar.
More advanced traders and investors could also consider everything from options to futures, but those are beyond the scope of today's article, so we'll cover 'em another time.
As always, both of these trades are speculative in nature, so you'll want to keep risk small by limiting the capital you place at work.
While that varies by investor risk tolerance and objectives, a good rule of thumb is to limit a speculative trade like this one to 2% of overall capital because doing so gives you plenty of staying power.
Never forget that opportunities like this one are not a matter of if or even when…
…but how.
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