Brexit: Anatomy of a Successful Trade
- 51.9% of British voters give the Establishment the one-finger salute
- And the Establishment flips out: Dow tanks, gold soars
- How the elites blew it… and Jim Rickards led readers to a money-doubling gain
- Four more “surprises” to expect after the Brexit
- Stress tests an even bigger joke than usual… a poorly timed presidential endorsement… the average citizen’s “marionette status”… and more!
So this is what it looks like when the global financial elites throw a hissy fit.
Yesterday afternoon, the Dow industrials crested the 18,000 level for the second time this month. This is the complacency we pointed to on Tuesday — a comfortable assurance that the people of Great Britain would play their assigned role of compliant peasants and vote to “Remain” in the European Union.
Jim Rickards took the other side of that trade. Not because he was certain “Leave” would win… but because that complacency served up an opportunity with massive upside and very limited downside.
Furthermore, he said, “If ‘Leave’ wins, we may see a huge collapse in stock prices, the pound sterling and the euro. We could also see a spike in the price of gold.”
We’re seeing all of that and then some: In the end, “Leave” won with 51.9%. Not a landslide, but not exactly a squeaker. Dow 18,000 is now — at last check — Dow 17,584.
The British pound, meanwhile, has cratered 8%, to a low last seen in 1985. The collapse began around 7:00 p.m. EDT last night with the earliest returns, which your editor watched on the BBC. “Remain’s” margin of victory in Newcastle was lower than expected; “Leave’s” margin of victory in Sunderland was more than expected. Pro-“Remain” pundits began fretting about which way the absentee ballots (“the postal vote” it’s called over there) would go…
Gold began to perk up, and then soared once “Leave’s” victory was locked in. This morning, the bid is up more than $70 from yesterday’s lows — now $1,328.
Government bonds are also rallying, led by U.S. Treasuries. Thus, yields are plummeting; as we write, the yield on a 10-year note is 1.58%.
And Jim Rickards’ recommendations for readers of Rickards’ Intelligence Triggers? Depending on their entry point, they’re pocketing a gain of 129%… and holding on for more on a second play that’s up 64%.
So what did Jim see that conventional wisdom did not?
For one thing, as Jim pointed out all week, global elites live in a bubble, isolated from everyday people. “The more powerful, the more ‘plugged in’ these elites are, the more out of touch they become with popular sentiment. They dine with each other, they fly around in private jets with one another, they assemble in places like Davos together.”
They also lack any sense of humor or capacity for self-awareness. With rare and refreshing exceptions, that is…
Worse for the elites, they put way too much stock in the “predictions” markets. While opinion polls were neck and neck, the betting odds gave “Remain” a 75% probability of victory.
Important distinction: That didn’t mean a 75-25 margin for “Remain.” It simply meant 75% of bettors expected a “Remain” victory, however narrow.
“That’s a very risky bet and probably reflects a lot of cognitive biases (confirmation bias, risk aversion, herding, denial, etc.) rather than cool objectivity,” said Jim.
Or to use a less technical term, wishful thinking. “The people making big bets on ‘Remain’ were likely to be the bankers and elites who have the most to lose from ‘Leave’ — including massive job layoffs that have been threatened by bank CEOs.
“This self-selection of the betting pool skews the odds and makes those odds a bad predictor of actual outcomes. I spent a decade building market prediction systems for the CIA and I understand their strengths, and their weaknesses.”
“Once markets decided to price for ‘Remain,’ this became one of the best trading opportunities I’ve ever seen,” Jim goes on.
“Since actual odds were 50/50 and the market was priced for 75/25, we recommended shorting the pound, buying gold and other trades that would benefit from ‘Leave.’ That way, we would not lose much if ‘Remain’ won, but we would make huge profits if ‘Leave’ won.
“That’s exactly what happened.”
It’s a textbook “Kissinger Cross” trade. You assess the available information. You also assess the available time in which to act. If you act too soon, you stand to incur losses. But if you wait for 100% certainty, you’ll miss out on the opportunity. You need to hit the “sweet spot.” Late last year, we graphically represented this sweet spot like so…
Below is what it looked like in action this week. The top chart is FXB — an ETF keyed to the British pound. The bottom chart is Jim’s proprietary Kissinger Cross indicator, applied to FXB:
The sweet spot — a 60% probability of a correct thesis — was reached earlier this month, triggering a buy on FXB put options. The sweet spot was crossed again today with the pound’s collapse, triggering a sell.
Different readers got different results depending on when they bought. If they acted on the warning we issued in Tuesday’s episode of The 5, they’re sitting on a gain of 129%.
Meanwhile, a second Kissinger Cross trade — one keyed to the U.K. stock market — is up 64%. (Britain’s main stock index, the FTSE 100, closed down 3.2% today.) This one is not yet a sell.
To learn more about the Kissinger Cross indicator and how you can put it to work in your own portfolio, follow this link for a tutorial from Jim.
So what next? The story is only beginning. “When markets move to the extremes we just saw, contagion sets in,” Jim says.
“Leveraged players have to sell liquid assets to get cash to meet margin calls on the illiquid losing positions.
“This moves selling pressure from obvious places like sterling to less obvious places like Asian stock markets. The selling pressure spreads around the world. Soon people begin to panic and everyone wants his money back. A global liquidity crisis breaks out.
“We saw this in 1998, and 2008, and we’re seeing the early stages of it again. This is something that can start in one day but does not necessarily end in one day. It can take weeks to find out where the bodies are buried as hedge funds and dealers gradually go bankrupt because of Brexit-related losses.
“We’ll stay on this story and find out who is the Lehman or AIG of this new market meltdown.”
Meanwhile, the elites remain clueless. “They cling to their elite bubbles, flawed models and bad policy prescriptions,” says Jim. “This means that Brexit-type fiascos will keep happening.”
But it also means more Kissinger Cross profit opportunities during the second half of the year. Jim provides the following itemized list…
- The Fed will continue to talk tough about raising rates but will not actually be able to do so
- Europe will begin to ignore U.S. sanctions on Russia and get back to business as usual
- Physical gold shortages are cropping up all over the world
- Geopolitical tensions are rising in the South China Sea, Syria, Turkey, Venezuela, Libya, North Korea and elsewhere around the world.
Will you be taking advantage? Click here to get started.
Hilariously timed Brexit postscript, Part 1: Yesterday, the Federal Reserve released the results of its annual “stress tests” for the largest U.S. banks.
Great news — everyone passed with flying colors! Compared with last year, they’ve “significantly bolstered their defenses against an economic downturn,” as The Wall Street Journal summarizes, “and could continue lending even during a deep recession.”
Which is undoubtedly true… until the moment it’s not. It’s hard to believe none of the big banks is exposed to a leveraged player — say, a midsized trading firm — that made a big bet on “Remain” and now faces margin calls.
Again, this isn’t necessarily something that will come to light today. As Jim pointed out, we might not learn who’s out there “swimming naked” until next week or next month…
Hilariously timed Brexit postscript, Part 2: In light of the anti-establishment zeitgeist the referendum has exposed — much to the horror of the elites — we present the following tweets from yesterday with no further comment…
“Well… I was almost too late in getting onboard with everything before Brexit,” writes a grateful reader who wrote in overnight after acting on Jim’s Kissinger Cross recommendations this week.
“I have never traded in options, and my eyes were sore reading through all the information and getting approved with Fidelity to trade options. Then going through all the trades you all were suggesting… my goodness! Even had several that were not bought and had to raise my offers. BUT… I got most of them done!
“My thought during all these trades was am I nuts? I had followed Jim for years and enjoyed his thought process concerning governments and their effects on economies. I was also trained fairly well in anti-terrorism and emergency management. I had spent 27 years as an officer in the Army and knew the system fairly well. Nothing as close to Jim’s experience, but enough to reassure me he knew his business, and extremely well.
“Still… this was risk on for me, but making serious money takes serious risks. Everything Jim has done has reduced that risk to a point where I felt more comfortable. In the back of my mind, I knew Jim was right about everything and had a calm feeling that the U.K. would be leaving the EU.
“At the beginning of this process last week, I was way out of my element and even got ticked off. I even wondered if it was a scam. There are lots of scams out there in money world! I still sucked it up, completed my due diligence and got my mind straight. I’m glad I did, but I only had a matter of hours to complete all the trades yesterday and the day before… my eyes were tired.
“I don’t know what my account will look like in the morning, but it should look a heck of a lot better than sitting in all cash for 18 months. With plenty of cash on hand, I can’t wait for my next recommendations.”
The 5: Thank you for the glowing endorsement. More recommendations are coming, rest assured.
Finally, we return to a matter we’ve raised periodically the last few weeks: The vote yesterday was, after all, an “advisory” referendum. It’s not binding.
Sure, it can take down Prime Minister David Cameron — but it can’t force Parliament to do something it doesn’t want to do.
Here’s an email from a reader that came in before the outcome was known: “I believe the elites can control events and populations much easier through NGOs or other quasi-governmental agencies established via democratically elected legislatures or parliaments. Think the U.N., EU and central banks.
“And when any of those entities are threatened, the elites call on their allies (witting or unwitting) in government, the media and elsewhere, to see that no changes occur with which they do not agree.
“Recent examples are the gold vote in Switzerland, the Scottish vote in the U.K. and Greece’s EU retention. I will be very surprised, nay shocked, if Britain escapes the EU. As Jim Rickards said, if it’s really important, they would not leave it to a vote. The British Parliament is the ace in the hole if the voters elect to leave.
“And if, by some queer twist of fate, such an event as Britain leaving the EU or some future unforeseen event should occur that threatens to weaken or destroy any of these elite entities, we will have a major military conflict somewhere on the planet that will just result in lesser individual freedoms and more population controls.
“In sum, the average citizen is consigned to marionette status. But in large measure, it’s our own fault. We are too willing to entrust our finances, our welfare, our health or our spiritual lives to someone else. Walt Kelly was soo right-on when he said through his character Pogo, ‘We have met the enemy and he is us.’”
The 5: Now there’s some depressing food for thought…
Have a good weekend,
The 5 Min. Forecast
P.S. As we get closer to virtual press time, the Dow has slid to a 500-point loss on the day.
Gold is still hanging in there as a safe haven at $1,318, and many gold stocks are standout performers today. More about gold and where it goes from here next week.
But in the meantime, we’ll remind you once more of the impressive short-term profits you can make from “unexpected” events like the British referendum and the volatility they set off. While most stock market investors are licking their wounds today, readers who follow Jim Rickards’ proprietary Kissinger Cross indicator are collecting a gain of as much as 129% in as little as two days. Learn more about how it works right here.