When to Bet Against the 'End of the World'

'Brexit' has distorted the market... How Steve Sjuggerud turned me into a believer with this stock... When to bet against the 'end of the world'... What the 'Big Mac Index' shows... Investing in the world's best real estate at a 'double discount'...

Sometimes, I think my job is to make my colleague Steve Sjuggerud feel like he's going crazy...

Regular Digest readers know that Steve, the editor of True Wealth, is a professional optimist. He wears it on his face.

And the beaming smile he's known for isn't just for show... I (Vic Lederman) see it almost every day in our beach-facing, island office in Florida.

But the idea of such an optimistic attitude often makes me squirm...

Now, I also see myself as an optimist. But I'm not naïve to the woes of the world. And I love "breaking" investment ideas by picking them apart... When I discover weaknesses in big ideas, it feels like a victory.

Steve, on the other hand, starts with maximum enthusiasm. And as a result, many of our conversations start with me pumping the brakes... "What about this?" "What about that?" "Have you thought about this problem?"

I've worked as an analyst with Steve for a little more than two and a half years...

At times, our personality mismatch is comical. But Steve and I have learned to be patient... We take the time to hear each other out.

And we've learned... despite taking different approaches, we often come to incredibly similar conclusions. On many of the biggest issues in life, we're on the same page... We just take different paths to get there.

But Steve's latest 'big idea' pitch was still too much for me to handle...

As we researched for a recent issue of True Wealth, I wanted to discuss "Brexit" – the ongoing process of the United Kingdom's withdrawal from the European Union ("EU") that started in June 2016.

In my view, all the discussion surrounding Brexit – and the latest negotiation deadline – could negatively impact his latest bullish idea.

"Don't worry about it," Steve said. "It's priced in. And even if it's not, it's OK."

He was smiling. Of course he was. Here's what "OK" meant...

Like always, Steve wanted to bet big. And despite the multiyear, never-ending Brexit negotiations, he wanted to bet on the U.K.

Not only that, he wanted to bet on real estate in the region. If that seems a little crazy to you, given that investors are fearing the end of the U.K., you're not alone...

Brexit sure seems like a pretty big deal...

It's one of those ongoing global hot-button issues – like the trade war between the U.S. and China – that gets all the high-profile attention in mainstream media.

The drama around Brexit has spooked investors...

Estimates of the economic damage it could cause are all over the place. And most of the projections that have been done are politically driven... and therefore, subject to bias.

At the least, the U.K. is in an extremely tough spot right now...

It's facing what many assume will be a "no deal" Brexit. An October 31 deadline looms for politicians to figure out how to execute the exit from the EU that U.K. voters chose in 2016.

For our purposes, the politics are beside the point. What's important is that the vote set a negotiation process in motion...

This process was supposed to help the EU and U.K. hammer out new trade deals.

According to the U.K.'s Parliament, the EU is its largest trading partner... Around 46% of the U.K.'s exports end up in the EU. And 54% of the U.K.'s imports come from the EU.

Simply put, the U.K. is extremely dependent on its trade relationship with the EU...

Brexit is about a renegotiation of that deal.

Unfortunately, the negotiations haven't gone well. And this round comes with a hard deadline...

If a deal hasn't been reached in 10 days, the EU and U.K. will sever their relationship with no new trade and border agreements in place.

Pundits have created numerous doomsday scenarios based on this no-deal Brexit... Some are more realistic than others. But still, a no-deal Brexit could cause a tremendous disruption to commerce. As I said, some investors fear the end of the world...

But does it mean all investment opportunities have ceased to exist in the U.K.? Heck no!

Brexit has created an incredible opportunity for investors...

The fear surrounding Brexit has significantly distorted the market – and one area, in particular. It's important to take the time to understand it.

I think most investors know – and Steve and I certainly believe – that when something unusual is happening, it's worth taking a closer look. It doesn't matter if you're naturally optimistic or pessimistic.

That's because you can often find great money-making opportunities in market distortions.

You just have to have the conviction to ignore the noise, look at the data, and let it guide you to its logical end.

With that said, let's take a look at what Brexit fear has done in recent months...

Once you've seen what I've written below, I'm willing to bet – no matter how fearful you are – you won't deny that these market distortions have created an opportunity...

Let's start with the British pound, the U.K.'s benchmark currency... In short, the British pound has taken a beating since the Brexit ball got rolling. And that's great for foreign investors.

The idea is pretty simple...

Right now, your money is more valuable in the U.K. than it ever has been before...

You can look at this in a couple of ways...

First, you can simply find out how many U.S. dollars it takes to buy a British pound. Today, it takes about $1.23 to buy £1. In July 2014, it took $1.71 to buy £1.

Obviously, you can see the big change there. But this number alone doesn't tell us the whole story. For that, we need to talk about Big Macs... The burgers. Seriously.

Here's how Steve explained it in the October issue of True Wealth...

I know it sounds silly. But The Economist magazine has published its Big Mac indexes for years. These track the price of McDonald's Big Mac hamburgers in different countries.

By comparing the same exact product overseas, we can focus on the difference between the actual currencies. The cost of beef, buns, and cheese should be pretty darn similar in the U.S. and the U.K. So if there's a major difference in the price of a Big Mac, the currency is likely the cause. The technical term for this is "purchasing power parity."

Steve's exactly right...

Looking at the price spread between the dollar and the pound only tells you the distance between the two currencies. But we want to know what the economics look like for real people.

So let's look at the 'Big Mac Index'...

This a fun – and surprisingly effective – exercise that shows what I'm talking about...

As of the end of last year (the latest data available from The Economist), you could buy a Big Mac in the U.K. for just 73 cents on the dollar. That's a 27% discount.

Historically, the opposite would have been considered normal... From 1999 through 2009, the Big Mac Index showed that the pound had significantly more buying power than the dollar. Check it out...

As you can see in the chart, the British pound spent most of the 2000s overvalued compared with the U.S. dollar. But Brexit fear has pushed it far into undervalued territory.

This gives U.S. investors a significant advantage. They get more bang for their buck in the U.K. than they ever have.

Now, U.S. investors have the currency advantage...

The pound is dirt-cheap. And Brexit or no Brexit, history says that this discount won't last forever. It's already starting to creep up.

This makes Steve's U.K. real estate bet seem a little less crazy. Remember, we're talking about one of the world's greatest real estate markets.

In short, don't let the Brexit drama prevent you from seeing the data.

It's important to see this advantage for what it is... a considerable tailwind behind the right investments. From the same True Wealth issue, here's how Steve believes this tailwind will play out – and why he believes it's so important...

Now, I'm not predicting this discount will go away overnight. But this major gap likely won't last long... And for it to go away, the pound needs to rise relative to the dollar. That's another massive tailwind for the local currency.

Again, we're putting our money to work outside the U.S. That's an indirect bet on the country's currency, too. And that means we need to think about the currency we're buying – the British pound.

Today, the pound is extremely hated and dirt-cheap... And that's exactly what I look for in an investment. It means that as things turn around, the currency aspect of this investment should give us a big boost.

In sum, here's the setup we have so far...

• The U.K. is one of the world's best real estate markets
• Brexit has scared the heck out of investors
• As a result, the pound has taken a nosedive against the dollar
• But that discount won't last forever
• Assets bought in pounds – like U.K. real estate – have a massive tailwind

This set of facts alone should get your attention.

But what if you could find a way to amplify the tailwind created by the depressed pound?

That's exactly what Steve has done. And it's why I turned from a Brexit naysayer to a data-driven opportunist...

Here is Steve's 'double discount' U.K. real estate strategy...

Steve has found a company that owns an incredible portfolio of real estate in the U.K. But because of the fear surrounding Brexit, it's trading at a discount to its net asset value ("NAV"). That's the company's true value... after its liabilities have been accounted for.

That's right... This company allows you to buy into some of the world's best real estate below cost, at an even cheaper rate than the "Big Mac" discount I described above. Here's the chart of the company's current discount to NAV...

It's simply incredible... A company that holds some of the world's most prized real estate is selling for nearly half off. And the currency tailwind is another 20% discount on top of that.

This is a "double discount."

The assets themselves – in this case, the real estate company – are trading below their current value. And the currency they trade in is trading way below its historic value.

History suggests both of these discounts will correct themselves over time... Brexit or not, double discounts don't last in developed markets like the U.K.

In fact, in a little more than a month since we recommended this position to our True Wealth subscribers, it's up more than 20%. And it's still a buy today.

Unfortunately, Steve won't let me give away the name and ticker symbol in today's Digest. I wish I could. But it's only for True Wealth subscribers. Still, the takeaway is clear...

Brexit fear is distorting the market. And investors need to take the time to look past the headlines and the fear... Instead, they must take a closer look at the data and find opportunities in the distortions.

Brexit has created this wild anomaly in the market. It's one that has pushed one of the most prized real estate markets in the world to bargain-bin prices.

So should you go with your knee-jerk reaction... that Brexit is scary? Or should you look at the data and see a highly unusual opportunity?

Even a natural skeptic like me knows the right answer.

As I said, you still have time to take advantage of this incredible opportunity today. You can get access to all of our research on this company – and much more – with a subscription to True Wealth. Right now, you can sign up for 75% off the regular price for a one-year subscription. Get started right here.

New 52-week highs (as of 10/18/19): Celgene (CELG), Americold Realty Trust (COLD), Dollar General (DG), Digital Realty Trust (DLR), Equinox Gold (EQX), Home Depot (HD), iShares U.S. Home Construction Fund (ITB), JPMorgan Chase (JPM), Lennar (LEN), Masco (MAS), NVR (NVR), Vanguard Real Estate Index Fund (VNQ), and Aqua America (WTR).

In today's mailbag: It appears Dan Ferris isn't the only one disgusted by the current "culture of larceny." As always, send your notes to feedback@stansberryresearch.com.

"Dan, your statement that politicians are imbeciles with hammers who think every problem is a nail is prescient, but inadequate. Besides, allowing them to be seen as imbeciles elicits empathy for them.

"Politicians are far more dangerous than that. They're the ones who try to kill cockroaches in a boat with a shotgun. They lack any long-term insight and usually only create a plethora of horrible ramifications for every problem they attempt to solve. And, they usually don't manage to solve the initial problem.

"But... I love MY Congressman! (Just joking!) Thanks for your work!" – Paid-up subscriber David W.

"Every time I hear one of these lame brained ideas I think of Ayn Rand's book Atlas Shrugged. Maybe we need to have this happen today. However, I'm not sure Atlas's prank was that successful, nor will it be today. Unfortunately, it seems as if we will always have those who expect to be supported in the most grandiose way without contributing anything. Sure, we have billionaires who contribute nothing. But we also have the Carnegies, Rockefellers and even Bill Gates today who have contributed huge amounts for the benefit of the masses. These dregs of society and their politicians need to wake up and do something with their lives. Most of those who made it to the top came from middle class homes and worked to get where they are today." – Paid-up subscriber Hazel C.

"It will be cheaper for the ultra-wealthy to pay the exit tax, leave the country, and start a business in a more tax friendly environment. 5% year over year will add up exponentially and will leave these folks no choice. This isn't even bringing up a 97.5% income tax. Why would you want to remain a U.S. citizen? This would drive out every new startup business, and the associated taxes, and the payroll taxes that will never get paid on top of it. What an asinine idea. If these haters get elected, good luck to the middle class." – Paid-up subscriber Jim S.

"'Politicians want us to think they're highly trained, experienced surgeons using the finest tools available. But they're really imbeciles with hammers who think every problem is a nail.'

"There are exceptions to the rule. My Uncle spent 34 years in the congress as a Democrat (which I clearly am not) and was always rational, well spoken, bi-partisan and believed everything needed a dialogue before legislation was fashioned. They recently opened a center in his name at IU – The Hamilton/Lugar Center for International Relations. Yes dimwits like Nancy Pelosi, Adam Shifty Schiff, and the countless others will never make it that far, but there are a few that will. Ron Paul is one example, but boy are they few and far between." – Paid-up subscriber Craig R.

Regards,

Vic Lederman
Jacksonville, Florida
October 21, 2019