When Nations Threaten War over Jello

You might’ve seen that Brexit became official about two weeks ago.

Fully nine months after voters decided in a referendum to leave the European Union, the British governrnment made it official by filing the paperwork for Article 50.

But what you probably didn’t see was that the very same day, the governrnment of Spain demanded that Britain returnrn Gibraltar (which is on the Spanish coast but has been a British territory for 300 years).

Spain also suggested (wink, wink) that it wouldn’t actively block Scotland from joining the EU should it decide to break away from the United Kingdom.

In the diplomatic firestorm that followed, Britain threatened to go to war with Spain should that country decide to take Gibraltar by force, and it had a few choice words to say about Scotland too.

I couldn’t make this stuff up if I wanted to.

Less than one day into Brexit negotiations, two European countries publicly considered going to war.

Now, I put the probability of armed conflict between England and Spain at zero.

This is 2017, not 1704.

In any event, war would be embarrassing.

Watching two decrepit former colonial powers fight for the scraps of the empires they used to control is like watching two old men in a nursing home fight over the last cup of Jello.

But I bring this up to show you how truly unpredictable geopolitics has become and, by extension, the world of investing…

Now that the UK is leaving the EU, Scotland is likely to agitate for another independence referendum of its own, given that Spain has now said it won’t block Scottish admission to the EU. (Previously Spain had indicated it would block Scotland, fearing it would make its own separatists in Barcelona bolder.)

Now, it’s pretty likely that Great Britain is about to get hacked down to little England.

Yet British stocks, as tracked by the iShares MSCI United Kingdom ETF (NYSEArca: EWU), are trading at a multi-month high and the pound sterling has traded in a stable range since October of last year.

That’s crazy. But I have no interest in trying to outsmart this market because, frankly, you can’t outsmart something that’s irrational.

Instead of trying to play the macro game, I’m focused on getting paid in cold, hard cash. And these days, that’s remarkably easy to do.

Bond yields started rising around the time of the Brexit vote last summer and then really shot higher after the U.S. presidential election.

Yields have drifted lower since early March and have probably peaked for now, but their spike created some interesting opportunities for value hunters like me, particularly in real estate investment trusts (REITs).

When bond yields started rising last summer, REITs got absolutely hammered, dropping about 15% from their August highs to their November lows.

They’ve recouped some of those losses over the past five months but, as a group, they’re still underwater, even as the broader stock market has rallied to all-time highs.

The good news is that a basket of quality REITs currently yields a good 4% to 5%, which is far better that what’s offered in the bond market, at least without rolling the dice on a risky junk bond.

But in my Peak Income newsletter, I can do even better than that. I’ve found a way to buy a quality portfolio of REITs at a 9.5% discount to their market prices… and at a yield of 8.8%.

I have no idea when – or if – this discount will ever close. But I’m OK with that.

I’m buying an already cheap asset class at an additional discount and getting paid almost 9% in cold, hard cash while I do it. With pricing like that, I don’t have to get the timing exactly right. I can collect the dividend indefinitely until Mr. Market comes around to seeing things my way.

If you’d like to know more about finding opportunities like these, I recommend you give Peak Income a try. While I love REITs at current prices, there are plenty of other asset classes that look every bit as good and, in some cases, pay even higher yields.

Give it a look, and see for yourself.




Charles Sizemore

Boom & Bust Portfolio Manager