Date: 03/14/22
Author: Kent Moors, Ph.D.
All eyes remain transfixed on the Russian invasion of Ukraine. In the broader view, however, it is merely the latest in a sequence of geopolitical situations impacting markets, although admittedly the most disconcerting. Most commentators view each as a unique event, assuming that the way each interacts with prices, supply, availability, and the like correspond to its own timeline and effects.
Most of the time, the exercise concludes with a statement about market volatility. Some doomsday implications may emerge from soothsayers charting out the death of economies, spikes in energy prices, or the end of civilization as we know it.
Of course, when these predictions do not happen, markets tend to bypass the insecurity hanging about. Yet, it often feels like investors are “ignoring” the events while still having one eye on what crisis may be brewing.
“Analysts” still largely regard such geopolitical events as insular, outliers, exceptions to the rule, one offs. They are not. Rather, such episodes are more the norm than most would want to conclude. And these days they are beginning to happen in tandem.
Consider what is happening now. As Russian strikes continue to pummel what are blatantly civilian targets in Ukraine, a dozen Iranian missiles rain down on Irbil, the Kurdish capital in northern Iraq, and Beijing is again making sinister sounds over both Taiwan and the South China Sea controversy.
Whatever passed for international order is becoming suspect. Markets are just coming to grips with how to react.
Take oil as the most visible manifestation of the current situation. Prices are now higher than they have been in more than a decade. WTI (West Texas Intermediate, the benchmark for futures contracts cut in New York) closed trading on Friday at $109.29 a barrel, while Brent (the more used international yardstick set daily in London) closed at $112.60. Some pundits are now suggesting it could reach $175 or even $200.
Neither of these is at all likely, given the certain economic retrenchment from rapidly declining demand that would occur well before those levels hit.
Another dynamic has set in, one that always happens when geopolitical events intrude. Energy traders are more troubled by market uncertainty than just about anything else. The reason is rather straightforward. Future consignments must be priced, and the largest single component of that pricing determination involves the cost of the underlying energy.
However, when geopolitical concerns take center stage, traders tend to offset by over weighting contracts in one direction or the other. Oil is the prime example in this regard. Normally, the price is set by the expected cost of the next available barrel.
But if traders’ handicaps point toward the more likely scenario as a price move up rather than down, they need to hedge risk on the upside by pegging contracts to the expected cost of the most expensive next available barrel and utilizing a barrage of options to offset the risk. The opposite takes place (the least expensive barrel) if the perception holds that the price is going down.
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The uncertainty hasn’t been overcome, just offset and it pushes the price even higher (in the current environment) or lower (as was the case throughout 2015 and early 2016). In each case, it is an overreaction, occasioned by traders attempting to get ahead of the pricing curve.
It has been some time since the cost of a futures contract (the trader’s price) has reflected genuine underling market factors. The latest run (done Friday) of my Effective Crude Price (ECP) calculations continues to show a genuine market price well below what is being quoted. ECP calculates the actual market price of crude oil once shorts, derivatives, artificial supply moves, and other outliers are removed.
The last ECP run is quite dramatic – the genuine underlying price of WTI comes in at $81 and Brent at $84! Put another way, the crisis environment has resulted in crude prices on steroids, roughly a premium over “fair market value” of more than 30 percent.
When the fog of war subsides, there is going to be a pronounced retreat in prices.
But this is only one part of my algorithmic arsenal allowing for an early detection of what crises do to investment prospects. On the other hand, the undergirding of the approach is my proprietary Σ Algorithm trading system, upon which both the Sigma Trader and PRISM Profits services are based. Σ Algo has been meeting it more head on – by providing a way to limit the impact of uncertainty.
The key involves pattern recognition, which is now an essential way to address the effects of geopolitical events. To get us there, a little background is necessary, some of which I have discussed previously here in Classified Intelligence Brief.
We begin with the difference between invention and innovation. The first is coming up with something completely new but happens rarely. The second takes something that already exists and uses it in a new way. Most of human advancement results from innovation.
Interestingly enough, this is also the case with my approach to investment advising. The ability to track opportunities is usually less about where they originate and more about the direction in which they are moving.
That requires a facility in identifying patterns and assessing trends, resulting in my “borrowing” from several approaches affecting periods of my life. In the case of my Σ Algorithm trading system, the six Key Sequencing Triggers (KSTs) are taken from very different approaches. Two begin in quantum equilibrium theory (from my early period in theoretical physics); another comes from formulae used to determine implied volatility in setting options pricing, a fourth is found in methods of estimating uncertainty ranges in random probability, while the remaining two are applications of distribution analysis.
But the most important application in just about everything I do arises from another source altogether.
During my university professorship days, I would occasionally ask students, “What war defines your generation?” Usually, that would be Iraq or Afghanistan. When I asked about their fathers, Vietnam was the normal response. For grandfathers, it was World War II.
Finally, when my turn came, the class would receive an unexpected response. Mine was the Cold War.
My day job may have been in a lecture hall. But for almost four decades the rest of my life was largely devoted to another career – in intelligence. There, the ongoing major power conflict defined everything about me. Geopolitics was not an aberration. It was what I reviewed over morning coffee.
According to the distinction that animated the meaning of that life (and upon occasion saved it), intelligence has a specific meaning. It is the guidance provided to somebody at a higher pay grade tasked with making decisions. That is, after all, what proper intel is supposed to do.
When I was lecturing at the US Army War College years later, I expressed it this way:
The basic distinction is among three components: (1) description; (2) analysis; and (3) intelligence. The first tells you what something is. The second tells you what it means. The third, tells you how to use it.
I found out quickly that the third was the only one of any interest to a policy maker. Usually, the absolute best alternative was unusable, given the environment in which the decision maker needed to apply it. But it was the process of arriving at that preference (or, more often, range of preferences) that was most important.
Working out how the process explained geopolitical intel options in one career, ultimately allowed me to apply it in parallel fashion when the subject matter veered toward the geopolitical effect on energy issues.
There is, however, a major difference. The definition of intelligence may remain the same (namely, how to use what has been uncovered). But in one life the end I sought is a policy action advisory, while in the other the objective is to identify investment moves.
Here’s what I learned from some four decades of considering such things. Geopolitics is not a random exercise of unrelated events. Patterns form, even in rapidly changing situations. This is true because of an interesting little realization I made almost 50 years ago.
Each decision or event limits the range of what happens next. Sequence and direction then become decisive.
When applying this to how geopolitics and investment issues interact, Σ Algo provides a political risk coefficient, a weighted factor allowing some early moves for investing into a developing geopolitical sequence. .
To date, Σ Algo has provided my subscribers at least 54 triple digit winners.
I have recently made a nice addition to the system’s battery of calculating tools. It is called the Crisis Impact Analyzer (somewhat tongue-in-cheek abbreviated “CIA” in homage to my decades devoted to that other life). It has identified several calculating nodes within the literally trillions of lines of numbers Σ Algo computer runs have produced over the past 16 months which, when networked via a tailored filtering process, are designed to identify stock and options moves most likely to benefit from rising levels of international risk.
CIA was introduced only recently and has already produced three triple digit profits. A fourth is about to hit this week. This one involves China rather than Ukraine.
As it happens, I am scheduled to appear Thursday on the most watched Chinese economic discussion show. The live transmission takes place at 9:30 pm Eastern time US, just as the Shanghai, Shenzhen, Beijing, and Hong Kong markets open on the other side of the world.
The discussion focuses on changes China’s energy policy needs to make in the face of rising oil prices. At the moment, I still intend to do this appearance. However, that depends on what Beijing does this week in its own saber rattling. After all, I did cancel a long-standing gig on several Russian TV networks commenting on energy and other markets once the “Z” tanks moved over the border.
I still firmly believe that investment opportunities are affected by worldwide events. I just don’t intend to provide advice to those who choose to take those events into dark places.
Dr. Kent Moors
This is an installment of Classified Intelligence Brief, your guide to what’s really happening behind the headlines… and how to profit from it. Dr. Kent Moors served the United States for 30 years as one of the most highly decorated intelligence operatives alive today (including THREE Presidential commendations).
After moving through the inner circles of royalty, oligarchs, billionaires, and the uber-rich, he discovered some of the most important secrets regarding finance, geo-politics, and business. As a result, he built one of the most impressive rolodexes in the world. His insights and network of contacts took him from a Vietnam veteran to becoming one of the globe’s most sought after consultants, with clients including six of the largest energy companies and the United States government.
Now, Dr. Moors is sharing his proprietary research every week…knowledge filtered through his decades as an internationally recognized professor and scholar, intelligence operative, business consultant, investor, and geo-political “troubleshooter.” This publication is designed to give you an insider’s view of what is really happening on the geo-political stage.
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