Profiting from the fog of war

By now the whole world knows about ISIS. This seemingly invincible army of several 1000 marauding across Iraq tweeting and preparing glossy annual reports. They have been linked to every world power and have now replaced their brand new Toyotas with even newer Humvees. My first impression would be if they are tweeting and communicating and using brand new Toyotas, then surely we should know a lot more about them, then we let on.

The Middle East has always been the toughest region for analysts and journalists. Middle Easterners love drama and exaggeration.  They will blame everything on some power or another and conspiracy theories are part of regular day to day reporting. Furthermore, to a Middle Easterner everything happens for a reason. The great powers have meddled in the region for so long most people see some grand imperialist plan behind every event. 

I don't find it surprising that even the seasoned journalists are buying into these wild conspiracy theories. They sound good, sell papers  and are great copy and paste material from regional websites. As a trader you can't trade on irrationality but you can profit from it, if you look through the fog of war you will see trading opportunities in every market. 

The oil companies, aid agencies, and anyone that has to take rational decisions seem to be playing things down a bit. I am glad that the markets did not go into full panic mode.  Ironically it is in times of crisis that the markets revert to looking at true fundamentals of the economy. 

Iraq  is clearly a failed state. It has been for decades. Iraq is currently Baghdad and the few well  guarded oil facilities in the South. The much talked about refinery in Baghdad was predominantly for domestic use and a pretty inefficient plant, at that.  Iraqi oil has been plagued by so many mishaps and has been on and off the market for so long that the Kurds seem to think they own most of it anyway.  

The predominantly Shia Iraqi government and army pretty much allowed the Sunnis and Kurds to manage their own domains. They did not fight ISIS,  because there was nothing to fight for. This a feudal, tribal failed state.  As far as the Shia are concerned that is Sunni land anyway. If the Sunnis attack Najaf or  Kerbala, things will change. 

The questions that should be asked are, not so much who is behind ISIS but who will attempt to gain from this bizarre phenomenon and the latest twist in another failed Middle Eastern project.  For the list is long and getting longer by the day, but I am sure the journos are already copy and pasting the latest conspiracy theory. 

From a trading perspective the noise and trading opportunities are widely amplified by geopolitical activity like this.  We saw that in Ukraine, as well. The initial  movement tends  to be quite rapid, particularly  with the algos going bananas looking at ISIS Twitter feeds about world domination. 

However hedge funds and regulators are far smarter then they used to be and a nod here and a few encouraging words normally sends the market in the direction it was going anyway or stabilises it.  

It is hard to believe, just last week everyone was complaining about a lack of volatility. 

The new paradigm of trading and politics: Follow the noise

There was a time when to succeed in the developing world you needed a flag, a carefully marked out border, an airline, and a despotic leader with lots of foreign bank accounts. Before that time the world  was pretty much a feudal realm with lots of self appointed leaders.

The recent events in the Middle East show us a new acceptable form of global politics. Random territories, controlled by different groups with conflicting sectarian and tribal links. Borders that are nonexistent or highly porous. Armies often number in the hundreds and drive around in Toyotas, pillaging, and massacring.  The so called authorities hide in massive fortified citadels protecting their oil.  Has anyone ever seen Mad Max, or Game of  Thrones.  This  is a mix of the two.  Ironically, Iran is  now seen as saviors in this mess. The pariah state condemned by most of the world has gone full  circle.  How bad are the baddies, when Iran is a goodie ? 

In a world of high tech gadgetry, can a couple  of 1000 lightly armed men with no air-support really take the world hostage and cause a panic in the oil complex. Then there are the Kurds.  A nation that spans four geographic countries, that has  no real  state but now has the capacity to negotiate and sell its oil in the open market and pretty much do anything it wants. In the middle of this, real nation states like  Iran and Turkey struggle to cope with the enfolding crises and somehow get condemned for not following global political and human rights norms. The ultimate questions are being asked and not answered.  Were we safer in a world with the likes of Saddam Hossein ??? Who knows.

This is the brave new world  of the high frequency traders, super speed news. A world where we can lose an airplane but can locate our Ipad at the touch of a mouse. Its a new  world for politics, but also  for trading.  Most independent traders still look at systems and use indicators. 90 % fail. At any particular moment 10% are succeeding and a few percent are doing rather well.  What do the 10%  do that is so  successful. They wait,  they don't trade. Not trading is your best  trade. They play Poker. Hang out with the kids  and keep  a very close eye on things.

They know what moves the market. A  market is never over bought or over sold.  It is at exactly the right price in that moment. Indicators on most  instruments have been over-something for days or months with no reversal.

They just wait. The most difficult thing for a human being in the age of action. Waiting  And when the small band of pirates run towards the oil, or when the Bank of  England dude talks up the pound or when some random correlation signals a black Swan in a market. they move. With all their available resources. Intensity that you can not believe and an unsurpassed conviction in the trade. You cant  really get that conviction with a lagging moving average. The 90% lag and fail, like their indicators.  Like the hooded guy on the Iraqi border. They go as fast as they can wiping out all the stops along the way and clearing the table. Then its back to the drawing board.

Now,  don't get me wrong, all this requires a ton of preparation. Sure you look at the charts checking out  Fibonacci,  Ichimoku and other exciting, colorful names from the last  millenia , but do they actually trade on it, unlikely. Its funny how oil  really  did not go  up  that much after the ISIS  business,  but it went up quite a lot in the weeks  before. There were no secrets, all the info about the impending madness  was a Google  search away. The eagle eyed algo or the able trader pieced it all  together. Everyone else was saying oil was overbought 2 weeks  ago. The 90%.  That is the new paradigm of politics and of trading. By all means, follow the noise, it is louder than ever, but enjoy the quiet, while  you wait.  

For more on poker and patience check out the aptly named Mercenary Trader link



      

The ISIS axis. Middle East's new power brokers

With the militant war raging in Northern Iraq  it seems  like the crazy plan  of containing the Syrian civil war has finally failed. The total inaction in Syria for the past 2 years has led to the training and arming of a large army of  battle hardened over zealous militants that now threaten to spillover into the rest of the region.

With Syria largely  forgotten and with no great prize  apart from a desolate wasteland the militants are moving to plan B. Even the name ISIS could have been apt for any James Bond nemesis.  Like any great movie the sequel has to have far more action, bigger explosions and involve the whole world.

ISIS is heading directly for the Iraqi  capital  and the oil fields of  Southern Iraq. ISIS's  timing is bizarrely perfect. With an America that doesn't seem to have an appetite for war and an Iran that is bending over backwards to seem nice, the vacuum in the region leads nicely to the doorstep of  Saudi Arabia.  Of course, you do not bite the hand that feeds you, so Saudi  is clearly the final  frontier for ISIS.

The only  questions that remain is will  Iran still  pretend to be nice or will ISIS wind them up enough for them to unleash their full insurgency in Iraq.  You can just imagine the fuming IRGC generals sitting  on their hands and gritting their teeth. It wasn't  a long time ago that Hezbollah and the IRGC were the most  feared insurgency in the Middle East.  Those days  have long gone.

Oh yes, there is  one more question.  The Kurds are remarkably quiet in this little war. Could there be a tacit  agreement between the Kurds  and ISIS to carve up the area.  That would  be a  formidable  force.  The Kurds are historically some of the most accomplished  and battle hardened fighters in the region. They also sit on a nice patch of oil rich land.  This is one hell of  a sequel  waiting to  happen.  And by the way , if you were thinking of  shorting oil and a nice quiet summer forget it.