Fighting terror through financial markets

Terrorism is a challenge the West faces, but it is a fight on more than one front. Financial markets are battlefields, too.

Some people respond to the attacks in Paris, and others like them, by saying it’s the end of the world. Sell everything, buy gold, go to your bunker, eat canned food and hunker down.

I don’t think any of that is true.

I agree terrorism is a challenge the West faces. It can be existential. And that can summon an existential response.

One of the things I like to do in analysing the true impact of the attack is to compare it to the attacks on 9/11. I don’t think body counts are the way to think about these murders. The proper way to think about it is the change in thinking post-attack, and its impact on society.

I think the Paris attacks were as traumatic to the French and Parisians as 9/11 was to New Yorkers. To me the impact was very similar.

What did the United States do after 9/11? It launched a military response. And France is now engaged in a military response.

I was very involved in working on threat finance with the US intelligence community after 9/11. I describe it in chapter 1 of my book The Death of Money and also in the first two chapters of my first book Currency Wars.

We saw a couple of things…

First, just a few weeks after 9/11 Osama bin Laden was videotaped — and I’m sure he knew he was being videotaped — discussing the aftermath of the 9/11 attacks with his other sheiks. He considered it an economic attack. He was interested in how much the stock market went down.

Bin Laden came from one of the wealthiest families in Saudi Arabia. He had education and financial sophistication. He was a bit of an entrepreneur when he was living in Sudan in the 1990s before he went to Afghanistan. He was financing his operations with honey farms and transportation companies. He was very financially savvy. And he viewed 9/11 as a financial attack.

He meant to destroy the West financially. He couldn’t set off bombs everywhere or kill every American. But he knew he could inflict damage to the economy by terrorising the US and making its people fearful. That would impose costs.

I don’t know what the budget of the Transportation Security Administration is. And I’m not saying that security is a bad idea. But I do think it is a very high cost in return for very low productivity. And that cost did not exist before 9/11.

France is going to experience that same thing now. I’m not saying the French economy is going to collapse.

But there are going to be costs, whether it’s lost tourism, lost restaurant revenue, or added security.

So, the terrorists try to win in these small increments. The keep piling costs on our society.

Using market information to detect future attacks

One of the things I worked on with the US intelligence community was what we call threat finance. That is, using financial weapons to degrade the power of your enemy. We looked at insider trading in advance of 9/11 and the evidence was overwhelming.

We looked at all angles and used multiple sources — statistical, academic, anecdotal, etc. And there’s no doubt in my mind that there was insider trading before 9/11. What we tried to figure out was…

1. Would there be another spectacular attack?
2. If so, would there be insider trading again?
3. If so, can one identify it in advance?
4. If so, can one also trace it back to source… get a warrant… break down the doors and stop the attack?

We were actually trying to find ways to save thousands of lives using stock market information.

Some people were jumping out of helicopters with knives between their teeth — but that was not my mission.

My mission was to work with applied mathematicians, modellers, market experts, intelligence officers and other information collectors to develop prototypes of a system that could spot a terrorist attack.

[cfsp key=”daily-reckoning-signup”]

And we did. We spent a long time and a lot of money to get a working prototype. It was called Project Prophesy. And we used it for five years. We were able to use it to identify one attempted terrorist attack in advance in August 2006.

We concluded insider trading before a terrorist attack would happen 72 to 24 hours before a terrorist attack took place. That was the window we hypothesised. The reason for that is as a terrorist, you don’t want to start too early.

Why? Because, first, you can be wrong before you’re right. That means even though a terrorist might bet the market will go down, it might go up before it goes down and they might lose their initial capital investment. That would obviously defeat the purpose.

The other reason the terrorist can’t start too early is that this type of insider trading would send out signals. The longer the signals are out there the higher the chance that an intelligence officer will catch them. So the terrorists want to keep a fairly tight window.

So, when I heard about the Paris terrorist attacks, after I got over the initial shock, I looked at their CAC stock index three days prior. Turns out, the French stock market was going up until exactly 50 hours before the attack. Then it went down 3.5% for two-and-a-half trading days.

Now, that by itself proves nothing. The only reason I raise the point is to ask French intelligence: “Are you looking at this decline as a potential advanced indication of a terrorist attack?”

That’s the type of questions we ask at Strategic Intelligence. There are global capital markets and there is the field of geopolitics. In one you have stocks, bonds, derivatives and other financial products you’re familiar with. In the geopolitics space you have intelligence work, military and diplomacy. Our work is at the intersection of both spaces.

Cutting off ISIS financing

The interesting thing about this space is that it is very thinly populated. There are brilliant experts in each field. But I’m one of the few people that work at the intersection of both.

For example, I’ve done work on cutting off ISIS financing. ISIS doesn’t have a bank account, so how do they operate? Well, they use the oldest money in the world… and the newest money in the world: gold and cryptocurrency.

My point is that there are very few people expert in both capital markets and geopolitics. How many people can leave a Wall Street boardroom, then go into the Pentagon and speak both languages? The answer is not many. That’s the big advantage readers of my services receive.

The Paris attacks are an absolute sea change. The European Union, if you take it as a whole, is the largest economy in the world. People keep saying the US is the largest economy and China is the second largest. But if you combine the European economy it is slightly larger than the US.

But one critique of Europe is: Given the size of their economy, why aren’t the Europeans more influential in the geopolitical sphere as China and the United States?

The answer is that the never had a unified military command or a unified foreign policy. I think this is the significance of the Paris attacks combined with the Syrian refugee crisis. Combine those two things and it means one thing: Europe will be brought closer together. I don’t think this will split Europe apart.

The will start thinking harder about military and diplomatic solidarity. The Paris attacks, though traumatic, will be the catalyst for this. They might have to do things like tighter border controls and immigration… but that doesn’t mean Europe is falling apart… it shows that the different countries can come up with a coordinated response. That’s a big deal.

We just concluded our global Strategic Intelligence research summit in Nicaragua. We had our team from Europe… as well as from seven other countries there. We wanted to think about what readers do in different countries when these consolidations start?

There is a group of national intelligence agencies called “The Five Eyes.” They’re comprised of Australia, Canada, New Zealand, the United Kingdom and the United States. The “eyes” are a reference to surveillance, as in “keep your eyes open.”

It’s jargon, but the Five Eyes are the intelligence services of those five countries that have the greatest degree of sharing and trust. I just saw the new James Bond movie, Spectre, and they talked about “The Eight Eyes.” That’s an invention of the screenwriters, but there is such a thing as the Five Eyes.

Now, France is not part of the Five Eyes. They have a very good intelligence service historically and there has been some sharing. But countries like France, Israel and some other countries are allies of the US, and are trusted, but they don’t have the same degree of intelligence cooperation as the Five Eyes.

Now France is being is informally included in the Five Eyes because of the Paris attacks. I’m very much of a bull on Europe. The normal American is bearish on Europe.

I see Europe as one of the few areas doing things right. I think Mario Draghi is a central banker who understands the most about central banking. That doesn’t mean Europe doesn’t have problems, they do, but I see them working through those problems.

I don’t see this in the United States and China. I just see those two countries printing up money to prop things up. But there is no bigger problem than a lack of domestic safety and security. Yes you want money, investments and an education but if you’re not safe, you’ve got nothing. That’s job one.

[cfsp key=”daily-reckoning-signup”]

You may like

In the news
Load More