China Has the Drone

October 31, 2013

  • Attack in Beijing: The eerie incident anticipated 24 hours in advance by Byron King
  • “China has the drone”: What it means, and how to invest
  • Markets suffer “post-Fed letdown”
  • What happens when Wall Street discovers the Fed can’t create jobs?
  • Proof the NSA has no sense of humor… readers revolt against the renminbi… employer-provided health policies next to be canceled… and more!

  “Imagine a remote region of central Asia,” writes our Byron King, beginning to paint a vivid word picture.

“In a small village, Islamist militants are hard at work preparing an improvised explosive device (IED). The perps are more or less relaxed, because they know that the nearest threat to their efforts is hundreds of miles away — at a Chinese army base. The target is the regional governor and his entourage, including several high-ranking officials on a show-and-tell tour in the countryside.

“In a week, their IED will be placed next to a Chinese government building and detonated remotely.”

Byron wrote this for readers of his Military Tech Alert on Tuesday — 24 hours before an eerily similar news item began ricocheting around the world.

  Beijing’s Tiananmen Square was the target of what the official Xinhua News Agency called a “rigorously planned, organized, premeditated, violent terrorist attack.”

A car plowed into a crowd and burst into flames. Five people were killed, including all three in the car. Another 40 were hurt. Most of the victims were tourists.

“A suicide car-bomb attack without the bomb” was one apt description we ran across…

The attack happened Monday. For the first 48 hours, Chinese media went out of their way to play down the incident, much less label it an act of terrorism. That changed yesterday with the arrests of five people — all of them ethnic Uighurs (pronounced WEE-gurs) from China’s northwestern province of Xinjiang.

For decades, the government in Beijing has been relocating ethnic Han Chinese to Xinjiang, rendering the Uighurs less than half the overall population. Think of Xinjiang as a Muslim version of Tibet, but without the worldwide sympathy. You don’t see “Free Xinjiang” bumper stickers in the U.S., nor celebrities like Richard Gere championing the cause, nor Uighur elder statesmen in exile like the Dalai Lama.

To the extent the Uighurs have fought back, the conflict was confined to Xinjiang. Until now.

  Here’s where Byron’s scenario departs radically from real life… but maybe not for long.

“Without warning, the rude house that serves as the terrorists’ base of operations explodes — BOOM! — and the plot vaporizes with them. Villagers hear the explosion and see the fireball rising. Neighbors pour in from the fields to see what just happened.

“They look up into the sky, but nobody can see or hear the small black dot nearly 15,000 feet up. It’s the platform from whence came the missile that just streaked straight into the terrorists’ lair. But if the locals could discern that black dot, they’d see a red star on a red bar painted on the side of a drone — an unmanned aerial vehicle” dispatched from a Chinese air base.

“This scenario,” Byron adds, “isn’t quite as far-fetched or as science fiction as you might think.”

  “China has the drone,” he says — although it hasn’t been used for assassinations, as far as we know.

“According to analysts who follow such things, China probably has the world’s second-largest fleet of military drones, numbering in the thousands,” lagging only the U.S.

And the Chinese have built their fleet at a fraction of the U.S.’ cost. The main U.S. drone, the Reaper, costs $17 million a pop. China’s Wing Loong, about $1 million.

And it’s highly likely the Chinese have pilfered U.S. technology to make it happen. “China has been stealing American mil-tech since the mid-1950s,” Byron explains. “Today, the Chinese tend to have actual blueprints, test trial results, technical explanations, etc. — all hacked from American computers, and those of NATO allies and many others. The Chinese have entire armies of hackers devoted to gathering intelligence.”

Thing is, controlling China’s restive masses along the lines of Byron’s scenario is only a part of the government’s drone plans.

  “The move toward drone warfare is part of China’s larger strategy,” he says, “to project power over the international waters to its east and south and over its small, weaker neighbors to the north and west.

“Last month, on Sept. 9, a Chinese drone penetrated Japanese airspace near Okinawa for the first time. Japanese defense forces noted the intrusion and scrambled jets. The Chinese drone was escorted out of the area by Japanese air force F-15s.”

Earlier this month, meanwhile, “the U.S. and Japan renewed a mutual defense treaty and included new terms involving drones. Specially, the U.S. military will begin flying long-range drones — like the Global Hawk — over the disputed Senkaku Islands in spring of 2014.”

The Senkakus — described in our pages last year as “strategically irrelevant and economically marginal islands” — are nonetheless a potential flashpoint between Japan and China, with the U.S. taking Japan’s side.

  “Most analysts,” Byron says, “believe that the U.S. military drone program is still about 20 years ahead of China’s efforts.

“Odds are that China will require 20 years or so to close the gap. But that’s assuming that the U.S./NATO/etc. can close holes in the research and defense networks through which secrets are slipping away.”

Which brings us to one of the “fifth domain of war” companies Byron is tracking in Military Tech Alert. For benefit of his paying subscribers, we won’t identify it by name. “This cybersecurity company,” he says, “specializes in surveillance electronics, aviation services and signals intelligence.”

Late last month, it won nine contracts totaling $324.4 million from the Pentagon. This month, the “shutdown” notwithstanding, it won two more contracts totaling $76.1 million.

But don’t think you’ve missed out. “I expect even bigger and better things from this company. It’s an even more attractive addition to the portfolio.” Better yet, Byron has pored over 178 pages of declassified documents to identify six other companies set to collect a $16.1 billion windfall from the Pentagon. Check out the fruits of his research at this link.

  Markets everywhere are working through a post-Fed letdown.

Yesterday afternoon, the Federal Reserve’s Open Market Committee made no changes to its interest-rate and money-printing policy. But because the committee didn’t include a line in its statement along the lines of “QE Forever!” it’s been a risk-off environment. As we survey the landscape this morning…

  • Major stock indexes have climbed down from their dizzying heights of late. At 1,762, the S&P 500 is about 10 points off Tuesday’s record close
  • Gold has given up $30, the bid now $1,324. Silver has tumbled more than a dollar, below $22
  • Treasury yields have popped, the 10-year jumping from 2.48% before the announcement to 2.56% now
  • Commodities are losing ground. Crude is at $96.31 a barrel, copper at $3.29 a pound.

The only beneficiary is the miserable greenback. The dollar index is back above 80 for the first time in two weeks.

 Another day, another anemic jobs indicator. First-time unemployment claims rang in last week at 340,000 — still well above the 300,000 you’d see in a “robust recovery.”

“Counting problems in California, tied to a computer changeover, are no longer inflating the numbers,” Bloomberg sums up, “nor are government contractors who were filing claims during the government shutdown in the first half of the month.”

In other words, even with anomalies wrung out of the system, the numbers are 30,000 higher than they were a month ago. Yuck…

  “Investors aren’t yet questioning whether the Fed’s printing press helps to create jobs,” says our macro strategist Dan Amoss.

“We have our doubts; job market data should remain soggy due to factors that have nothing to do with a shortage of money supply. New money supply can’t cure what ails the job market. In fact, by propping up stale bubbles and unproductive economic activity, QE is working against the establishment of a healthy, sustainable job market.

“How might the Fed react if the job market weakens despite QE? The Fed would predictably increase QE, not taper it. For now, new money supply of $85 billion per month is on autopilot until something dramatic occurs to change the Fed’s worldview.”

  And now, government’s thumb on small business — NSA edition. Two years ago, the feds demonstrated they have no sense of humor when they threatened to sue the owner of a novelty store who peddles coffee cups and T-shirts with slogans like “Department of Homeland Stupidity.” And this…

Supposedly, the entrepreneur, one Dan McCall from Sauk Rapids, Minn., has run afoul of federal laws forbidding the use, mutilation, alteration or impersonation of government seals.

But Mr. McCall is fighting back in court on constitutional grounds. What’s more, he says his “use of images of the NSA and DHS seals, whether unaltered but in combination with critical text, or altered in parodic form, did not create any likelihood of confusion about the source or sponsorship of the materials on which they were available to be printed.”

“It’s bad enough,” says attorney Paul Alan Levy, “that these agencies have us under constant surveillance, [but] forbidding citizens from criticizing them is beyond the pale.”

It is not, however, very surprising…

  “Nobody wants those renminbi,” a reader writes after our account yesterday of the world’s financial capitals falling all over themselves to trade the Chinese currency.

“China is still a controlled state; the U.S. is not. And oil exports (reserves) will substitute for gold in backing the U.S. dollar.”

Nor was that reader alone: “I think China’s manipulation of currency makes the U.S. feds look great. China has built many new huge cities with no occupants. Everything is relative.”

The 5: Was it something we said?

We’ve been pounding for years on China’s efforts to make its currency a worthy competitor in the international marketplace. We’ve had EverBank’s Chuck Butler suggest China seeks a gold-backed reserve currency supplanting the dollar. We’ve had Currency Wars author Jim Rickards tell us China wants “a seat at the table” whenever the international monetary system is reorganized for the fourth time in a century.

We’re not sure what we said yesterday to set off a minor round of chest-thumping. But it won’t dissuade us from watching very carefully what the Communist Party Central Committee does at its “Third Plenum” nine days hence.

  “When will your congressional members grow up and accept the reality of an improved health care system?” a reader writes, with a peculiar defense of Obamacare.

“Had any Republicans acted in the interest of American citizens by making the health care bill more effective from the start and by supporting it throughout, there would be far fewer problems than exist now. Instead, they wage a useless and costly battle. Health care systems work and are less costly to a country overall when they are embraced.

“Once established, these systems are never perfect because they are dealing with an ever-changing population and ever-changing technologies. A dynamic system such as this requires dedicated, dynamic people up to the challenge. From here, I don’t see much to encourage me.”

The 5: We were never sure what the Republicans were so upset about. The Affordable Care Act differs little from legislation Nixon proposed a few months before he resigned. The individual mandate was a brainchild of the Heritage Foundation. And only yesterday, the president praised the “Massachusetts model” implemented by his opponent in the election last year.

  “It appears that most corporate health insurance plans will need to be revised (terminated and re-offered),” writes a reader, warning the individual marketplace isn’t the only one getting upended.

“We have offered our staff medical, dental and vision in three plans. The ACA requires the medical plan to include pediatric dental and vision. Our medical plan has been terminated, and we are waiting to hear what the new offer will be. We still need to offer dental and vision, because those plans are for our employees, not just their children.

“We are not allowed to keep our insurance, although it is far more comprehensive that just the mandated ACA coverage. This is bizarre and not yet being reported in the press, who are still focusing on individual coverage.”

The 5: Gee, you mean it’s not about “bad apple insurers,” as the president said yesterday?


Dave Gonigam
The 5 Min. Forecast

P.S. After yesterday’s episode, we quickly filled all 25 available slots with readers seeking the name and ticker symbol of a specialty company in the U.S. oil patch that has the potential to turn every $1 invested into $62.50. (If you missed our comprehensive briefing, you can catch up here.)

We have 25 more slots available today. After midnight tonight, we’re pulling the presentation from the Web for good. The company’s market cap is so small we don’t want our readership artificially moving the share price. Check it out at this link. If the 25 slots are already filled, we apologize.


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