November 15, 2013
- The day the planes crashed in New York and Chicago…
- …and other shocking developments from a cyberwar game in Israel
- Live from New York, the diminishing returns of QE
- Checking Paulson’s and Soros’ latest gold moves
- China moves to defuse a revolution (not that they put it that way)
- Subprime is cool again, while student debt hits a milestone
- Setting the record straight… a contemporary dictator who actually rails against the “bourgeois”… Wall Street Journal takes a page from The 5… and more!
President Wesley Clark declared a state of emergency after 700 people were killed in the crash landings of two planes — one at Washington Dulles, the other at and Chicago O’Hare.
In the run-up to that twin disaster, computer glitches had shut down electricity in many regions of the country, shut down Wall Street and crippled air traffic at the major hubs.
Clark — as in the retired general — played the part of the president during a war game held on Monday at Tel Aviv University in Israel.
The exercise began with Israel coming under coordinated cyber and terrorist attacks. Five hours later, the organizers called it off… because the U.S. and Russia were on the brink of a shooting war in the Middle East. “If we hadn’t stopped when we did, the entire region could have been engulfed in flames,” said Israeli Defense Ministry consultant Haim Assa, who designed the exercise.
Mr. Assa missed his calling writing spy novels; his exercise had at least as many unexpected plot twists as a good thriller.
The Israelis taking part in the exercise assumed the initial attack had been launched by Hezbollah, in league with the Iranians. Wrong: It was actually the work of al-Qaida leader Ayman al-Zawahiri. Zawahiri calculated correctly that the attacks would goad the Israelis into blaming and attacking Hezbollah.
Here’s the genius of Mr. Assa’s scenario: In real life, Hezbollah is allied with the Assad regime in Syria. Many of the rebels fighting Assad in the Syrian civil war are al-Qaida types.
“In the simulation,” says Gen. Clark, “we realized how difficult, if not impossible, it is to ascertain the source of attack.”
That was one lesson of the exercise. Here are some others as gathered by Defense News, which observed the exercise on Monday…
- “When confronted with this new cyber situation, our responses simply weren’t good enough,” said Maj. Gen. Eitan Ben-Eliahu, a former commander in the Israeli Air Force who played the part of the Israeli defense minister
- “In contrast to the accepted concept in conventional war that posits that the best defense is offense, in the cyber domain, the best defense is defense,” said Erez Kreiner, a former Shin Bet official, who played the part of the U.S. defense secretary
- “Defenses must include all civilian infrastructure: hospitals, electricity, water, transportation, etc., since everything connected to computers can become a target for cybernetic attack,” said retired Maj. Gen. Itzik Ben-Israel, who once ran the research-and-development arm of Israel’s defense ministry.
Cyberattacks are quickly surpassing terrorist attacks as the major threat on the U.S. government’s radar.
An attack on the scale of Sept. 11 is “more likely now to be overseas than it is in the homeland,” said Rand Beers, the acting Homeland Security secretary, during a Senate hearing yesterday.
As such, new FBI director James Comey said over the next decade, “Resources devoted to cyber-based threats will equal — or even eclipse — the resources devoted to noncyber-based terrorist threats.
“That’s where the bad guys will go. There are no safe neighborhoods. All of us are neighbors [online].”
“We intend to build more bridges to the private sector in the cybersecurity realm,” Comey added.
“Private-sector companies are the primary victims of cyber-intrusions, and they also possess the information, the expertise and the knowledge to address cyber-intrusions.”
We’re fairly sure that executives at companies specializing in cybersecurity were hearing the cash registers ring at that moment.
And the new windfall is on top of what’s already in the pipeline: “We now know,” says our Byron King, “the Pentagon’s ‘Black Budget’ is bigger than the U.S. Justice Department and National Park Service combined. In fact, it’s five times larger than the Head Start budget, six times larger than the budget for high-speed and other passenger-rail programs and 31 times larger than the Securities and Exchange Commission budget.”
What’s more, Byron says a $16.1 billion spending spree is about to be unleashed. “It’s almost like a mountain of money being dropped into the stock market. A mountain of cash you could get a piece of… if you know where to look.” Based on leaked documents he’s had a chance to examine, Byron has pinpointed seven players most likely to collect the lion’s share. Click here to begin unlocking access to his exclusive research.
The Dow is powering further into record territory as the week winds down. Fed chair nominee Janet Yellen made all the appropriate “dovish” noises at her confirmation hearings yesterday, and as we write, the big index is less than 75 points from 16,000.
Traders are shrugging off a discouraging data point in the form of the Fed’s Empire State Manufacturing Survey.
After five months in positive territory, it now indicates factory activity in New York state is contracting — confounding the “expert consensus” among dozens of economists polled by Bloomberg. Can’t blame it on the “partial government shutdown,” either — this is November’s report.
New orders, shipments, even employee workweek — they all went negative. The warnings we shared on Tuesday from Bridgewater’s Ray Dalio and our own Dan Amoss about diminishing returns from “quantitative easing” are all evidenced in this report.
Gold is making little noise, all but unchanged from 24 hours ago at $1,288.
John Paulson is sticking with his existing gold position, judging by the latest 13F form Paulson & Co. filed with the SEC.
As of Sept. 30, he’s still the biggest holder of GLD, the giant gold ETF, with 10.23 million shares. Paulson cut his holdings in half during the second quarter.
George Soros, meanwhile, has picked up 1.1 million shares of GDX, the big gold-mining ETF. He has not re-entered his GLD position, which he sold off earlier this year.
We must always include the following caveat when reporting these numbers: Fund managers are under no obligation to report holdings of gold bullion on a 13F.
Finally, something concrete to come out of China’s “Third Plenum”: The one-child policy is being eased.
Families will now be allowed two children if one parent is an only child, according to the official Xinhua News Agency.
“Correspondents say the policy has become increasingly unpopular,” says the BBC, “and that leaders fear the country’s aging population will both reduce the labor pool and exacerbate elderly care issues.” No lie: A quarter of China’s population will be over 65 by 2050.
And then there’s the issue of how many couples opted to have boys: “By the end of the decade,” the Beeb adds, “demographers say China will have 24 million ‘leftover men’ who, because of China’s gender imbalance, will not be able to find a wife.”
God help the Chinese leadership if they can’t find a job either.
There’s a passage from Jim Rickards’ Currency Wars that’s stuck in our minds all year: “No one knows better than the Chinese Communist Party leadership what would happen if… jobs were not available. The study of Chinese history is the study of periodic collapse. In particular, the 140-year period from 1839-1979 was one of almost constant turmoil” – bookended by the Opium Wars and the Cultural Revolution.
Yeah, we’re pretty sure the Central Committee talked about that a lot behind closed doors last weekend.
So much for the “deleveraging” of the U.S. consumer. The New York Fed is out with its quarterly Household Debt and Credit Report. Household debt outstanding grew more during the third quarter than anytime during 2008. Here’s the breakdown…
- Mortgage debt: Up $56 billion, to $7.897 trillion
- Student loans: Up 33 billion, to $1.027 trillion
- Auto loans: Up $31 billion, to $845 billion
- Credit cards: Up $4 billion, to $672 billion.
The two growth areas are student loans and auto loans. On student loans, the total debt outstanding surpassed $1 trillion for the first time. (Other measures of student debt topped this figure long ago.) The share of student loan balances overdue by 90 days or more is now 11.8% — up from 10.9% the previous quarter.
Meanwhile, subprime auto lending is back to pre-crisis levels. During the second quarter — and these are private-sector figures not included in the Fed report — more than 27% of new car loans are going to borrowers with credit scores of 500 or less. Yikes…
A 5 emendation: We heard from Financial Sense contributor Erik Townsend after we passed along his account yesterday of an encounter he had with Janet Yellen.
“Yellen did not make comments about wishing she could figure out a way to cause negative interest rates in her lecture,” he clarifies. “She made those comments in a hallway conversation before or after her speech at the Commonwealth Club.
“Also, I don’t remember the line about ‘because that’s exactly what we need to rejuvenate the economy’ — what I remember is that I asked her about savers and investors, and she made a nebulous statement about society needing to ask more from wealthy people, or something along those lines.
“Everything you said previously accurately reflects my perception of what she meant, but I don’t think her words were quite as blunt as what you quoted me as quoting her as saying.”
We thank Erik for the clarification, and for the accidental introduction. We look forward to interviewing him soon about the “petrodollar” trade that’s underpinned much of global finance for the last 40 years — and how much longer it can last.
Now to the latest tragicomic events from Venezuela — where President Nicolas Maduro is on the warpath against the “bourgeois.”
Not content with the state takeover of an electronics chain he accused of “price gouging,” Maduro has now proceeded to — well, let’s let him put it in his own words:
“They are barbaric, these capitalist parasites! We have more than 100 of the bourgeoisie behind bars at the moment.”
Yes, the government has arrested about 100 business owners. “Since the weekend,” Reuters reports, “soldiers and inspectors have gone into 1,400 shops, taken over operations at an electronics firm and a battery-making company and rounded up a handful of looters.”
Local elections are in three weeks, so some of the crackdown is theater. But there’s no sign Maduro’s about to let up on the exchange controls that have led to a shortage of hard currency; many importers have to get their dollars on the black market, and pass along the costs to consumers.
“The government,” Reuters adds, “has ordered local telecom companies to block various websites showing the bolivar at 10 times the official rate of 6.3 to the greenback on the illegal market.”
Actually, the situation has gotten a hair better for ordinary Venezuelans this week. We turn again to the Troubled Currencies Project maintained by Cato Institute senior fellow Steve Hanke, based on black-market exchange rates. When last we checked on Monday, inflation was running at an annual rate of 320%.
It has now eased to 297%. Progress!
“The WSJ copying The 5?” a reader writes. “How flattering.”
It seems The Wall Street Journal is launching something called The 10-Point — “my new daily email briefing that is a succinct look at what’s important, unmatched elsewhere or memorable about today’s Wall Street Journal,” says Editor-in-Chief Gerard Baker.
Well, you know what they say about imitation. Hard to pull off, though, seeing as we aim for insights you won’t find in the Journal, or anywhere else.
Of possible interest if you’re a relative newcomer: The 5 has been around since April 2007. Fox News launched its dreary chatfest known as “The Five” in 2011 as an emergency stopgap when Roger Ailes decided having Glenn Beck on the payroll was more trouble than it was worth.
Now you know.
Have a good weekend,
Dave Gonigam
The 5 Min. Forecast