The Secrets of Huawei

March 24, 2014

  • Cyberwar goes both ways: NSA burrows into a Chinese telecom giant
  • $180 billion in U.S. tech losses… and how to turn them into gains for your own portfolio
  • “Terrified of another Wall Street hissy-fit”: David Stockman on the Yellen Fed
  • Elmerraji eyes a correction… the shockingly risky lives of tax preparers… the two things we “can’t have an honest conversation about”… and more!

  “We currently have good access and so much data,” read the internal NSA document, “that we don’t know what to do with it.”

The data came straight from Huawei — a Chinese telecom giant long rumored to be a front for the People’s Liberation Army (PLA).

For years, the feds have suspected Huawei of hacking into government and corporate secrets in the United States. As it turns out, the shoe is on both feet.

The NSA “pried its way into the servers of Huawei’s sealed headquarters,” according to a New York Times account of documents leaked by Edward Snowden. “It obtained information about the workings of the giant routers and complex digital switches that Huawei boasts connect a third of the world’s population and monitored communications of the company’s top executives.”

From an NSA slideshow about hacking Huawei…

The nondenial denial from the White House was a gem: “We do not give intelligence we collect to U.S. companies to enhance their international competitiveness or increase their bottom line,” said spokeswoman Caitlin Hayden.

  No, the NSA does something much more valuable for its purposes.

Aside from looking for links between Huawei and the PLA, “the plans went further,” says the Times: “to exploit Huawei’s technology so that when the company sold equipment to other countries — including both allies and nations that avoid buying American products — the NSA could roam through their computer and telephone networks to conduct surveillance and, if ordered by the president, offensive cyberoperations.”


“The Huawei revelations,” says Bush-43 Justice Department official Jack Goldsmith, “are devastating rebuttals to hypocritical U.S. complaints about Chinese penetration of U.S. networks.”

Bonus points: Goldsmith reminds us the story broke “at about the same time that Michelle Obama is in China extolling the virtues of free speech and an open Internet.”

Presumably, the topic did not come up when the first lady met with President Xi Jinping…

The Times cites “a half-dozen current and former American officials” justifying the hacks by saying China’s penetration of American networks has only grown since the revelations in February last year about “Unit 61398” of the PLA — an office tower in Shanghai presumed to be a nerve center for cyberwar.

 “We’re hearing from customers,” says Microsoft lawyer John Frank, “especially global enterprise customers, that they care more than ever about where their content is stored and how it is used and secured.”

That’s another wrinkle to the NSA’s boundless surveillance — the impact on U.S. tech firms, finding skittish overseas customers.

As we mentioned last year, the Information Technology and Innovation Foundation projects the U.S. cloud-computing business stands to lose $35 billion by 2016. The tech research firm Forrester Research pegs the potential losses at $180 billion — fully one-quarter of industry revenue.

  And the impact goes beyond lost customers. From another New York Times piece over the weekend: “Security analysts say tech companies have collectively spent millions and possibly billions of dollars adding state-of-the-art encryption features to consumer services, like Google search and Microsoft Outlook, and to the cables that link data centers at Google, Yahoo and other companies.”

IBM alone is spending $1.2 billion to build 15 overseas data centers to lure — or keep — foreign customers.

What’s it to you? Is it possible to capture some of these money flows for yourself? Absolutely. We’ve been talking up the profit possibilities from cybersecurity since last summer… and the potential is about to be amped up further — as soon as one week from today. NSA testimony to Congress all but confirms it…

Click here to begin reeling in triple-digit cybersecurity gains…

  Major U.S. stock indexes are in the red this morning. Blue chips are holding up best, with the Dow nearly unchanged at 16,280.

Small caps, in contrast, are getting whacked; the Russell 2000 is down more than 1.5% as we write.

The S&P 500 is off half a percent, to 1,856 — further confirming the suspicions of our trading desk that an overdue correction is on the way. “The last four trading sessions have been completely sideways,” says Jonas Elmerraji, “and Friday’s failed attempt at new highs came on the highest trading volume we’ve seen in almost a year. Likewise, momentum in the S&P 500 is starting to look just like it did before our last big correction in January.”

  “Green is the new orange,” quips David Stockman. He recently saw Fed chief Janet Yellen say recently, “I can’t see threats to financial stability that have built to the point of flashing orange or red.” If stocks are in the green, it’s all systems go at the Fed.

Mr. Stockman, Reagan’s first budget chief and author of last year’s financial mega-tome The Great Deformation, has taken to the blogosphere with a site called David Stockman’s Contra Corner. A generous sampling of what’s on offer is found in an article called “Yellenomics: The Folly of Free Money.”

So about green as the new orange: “The truth is, the monetary central planners ensconced in the Eccles Building are terrified of another Wall Street hissy-fit. So they strive by word cloud and liquidity deed to satisfy the petulant credo of the fast money gamblers — namely, that the stock indexes remain planted firmly in the green on any day the market’s open.

“It is not a dearth of clairvoyance, then, but a surfeit of mendacity which causes our mad money printers to ignore the multitude of bubbles in plain sight.”

Understand Stockman is certain stocks are in a bubble. “As during the prior two Fed-inspired bubbles of this century, the stock market is riddled with white-hot mo-mo [momentum] plays which amount to lunatic speculations.

“Tesla, for example, has sold exactly 27,000 cars since its 2010 birth in Goldman’s IPO hatchery and has generated $1 billion in cumulative losses over the last six years — a flood of red ink that would actually be far greater without the book income from its huge ‘green’ tax credits which, of course, are completely unrelated to making cars. Yet it is valued at $31 billion or more than the born-again General Motors, which sells about 27,000 autos every day counting weekends.”

  And about the revival of the U.S. auto industry: Credit goes to “the re-eruption of auto debt and especially of the subprime kind,” Stockman writes.

“The latter specie of dopey credit had almost been killed off by the financial crisis… but that is ancient credit market history that has now been forgiven and forgotten. Since those clarifying moments, subprime car loans have soared 10 times — rising from $2 billion to $22 billion last year, when issuance clocked in above the frenzied level of 2007. Subprime loans now fund a record 55% of used car loans and 30% of new car loans.

“In short,” Stockman sums up, “recent U.S. history signifies nothing except that the sudden financial and economic paroxysm of 2008-09 arrived, apparently, on a comet from deep space and shortly returned whence it came.” Heh…

  “The threat of violence against professional tax return preparers is real,” says an urgent briefing from the Accounting website.

Who knew?

The article cites a case from Detroit last month: A man accompanied a woman client to a tax-prep business. “The woman had become agitated when she found out her tax refund wasn’t ready and engaged in a scuffle with a security guard. During the ensuing tussle, the man pulled out a gun and started firing away.” Four people were hurt.

Less serious incidents took place in Illinois, Missouri and Florida — also last month.

The article implies that violence against tax preparers is some sort of growing trend, although it offers nothing more than the foregoing anecdotal evidence. Regardless, “this is a good time to beef up security measures around your office,” Accounting Web’s readership is urged.

“For example, you might install surveillance devices, if you haven’t already, and even use metal detectors. Don’t take anything for granted or think that you’re immune to the dangers. Remember that you are not the only one potentially at risk — so is anyone who works for you or comes to your office for services.”

As though that advice couldn’t apply to everyone…

[Ed. note: Frustrating as tax season might be, we urge you not take it out on your accountant, even verbally. A far better approach is to make sure your tax preparer is up to speed on all the legal tips and tricks included in the Laissez Faire Club’s special report, Vanishing Point: How to Disappear From the IRS This Tax Season and Save a Boatload of Money in the Process. Even if you’ve already filed for 2013, you can put these ideas to work in 2014 and save as much as $20,000. Check it out.]

 “I just don’t have time,” a busy reader writes, “to watch/listen to the videos linked to these emails.

“Is there no way to obtain a link to the offers without the 15 or 20 minutes to listen to the video? You lose me after two or three minutes. Some services permit you to read a transcript of the ad, and I can read a lot faster than I can listen.”

The 5: A common complaint, and one we’ve seen regularly for nigh four years. Trust us, we’ve done side-by-side tests, and the presentation format wins hands down. Blame your fellow readers.

That said, simply wait a minute or two and you’ll get an invitation to switch to a transcript. Sometimes you can even scroll down to click to the transcript right away. (Here, for instance.)

  “Looks to me,” a reader muses, “as if ‘in the market’ is the place to be for the next decade or so. Else you’ll be sitting with your cash on the sidelines wailing, ‘Why didn’t I pay attention before the market skyrocketed?’

“There is going to be much turmoil in the world — as there always has been — but those who jump out now may really regret it later. Thanks, 5 — you do a great job!”

The 5: We’ll go back to what the market agnostic Barry Ritholtz said earlier this month: “It is beginning to look like a new long-term bull market is underway.”

Ritholtz called the bottom five years ago this month — although he concedes he was lucky with the timing — and it took him five years and 178% on the S&P 500 before he felt comfortable making that declaration.

We included David Stockman’s contrary musings in today’s episode in the interest of an alternative opinion… and to keep our “doom and gloom” cred intact!

  “Judging from the number of people in the United States who have much the same opinion of the IRS as author Lawrence Hunter did in Friday’s 5, I believe that it would be a sure winner for the Republican Party in 2014 if they made a pledge now that if they get control of both the Senate and House they would introduce a flat tax to eliminate the graduated one, and therefore greatly downsize the IRS. Any thoughts?”

The 5: We’re no closer to a flat tax now than when Steve Forbes made it the centerpiece of this run for president 18 years ago. Republicans controlled both houses of Congress for a majority of that time. Why change their tune now?

You really think the Republicans, any more than the Democrats, are willing to dump the home mortgage interest deduction? We can hear the screams from the real estate lobby now all the way up I-95 from Washington to our Baltimore headquarters: “You’ll kill the housing recovery!”


Dave Gonigam
The 5 Min. Forecast

P.S. When our executive publisher and 5 creator Addison Wiggin filmed the documentary I.O.U.S.A. in 2008, U.S. comptroller general David Walker told him only two things were necessary to climb out of the national debt abyss.

“If we can fix just two things,” Walker said, “we can get out of this mess. But we can’t have an honest conversation about it.” Those two things were the cost of end-of-life health care… and the home mortgage interest deduction.

P.P.S. Our dear reader’s earnest entreaty for political change only spotlights how little faith you should have in political change. Do what’s within your own control. Follow our guidance and take advantage of all those loopholes currently written into the tax code.


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