Cyberwar, Then and Now

March 27, 2014

  • How cyberwarfare was first launched in 1914
  • Scrambling to prevent the most destructive act of cyberwarfare ever… and it’s investable
  • The banks’ bogus “stress tests”: Catalyst for a rally in financials?
  • Chris Mayer in Ireland, spotting prime investment property while squeezing in a round of golf
  • Patience is a virtue: Revisiting one of our favorite gold charts
  • Dueling lawsuits at a cheaters’ website… a ban on inherited wealth… a reader’s common sense (for all the good it’ll do)… and more!

  One hundred years ago, the British committed what you might call the first act of cyberwarfare.

It was Aug. 4, 1914. World War I was underway in earnest. Britain had just declared war on Germany.

Within hours, the British severed the undersea telegraph cable connecting Germany to the United States, “effectively isolating Germany and her allies,” according to the website of Britain’s Porthcurno Telegraph Museum. “From then on, all Germany’s trans-Atlantic telegrams had to be routed through England!”

The act also had the effect of ensuring any news Americans got about the war was filtered through Britain first. It wasn’t long before British propaganda about German atrocities — the “Huns” butchering Belgian babies — whipped up support for American entry into the war.

“Under the influence of what they read in their newspapers, Americans came to regard the war as a simple battle between good and evil,” wrote Phillip Knightley in The First Casualty, a magisterial history of 20th-century wartime propaganda.

Only weeks before the guns fell silent in 1918, the Belgium meme was still being used to sell Liberty Bonds…

Would America have entered World War I without Britain’s primitive act of cyberwar?

  The modern-day Internet relies on undersea cables every bit as much as the telegraph did a century ago.

“For international communications,” says Alan Mauldin of the research firm TeleGeography, “over 99% is delivered by undersea cables. It’s a common belief that satellites are the future of how things are carried, but that hasn’t been the case for quite some time.

“Satellite capacity is limited,” he explains to CNN, “so it’s very expensive. Cables can carry a massive amount of data by comparison, so it’s a lot cheaper.”

And the nature of the Internet is such that the email you send across town might easily ricochet around the world before it gets there. According to The Economist, more than 90% of all Internet traffic — domestic and international — runs through undersea cables. (Click on the map below for a nifty infographic the magazine created.)

 “Without this critical resource,” says our Byron King, “your lights wouldn’t turn on when you flipped the switch… you couldn’t use your smartphone… hospitals could not function… the banking system would all but shut down… and even the shelves at your local grocery store would quickly be empty.

“Just imagine if terrorists, or a foreign government, could take down critical systems — like the New York Stock Exchange, for example — simply by disconnecting the U.S. grid from the rest of the world. That’s just one example of the impact on the economy.

“Now consider that undersea cables are the No. 1 tool U.S. authorities use to coordinate with troops and allies overseas. Losing the wires could paralyze the U.S. military, as well as wreak havoc on Wall Street. All that and much more.”

  This crudest form of cyberwar broke out anew in January 2008, when three undersea cables were attacked and cut.

“The first attack, on Jan. 30, severed the SeaMeWe-4 and the FLAG Europe-Asia cables,” Byron explains. “Instantly, Internet and telephone service slowed to a crawl or even went down all along a 3,000-mile swath from Cairo to New Delhi. It was later determined that 70% of Egypt’s and 60% of India’s Internet connections were disrupted.”

An accident? A ship’s anchor snagging the cable? No: Surveillance footage reviewed by investigators in Dubai revealed no ships passed through the area at the time of the cut. It was clearly an act of foul play. “Despite a thorough investigation,” says Byron, “the true identities of the attackers were never uncovered.

“What’s the lesson? When it comes to protecting our economy and our lives from terrorists or foreign aggressors, sure, we need data protection — like passwords, encryption and firewalls. But we also need physical protection at the Internet’s most vital choke points.”

  “But here’s the problem,” Byron goes on. “We can’t stations ships near every vulnerable cable. No airplane can remain airborne long enough. So ‘old’ types of answers will not work in the new environment.”

As it happens, one of the “Big Five” defense contractors is in the forefront of this physical cyberdefense.

“They’re working on a system to deploy cheap, unmanned aircraft from all kinds of U.S. Navy platforms” — even submarines, Byron says. An even more cost-effective solution in the works is an array of fiber-optic sensors that can be deployed in shallow coastal waters. “That’s where submarine Internet cables are most vulnerable to attack, especially from low-tech terrorists who could reach them with basic scuba equipment.”

As Byron is wont to say, “Yes, it’s investable.”

[Ed. note: Byron thinks the contractor he’s talking about has the potential to double in 24 months, so out of respect for his paying Military-Tech Alert readers, we’ll refrain from sharing it today.

Actually, there’s no better time to become a subscriber yourself. Byron believes we’re less than one week away from American entry into a new WWI — Web War I. That means some of the niche cybersecurity plays he’s following have the potential to do much more than merely double your money. We encourage you to check out Byron’s research — gleaned from declassified documents and his extensive contacts in government and industry — at this link.]

  Stocks are directionless this morning after another sell-off yesterday. The major indexes are slightly in the green, except the Nasdaq, which is losing more ground.

The Street buzz is about the Federal Reserve’s bogus “stress tests” on the 30 biggest banks. For the sake of appearances, the Fed forbade five of them from raising their dividends or buying back more stock. One of them was a too-big-to-fail — Citi — which is down 5% this morning.

The truth: With the stress test charade out of the way, financial stocks are set to rally. The Rude Awakening’s Greg Guenthner points to a report from the research firm BTIG. “It sees financial companies on economic improvement, rising interest rates and the conclusion of the stress tests.”

One other factor in financials’ favor: Biotech stocks are finally rolling over. The biotech iShares ETF (IBB) is down 8% in recent days. If you’re of a trading mindset, Greg says “the key to surviving the biotech bloodbath is to rotate into financial stocks.”

  “It’s a great market to be in as an investor,” writes Chris Mayer from Dublin, checking out residential properties.

OK, he also squeezed in a round of golf — his first time at a real links course. “The course was everything I imagined a links course to be… winding around the coast, thick gorse and impossible rough, deep bunkers (I got out of a pair, proudly, with no problem), rolling dunes, slick greens and that whipping wind… and the sky, colored like the inside of an oyster shell.”

And what of the real estate, you wonder? “Overall,” Chris reports, “I heard from numerous people how the residential market in Dublin is getting tight. Yet property prices and rents will have to rise to induce new supply.”

A two-bedroom condo that went for 350,000 euros in 2007 could be had for 120,000 euros in 2012. If you wanted to sell, you could get 155,000 euros now… but only if you wanted to give up the 14,000 in annual rental income.

“The housing index for Dublin is half of what it was at the peak in 2007,” says Chris. “It may never get back to those heights. But it doesn’t have to for us to make solid returns from here.”

So far, his favorite way to play it continues to be a U.S.-traded firm with significant exposure to Irish real estate. It’s a stock for the good ol’ coffee can, he says.

  And there goes $1,300 gold. The number broke shortly after trading opened in London overnight. At last check, the bid was $1,298, a six-week low.

Can’t blame it on dollar strength. The dollar index is ruler-flat, at 80.04.

 Want a bullish fundamental factor in gold? It remains a shockingly low percentage of global financial assets.

The World Gold Council recently crunched some numbers and found gold makes up only 1% of global financial assets. If true, that’s not much more than it was five years ago — as shown in one of our all-time favorite charts.

Part of the reason gold continues to make up such a small slice is that loose money from central banks has managed to balloon other financial assets 10-fold over the last two decades. That, says the council, is in “stark contrast to levels seen in past decades, as well as what research suggests optimal gold allocations should be.”

And while the percentage is growing microscopically, the council suggests “an increase to a global strategic allocation of 2% — the lower boundary of optimal gold holdings based on our research and that of others — can be sustainable and feasible.”

The report wasn’t so radical as to suggest gold might rise — and other assets might crater — to the point of reaching 1981 levels or those of the other years depicted in that chart… Heh.

  Great moments in business law: A woman is suing her former employer for on-the-job injuries sustained while… typing up phony profiles of hot Brazilian women looking to have an affair.

Perhaps we should back up a moment: Ashley Madison is the name of a dating website that caters to people looking to cheat on their spouses. A search of The 5’s archives reveals we’ve written about it once before — as the beneficiary of a lousy economy. “Who wants to pay $40,000 for a divorce when you can pay $49 for an affair?” the CEO of the parent firm asked rhetorically.

Back to the present: Doriana Silva of Toronto says she was hired by the firm to create 1,000 “fake female profiles” for a new Portuguese-language version of the site. The work, she claims, was impossible to perform in only three weeks, and thus damaged her wrists and forearms. She wants $20 million.

Bonus points: The website is countersuing, claiming Silva made off with confidential documents, including copies of her “work product and training manuals.”

  “The Piketty wave has already started,” a reader writes after seeing yesterday’s episode. He then points us to a Guardian article with the headline: “Inherited Wealth Is an Injustice. Let’s End It.” Oy…

“To Mr. Piketty or Mr. Krugman or any of the other tax advocates in the world,” writes another reader: “How do you increase a country’s wealth by simply creating debt or taxes?

“Mr. Piketty advocates a wealth tax, but what happens when everyone has the same amount? When that happens, the ones who used to have the wealth will quit, since there is no incentive to work. At the same time, the ones who were given the money for free will not work, as they never had any incentive to do so. In the end, everyone fails.

“But isn’t this what happened to the Soviet Union? It took them 70 years to give up on the idea, so it can go on for a long time. Some may say the wealth tax is different, but essentially, it’s the same: You take from one to give to another. You kill the incentive for one, while the other never had it. This is not a long-term plan for prosperity.”

The 5: Who said prosperity or a rising standard of living was the point? Heh…


Dave Gonigam
The 5 Min. Forecast

P.S. A currency losing value is the surest route to a lower standard of living. And one government document we’ve uncovered confirms that’s the plan — a purposeful devaluing of the dollar. We expose the document and help you mount a defense, right here.


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