August 6, 2014
- 1.2 billion passwords in the hands of Russian hackers
- Following the cybersecurity money for staggering gains
- While stocks correct, gold finds a bid: Amoss spots a transition just underway
- Wither the dollar? Chinese-Russian coalition about to get powerful new partners
- Post-hyperinflation Zimbabwe… another reason more startups are blowing up… intelligent and resourceful librarians… and more!
Those darn Russian hackers are at it again.
Nearly four years ago, they struck the Agora Financial website. Click on any of our links, and you’d get a warning courtesy of Google the link was “dangerous” because of “malware.”
The attack started on a Friday. The “IT Overlords” — as they call themselves over at the Agora mothership two blocks from our office — worked through the weekend. By midmorning Monday, they’d put the hackers back in their place.
Now comes word they’ve stolen “1.2 billion username and password combinations and more than 500 million email addresses,” according to this morning’s New York Times.
The Gray Lady cites a Milwaukee-based cybersecurity firm called Hold Security. “Hackers did not just target U.S. companies, they targeted any website they could get, ranging from Fortune 500 companies to very small websites,” says company founder Alex Holden.
“And most of these sites are still vulnerable.” For now, he won’t name the targets, lest he give an open invitation to other hackers to steal still more info.
“So far,” says the Times, “the criminals have not sold many of the records online. Instead, they appear to be using the stolen information to send spam on social networks like Twitter at the behest of other groups, collecting fees for their work.”
Still, it’s not a bad idea to change your passwords, certainly for your bank or brokerage. To create a strong one that makes the hackers’ job more difficult, check out a password manager like Password Safe, created by online security expert Bruce Schneier.
The timing of this latest hacking revelation is no accident: It coincides with the Black Hat security conference in Las Vegas.
We won’t hold it against Mr. Holden for strategically releasing the information to achieve maximum impact, hoping to score some fat new contracts at a trade show.
But we’ve had our guard up about these sorts of disclosures for 18 months now, ever since another firm called Mandiant traced scads of cyberattacks to the Chinese military. “It’s good business today to blame China,” said Jeffrey Carr, author of Inside Cyber Warfare, and a skeptic of Mandiant’s evidence.
It was indeed good business for Mandiant. The firm took in $100 million in revenue during 2012. By January of this year, it was bought out for $989 million.
Now with a new cold war descending on us, it’s equally good business to blame Russia.
We suspect few readers of the Times story read far enough down to see the bit about how “Mr. Holden said he saw no connection between the hackers and the Russian government.” Heh…
Bottom line: Cyberdefense is big business, getting only bigger. Our resident military insider has identified a handful of companies positioned to collect the lion’s share of profits. And we mean staggeringly high percentage gains. How high? You won’t know if you don’t click…
Gold popped as soon as the Comex opened this morning. At last check, the Midas metal is up 1.5%, to $1,308.
No, there’s no obvious catalyst. But after stocks tumbled again yesterday, 5 PRO editor Dan Amoss sniffs a transition in the air…
“The longer certain natural behaviors are suppressed,” says Dan, “the more violent the snapback can be…
“By now, every investor knows stocks tend to rise when the Federal Reserve is force-feeding cash into the financial system with quantitative easing (QE) programs. Yet everyone seems to want to stay fully invested until the last moment, wait for signs of market deterioration and then sell stocks to raise cash.
“The problem is obvious: Everyone can’t successfully follow such a plan. If too many investors wind up acting on such plans, the stock market could fall sharply — as it did in mid-2011.”
As a reminder, the Dow tumbled more than 15% in three weeks.
The potential for this “phase transition” — stocks down, gold up — is important enough that we’re posting today’s PRO in the clear. Even if you don’t subscribe to our PRO level of service, you can read today’s edition free. Just scroll down…
Major U.S. stock indexes are rallying, however weakly, from yesterday’s losses. As we write, the Dow is up less than a quarter-percent, to 16,424.
Don’t look now, but the “anti-NATO” is about to get much bigger. Or maybe the “de-dollarization coalition.”
The Shanghai Cooperation Organization (SCO) was formed in 2001 — consisting of China, Russia and four of the Central Asian “-stan” countries that once belonged to the Soviet Union. Those are the countries in green on the map below.
No new members have joined since. But five countries — shown in blue — have had “observer” status for several years.
Map of the Shanghai Cooperation Organization by Wikimedia user Crossswords
Green: Member states
Blue: “Observers”
Purple: “Dialogue partners”
Now the Voice of Russia reports four of those five — Iran, Pakistan, India and Mongolia — are set to formally join up, perhaps as soon as the next annual SCO summit next month.
“At present, the SCO has started to counterbalance NATO’s role in Asia,” explains Alexei Maslov at the Higher School of Economics in Moscow. “Consequently, these countries want to take part in the SCO in the capacity of safeguard of their interests.”
It takes a lot to bring archenemies India and Pakistan together. The SCO just might pull it off…
But the SCO isn’t just a quasi-military alliance.
As long ago as 2009, Russia’s then-president Dmitry Medvedev carped about dollar dominance: “There can be no successful global currency system if the financial instruments that are used are denominated in only one currency.”
Fast-forward five years and many of the SCO’s member and observer states now trade in each other’s currencies, bypassing the dollar.
Shortly before the SCO formed in 2001, the U.S. dollar made up more than 70% of all the foreign exchange reserves held by the world’s governments and central banks. Now it’s a little over 60%.
But before we count out the dollar completely, we have this totally counterintuitive item before we get to today’s mailbag.
You might remember the hyperinflation that ripped apart Zimbabwe in 2008-09. We chronicled it extensively in our virtual pages. We didn’t have to mock the situation, for Zimbabwe’s government and central bank did a fine job of that on their own…
But the frontier-market specialists at Frontaura Capital in Chicago pass along this shocking factoid: Since 2009, inflation has worked out to an annualized 0.65%.
“Zimbabwe switched to the U.S. dollar in 2009,” explains our globe-trotting Chris Mayer. “This means all government spending is in U.S. dollars. All taxes are in U.S. dollars.”
But dollars — and cents — are hard to come by. You hand over a dollar for an 80-cent bag of potato chips and you’re likely to get back two pieces of chocolate. Or maybe a bit of fruit.
“U.S. dollars are hard to get,” Chris sums up, “hence, the currency holds its value quite well in Zimbabwe.”
Goes a long way to explain how the 90-year-old dictator Robert Mugabe is still in power, eh?
Well, that and the ruthless suppression of dissent: In a country where Internet usage remains sparse, Mugabe sends his henchmen around to confiscate shortwave radios, lest the people hear any news beamed in from other countries.
“Your ‘Fail Early and Often’ chart from yesterday is both enlightening and disturbing,” a reader writes about the accelerating failure of startups in the last 20 years. “I wonder, however, whether your analysis of cause and effect has not overlooked a key insight of Austrian economic theory.
“Certainly, large corporate interests are favored by statist regulatory policies, and this factor must contribute to some degree to the failure of new enterprises. I would suggest that a much stronger factor is the tendency toward ‘entrepreneurial error’ arising from the distortion of interest rates imposed on the economy by a central bank: in the case of the U.S., the Federal Reserve.
“Artificially lowered interest rates, or, more honestly, price controls on currency, increase the probability that profit/loss calculations by entrepreneurs will be invalid and, in fact, skewed toward the expectation of greater profit than is actually likely. This is because the calculations assume greater availability of critical resources than actually exists. Why? Because low interest rates imply high savings rates, and high savings rates imply an actual cache of resources available for productive use.
“When the interest rate is artificially suppressed and does not arise from a market evaluation of the true savings rate, entrepreneurs, being naturally optimistic, tend to base their plans on the availability of resources that simply do not exist. Thus their plans are much more likely to fail, as your chart makes clear.”
The 5: Good point, and it would be interesting to see the numbers going back further than the Greenspan era.
As Reagan’s first budget chief, David Stockman, wrote last month, interest rates are “the most important price in all of capitalism.” Prices are supposed to convey meaningful information about supply and demand. But interest rates under Fed control? Not so much.
“You might want to check a book called Shale Gas: The Promise and the Peril by Vikram Rao,” suggests a reader after our “frack attack” episode yesterday.
“This energy expert shows the water consumed during fracturing is 38 liters per megawatt-hour of energy produced. Whereas ethanol takes 32,000-370,000 liters of water to achieve the same amount of energy. Soybean diesel takes 180,000-960,000 liters per megawatt-hour. The higher number reflects irrigation, which is more common than not.
“Why aren’t people going after the environmentally unacceptable production of ethanol and soybean diesel? If water consumption is the concern, then unconventional energy is the solution, not the problem.
“The author also explains quite well how groundwater is isolated and the facts of how impossible it is to contaminate groundwater by fracturing deeper rocks.”
The 5: We spotlighted the ethanol boondoggle during much of 2007-08. Then came the financial crisis, and the urgency of the moment turned our attention to the bailout boondoggle.
Now ethanol and too-big-to-fail are both part of the culture of “extraction” practiced by Washington and Wall Street…
“Is it possible fracking could alleviate the danger of a major earthquake?” another reader inquires. “A major quake occurs when two large subterranean plates move against each other. If the interface of those plates is broken into essentially gravel, minor shifts in the position of those plates can occur without much excitement.”
Our reader then pivots to another topic: “Could the biggest threat of genetically modified organisms (GMOs) come from the control of the food supply by the patent holders of the major crops? It might make a good investment, but is it good for humanity?
“Finally, I suggest that people buy one share of mega corporations. This would give millions of people a vested interest in the operations of companies like Monsanto. If they felt that the long-term viability of the company was at risk due to the actions of the board of directors, they could sue to reverse or amend those actions.
“This is more of an Occupy the Boardroom than an Occupy Wall Street. A half million agitated shareholders might make a bigger impact than a board member with a million shares. They are public corporations, after all. How long would it take for these companies to see the light if hundreds of thousands of people started to buy into their companies?”
The 5: Hmmm….
“Thanks for some good news for a change,” writes a librarian from Pennsylvania. It appears she’s heartened by her fellow librarians in the Keystone State and their inventive response to accusations of “agri-terrorism.”
“And,” the reader continues, “thanks for standing up for better information about GMOs. As an ex-librarian and artist, dependent upon some investments to survive, I loved the combination.
“Librarians always are intelligent souls who can find a way to get around stupid rules, believe it or not. Love it that some in my neighborhood are doing this!
“Ask any librarian about GMOs and how bad they are, along with all the small and third-world farmers who have been devastated by their invasive attributes, economic strangleholds and brainwashing. (GMO crops are hybrid, thus require re-buying each year, and each variety is more Roundup resistant, sort of like the problem with antibiotics and superbugs, not to mention directly ingested health risks.)”
The 5: We know well of what you speak: Your editor has been privileged to share 12 years of wedded bliss with an intelligent and resourceful (and charming and fetching) wife!
Best regards,
Dave Gonigam
The 5 Min. Forecast
P.S. For every $500 Peter Thiel plunked down on Facebook back in 2004, he collected $1 million when he cashed out in 2012, shortly after Facebook started trading publicly.
Fact is, the big money in initial public offerings (IPOs) comes long before the stock goes public.
But don’t think you’re shut out. Our penny-stock specialist has found a back door. Enter here.
The longer certain natural behaviors are suppressed, the more violent the snapback can be…
By now, every investor knows stocks tend to rise when the Federal Reserve is force-feeding cash into the financial system with QE programs. Yet everyone seems to want to stay fully invested until the last moment, wait for signs of market deterioration and then sell stocks to raise cash.
The problem is obvious: Everyone can’t successfully follow such a plan. If too many investors wind up acting on such plans, the stock market could fall sharply — as it did in mid-2011.
Several technical analysts have noted that beneath the big indexes like the S&P 500, fewer stocks have participated during this summer’s frequent market rallies.
Typically, ahead of important market peaks, the big indexes make new highs on declining volume. Fewer stocks participate in each new high set by the indexes. Junk bond prices fall and yields rise. That’s what we are seeing.
Despite the recent flurry of “great” economic news, investors are getting skittish about the market getting weaned off QE. Traders are looking ahead to the end of the Federal Reserve’s QE3 program in October and don’t want to approach it with too much exposure to riskier assets.
The last two times the Fed cut off QE, stocks and junk bonds sold off sharply and Treasury bonds rallied. Gold, you may be surprised to know, also rallied after the Fed stopped the prior two QE programs:
Why did gold rally at the end of QE? Perhaps traders recognized that QE inflated risky assets; as those asset prices deflated, they sought insurance (in the form of gold).
Gold is a form of insurance for a situation in which the Fed’s power to influence markets wanes — as it did for a while in late 2008. The Fed cannot afford to let its perceived power wane, so it will choose to crank up the printing presses yet again, all in an attempt to foster what it considers financial stability.
Most professional investors believe that the stock market has rallied far beyond levels justified by fundamentals. So a buyer’s strike might be forming, and could last as long as the Fed is tightening.
In his Aug. 5 Epsilon Theory note, Ben Hunt offered his perspective on the buyer’s strike he sees:
“The overwhelming perception I had of the advisers and investors I met over the past few weeks is that they feel as if they’re going along with some big charade. There’s a profound disillusionment with political and economic leaders… not that these leaders are necessarily incompetent, but that they are completely insincere. The advisers and investors I met — no matter how successful they had been over the past five years — were weary of the game and wary of being told what to think…
“There’s still plenty of ‘confidence’ in markets, per se, because these advisers and investors are justifiably confident in their knowledge of how the game is played. No one is running for the hills or hiding under a rock. On the contrary, everyone is pretty much fully invested because they feel like they have to be. But there’s no faith in markets, which is a totally different thing than knowledge or intellectual confidence.”
You can find more in Ben Hunt’s full note, available at this link.
Meanwhile, the thoughts above help explain why we’ve spent most of the summer discussing stocks to avoid or short in The 5 PRO and have repeatedly highlighted the value in the gold mining sector. If gold tacks on a few hundred dollars amidst a “risk off” environment, many gold stocks could double in price.
There are always cheap and undiscovered stocks to be found in the market. But chances are, with the market environment as shaky as it is, most stocks will be offered to you at cheaper prices after the market enters its typical end-of-QE panic.
[Ed. note: If you want to prepare for the coming market changes Dan’s talking about, you don’t want to miss The 5 Min. Forecast PRO. Every day, Dan brings you actionable guidance based on the themes we follow in The 5. For access to all the buys, avoids and shorts, sign up right here.]
