They Want it All for Nothing, as Quickly as Possible…

Monday, 19th October, 2015
Melbourne, Australia
By Kris Sayce

  • Markets continue to bounce, but softly
  • The new world war is already here
  • How the ‘force multiplier’ will cause mass destruction


Well, it’s what your lecturer in world history replied when he was asked why he’d been forging lottery tickets: “Everyone’s making themselves better-off by various means, so I wanted to do the same in as short a time as possible.” I don’t remember his exact words, but the gist of it was that he wanted it all for nothing, as quickly as possible, without any effort. People have grown accustomed to having everything ready-made for them, they’re used to depending on the guidance of others, having everything chewed up for them first. Well, and when the great hour finally struck, they all showed themselves at face value…

Razumikhin in Fyodor Dostoyevsky’s Crime and Punishment

If you don’t want to work hard to get what you want, cheat.

That isn’t a new attitude. For centuries, some people have taken that attitude towards hard work.

It’s why ‘er Majesty’s prisons rarely run at anything less than full capacity.

But don’t for a minute think that it’s only the proletariat who cheat to try to get what they want.

As you should have learned over the past seven years, Wall Street, Washington DC, the City of London, Westminster, and Canberra aren’t above cheating either.

Think back to the 2008 and 2009 meltdown.

I, and those who follow the Austrian School of economics, argued that the best solution to the financial collapse was to allow a complete financial collapse.

That is, governments and central banks should have allowed the banks and big businesses to fail. It would have been painful. Savers would have lost their savings (some, their life savings) and others would have lost their jobs.

As painful as that would have been, the world economy would likely have righted itself within a matter of months. But for those in control, that was too long to wait. Governments and central bankers wanted to fix things now…right that minute.

So, they cheated.

That’s the irony. The strategy that the world’s bankers and governments thought would be a quick fix to prevent a ‘long bust’, has turned into a seven-year crisis for the world economy.

And frankly, there’s no end in sight. For as long as bankers and governments insist on meddling, printing money, suppressing interest rates, and — well — cheating, the crisis will continue.

However, not all of the ongoing crisis is within the control of governments and central bankers. There are also the elements over which they have no control.

According to our global strategist, Jim Rickards, this is where a potentially even bigger threat exists. You’ll see Jim’s take on this in a moment. But first…

Markets continue to bounce, but softly

On Friday night, the US S&P 500 index gained 0.5%. The Dow Jones Industrial Average added 0.4%.

In Europe, the FTSE 100 index gained 0.6%, and the German DAX index rose 0.4%.

As for the Aussie market today, it has flitted between positive and negative, without a decisive move either way.

The Aussie dollar appears to have found a level at which traders are happy to see it trade, just below 73 US cents, while gold and oil have similarly found temporary trading ranges.

I hate to say it, but it seems the market is now in a holding pattern, pending next week’s meeting of the US Federal Reserve’s Federal Open Market Committee (FOMC).

The FOMC sets the US benchmark interest rate, the Fed Funds Rate.

As recently as August, the markets believed there was a 50% chance of the Fed raising rates next week. Now, the statistical probability has fallen to just 6%.

The FOMC’s only other meeting before the end of the year is in December. The market now only gives the Fed a 32.3% probability of raising interest rates at that meeting. That’s down from a 48% chance in August.

Jim Rickards has said all along that the Fed won’t raise interest rates this year. It’s looking more and more like he’s right. What does that mean for the markets?

I’m afraid to say it, but it means more of the same — volatility and uncertainty. Surely you must be used to it by now!

Over to Jim…





The New World War Is Already Here

By Jim Rickards, Strategist, Strategic Intelligence

Financial warfare is not the warfare of the future.

It’s already here. It’s going to become a bigger threat as time goes on. Your chance to protect your portfolio is now.

Before we explain how and why it’s important, let’s begin by analysing and defining this new kind of war.

Financial warfare, like conventional warfare, aims to enhance national power, diminish the power of rivals and achieve policy goals. It is actual warfare conducted through banking and capital markets channels. It is not mere economic policy as in the case of so-called currency wars, trade wars or embargoes.

Financial warfare can serve many purposes. The 2015 US financial war on Russia, for example, is punishment for its support of the rebellion in eastern Ukraine.

It can also force behaviour. The 2012 US financial war on Iran aimed to force Iran to the bargaining table with regard to its uranium enrichment activities and pursuit of nuclear weapons.

The financial warfare battle space can be offensive or defensive. Offensive capability includes attacks on banks and stock exchanges to steal data, shut down systems or cause financial panics. Defensive capability includes the construction of firewalls, creation of redundant systems and creation of non-digital substitute systems that cannot be hacked.

For example, during a recent financial war game exercise at the Pentagon, I recommended that the Securities and Exchange Commission (SEC) and New York Stock Exchange (NYSE) buy a warehouse in New York. They would equip it with copper wire landline phones, hand-held battery powered calculators and other pre-internet equipment.

This facility would serve as a non-digital stock exchange with trading posts. The SEC would assign 30 major stocks to each of the 20 largest broker-dealers, who would be designated specialists in those stocks.

This would provide market making on the 600 largest stocks, covering over 90% of all trading on a typical day.

Orders would be phoned in on the hardwired analogue phone system and put up for bids and offers by the specialists to a crowd of live brokers. This is exactly how stocks traded until recently.

The SEC would ban computerised and algorithmic trading as nonessential. Only real investor interest would show up in this non-digital venue.

In the event of a shutdown of the NYSE by digital attack, the authorities would activate the non-digital exchange. The US would let China and Russia know this facility existed as a deterrent to a digital attack in the first place.

If America’s rivals knew it had a robust non-digital ‘Plan B’, they might not bother to conduct a digital attack in the first place.

How the ‘force multiplier’ will cause mass destruction

Financial warfare attacks vary in their degree of sophistication and impact.

At the low end of the spectrum is a distributed denial of service, DDoS, attack. This is when a hacker floods a target server with an overwhelming volume of message traffic. Either the server shuts down or legitimate users cannot gain access. In such attacks, the target is not actually penetrated, but the message traffic jam disables it.

The next level of sophistication is a cyberhack in which the target, say a bank account record file or a stock exchange order system, is actually penetrated. Once inside, the attacking cyberbrigade can either steal information, shut down the system or plant sleeper attack viruses that they can activate later.

In 2010, the FBI and US Department of Homeland Security located such an attack virus that Russian security services planted inside the Nasdaq stock market system.

You have probably noticed that unexplained stock market outages and flash crashes are happening with increasing frequency. Some of these events may be self-inflicted damage by the exchanges themselves in the course of software upgrades, but others are highly suspicious. Exchange officials have never disclosed the exact causes.

The most dangerous attacks of all are those in which the enemy penetrates a bank or stock exchange not to disable it or steal information but to turn it into an enemy drone. Attackers can use such a market drone for maximum market disruption and the mass destruction of Australians’ wealth — including your stocks and savings.

In this scenario, an attacker could penetrate the order entry system of a major stock exchange such as the Australian Securities Exchange (ASX), or one of the order matching dark pools operated by major investment banks, such as the SIGMA X system that Goldman Sachs controls.

Once inside the order entry system, the attacker would place large sell orders on highly liquid stocks such as BHP Billiton Ltd [ASX:BHP] or Telstra Corporation Ltd [ASX:TLS].

Other system participants would then automatically match these orders in the mistaken belief that they were real trades. The sell orders would keep flooding the market until eventually other participants lowered their bids and began to deflect the selling pressure to other exchanges.

The cyberbrigade would launch an attack of this type on a day when the market was already down by 3% or more, like the one we saw on Monday this week.

Military strategists call that a ‘force multiplier’. It’s how you use external events to increase the power of an attack you have planned.

The result could be a market decline of 20% or more in a single day, comparable to the stock market crash of October 1987 or the crash of 1929.

You would not have to trade anything or be in the market during the attack; it would wipe you out based on the market decline even if you did nothing.

The key is to have some portion of your total assets invested in non-digital assets that cannot be hacked, wiped out or disrupted in financial warfare.

Such assets include gold, silver, land, fine art and the kind of private equity that does not rely on electronic exchange trading for liquidity.



Ed Note: The above article originally appeared in Strategic Intelligence in August 2015. You can find out more about the work that Jim and Shae do at Strategic Intelligence here.


End of day market data

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52-week highs: 31 stocks, including Challenger Ltd [ASX:CGF], Globe International Ltd [ASX:GLB], Pro Medicus Ltd [ASX:PME], SpeedCast International Ltd [ASX:SDA], and Tribune Resources Ltd [ASX:TBR].

52-week lows: 13 stocks, including Origin Energy Ltd [ASX:ORG], Prime Media Group Ltd [ASX:PRT], and Zimplats Holdings Ltd [ASX:ZIM].