The biggest threat to the financial system

Wednesday, 31 July 2019
Adelaide, Australia
By Bernd Struben

  • ‘Functioned as designed’
  • Cash…in the mailbag

Score one for equality.

In the realm of engineering and computer programming pesky men still dominate. But in the realm of malicious hackers equality just got a big step closer.

If you haven’t heard of Paige Thompson yet, you’re going to.

She’s the 33-year old former Amazon Web Services employee accused of a massive data hack.

How massive?

The FBI has charged her with stealing more than 100 million US and Canadian customer records from Capital One Financial Corp. [NYSE:COF].

More than 100,000,000 million records!

That’s a mind boggling number of people who’ve had their personal data — including address, income, and date of birth — compromised. According to Capital One, most of the stolen data came from customers’ credit card applications from 2005–2014.

An 11 year trove of data that was meant to be securely stored in ‘the cloud’.

And some of that data is a lot more sensitive than your name or birthdate. The company reported that roughly 140,000 of their credit card customers’ social security numbers had also been stolen. Along with about 80,000 linked bank account numbers of their secured credit card customers.

That’s 220,000 people who’ll be keeping a sharp eye on their financial statements these next few months.

More after a look at the markets…

Markets

With investors the world over awaiting the US Fed’s interest rate decision (overnight Aussie time), global markets refocused on the growing impasse in the US-China trade war…and closed lower.

It seems China has yet to live up to its promise to buy more US soybeans and other farm products. And Trump is not happy, as you can see from his tweet below:

China is doing very badly, worst year in 27 — was supposed to start buying our agricultural product now — no signs that they are doing so. That is the problem with China, they just don’t come through.’

High level negotiations continue in Shanghai today. But don’t hold your breath for any breakthroughs just yet.

So how are the markets reacting?

Overnight, the Dow Jones Industrial Average closed down 60.73 points, or 0.09%.

The S&P 500 closed down 7.79 points, or 0.26%.

In Europe the Euro Stoxx 50 index finished down 60.73 points, or 1.72%. Meanwhile, the FTSE 100 fell 0.52%, and Germany’s DAX closed down 270.23 points, or 2.18%.

In Asian markets Japan’s Nikkei 225 is down 127.16 points, or 0.59%. China’s CSI 300 is down 0.74%.

In Australia, the S&P/ASX 200 is down 25.08 points, or 0.37%. Unless there’s a big turnaround in the final hour of trading, that leaves yesterday’s close as the new highwater mark for the index.

So you can cross off 1 November 2007’s 6,828 point record and jot down 30 July 2019’s 6,845 point close in its place. Let’s just hope it doesn’t take another 11 years and nine months before we can move that mark again.

On the commodities front, West Texas Intermediate crude oil is US$58.32 per barrel. Brent crude is US$65.05 per barrel.

Turning to gold, the yellow metal is trading for US$1,430.99 (AU$2,082.05) per troy ounce. Silver is US$16.55 (AU$24.08) per troy ounce.

One bitcoin is worth US$9,581.19.

The Aussie dollar is worth 68.73 US cents.

‘Functioned as designed’

Getting back to one of the biggest data breaches in history, Amazon confirmed that it provides data storage services for Capital One. And not just for Capital One. Amazon is not only the world’s biggest online retailer, it’s also the world’s biggest cloud services provider.

While fessing up to being in possession of the 100 million compromised accounts, Amazon pointed out that, well, the hack could have happened to anybody.

From CNBC:

“AWS [Amazon Web Services] was not compromised in any way and functioned as designed,” Amazon said in a statement to CNBC. “The perpetrator gained access through a misconfiguration of the web application and not the underlying cloud-based infrastructure. … This type of vulnerability is not specific to the cloud.”

Now in case you’re not clear, when they talk about ‘the cloud’ there’s nothing mysterious afoot here. Cloud storage simply refers to remote data centres not on your own premises. They’re little more — or less — than connected warehouses packed with computer memory banks.

Even if you or your company doesn’t use cloud storage, your bank or other companies you do business with probably do. Meaning you often have little to no idea where your sensitive data may be residing. We’re simply left to hope it’s all secure.

And as more than 100 million people discovered this week, that hope is often in vain.

The fallout, even assuming none of the data is used for malicious purposes, is already immense.

Capital One estimates the breach could cost upwards of US$150 million.

Apparently their number crunchers didn’t bother to check the company’s share price. Have a look at the five day price chart below:



chart image
Source: Google Finance
Click to enlarge

I marked the closing price on Monday before the data breach was reported. You can see the fallout in the opening hours of trading on Tuesday,

The share price was down 7.36% in intraday trading before recovering to close 5.91% lower. And this is a stock currently valued at US$41.8 billion.

If my calculations are right, at the height of the selloff the breach had cost shareholders US$3.4 billion. Just a smidge more than the $150 million the company expects it to cost.

Little wonder then that the world’s top institutions spend billions of dollars a year on cybersecurity.

The two biggest US banks alone — JPMorgan Chase and Bank of America — spend an eyepopping US$1.4 billion a year on cyber defence measures.

That’s just these two banks. To give you an idea of how serious they believe the threat is, here’s what Jamie Dimon, CEO of JPMorgan Chase, wrote in a letter to shareholders back in April (as quoted by CNBC):

The threat of cyber security may very well be the biggest threat to the U.S. financial system. The financial system is interconnected, and adversaries are smart and relentless — so we must continue to be vigilant.

Protecting sensitive, confidential data — financial, government, medical, etc. — is already a thriving industry. And as we continue to move off of paper and onto microchips that industry is set to boom.

These are the kinds of revolutionary technological trends Sam Volkering follows closely over at his premium investment advisory, Revolutionary Tech Investor. He calls the stocks in this booming sector ‘Cyber Defenders’. While three of his four recommendations here are currently in the red, they all remain active buy recommendations. And you need look no further than the likes of Paige Thompson to understand why.

Revolutionary Tech Investor isn’t currently accepting any new subscribers. Sam — and his trusty analyst Ryan Clarkson-Ledward — are working on some exciting new changes…and new recommendations.

If all goes to plan that will all be rounded off by the end of this month. And the doors to new subscribers will reopen…if only briefly.

I’ll keep you up to date with how that’s progressing.

Cash…in the mailbag

No. There was no cash in the Port Phillip Insider mailbag this morning. It’s digital, after all. A good thing too. I wouldn’t want to be accused of being a tax evading terrorist or…gasp…a dealer of illicit tobacco.

This week we looked at the RBA’s rate cutting path to zero. And I warned that the next step would be negative rates…if only the government can do away with cash.

Here’s an excerpt from Monday:

So long as we have good hard cash to fall back on, negative rates on the consumer level just won’t wash. With that in mind, keep an eye open for a revived media blitz linking cash (and cryptocurrencies) to all kinds of nasty crime, terrorism and tax evasion.

Sure enough, on Tuesday the financial news outlets ran stories of the government’s plan to abolish cash payments over $10,000 by 2021. MP Michael Sukkar was quick to link cash to ‘criminals and terrorists’.

Today Australians were greeted by this headline in the AFR, ‘Calls to further restrict cash payments in black economy crackdown’.

The reasoning for the crackdown? ‘The cash payment cap is expected to make it more difficult for criminals, syndicates and illicit tobacco traders to operate.’

Illicit tobacco traders? Seriously? This is a problem of the government’s own creation. What did they reckon would happen when ever-higher sin taxes drove Aussie cigarette prices through the roof?

Moving on, the article continues:

KPMG tax partner Grant Wardell-Johnson said the limit would drive down questionable transactions but called for the threshold to be lowered to $5000 or even $2000 within five years.

“We understand why the taskforce recommended $10,000, because it fits with the AUSTRAC legislation. Our view is to accept $10,000 at this juncture but there’s a prospect of lowering that in the future as people find this more acceptable,” he said.

Sorry, Grant. There is nothing acceptable about a $2,000 cash transaction limit. Even without the eroding powers of inflation.

But then the real idea here isn’t to limit cash to $2,000. It’s to eliminate its use entirely. That would open the door wide for negative interest rates alongside future bank bail-ins. So long as you can’t flee to physical money it’s not really yours.

With that we turn to this reader mail, from Steve:

Thanks for the article yesterday on cash restrictions.

I reckon you’re on the right track – create a problem to enable legislation to be palatable to solve the problem just created.  This is the way of the world nowadays.

If we only had cash (like the old days) then you could not spend what you did not have and so society stayed within its means from end to end.   That does not create enough a) profit growth or b) control via indebtedness for our puppet masters.   I see through my work the erosion of freedoms in our households owing to increased pressures to buy “stuff” and striving for more money to buy yet more “stuff” which is usually on credit and then the treadmill of reducing the debt and earning more etc.  Breaks up relationships, stops real communities from happening owing to working long hours, causes more fear … fear of missing out being the largest.  And of course, creates greed and a whole mentality around that which is unhealthy.

The issue we really face is how do we overcome the apathy of the populace to resist these changes?  To see that the fears being raised are not real?  To realise that power is only power when it is given.. it is not taken.

People can cease the power-suction from them to the elite… by being united in an ideal which might be to keep cash and ditch credit.   Crypto currencies are something else to be avoided (but keep the blockchain tech) so we don’t have the erosion of value at the whim of the market manipulators.

Push back… not fight back.  Pushing back by weight of numbers and unity whereas fighting is usually left to the few who tend to get knocked down or disappear.. which then scares the people into conformity.  Pushing gently over time – your readership across Port Phillip Publishing is a large base from which to start… yet it is still too small.  7% of the communities united on the cause can be enough to bring about change in those communities…. just 7%.  1.75m people committed to the cause in Australia.  

Keep up the good work.’

Great points, thanks Steve.

Indeed the fears being raised are not real. Or if they are, they pale in comparison to the fear we should feel for the solutions on offer.

In the meantime we’ll do our best here to get our readership up to 1.75 million.

That’s all the time and space we have for today.

Questions or comments? Send them to letters@portphillipinsider.com.au. If we publish them here we’ll only use your first name.

Cheers,
Bernd