Time In A Bottle
• How to profit from the coming cyber wars
• Gold’s down. What’s up with that?
• European PIGS Start to Fly
In today’s Money Morning…Hillary Clinton decides private industry is safer than government…the knights of the digital round table do it for love, not just money…shooting fish in a barrel…and more…
Hillary Clinton is the leading US Democratic Party candidate. That means if US primaries were on tomorrow, Clinton would win. And she would be running for President next year.
But things might be about to change…
As a former US Secretary of State it’s fair to say she has some pretty strong connections in the US government. She is also a former First Lady.
Thus it’s fair to say she has access to a fair bit of top-secret information.
As a person in her position, digital security is very important. And in a typical case the Department of Homeland Security (DHS) would give a person in such a position a ‘secure’ email server.
Well that’s not the case for Clinton.
In fact her choice of email server could swing the US primaries. And in turn impact the 2016 US Presidential elections.
Who would have thought an email server could be so important? And who would have thought her decision would create some of the best investment opportunities of the 21st century?
Sounds daft doesn’t it? An email server affecting a presidential race. But as of this morning, the FBI is looking into Hillary Clinton, and not in a good way. Her email set up at home is ‘unusual’ according to government officials.
She doesn’t use the typical government email set up. Instead she has a private account set up by a Denver-based company.
And this is now under question due to one big factor. The security of her email. Remember, Clinton is privy to top-secret information. And the government is worried about the security of said information.
They like control and right now with Clinton, they don’t have it.
Let’s me ask you something.
Assume you had to choose between two email set-ups. Your decision is solely based on the security that email will provide. Nothing else.
One is an email that a national security government agency sets up for you.
The other is an email server set up by a private technology company.
Which do you choose? It sounds like a straightforward answer right? You’d go with the government one. Wouldn’t you? Surely they would have the highest level of security?
Government versus Industry
Speaking to Business Insider, Immunity Inc. senior security researcher Alex McGeorge said,
‘Government cybersecurity experts know that government servers will be compromised no matter what, so they are fully prepared to get hackers off the system as soon as possible.’
But the real question isn’t if they’re prepared. The question is can they do something about it. In the cyber security industry it common knowledge the best hackers don’t work for the government.
No. They work in the non-government cyber industry. Both privately held and publicly listed companies.
Why do they avoid the government? Well it’s because they want to be paid better for one thing. Much better. But it’s not all about the money.
Some hackers (WhiteHat hackers, the good guys) do it to genuinely make a difference. They don’t want to deal with the bureaucracy and red tape of government departments. They see a problem and they know they can help to fix it. They just want to get on with it.
I was speaking to some hackers last night. In a jovial way I asked if they did it for the love or money. They said the money is good, in fact great. But they do what they do because they just love the work. They want to make a difference. And importantly they know how to fix the problems.
These guys see themselves as modern day knights of the round table — and they’re kind of right.
They exist and thrive in a digital world where they thwart cyber attacks on a daily basis. And many of them work for publicly listed companies. These hackers are the guys you want fighting on your side in this digital battle.
And the companies they work for are the companies you want your investment money in.
I bring this up because I’m currently at BlackHat USA 2015. This is the world’s biggest international security conference.
Attending are the best and brightest security experts, and some of the most experienced and talented hackers in the world.
These are the guys and girls the government comes to when they’ve got a problem. Not the other way around. And that’s why Clinton’s decision to use a private company for her email server is so important.
She decided to get a private company to set up the system for her. Not the government. The issue isn’t the way her system’s set up. The point is she felt a private company would do a better job. And the fact is, a private company will do a better job than the government.
And that’s exactly why there’s only one side to turn to as a consumer and as an investor with when it comes to safety, security and making money in cyber security.
Like shooting fish in a barrel
When you want to secure a network, lock out cyber attackers and protect your data you turn to private enterprise. You don’t go to your local MP and ask for help.
Your need, your company’s need even your local MP’s need to have digital protection increases every day. And over the coming years as the Internet of Things grabs hold of us, this need will exponentially increase.
When it comes to the ‘Internet of Things’ (IoT) we’re talking billions of devices. Things like a connected fridge, smart home, connected car and fitness tracking technology.
It’s literally ‘things’. Mundane, everyday objects connected online. What that means is that manufacturers are now becoming software vendors.
For example, think of Whirlpool, the washing machine maker. Whirlpool doesn’t just make washing machines. They are now a software vendor too. And therein lies a responsibility to protect not just their machines, but also their software too. They have to secure it, update it and patch it when hackers find a flaw.
That also means Whirlpool has to spend money on getting help to secure their products. And that means money flowing to digital security companies that help them achieve this.
Now where this gets really good for investors is that investment in digital security companies right now is like shooting fish in a barrel. You basically can’t miss.
The need for digital security is so immense and growing so fast that many security companies don’t even need to look for customers. They actively have other companies and governments knocking on the door asking for help.
One of the key takeaways from BlackHat today is how important digital security is in the modern world. This is driven in part by the natural growth of the internet. But it’s really getting intense because of the explosion of the IoT.
Importantly it’s not an issue that’s restricted to any one country. Companies from all over the world are a part of this.
If you’re only interested in investing in Aussie companies, that’s great. There are several nitro-charged cyber security companies right now that you can invest in. But these aren’t household names, they’re small-cap Aussie companies that most of the mainstream ignore. They ignore these companies because they don’t understand them.
And crucially they don’t understand the industry they’re in and how important it is for the future.
Cyber defence is an investors market right now. Both domestically and internationally. By that I mean there are a number of great companies, many on the ASX, that you can invest in.
These companies will be the foundation of our digital world. The future of the internet, the IoT and the connected world are in their hands. As I see it, this is the best investment opportunity of the 21st century.
Do you have investments in digital and cyber defence companies? If not, why not?
How to Profit from the Coming Cyber Wars
Thursday, 6th August 2015 – Las Vegas
By Sam Volkering
Gold’s Down. What’s Up With That?
Jim Rickards, Strategist, Strategic Intelligence
Gold is trading around US$1,085 per ounce. That’s a five-year low, down over 40% from its all-time high in August 2011, and down over 8% this year alone.
According to Bloomberg, hedge funds are net short gold for the first time since records began in 2006. Sentiment is abysmal. To paraphrase the brilliant Jim Grant, gold, it seems, has never been more unloved.
Investors know all of this well. The question is why, and what does a temporary collapse in the US dollar price of gold signal?
The search for answers takes us on a journey through the inner workings of this most important and least understood market.
A new age of King Dollar
The first issue to consider is what we call the ‘numeraire’. That’s a French term used in maths and markets. It refers to the yardstick we use to measure other things.
If the US dollar is the numeraire, then gold is down measured in US dollars. But if gold is the numeraire, then it’s more accurate to say that gold is constant (that’s what a numeraire is) and the dollar is much stronger.
In August 2011, one US dollar got you 1/1,900th of an ounce of gold. Today one dollar gets you 1/1,085th of an ounce of gold. You get more gold for your money.
How you look at it depends on whether you believe gold or the dollar is the better long-term benchmark for wealth. I prefer gold, others prefer paper dollars — take your pick.
Support for this ‘strong dollar’ view comes not just from gold but also from every major currency and commodity in the world. Look at the list of things that are down against the US dollar over the past year: iron ore, copper, oil, natural gas, sugar, wheat, Australian dollars, Canadian dollars, the euro, the Japanese yen, and so on.
The only reason the Chinese yuan is not down also is that the Chinese have made a strategic decision to kowtow to US wishes. They maintain a US dollar peg as the ‘price of admission’ to the basket the IMF uses to calculate the value of its world money, called SDRs.
That decision is causing Chinese growth to fall off a cliff, but that’s another story. The point is this is not an age of weak gold — it’s a new age of King Dollar. Therein lies a tale.
An historic blunder
The last age of King Dollar started in 1981 with the combined efforts of Paul Volcker and Ronald Reagan to end the monetary confusion of the 1970s. It lasted until the US economy hit the wall in 2007.
Importantly, that age of King Dollar prevailed through Republican and Democratic administrations, and included the two longest peacetime expansions in US history, 1981–1989 (92 months), and 1991–2001 (120 months).
The US could afford a King Dollar strategy because it had strong, continual growth during the decades of the 1980s and 1990s. The rest of the world would benefit from weaker currencies that promoted their own exports.
The new age of King Dollar is different. Now we are in a period of weak growth, global debt, and currency wars.
When the US Federal Reserve and Treasury greenlit the strong dollar after 2012, they committed a historic blunder. They assumed, based on faulty forecasts, that the US was returning to trend growth and could afford a strong dollar, as was previously the case.
Instead, US growth has continued to disappoint. Now the US economy itself is flirting with recession because of this unfortunate mix of weak growth and a strong currency.
Meanwhile, the Fed has created asset bubbles (in stocks and real estate) and asset crashes (in gold, oil and currencies) under its misguided policies.
Deflation is looming
A foreseeable consequence of a strong dollar in a weak economy is deflation. Collapsing US dollar prices for a long list of currencies and commodities is the result.
The Fed is trying to offset this deflationary tendency with zero interest rates, but it’s not working. At best, the forces of deflation and inflation are cancelling each other out. At worst, deflation will start to win this tug-of-war in the months ahead.
There are also technical factors at play when it comes to gold. Once the US dollar price of gold sinks to a certain level, leveraged investors such as hedge funds hit their self-imposed stop loss limits and have to sell. Others who bought gold on margin may be forced out of their positions by brokers. Finally, some large selling has been coming from China in response to the stock market crash there.
Hedge funds losing money on stocks sell gold to raise cash to meet margin calls. When hedge funds are in distress, they don’t sell what they want, they sell what they can, and gold fills the bill.
All of these factors — stop loss, margin and leverage — add momentum to gold’s downward price movement.
The strong hands will buy
These trends are unsustainable. The Fed will have to blink when it comes to their much-talked-about rate hike, or else they will cause a global crash.
Look for the Fed not to raise rates soon. Perhaps not for years. The gold selling by weak hands in China and elsewhere will run its course. Once you’re out, you’re out. The strong hands are happy to buy at these depressed levels.
There’s nothing unusual about a 50% retracement in commodity bull markets. On the long road from US$200 per ounce to US$5,000 per ounce (or higher), a 50% pullback should be expected. If you take US$1,900 as an interim high, a pullback to the US$950 to US$1,050 per ounce area would be unsurprising. It looks like we’re just about there.
If the Fed maintains its kamikaze tight money mantra in the middle of a deflationary currency war, then gold and other commodities could go a bit lower. My expectation is the Fed will wake up to the damage it’s doing and reverse course — possibly even launching QE4 in 2016.
As this plays out over the next few months, look for commodity and currency markets to hear the message that the Fed will achieve inflation ‘whatever it takes’.
Once that message sinks in, gold will once again shine.
Strategist, Strategic Intelligence
James G. Rickards is the strategist for Strategic Intelligence, the newest newsletter from Port Phillip Publishing. He is an American lawyer, economist, and investment banker with 35 years of experience working in capital markets on Wall Street. He is the author of The New York Times bestsellers Currency Wars and The Death of Money. Jim also serves as Chief Economist for West Shore Group.
European PIGS Start to Fly
Callum Newman, Contributing Editor, Money Morning
Do you remember the PIGS? That was the tag for the economies of Portugal, Ireland, Greece and Spain at the height of the Eurozone crisis in 2010.
Well, check out the news now. The Financial Times reports that Spain and Ireland are now the fastest growing economies in the Eurozone.
Ireland’s beginning to look like the greyhound of the pack, rising at six times the pace of the rest of Europe. The Irish central bank is forecasting growth for the next two years above 4%.
Check out how things have been travelling over the last few years…
Source: Financial Times
Of course, we treat central bank forecasts with the same amount of credibility as that of a mainstream economist. That’s somewhere next to the old guy at the pub with a red nose and no teeth.
But in this case they might accidentally be right. One reason is the ongoing recovery out of the housing bust in both countries. Private equity firm KKR announced plans to put up 500 million euros to lend to property developers, to increase housing supply. Irish house prices are up 10% for the year.
People in high places are sighing with relief when they see that. It means they find it easier to find a buyer so they can flog off their bad assets.
Major UK bank Lloyds, for example, just sold its 827 million pound portfolio of Irish commercial loans to a consortium betting on continued Irish expansion.
According to the Financial Times,‘Rising house prices, an improving economic outlook and great availability of financing have helped Lloyds withdraw from its lossmaking Irish operation.’
Importantly for Lloyds, the sale continues the ongoing cleanup of its balance sheet after its disastrous exposure to the meltdown of the GFC. The sale will take its level of impaired loans down from 2.7% to 2.2%
It’s not alone there. Spanish banking giant Santander results came in last month too. Its overall percentage of non-performing loans fell from 5.45% a year ago to 4.64%. Net profits were up 17.6%.
What’s happening is expansionary for banks and bullish for stocks and the economy in general. When bank credit is expanding, the economy will inflate.
And despite the worries about the Fed or the Bank of England raising rates, this is actually good for banks. That’s because it will increase their net interest margin, or the spread between their costs and income to put it another way.
This is not just mere opinion. History shows it as fact. Some knowledge of cycles can also tell you the exact timing to profit from it.
Speaking of Spain, colleague Phil Anderson reported last week on the Chinese consortium that might have just sealed the real estate deal of the decade.
They were the sole bidders on a Spain’s Ciudad Real’s ‘ghost’ airport near Madrid, whose previous owners went bankrupt. Here’s the kicker. They put down €10,000 for an airport that cost €1 billion to build.
Soon Chinese goods will be flowing through Spain, alongside all the tourists. Spain’s economy has grown for eight consecutive quarters, with record spending by foreign tourists. That’s chocked up the country’s fastest quarter of growth since 2007.
And if you need another reason to be bullish, let’s not forget the price of oil. In the US, crude oil costs 51% less than it did a year ago.
Some of those costs savings Americans are enjoying appear to be giving consumer spending a boost, according to the Wall Street Journal:
‘The good news here is that real, or inflation-adjusted, personal consumption expenditures grew at a 2.9% annual rate in the second quarter, up from 1.8% in the first.
‘Though the evidence is still tentative, it may be that increasing confidence in the job market is making consumers more willing to spend the money they have been spending on gasoline.’
This is as we forecast in Cycles, Trends and Forecasts late last year. We said at the time lower oil prices were a trillion dollar boost to the US economy. It is difficult to think of anything that has a bigger beneficial impact. The mid 1980s oil price collapse, for example, kicked off a huge economic and stock market comeback.
It’s a time to be bullish. Don’t miss the opportunities because of worry. Get started here.
Contributing Editor, Money Morning
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