26 MAY 17 – Executive Intelligence Summary

EXECUTIVE INTELLIGENCE SUMMARY – 26 May 2017 🔒

[wcm_nonmember]In this EXSUM… (2860 words)

  • Kaspersky: Critical infrastructure is the current cyber battleground
  • DHS warns of the use of signal jammers
  • NATO-Russia and North Korea SITREP
  • Trump: Middle East cannot wait for US to win the war on terror
  • DHS taking an interest in Leftist “domestic terrorism”
  • Fed to trim balance sheets – what’s the impact?
  • China heading towards fiscal, economic dire straits
  • And more…

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Bottom Line Up Front:  Cryptocurrencies like Bitcoin and Ethereum had a wild month and it’s not over.  After gaining 100% in price in the last month and peaking over $2,700 through Friday, Bitcoin plummeted to the low $1900s before stabilizing just under $2,000 early Saturday morning.  Almost all other cryptocurrencies traded on the Poloniex exchange are down anywhere between 10 and 50 percent through Saturday morning.  Bitcoin was down nearly 20 percent.  This is not an investment report and I’m not going into the business of investment advising — *this is not investment advice* — however, I do believe the cryptocurrencies hold great promise as a store of value and an investment.  I own Bitcoin and several other cryptocurrencies because we’re still in the very early phase of blockchain technology and greater adoption of cryptocurrencies are going to drive prices higher over the long term.

For those unfamiliar, the “blockchain” is a relatively new distributed ledger technology.  Let’s say that we were on an island and everyone has a bank account with digital currency, exactly like how the modern banking system works today.  You’re a coconut salesman and I’m a coconut buyer.  I want to buy 100 coconuts using the digital money in my bank account, so we both go to the central ledger facility and we say to the ledger keeper that I’m transferring 100 island bucks from my bank account to yours.  For his time and energy, the ledger keeper takes a standard processing fee of 2.9 percent, or some other fee structure.  And then your bank account also charges you a monthly fee for the convenience of having this account with them. They’re the centralized processor and they need to make money for all these money transfers.  So we wait in line because everyone on the island uses the same ledger system at the same ledger facility.  If it’s the weekend and the ledger keeper doesn’t feel like working, then we can make our transaction today and then wait until the ledger catches up on Monday.  This centralized ledger process can be problematic because if someone can impersonate me, then he can fool the ledger system into sending you all my money.  This is essentially how bank robbers made off with $81 million dollars last year, by fooling the international financial messaging system known as SWIFT.

What blockchain technology does is distribute this ledgering process so that everyone can keep a ledger, and can track these transfers from wallet to wallet.  They don’t know who owns the wallets, just that the digital currency is being transferred.  Everyone who has a digital wallet can now process their money transfers, and there’s no waiting in line, no middle man, and only a very small fee.  I agree to send you 100 island bucks for those coconuts, and that transaction is validated in independent ledgers so that there’s proof that this transaction has been made.

This blockchain technology has uses far beyond buying and selling things on our island.  Banks and other financial institutions are looking into using this technology, as well as logistics companies to help track shipping and receiving.  Blockchain technology has a bright future.  We’re in the virtual infancy of this technology, and for these reasons, I believe cryptocurrencies will be widely adopted in the future.  If you’d like to get involved, Coinbase is a good place to start.  (Disclaimer:  I own Bitcoin, Ethereum, Augur and Monero.  I have zero financial interest in Poloniex or Coinbase.)

 

Priority Intelligence Requirements:

PIR1: What are the current indicators of systems disruption or instability that could lead to civil unrest or violence?

PIR2: What are the current indicators of an outbreak of global conflict?

PIR3: What are the current indicators of organized political violence?

PIR4: What are the current indicators of economic, financial, or monetary instability?


PIR1: What are the current indicators of systems disruption that could lead to instability, civil unrest, or violence?

Kaspersky: Critical infrastructure is the current cyber battleground

Citing a cyber attack against a Siberian coal mine and an oil refinery, Kaspersky Labs founder Eugene Kaspersky warned that the SCADA systems of critical infrastructure are vulnerable, and urged governments and utilities to do more to protect their networks.  Kaspersky is concerned with nation-state attacks, as well.  “If we don’t have electricity, that is the end of civilisation.  Last year and in 2015 there were full-blown cyber attacks against the Ukrainian power grid.  They switched the power off via accessing the SCADA and they also wiped all the SCADA firmware.”  (SOURCE)

DHS warns of the use of signal jammers

This year, DHS is holding JamX17, an exercise that teaches first responders to identify when signals are being jammed.  “If you have several [signal] bars, but you can’t talk, if you have multiple things that don’t work—GPS isn’t working, something else isn’t working—maybe you’re being jammed,” said a DHS official.  DHS is concerned over the use of illegal jammers in the United States.  (SOURCE)


PIR2: What are the current indicators of an outbreak of global conflict?

The prospects of global conflict continue to revolve five geopolitical actors: Russia, China, North Korea, Iran, and the Middle East. In the event of war with any of these nations, consider domestic systems disruption a distinct possibility.

NATO-Russia SITREP

In a recent interview, Senator John McCain (R-AZ) called for US support to Montenegro, a small but “strategically located” European nation in the process of joining NATO.  According to McCain, Russia attempted to overthrow Montenegro’s government to prevent the accession to NATO.  McCain characterizes Russian activities across Europe as aggression, which he says is an argument for the NATO alliance.

“The world is more dangerous than it has been in the last 70 years, which argues for a strong NATO alliance, and you’re seeing reactions from countries that are even non-NATO. For example, Sweden has just reinstated conscription. I don’t think any of us 10 years ago thought that Sweden would ever have a draft,” McCain says.

McCain on Russian power:

  • “I think you can look at it as a very ambitious Vladimir Putin, whose goal is to restore the Russian empire, and all the actions that he is taking and with significant success.”
  • “Russia is now a major power in the Middle East, which they haven’t been since Anwar Sadat threw them out of Egypt in 1973.”(AC: Russia has already deployed military personnel to an old Soviet base in Egypt.)
  • “We’re seeing Russia’s significant influence in places like Syria. You’re seeing a military buildup at their bases there. And you are seeing a Russian military buildup [in general] which is quite impressive as well.”
  • “[W]e also have not very well addressed at all the whole issue of cyber warfare, which the Russians have proven to be extremely capable of. They are able and have shown the effects of shutting down power plants, shutting down financial institutions. Some of the activities that they have used in the use of cyber warfare do not portend well for the future unless we are able [to work] with our allies…”
  • “I believe that we are in for a very challenging period, because I believe that Vladimir Putin – and not just Vladimir Putin, but problems in the Middle East, problems in Asia and the Pacific are there too – but in the case of the challenges of Vladimir Putin, I think that they will be significant.”

McCain on conflict in the Baltic region:

  • “I do not predict conflict or war. But I do predict challenges which are met by strength, the old line of Ronald Reagan – peace through strength. And by strengthening our alliances, showing that our militaries working together are very capable, I think we will prevent that conflict. But there will be stresses and strains, particularly in the Balkans, and we have sort of walked away from that place. There are tensions amongst the various countries. There is significant Russian influence. We need to pay more attention to those countries – after all, we did fight a little war there.”  (SOURCE)

I only include McCain’s comments here because he’s a powerful Senator and has clearly been lobbying for additional military activities in Europe.  McCain does not predict war, which is significant and probably a good indicator; however, US military deployments to Europe and counter-propaganda in Baltic and Balkan nations certainly will increase tensions with Russia.

 

North Korea SITREP

This week in a phone call to Philippines president Duterte, President Trump mentioned that there are currently two nuclear submarines off the coast of the Korean Peninsula, and that “a major, major conflict” with North Korea is a possibility.  Meanwhile, Yonhap News Agency and Voice of America reported this week that North Korean grain imports from China are up by 500 percent this month compared to this time last year (1).  Grain imports for 2017 have increased by 430 percent overall from this time last year.  Although there could be multiple explanations for this, the most obvious explanation is that North Korea is expanding its grain reserves, which is an indicator of potential conflict.  Geopolitical analyst George Friedman mentioned at the Strategic Investment Conference this week that F-16s are conducting daily exercises in the region, which he says also occurred in the lead up to Desert Storm.  On 31 May, the US Government is set to brief South Korea on civil defense measures.

1: http://english.yonhapnews.co.kr/news/2017/05/26/0200000000AEN20170526002100315.html

 

Trump: Middle East cannot wait for US to win the war on terror

Speaking before the leaders of 50 Muslim-majority nations, President Trump explained that the fight against extremism and terror first belongs to Muslim nations.  “[T]he nations of the Middle East cannot wait for American power to crush this enemy for them. The nations of the Middle East will have to decide what kind of future they want for themselves, for their countries, and for their children,” Trump explained.  “[Our] goal is to meet history’s great test—to conquer extremism and vanquish the forces of terrorism.”  (SOURCE)  Anchoring this speech in Saudi Arabia was a $110 billion arms deal, which according to the Trump administration will help the Saudis’ “to take a greater role in security operations.”  (This arms deal includes future purchases, which will balloon to $350 billion over ten years.)  Trump’s visit also coincided with a Global Center for Combating Extremist Ideology, which aims to tamp down extremist rhetoric and online recruiting.

This is the largest arms deal in US history, and clearly reverses the Obama-era policy of attempting to moderate in the region by working more closely with Iran.  Much like during the Bush era, the US has again chosen the Saudis as a partner in the Middle East, and the Trump administration clearly favors defeating Iran.  That includes the use of Saudi and Sunni proxies, which is why this arms deal is so significant.  Saudi Arabia and Iran are currently waging proxy war for supremacy in the Middle East, on battlefields that include Syria, Iraq, Yemen, and Bahrain.  In fact, the State Department was very explicit in a letter that approved the arms deal: “This package of defense equipment and services supports the long-term security of Saudi Arabia and the Gulf region in the face of malign Iranian influence and Iranian related threats.” (SOURCE)

 

Defense in Brief:

They Army is set to begin a program to recruit officers from the Intelligence Corps and turn them into “hybrid” data scientists.  Being that the nature of future warfare is growing increasingly data-heavy, these intelligence officers would “actually write an algorithm that can create a search on the fly, in the field, to help you dissect or aggregate or understand information better.”

In a Congressional hearing this week, CYBERCOM officials provided information about Joint Task Force – Ares and cyber operations against the Islamic State and potentially other targets.  “The Task Force has brought cyber out of the shadows and successfully demonstrated the value and capabilities of cyberspace operations to the Joint Force when integrated as part of broader coordinated military effort,” Lt. Gen. Paul Nakasone said.  “I think what we are learning is the importance of being able to counter a message, being able to attack a brand – in this case attack the brand of ISIS – and then the other thing is how do we do this with the speed and accuracy that is able to get at an adversary that six months ago was moving uncontested in cyberspace? I think we have learned those things over the past six months and I think that we as a department have done that much better,” Nakasone added.


PIR3: What are the current indicators of organized political violence?

DHS taking an interest in Leftist “domestic terrorism”

This article is clearly biased against ring wing groups, however, it does draw out two significant points.

  1. “Doxxing” is the practice of posting an individuals name, address, employer, and potentially other information online, often used for harassment.  Because most Antifa members want to retain their anonymity (hence the masks), they often do so at just about any cost.  After an Antifa protestor in Portland was punched in the face by an Alt-Right rally-goer — “flattened” as the author puts it — police showed up to investigate and make an arrest.  “[The police officer] told antifa protesters that for police to make an arrest, the victim would need to provide his name. After some chatter in the group, the word came back via the human megaphone: ‘No victim!'”
  2. DHS is taking an interest in Leftist violence.  According to one DHS memo, “Rioting by violent anarchist extremists at events [in Portland, November 2016] met the criteria” for domestic terrorism.  “DHS has a duty to report and analyze such acts of ideologically motivated violence.”  According to this article, the DHS unit responsible for countering “right wing extremism” has been disbanded.  (SOURCE)

 


PIR4: What are the current indicators of economic, financial, or monetary instability that lead to worsening economic conditions or civil unrest?

Fed to trim balance sheets – what’s the impact?

This week, the Federal Reserve announced that later this year they would begin trimming down their balance sheet of $4.5 trillion.  That’s $4.5 trillion of dollars created out of thin air; at least $3.7 trillion of which was created over the past nine years, as the Fed financed the US Government’s deficit.  The Fed has engaged in a practice of reinvesting the profits from matured bonds back into new Treasury bonds, to continually fund the US Government.  Last year the Fed financed 40 percent of US deficit spending.

This week’s announcement means that the Fed will start winding down this process.  Over the next three years, over a trillion dollars of bonds will mature.  Since the Fed is no longer re-purchasing new bonds after old ones mature, there’s some real concern about how Treasury bond auctions will play out.  What will happen when the US Treasury suddenly loses a buyer responsible for 40 percent of its bond sales?  What happens if a Treasury bond auction fails?  The Fed did leave some wiggle room by saying that the plan could be modified if “material deterioration” in the economy resulted.

Increased rates on Treasury bonds (making them more attractive for investors) means that the Trump administration will have a tougher time financing its pro-growth policies, which includes a trillion dollar infrastructure spending plan.  This move by the Fed could hurt the Trump growth agenda, especially at a time when Trump is talking up tax cuts.

 

China heading towards fiscal, economic dire straits

This week, economist Jim Rickards warned that China has multiple economic bubbles, which he characterized as “getting ready to burst”.  “The combined Chinese government and corporate debt-to-equity ratio is over 300-to-1 after hidden liabilities, such as provincial guarantees and shadow banking system liabilities, are taken into account.”

For the first time in 30 years, Moody’s on Wednesday issued a credit downgrade for China, from A1 to Aa3. (AC: Aa3 is equal to S&P’s AA- rating.  Overall, this credit downgrade is a minor one, however, further credit downgrades are likely as China’s economy continues to slow.)  “China’s financial strength will erode somewhat over the coming years, with economy-wide debt continuing to rise as potential growth slows,” according to the international credit rating agency.

Yet this comes at a time when the Chinese Communist Party has enacted capital controls to stem the outbound flow of investment cash from China into other places.  This week, Jeff Gundlach of Double Line Capital surmised:

“Bitcoin up 100% in under 2 months.  Shanghai [Chinese stock exchange] down almost 10% same timeframe, compared to most global stocks up.  Probably not a coincidence!”

Meanwhile, Rickards is predicting that the eventual Chinese devaluation of the Yuan, which will be necessary to float the nation’s massive debt, will cause at least a 10% correction in the US markets and an increase in gold prices.  Rickards says this will come after this year’s National Congress, which occurs once every five years.

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Samuel Culper is a former military intelligence NCO and contract Intelligence analyst. He spent three years in Iraq and Afghanistan and is now the intelligence and warfare researcher at Forward Observer.

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1 Comment

  1. The day before I read this Ex-Sum I had just made my first Bitcoin transaction: U.S.$20 at a bitcoin ATM at a liquor store!

    Thanks, Sam, for the very useful info. on the subject. It also just helps to know you support it.

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