The Winds of War (Part Three)

Today, the Justice Department announced that 13 Russian nationals were indicted for interfering in the 2016 election in acts of “information warfare.” There are some really serious implications here and no doubt partisans will be attempting to spin this as either pro- or anti-Trump for political reasons. The indictment makes clear, however, that the effort did not change the outcome of the election. Further, it is clear that activity was both pro-Trump and anti-Trump, suggesting the goal was discord rather than a specific outcome. In fact, the activity began prior to Donald Trump entering the race. Finally, there is nothing in the indictment that suggests any willful collusion by any American. In fact, the indictment makes clear that the Russian instigators went to great lengths to hide the fact that they were Russian. They attempted to portray themselves as American activists under the banner of the Internet Research Agency.

Why is this so significant? This finding continues to demonstrate what we have shared over the past decade, mainly that Russia has been engaged in a type of warfare against the United States. That is fact. This effort is based on destabilizing our economy and unity following the playbook of Unrestricted Warfare.

Here are examples from just two of the many articles we have written on the topic:

Putin Prepares for a Currency War that He Thinks (Hopes?) Will …

The second example clearly shows that Russia sent spies to the United States in an effort to learn how to undermine our market using Exchange Traded Products (ETFs and ETNs).

1,000 Flash Crashes at Once; What Role Did ETFs Play in Today’s …

This post is very significant in light of the recent market turmoil and another revelation of the past week we will discuss. The bottom line here is that Russian subversion efforts are much wider than simply attempting to influence the electorate. In fact, the clear proof of Russian efforts to fund both sides of protests and rallies validates our concerns in many respects.

 On February 13th, the U.S. Senate Intelligence Committee held important hearings featuring the top intelligence officers in our government. The hearings are worth watching. Here is a link to see them.

Perhaps the most dramatic testimony came from DNI Dan Coats. This is a refreshing contrast to the often political and certainly weak testimony of his predecessor. This DNI, however, not only knows the true threat but also is willing to admit it. You can read his report produced in conjunction with the Senate hearings here: 2018 DNI Worldwide Threat Assessment. Here are some of the important findings that were shared (as reported by Austin Bay in TownHall):

On February 13, U.S. Director of National Intelligence Dan Coats appeared before the Senate Intelligence Committee and discussed his just-released “Worldwide Threat Assessment of the U.S. Intelligence Community” report.

That document synthesizes what U.S. military and civilian intelligence analysts, cyber warriors and counter-intelligence experts regard as the “sobering” (a word Coats used) threats to the American people and their interests.

During his testimony, DNI Coats was flanked by the directors of the FBI, CIA, the Defense Intelligence Agency, NSA and the National Geospatial-Intelligence Agency (NGA). Their agencies contributed to the assessment.

Coats’ initial threat statement is sharp, clear and dire, so I’ll quote it at length.

“…We face a complex, volatile and challenging threat environment,” he began. “The risk of interstate conflict is higher than any time since the end of the Cold War, all the more alarming because of the growing development in use of weapons of mass destruction by state and non-state actors.’

Sobering? Yes. Interstate wars can escalate into regional wars. When belligerents possess WMD, escalation can have global consequences.

However, on the cusp of the 21st century’s third decade, other wicked variables complicate diplomacy, spying, commerce, warfare and minute-to-minute human survival.

“Our adversaries as well as the other malign actors,” Coats continued, “are using cyber and other instruments of power to shape societies and markets, international rules and institutions, and international hotspots to their advantage.”

That summarizes many wicked activities. Examples include cyber disruption of communications, cyber crime, propaganda and false flag operations, economic warfare, political and economic penetration of international institutions and support for proxy warfighters in crises in order to destabilize a region.

But the DNI’s introduction was far from over. “We have entered a period,” Coats said, “that can best be described as a race for technological superiority against our adversaries who seek to sow division in the U.S. and weaken U.S. leadership.” Moreover, non-state actors “to include terrorists and criminal groups are exploiting “weak state” capacity in Africa the Middle East Asia and Latin America, causing instability and violence both within states and among states.”

Coats identified five “functional” types of threats to the U.S.: Cyber spying, propaganda and attacks directed by nation states, non-state actors and criminal groups; WMD and WMD delivery systems; Terrorism; Technological threats from space and in space; Transnational crime.

The cyber war has begun. “Frankly the U.S. is under attack,” Coats said, by “entities” using cyber pathways to penetrate security and economic activities. Russia, China, Iran, North Korea and crime organizations conduct disruptive cyber operations against the US. China is particularly adept at using cyber weapons.

All of this confirms both what we have shared with you over the past decade as well as the original research we conducted for the Pentagon and then relayed to multiple federal agencies starting in 2008. We are already in a global cyber-economic war. Our adversaries are the same ones we have described to you (including radical Islam). the weapons are as we have explained, cyber, market manipulations, economic warfare, propaganda, Intellectual Property theft, and so forth. Beyond that, we have explained in detail how China, coordinating with and perhaps led by Russia, has purposely sought to displace U.S. hegemony in the dollar and global financial system. Some see this as normal economic development. The reality, however, is far more sinister.

FBI Director Chris Wray was very direct during his testimony. If you’ve been reading this blog, it will seem quite familiar (quoting from Michal Kranz in Business Insider):

FBI director Christopher Wray reiterated a commonly held view on Tuesday that China is seeking to become a global superpower through unconventional means — but framed the threat China poses to the US as not just a governmental one, but as a societal one, too.

Speaking before the Senate Intelligence Committee alongside the heads of other US intelligence agencies, Wray told Senators that China is using a host of methods to undermine American military, economic, cultural, and informational power across the globe that rely on more than just China’s state institutions.

“One of the things we’re trying to do is view the China threat as not just a whole of government threat, but a whole of society threat on their end,” Wray said, “and I think it’s going to take a whole-of-society response by us.” …

Wray pointed to China’s use of unconventional intelligence sources at US universities as a salient example of China’s reach.

In intelligence jargon, “collectors” are individuals who collect intelligence on behalf of agencies or governments. And he said they’ve infiltrated American universities.

“I think in this setting, I would just say that the use of non-traditional collectors — especially in the academic setting, whether it’s professors, scientists, students — we see in almost every field office that the FBI has around the country,” Wray said.

“They’re exploiting the very open research and development environment that we have which we all revere, but they’re taking advantage of it,” Wray added, noting that there is a “naiveté” amid academics about the risks posed by foreign nationals at universities. …

While there is no evidence that a majority of Chinese students or academics pose any threat to US interests, there are a number of education efforts that the Chinese government uses as vehicles for soft power.

The first of these are the Confucius Institutes, which Rubio alluded to during his questioning of Wray and Coats at the Senate hearing.

These institutes mirror many other foreign-language education entities that countries fund around the world, but with a couple caveats. Rather than existing as stand-alone bodies, they are inserted into US universities, and in addition to teaching Mandarin Chinese, they also reportedly engage in disseminating Chinese propaganda and restricting what professors and students should say.

The bottom line is that there is a war underway and it is growing, not receding. Nothing demonstrates this more than the fact that our systems are probed daily and nothing is left off the table according to the DNI:

“Frankly, the United States is under attack by entities that are using cyber to penetrate virtually every major action that takes place.”

Even Defense Contractor Raytheon now demonstrates the understanding of just how big a problem this has become. Beyond cyber, there is the massive infiltration at all levels, including our own CIA. The Chinese have even made serious efforts to turn our own companies against our interests.

Read the DNI report. Watch the testimony. Now imagine my personal frustration based on the fact that I warned about all of this to major intelligence agencies for years only to have my work ridiculed, suppressed, and threatened. Now, finally we are seeing some reasonable recognition of the threat we face. In fact, we saw a piece of good news this week. The SEC rejected a Chinese attempt to buy the Chicago Stock Exchange (as noted by Reuters):

U.S. regulators on Thursday killed the politically sensitive sale of the Chicago Stock Exchange (CHX) to a group led by China-based investors, saying a lack of information on the would-be buyers threatened the ability to properly monitor the exchange after the deal. The move by the Securities and Exchange Commission (SEC) ends a two-year battle to gain approval for the sale and underscores the more hostile environment facing Chinese buyers under the administration of U.S. President Donald Trump.

Trump brought the CHX deal up twice during the election campaign as an example of how jobs and wealth were leaving the United States. SEC staff initially approved the sale of the privately owned exchange in August, but within minutes of the announcement SEC commissioners, led by Chairman Jay Clayton, a Trump appointee, put the decision on hold for further review.

U.S. lawmakers from both parties had harshly criticized the deal in joint letters to the SEC, arguing that it would give the Chinese government access to American financial markets and questioning the SEC’s ability to regulate and monitor foreign owners.

“This has been a long fight, and I am grateful we now have a President who recognizes the national security threats of allowing a Chinese government-affiliated company to own the Chicago Stock Exchange,” Republican Congressman Robert Pittenger said in a statement on Thursday.

This is extraordinarily significant in light of what we will share in Revelation Three. It also is reflective of an incredible shift in the national security approach from the last Administration. Our friend Joe Schmitz, a Trump Advisor and former Inspector General at the Department of Defense, wrote about this at the start of the year in a NewsMax article:

Recent presidents generally ignored American first things, e.g., core American principles such as Compact Theory, Popular Sovereignty, and Subsidiarity, which underlie our Declaration of Independence, Constitution, and Bill of Rights. Instead, they focused mostly on second things, e.g., money and survival — priorities for even atheist criminal thugs and Islamist jihadists.

In his forward to our new “National Security Strategy,” President Trump announced: “We have recommitted ourselves to our founding principles and to the values that have made our families, communities, and society so successful.” The first paragraph of the first page of the new “National Security Strategy” begins with this unapologetic recitation of American first things: “An ‘America First National Security Strategy’ is based on American principles, a clear-eyed assessment of U.S. interests, and a determination to tackle the challenges that we face. . . . And it is grounded in the realization that American principles are a lasting force for good in the world.”

The new “National Security Policy” then proclaims, “‘We the People’ is America’s source of strength,” followed by this veritable parade of American first things: “The United States was born of a desire for life, liberty, and the pursuit of happiness — and a conviction that unaccountable political power is tyranny. For these reasons, our Founders crafted and ratified the Constitution, establishing the republican form of government we enjoy today.

“The Constitution grants our national government not only specified powers necessary to protect our God-given rights and liberties but also safeguards them by limiting the government’s size and scope, separating Federal powers, and protecting the rights of individuals through the rule of law. All political power is ultimately delegated from, and accountable to, the people.”

Not since Ronald Reagan has an American president so courageously and publicly reaffirmed American first things.

This courage sets the stage for what the ancient Chinese philosopher Sun Tzu described as supreme excellence in warfare: “To fight and conquer in all your battles is not supreme excellence; supreme excellence consists in breaking the enemy’s resistance without fighting.”

And to help us achieve such a supremely excellent result, our new commander in chief, in stark contrast to the willful blindness of prior presidents, identifies our various jihadist enemies as “linked by a common radical Islamist ideology.” The new “National Security Strategy” describes this ideology as “wicked,” “barbaric,” and “evil.”

The new strategy also indicates that, “To prevail, we must integrate all elements of America’s national power — political, economic, and military.”

So now the implementation phase begins, but the foundation for success is well laid.Read Full Article Here Trump’s ‘National Security Strategy’ Consistently Puts America First | Newsmax.com

In other words, this Administration recognizes the total war we are in. The key to victory is drawing upon our national strength which is found in our spiritual, and economic fiber.

Revelation Three:  Our Financial Markets Are at Risk

The stock market just enjoyed one of its strongest weeks in years after last week’s serious decline. People have been wondering what caused the sharp loss, which seemingly arrived out of the blue. Many experts point to the purchase and sale of “volatility” derivatives used by professional managers to hedge risks.

Without getting into the weeds on how this all happened (you can read an explanation here), a whistleblower came forward to warn that manipulation was at work (as noted in The Wall Street Journal this week):

A U.S. regulator is looking into whether prices linked to the stock market’s widely watched “fear index” have been manipulated, according to people with knowledge of the matter. The Cboe Volatility Index, known as the VIX, is derived from S&P 500 options prices. The Financial Industry Regulatory Authority is scrutinizing whether traders placed bets on S&P 500 options to influence prices for VIX futures, the people said.

Separately, a letter from a law firm Monday representing an unidentified client urged U.S. regulators to investigate VIX manipulation, claiming it has cost investors hundreds of millions of dollars in losses each month. If evidence of manipulation is found, it would be a black mark for the VIX, which has soared in popularity over the last decade as a hedging tool for investors. The VIX is designed to track investor anxiety and tends to move in the opposite direction of the benchmark S&P 500 index. Investors purchase VIX futures and options to protect against declines in stocks….

Some market participants and observers of derivatives markets say VIX manipulation is feasible. More than a dozen traders and brokers told the The Wall Street Journal that they avoid the expiration days for VIX futures or advise their clients to do so, with some citing manipulation fears.

“There’s smoke there,” said Prof. Pirrong. “It’s definitely worth further inquiry.”

The amazing  thing is that an estimated $8 billion in trades of volatility products (much of that in Exchange Traded Notes) could be responsible for $3 trillion in stock market losses. Considering that an enemy would only need to start the trade, the potential for manipulation is clear. In fact, a clever saboteur would find a way to profit from the turmoil.

Now, couple the reality of manipulation with the fact that our markets are all controlled by machines. A clever hacker could cause a complete collapse as we have warned. So, we know that Russia and China and others are hacking things daily. And, we know that Russia and China and others have purposed to so mayhem. Can we doubt that they are working on crashing our markets?

One MarketWatch contributor summed up the risk in a Valentine’s Day article. Here are excerpts:

This is what happens when Skynet from ‘Terminator’ takes over the stock market

A massive amount of automated trading helped cause last week’s turmoil in the U.S. stock market.

It reminded me of Skynet. Remember Skynet?

“Skynet is a fictional … artificial general intelligence system that features centrally in the ‘Terminator’ [movie] franchise.Skynet gained self-awareness after it had spread into millions of computer servers all across the world; realizing the extent of its abilities, its creators tried to deactivate it. — Wikipedia ….

Those worried that Skynet has conquered financial markets are urged to read “Flash Boys” by Michael Lewis, who describes the proliferation of high-frequency trading. I believe the speed of the decline over the past week was driven by computers trading with other computers on high amounts of leverage. High frequency trading (HFT) routinely surpasses 50% of volume on most stock exchanges, and it may have made up more than 50% of volume last week. Early warnings of problems HFT proliferation have been consistently given by ZeroHedge.

The 1987 crash in the stock market was blamed on “portfolio insurance,” a form of computerized trading in which the lower the stock market went, the more the computer programs sold into the move lower, which created a quick avalanche effect. Some of last week’s moves felt like small avalanches….

The ETP (Exchange Traded Product) space is over $3 trillion. As that space has grown, so has the use of computerized trading that helps manage ETP securities. Much of the blame over the past week has been put on short volatility ETFs, which among other things take short positions in front-month Cboe Volatility Index futures.

The explosion of stock market volatility causes those ETPs to reverse their short VIX futures positions, causing a record surge in VIX futures buy orders after-hours, when such ETPs typically square their positions. On the day the Dow Jones Industrial Average declined 1,175 points, a surge in VIX futures buy orders created a surge in S&P futures sell orders as they are inversely correlated. Because of the record buying of VIX futures, their prices rose quickly after-hours, which caused many ETPs whose portfolios are short VIX futures to suffer record 80% declines after-hours, in effect blowing up their portfolios.

While most of the assets in short-volatility ETFs have already been liquidated over the past week, there are still over $3 trillion in assets in all ETPs, so I am sorry to say that Skynet is still lurking in the stock market. It looks to me like the regulators allowed a monster to grow in the face of the ETP industry and they will have a very difficult time reining it in.

So, we have a cyber risk (and we know of Russian, Chinese, North Korean, Iranian, and radical Islamist efforts here) and a risk of manipulation of Exchange Traded products (which we know that Russia specifically has targeted). These can no longer be denied.

Recap

So here’s the bottom line. We are at risk and under attack. But we finally have a recognition of this threat by our government with concrete action being taken (as evidenced by the denial of Chinese takeover of the Chicago Stock Exchange). We will have to be diligent. The good news, though, is that we are in a solid position to win this economic war. the National Security Strategy is very encouraging. Our nation is resilient and in a better position than any nation in the world. If we take the right steps, we will alert our adversaries and enemies to not mess with us. If they want a fight, we can and will be prepared to win.

I can tell you that we are doing our part to awaken America. We’ve written two best-selling books on the subject (Secret Weapon and Game Plan). We’ve briefed our government and thought leaders. We’ve written this Blog and spoken to groups across the country. Now, we are launching Economic War Room with Kevin Freeman, a new online television program that will clearly address the economic threats we face. We will offer understanding of the threat, solutions for the problems, and a clear message of hope. Register at EconomicWarRoom.com to be notified of our launch.