Laughing – and Cringing – at Leviathan

Posted On May 30, 2014 By Dave Gonigam

May 30, 2014

  • Federal contracting: When failure is an option, and a desirable one
  • The NSA’s newest target? What the sudden shutdown of TrueCrypt means to you
  • Pointing fingers as gold sinks below $1,250
  • The anniversary of the first modern bailout… and the tarnished legacy of a “hero”
  • Americans suddenly turning tightwad… the Brits love hookers and blow too… a cautionary tale about CEO pay… and more!

  The day is young, but surely this qualifies as the tweet of the day. From investigative reporter Tim Shorrock…

Indeed, the Department of Health and Human Services kicked CGI Federal to the curb in February for making a hash of HealthCare.gov. But the Department of Defense seems unconcerned.

CGI Federal is a division of publicly traded CGI Group (GIB). While Obamacare has delivered GIB a mild hit in recent months, the firm’s overall performance since the start of the stock market rally in 2009 has crushed the S&P 500…

Meanwhile, other developments within the federal leviathan are equally bizarre… but a lot less funny.

  “WARNING: Using TrueCrypt is not secure as it may contain unfixed security issues.”

And with that announcement in a red but otherwise unassuming font, the anonymous people behind one of the most widely used computer encryption systems closed up shop on Wednesday.

“For more than a decade,” reports Ars Technica, “the open source and freely available TrueCrypt has been the program of choice of many security-minded people for encrypting sensitive files and even entire hard drives.” Its most famous user is Edward Snowden — a fact that’s fueling no shortage of rumor and speculation.

   “There are two main theories floating around, each worthy of its own movie plot,” Mike Leahy explained to us.

Mike is the online security specialist for the Laissez Faire Club — a lawyer and Certified Information Privacy Professional (CIPP/US). He’s been talking with dozens of fellow experts in the last 48 hours, trying to make sense of a nonsensical announcement.

“The most insidious theory is they got a subpoena.” That is, TrueCrypt’s developers received a National Security Letter demanding some sort of information. That’s serious stuff — if you’re the recipient of an NSL, you can’t disclose that fact to anyone unless you want to do hard time.

Shutting down the service abruptly would serve as a “warrant canary” to TrueCrypt users, much as when the encrypted-email service called Lavabit — also used by Snowden — shut down with no warning last year.

“The other theory is less insidious, but equally troubling,” Mike says: “They discovered a back door and they don’t want to release it.” In other words, the developers found some gaping vulnerability in TrueCrypt, one that’s nearly impossible to fix. Rather than tip off someone like the NSA by disclosing the bug’s existence, they simply called it a day.

“My highly unscientific poll,” says Mike after consulting with his fellow experts, “leans toward this being a canary incident.”

   So what, if anything, can you do if you’re concerned about your digital privacy? After all, Mike heartily recommended TrueCrypt here in our virtual pages back in February.

“That’s a scary question,” Mike said after we posed it. If you’ve been using TrueCrypt, the fallback is Pretty Good Privacy (PGP) — the encryption system that’s been around longer than many of us have been using computers. “It’s not as elegant as what TrueCrypt gave us, but it gets the job done.” Mike says he’s looking at other encryption solutions going forward.

Even if you don’t feel the need to encrypt your files on a regular basis, Mike says it’s all too easy to unwittingly open yourself up to the feds and to hackers… and almost as easy to take a few preventive steps. We leaned on Mike extensively for the Laissez Faire Club’s book A Man’s Right to Happiness. For instance…

  • The single biggest privacy mistake most people make every single day, opening themselves up for hackers and prying eyes… without ever realizing it. (Page 39)
  • Why logging onto your computer the way the software companies want you to log on actually exposes your computer to being hacked by NSA snoops. (Page 40)
  • The one simple and easy move you must make when you log onto your computer. This tip allows you to build castle-like walls around your emails and private browsing activity. (Page 40.)

Other sections of the book give help in building your defenses against the IRS and Obamacare. And as we’ve said for several months now, it’s only $7. If you don’t have your copy yet, we’ll ship it to your door — and cover the shipping costs — as soon as you let us know.

  The major U.S. stock indexes are flat as the proverbial holiday-shortened week draws to a close. The S&P is inching further into record territory as we write, up less than a point, at 1,921.

Gold sank below $1,250 midmorning. At last check, the bid was $1,247. Unlike gold’s previous drops this week, dollar strength can’t get any of the blame: The dollar index is off only slightly, to 80.4.

  “The principal reason,” GoldMoney’s Alasdair Macleod says of gold’s drop this week, “was the expiry of the June gold future contract on Comex, whose open interest has unwound 120,000 contracts in the last six trading sessions.”

A lot of this, Mr. Macleod says, is a function of hedge funds taking bigger positions in bonds. That is, it’s no coincidence gold tumbled this week while the price of a 10-year Treasury note rallied, its yield falling below 2.5%.

“It’s not confined to U.S. Treasuries,” he points out: “High-risk assets such as Spanish and Italian 10-year bonds now yield an incredibly low 2.81% and 2.92%, respectively. It is an open question as to how the gold price will react when these obvious anomalies are corrected.”

  The mighty American consumer snapped his wallet shut in April, according to this morning’s income-and-spend report from the Commerce Department.

Personal incomes grew 0.3%, while personal spending fell 0.1%. That reverses several months — relentlessly mocked in our virtual pages — in which Americans spent out of an increasingly empty pocket.

So-called experts — desperate for evidence the consumer will continue propping up the economy — attribute the spending drop to a pause in auto sales. But on closer inspection, that doesn’t hold up: Purchases of services fell, and so did purchases of “nondurable” goods designed to last less than three years.

This report also includes “core PCE” — the Federal Reserve’s favorite measure of inflation. It registers a 1.4% year-over-year increase. That’s the biggest in more than a year… but still well below the Federal Reserve’s 2% sweet spot. (As always, any resemblance to your own cost of living is purely coincidental.)

  Global food prices have registered their first quarterly increase since mid-2012, according to the World Bank.

Rising demand in China, drought in the United States and even the trouble in Ukraine all contributed to a 4% increase in internationally traded food prices during the first quarter of this year.

That said, global food prices remain 2% below year-ago levels and 16% below the all-time highs in August 2012.

But we’re always on alert when the trend starts moving up — especially because wheat was the biggest contributor to this increase, up 18% in a mere three months. Without a soaring price of bread in early 2011, the Arab Spring might have never happened.

   We nearly let May pass us by without noting an ignominious anniversary: Modern bailout culture got its start 30 years ago this month.

In May 1984, Continental Illinois — the nation’s seventh-largest bank, with $42 billion in assets — went bust. It became insolvent for the usual reasons — too many foolish loans to imprudent customers who didn’t have the means to pay them back.

Continental Illinois gave us the first widespread use of the term “too big to fail,” as used by Connecticut Congressmember Stewart McKinney.

Indeed, the Federal Reserve and the FDIC would not allow the bank go under. Of course, the bank’s depositors were made whole — that’s the point of FDIC deposit insurance…

   But something brand-new happened in 1984: The bank’s bondholders were also made whole.

“Basically,” G. Edward Griffin writes in his Federal Reserve history The Creature From Jekyll Island, “the government took over Continental Illinois and assumed all of its losses. Specifically, the FDIC took $4.5 billion in bad loans and paid Continental $3.5 billion for them. The difference was then made up by the infusion of $1 billion in fresh capital in the form of stock purchase.

“The bank, therefore, now had the federal government as a stockholder controlling 80% of its shares, and its bad loans had been dumped onto the taxpayer.”

Which was just how Fed chief Paul Volcker wanted it. Days after the deal was done, he defended it before Congress…

Ten years later, Continental Illinois was folded into an even more notorious too-big-to-fail — Bank of America.

Whenever Volcker shuffles off this mortal coil — he’s a vigorous 86 now — his obituaries will surely remember him as the guy who “broke the back of inflation” in the early ’80s. Even the Fed’s fiercest critics give him his due for that.

But 30 years on, we didn’t want this other part of his legacy to pass unnoticed…

   “Why should Italians have all the fun?”

That must be what the economic statisticians in Britain must be thinking with their announcement they too will include drug dealing and prostitution in GDP figures starting next year.

According to The Guardian, the wonks “have discovered these unsavory hidden-economy trades make roughly the same contribution as farming — and only slightly less than book and newspaper publishers added together.”

After tentatively crunching the numbers for 2009, the statisticians came up with some suspiciously precise figures…

  • There were 60,879 prostitutes in the U.K. that year
  • They averaged 25 clients per week
  • The average client paid £67.16 per visit — about $100.

Now the wonks will apply their handiwork to subsequent years, right up to the present. As with the Italians, the goal is to bring the GDP numbers in line with European Union standards.

And all along, we thought those bureaucrats in Brussels were sort of an inhibited bunch…

   “About CEO pay,” a reader writes, picking up on a topic earlier this week, “I remember some stock I owned, having acquired it back in the 1990s, (Cybex, originally part of Lumex.)

“When a ’98 merger with Trotter brought their management in (along with forcing a company privately held to go public), CEO John Aglialoro soon saw his pay leap 10-15% annually. For the record, J.A. is the same guy who won nationally on a TV poker-playing contest and bankrolled the failed attempt to bring Ayn Rand’s Atlas Shrugged into our movie consciousness.

“All this while the stock — previously as high as $17 per share — tanked off the market, getting delisted once, and nearly so at least two more times. Eventually, he offered a mere $2.55 per share to bring it private — a move that brought a class action lawsuit, still to be ruled upon. So much for performance pay.

“Or just look at the severance package gifted to Target’s exiting CEO, who oversaw the credit breach. I could retire on one-tenth of that. None of them is more educated than I, and I’d be willing to take over any top corporation for one-tenth of the pay their current CEOs make. My qualifications (MBA & 40 years experience) exceed many of theirs, but I’ll bet some recent college grad could do just as well. They fail to actually create wealth (only labor does that) but reap the benefits of it to excess.

“My father grew up on a farm and used to put it simply: ‘Money is a lot like manure. Piled high in one spot, it stinks. If you want it to do any good, you have to spread it around more evenly.'”

The 5: “Great CEOs, the ones who can really help a company grow, are no more common than great baseball players,” says our investment director Paul Mampilly.

“Out of thousands who try to play, only a handful make it to the big leagues. Only a few of that handful become all-stars. The rest are average or below average. The same goes for people managing billion-dollar companies. Fifty percent or more of managers are below average and are usually dangerous to shareholders. I know because I’ve seen it up close.”

A scary thought, that — entrusting your hard-earned money with the equivalent of a journeyman outfielder who has a career .252 batting average…

Have a good weekend,

Dave Gonigam
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