The Contrarian

“In the investment markets, what everyone knows is usually not worth knowing.”

The Spy Game And Privacy

Here is an excerpt from an article from our friend, John Mauldin, about how countries try to spy on each other. This affects US investors more than you might think. (Our comments are at the bottom.)

“Buy American, Get Spied On”

The equipment that moves and processes our data is hitting border checks, too.

In 2014, journalist Glenn Greenwald set off Silicon Valley alarm bells with some photos from Snowden’s NSA data trove. Taken from a 2010 NSA internal newsletter, the images showed NSA workers intercepting product shipments of networking giant Cisco (CSCO). They opened the boxes, implanted spyware, and then sent them on to customers. No one ever knew a thing.

Cisco executives freaked out. CEO John Chambers fired off a letter to President Obama, saying:

We simply cannot operate this way; our customers trust us to be able to deliver to their doorsteps products that meet the highest standards of integrity and security… We understand the real and significant threats that exist in this world, but we must also respect the industry’s relationship of trust with our customers.

It was a nice try, but too late. Instead of respecting Cisco’s hard-won customer loyalty, the US government exploited it without even asking permission—and sure enough, Cisco’s sales to emerging-market countries plunged that quarter.

It got worse, too.

A few months later, Chinese authorities ordered government agencies, banks, and state-owned enterprises to begin purging foreign computer gear and replace it with Chinese-made alternatives.

More recently, China has been demanding foreign companies accept “security reviews” that critics say are just attempts to swipe US technology for Chinese firms.

Washington has its own national security review process for foreign companies that want to buy US assets. It has blocked transactions with Chinese tech companies like Huawei, which of course cried foul.

What is all this if not a secret trade war?

Technology buyers increasingly react to these hassles and fears by preferring locally made equipment, even when their governments don’t force them to. That’s bad news if you are a tech company with global aspirations.

While President Trump probably can’t solve these problems, he could potentially make them worse.

For example, he’s been talking about forcing Apple (AAPL) to start making its iPhones in US factories. He also said the government should make Apple decrypt a phone belonging to the dead San Bernardino terrorists.

Trump ally Sen. Richard Burr (R-NC), who just won reelection, tried last year to pass a bill that would have forced US tech companies to give the government “backdoor” access to encrypted memory. It will likely pass if he tries again this year.

The tech industry fiercely opposes weakening encryption, arguing it makes everyone’s data vulnerable to hackers and give foreign buyers another reason to avoid US products.

American tech companies dominate the world because their products work anywhere and anyone can use them. The developing cyber trade war gives a leg up to foreign competitors.

If you own any tech stocks whose growth plans include customers outside the US, you might want to review their valuation.

Don’t assume borders will always be as open to trade as they are now. The gates are closing fast.

Our comment:  The spy game is complicated. There is always the trade off between security and privacy, except that internationally, the business repercussions of spying can be very damaging. Imagine if Apple were forced to provide a ‘backdoor’ into the iPhone by the US government! International sales would plummet.

We once ordered a laptop from a major US company with special configurations. The laptop was shipped directly from their Shanghai manufacturing facility. We were surprised, and skeptical. The computer was full of malware and perhaps spyware. The hard drive was always working, even when the computer wasn’t being used.

At a conference I mentioned that to a top cybersecurity expert from the NSA. He said that it is much better to buy from a major US retailer, and not direct. He suggested that in China, when they see a direct shipment to a company in the US, it gets “special handling” in the last phases of installing software. He was aware of the problem.

Cyber-Espionage will only worsen. The important question for Washington leadership is whether to spend tens of billions of dollars per year and the incredible computer resources of the US spy agencies for spying on all Americans, or if those resources are better used for preventing threats from abroad.