Speaker 1: Ye, Welcome to the Bloomberg Surveillance Podcast. I'm Tom Keene
Speaker 1: Jay Leye. We bring you insight from the best in economics, finance, investment,
Speaker 1: and international relations. Find Bloomberg Surveillance on Apple Podcasts, SoundCloud,
Speaker 1: Bloomberg dot Com, and of course on the Bloomberg. The
Speaker 1: markets are going to be a big part of the
Speaker 1: conversation today, as is a fantastic piece of reporting from
Speaker 1: our colleagues over at Bloomberg Business Week. A special shout
Speaker 1: out to Jordan Robinson and Michael Riley as they reveal
Speaker 1: how China used the smallest of chips in a hack
Speaker 1: that infiltrated some of the biggest companies in America. The
Speaker 1: attack by Chinese spies reaching almost thirty US companies by
Speaker 1: compromising America's technology supply chain. This all according to extensive
Speaker 1: intervie used with government and corporate sources. And I'm pleased
Speaker 1: to say, Tom Keane, we're gonna be talking about this
Speaker 1: a little bit later in the program, So really looking
Speaker 1: forward to doing that a little bit later right here
Speaker 1: on Bloomblock Surveillance to get to the price action and
Speaker 1: what's happening in markets. I'm also pleased to say that
Speaker 1: joining us here in New York is to buys the
Speaker 1: left of its city group, Global Markets Chief US equity strategist,
Speaker 1: Good morning to to Bias, good morning, how are you?
Speaker 1: Let's start with those yields ten years, thirty years, or
Speaker 1: breaking out what does it mean for the equity market. So, look,
Speaker 1: we've been worried about this environment for a while. The
Speaker 1: economy is strong enough for wage pressures are starting to
Speaker 1: grow and probably growth in further based on some of
Speaker 1: our analysis, So this was kind of almost in the cards. However, um,
Speaker 1: how much flexibility is there in the equity market to
Speaker 1: handle this? In our sense is that you've had a
Speaker 1: range on equity ris premium since the financial crisis of
Speaker 1: four to seven percentage points right. We're about four point
Speaker 1: four percent right now, so you have flexibility to get
Speaker 1: you to kind of about three and a half percent,
Speaker 1: offset by less risk premium because you believe the economy
Speaker 1: is growing beyond three and a half percent starts becoming
Speaker 1: more challenging on the tenure yield um, and I think
Speaker 1: that's where the pressure starts to evolve on on on valuation.
Speaker 1: The chapter of the Fed Reserve out with I think
Speaker 1: a really important common in the last twenty four hours
Speaker 1: that he thinks we're a long way away from hitting
Speaker 1: the neutral, right, But the FED, what do you think
Speaker 1: of that? Subus? So look, I wonder how much and
Speaker 1: again I'm trying to get into the motive behind saying that.
Speaker 1: How much of that is moral suation trying to prevent
Speaker 1: um the yield curve going flatter and footing, And how
Speaker 1: how much is that kind of FED speak to to
Speaker 1: force some steepening in the curve. I don't know his motive.
Speaker 1: I don't know if that is what he wanted to imply,
Speaker 1: But the FED historically has been able to utilize its
Speaker 1: language to kind of get its way in the market.
Speaker 1: If it didn't, then it can go into the market
Speaker 1: and actually use its toolbox and crowbar kind of forced
Speaker 1: the outcome. Do you care what Indian rupees doing? I mean,
Speaker 1: I know city groups, you know, got branches and bay
Speaker 1: and you're selling toasters and all that. But I mean,
Speaker 1: the day after day John and I are watching e
Speaker 1: M blow up in you know, different ways, in different forms,
Speaker 1: and it seems like we're just rationalizing the revenue stream
Speaker 1: of Amazon or Apple or the other magic stocks. Doesn't
Speaker 1: a guy like you care about the knock on effects
Speaker 1: to e M. We have to worry about. I mean,
Speaker 1: one of the things that we watched, for example, is
Speaker 1: the dollar relative to the performance of US markets versus
Speaker 1: e M. And what do you see? It's very tight
Speaker 1: over like thirty years. So anytime the dollar goes up,
Speaker 1: you tend to see outflows from emerging markets UM, and
Speaker 1: it puts meaningful pressure not just on the currencies one
Speaker 1: of the economies as well as that foreign direct investment
Speaker 1: kind of leaves in a often bumpy and an erratic way.
Speaker 1: So do I care about the rupie personally? Maybe if
Speaker 1: I'm planning a trip to the taj mahal Um. Do
Speaker 1: we worry about it? From UM economic knock on effects
Speaker 1: to the US It's fairly small for US cutty markets.
Speaker 1: It's horrible if you're sitting in in the emerging markets
Speaker 1: equity world to bus when you look at US markets
Speaker 1: in a vacuum. And what I mean by that is
Speaker 1: just focusing on domestic issues. America looks great. The DP
Speaker 1: report yesterday was solid. The non manufacturing guy Sam was fantastic,
Speaker 1: and it looks like we're set up for a decent
Speaker 1: payrolls report. As well in a vacuum things look great.
Speaker 1: When you look at things internationally, you just wonder how
Speaker 1: US markets are holding up so well to bias. So
Speaker 1: so I'm getting a lot of those questions actually, like
Speaker 1: why is the US? Yeah, so so one is the
Speaker 1: economy where we you know, keep in mind, probably sent
Speaker 1: of the SMP five revenues are US driven. If it's
Speaker 1: if it's for example, Asian sales of semi conduckers, it
Speaker 1: really isn't. Those are products that are coming back here
Speaker 1: in the form of smartphones, tablets, computers, servers, et cetera,
Speaker 1: some apparently with rice like uh, espionage units on them.
Speaker 1: But the the the economy itself is for that's one thing.
Speaker 1: Number two, technology in particularly which is on the way
Speaker 1: to the SMP five um is phenomenal in terms of demand.
Speaker 1: And then lastly we have massive buyback activity. So that's
Speaker 1: that's kind of keeping us separate from the rest of
Speaker 1: the world. Exacuity, can we do a Surveilla's clarification not
Speaker 1: a correction? Chris from New Jersey emails in and says,
Speaker 1: did Tobias mean the old Trump taj Mahal that is
Speaker 1: now the hard rock cafe in Atlantic city. I haven't
Speaker 1: been many many Exactly I want to go. You want
Speaker 1: to get back there? Okay, I just lose money. Needs
Speaker 1: to worry about the rupeat. If he wants to go
Speaker 1: to New Jersey, tell Chris actually has been replaced. Just
Speaker 1: keep that in minded New Jersey. That's why it time
Speaker 1: to email. Oh god, I think it was a different Chris.
Speaker 1: I guess, but I don't care what. Maybe you don't
Speaker 1: understanding I literally do not understand the appeal of gambling.
Speaker 1: I really don't. Well, let's let's people think what you
Speaker 1: do is gambling. I mean, come on, so let me
Speaker 1: give you so far off? Can I can? I give
Speaker 1: me two very important statistical days. Okay, um, nearly seventy
Speaker 1: eight percent at the time. If you buy equities the
Speaker 1: SMP five hundred, you will be up a year later.
Speaker 1: If you look back over fifty sixty years, if you
Speaker 1: go to a casino, there is a fifty six percent
Speaker 1: probability that you will lose money. Okay, how do you
Speaker 1: respond to the doubt chart? I have from two thousand
Speaker 1: seven that five of the thirty three stocks rather have
Speaker 1: outperformed Amazon, Visa, Nike, and there's two others. I can't
Speaker 1: remember right now, ge on the bottom clearly, but I
Speaker 1: use the SMP five. But if you don't gamble and
Speaker 1: get those five stocks, you don't get elpit, do you.
Speaker 1: But if you bought the index, the Dow Jones Index,
Speaker 1: you would have been fine. If you're trying to I
Speaker 1: think for most individuals trying to pick that wonderful stock
Speaker 1: that's gonna make you ten times your money, you're you're
Speaker 1: probably gonna lose because that probably approach. You know, I
Speaker 1: always shove around with you. I own a few penny stocks.
Speaker 1: They did didn't start out that way. Um, so all
Speaker 1: of us will make a mistake buying stocks. But but
Speaker 1: if you're buying stocks in aggregate, it's it's a winning
Speaker 1: combination over time. The statistics Aretty, thank you for so
Speaker 1: many things, but thank you for joining us this morning
Speaker 1: to bars Left City Group Global Markets chief US. Can
Speaker 1: you see that we're both you are troubled today on
Speaker 1: both of us were watching Leaves Canadians last night. We
Speaker 1: are talking about that one because in the real world,
Speaker 1: least Canadians really matters in certainly in Canada matters. And
Speaker 1: when Toronto beats Montreal, it really hurts us. Montreal or Toronto,
Speaker 1: John Farroll and Tom Keane, And in terms of the
Speaker 1: diplomacy and the international relations of our Bloomberg Business Week
Speaker 1: effort on spying by China by elements of the People's
Speaker 1: Liberation Army by placing microchips on over boards that ended
Speaker 1: up being used by thirty American corporations, and illusions occurse
Speaker 1: over to our defense and intelligence establishment. It is good
Speaker 1: to speak to the eleventh United States Ambassador to China,
Speaker 1: the gentleman from Montana, Max BACKUS Ambassador book is wonderful
Speaker 1: to have you with us up today. Many in government
Speaker 1: have known about these efforts by China for years. Bloomberg
Speaker 1: now publishes the history of this from two thousand fourteen
Speaker 1: and definitely two thousand fifteen bring us to the present
Speaker 1: right now. Is cyber attack, spying whatever you want to
Speaker 1: call it from China? Is it a growing issue or
Speaker 1: is it a stable issue that's a growing issue, Um,
Speaker 1: It's probably one of the biggest issues we have. During
Speaker 1: the time I served UM in China, I pressed the
Speaker 1: government as hard as I could to try to admit
Speaker 1: that that made me a distinction between them for security
Speaker 1: purposes and science for commercial purpose. I couldn't even get
Speaker 1: them agree to that. Finally we got the goods on
Speaker 1: them when we are able to document that one of
Speaker 1: their patriot companies, DTE was Transparent Technology against uh as
Speaker 1: a proliferation statute and that's akin to what they've been doing.
Speaker 1: We also during the OPR investigation found it. So they
Speaker 1: sold about fifty million records of the US citizens, and
Speaker 1: we had the goods on them, and they didn't admit it,
Speaker 1: of course, but they did agree that we started to
Speaker 1: sanction them, that they agreed to the security agreements with
Speaker 1: with with US and which was there's five parts to it,
Speaker 1: namely to them. So that's good to first admit it. Okay,
Speaker 1: we're spying, which just something about it. Right within this
Speaker 1: ambassador is the idea of what should be our approach.
Speaker 1: Things move slowly in the legislative body of a wor
Speaker 1: do we have time to go through a slow American
Speaker 1: process to protect our cyber technology or do we do
Speaker 1: we have to speed things up. We're gonna have to
Speaker 1: speed things up. I think this is the biggest problem
Speaker 1: we have, not just with China but frankly the world.
Speaker 1: That is, we are behind the eight ball, we Americans. Um,
Speaker 1: it's just technology that's growing so quickly, and that's good.
Speaker 1: Uh reach a point where countries are going to have
Speaker 1: to realize that they we've got to home reach some
Speaker 1: kind of agreements otherwise it's it's gonna be wild. Wise.
Speaker 1: I think we've got some problems with a line. So
Speaker 1: we'll have to apologize the technical difficulties with us this
Speaker 1: morning that there's an important interview and you could hear
Speaker 1: the heat there in the in the history that the
Speaker 1: ambassador Backus was directly involved in with z T E
Speaker 1: and z T is brought up in the store. Worry
Speaker 1: is sort of iteration one, and now this is iteration too.
Speaker 1: So I think traditionally when we think about cyber protection
Speaker 1: at cyber warfare with thinking about the software Tom And
Speaker 1: what's interesting about Bloomberg's reporting today and reporting from our
Speaker 1: colleagues at Business Week, is this is about the hardware.
Speaker 1: And of course, as everyone listening knows, a lot of
Speaker 1: this hardware is made in China, So what can you
Speaker 1: do to national that the hardware is made in But
Speaker 1: you nailed the luxury and I mentioned this on television
Speaker 1: and Kinneth Rogoff of Harvard ten years out front on this.
Speaker 1: We're addicted to the capitalism to the price theory of
Speaker 1: cheap stuff from China, whether it's you know, bow Tizer
Speaker 1: or whatever. Well, guess what. Some of this stuff is
Speaker 1: important and involves espionage and that and my question the
Speaker 1: ambassador was going to be, Okay, if we don't make
Speaker 1: it in China, where do we make it in America?
Speaker 1: Which is President Trump's theme? And you hear a thundering silence,
Speaker 1: And if and if the hardware is compromise, what can
Speaker 1: you do? Tom? You're going to check every single life
Speaker 1: fund that's produced out of China. You're going to check
Speaker 1: every single chip that has produced out of China. Yeah.
Speaker 1: I want to make clear that within the reporting and
Speaker 1: speaking with Jordan Robertson, that this is not about consumer
Speaker 1: goods and iPhones here, and I'm certainly not trying to
Speaker 1: infer that that's what this is about. What I'm saying, Tom,
Speaker 1: is that much of the hardware is produced there. So
Speaker 1: how on earth do you have some kind of cyber
Speaker 1: protection scheme, initiative policy that protects you from what has
Speaker 1: happened and what our reporting reveals. And and again, as
Speaker 1: Max Park has said, there, we've negotiated and got nowhere
Speaker 1: and sort of you really wonder where it goes. And
Speaker 1: I would suggest that all Democrats, um would give a
Speaker 1: victory lap to the president for at least identifying the
Speaker 1: urgency and immediacy. Was with Secretary Ross about this, but
Speaker 1: I think it makes it very public. It makes it
Speaker 1: very public, and it comes want to day you that
Speaker 1: we're expecting Vice President Mike pens to come. I'm glad
Speaker 1: you mentioned and layout allegations of Chinese election medaling in
Speaker 1: a harshly worded speech to expecting late today um Dan
Speaker 1: in Washington, Tom, so look out for that. One of
Speaker 1: our most popular guests over the years. Luisia Mata joins
Speaker 1: us now from Luisia Mata Technical Research. Louise, I'm just
Speaker 1: going to cut to the chase. You look at consolidation
Speaker 1: and distribution, the minute price changes that are seen in
Speaker 1: point and figure charting. Can you be long equities today?
Speaker 1: We are growing much more cautious. I think I would
Speaker 1: be taking money off the table in the groups and
Speaker 1: stocks that are underperforming and that are showing monthly momentum
Speaker 1: sales signals, and we have more and more. Give us
Speaker 1: an example of those sectors. Does it include banking? Okay, yeah,
Speaker 1: it does include the financials, utilities of course, reads, materials,
Speaker 1: industrials s flirting with the cell signals, financials and staples
Speaker 1: at this moment. And we have to see how the
Speaker 1: new consumer discretionary in the communications groups evolved, because what
Speaker 1: SMP did was not start them new with the the
Speaker 1: news the new sectors. Yeah yeah, yeah, they they encourage
Speaker 1: them and change the devices. We will see over time.
Speaker 1: In folks, I think all of you know that I'm
Speaker 1: in fully on board with point and figure charting, going
Speaker 1: back to and the I have no time function on
Speaker 1: the X axis, Louise. What everybody wants to know is
Speaker 1: can you use traditional technical analysis to benefit on a
Speaker 1: bi hole cell basis with modern stocks like Apple Computer
Speaker 1: and particularly with Amazon of course, yeah, you mean the
Speaker 1: point and figure charts And what do they say then, okay,
Speaker 1: you could use them. What do they say right now? Well,
Speaker 1: the the Apple is continuing in an uptrend just the
Speaker 1: way it is on a bar chart. There. You know
Speaker 1: they have similarities and Amazon as well, so you you're
Speaker 1: you're gonna hold those right now? Can you acquire new
Speaker 1: shares of Apple and Amazon? In particularly the idea that
Speaker 1: the market so underweight to Apple that they gotta they
Speaker 1: gotta level up by the end of the year. Well,
Speaker 1: the stock has been doing incredibly well. I mean, if
Speaker 1: you have no positions, I think you could probably nibble
Speaker 1: a little. But things are getting quite extended, and given
Speaker 1: the fact that we're starting to see some underlying um
Speaker 1: starting to see over the past months of this year,
Speaker 1: we've been seeing negative divergences in new highs, new lows,
Speaker 1: and volume momentum and stocks above the two hundred day
Speaker 1: moving averages which now for the New York Stock Exchange
Speaker 1: has broken below and is a clear warning for the
Speaker 1: overall market. So the divergences have been going on for
Speaker 1: several years, so we're getting closer and closer. What what
Speaker 1: would happen next? Which would concern us would be uh
Speaker 1: monthly momentum sell signals on our industries. The European industries
Speaker 1: are all on monthly sales. Most of the Asian that
Speaker 1: we follow are, with the exception of Japan and India.
Speaker 1: Luisia Matta. In the last twenty four hours, it's been
Speaker 1: amazing split between large cap and small cap with small
Speaker 1: kept John correct me small cap self right smoke cap
Speaker 1: movie sound What do you mean, this is right in
Speaker 1: the heart of Luisia Mata's research. Note, why do you
Speaker 1: parse small, mid and large cap. Well, the small in
Speaker 1: the meter starting to roll over. They've been under performing,
Speaker 1: but now the prices are actually starting to roll over,
Speaker 1: while the down the SMP have been inching higher. We
Speaker 1: still have upward potential in the down in the SMP.
Speaker 1: But I think one has to be growingly cautious than
Speaker 1: watching one sports individual stocks in the portfolios, because a
Speaker 1: lot of individual stocks around cell signals. Also, he's told
Speaker 1: to me about the sound signals you see abroad and
Speaker 1: the fact that you don't see that trend in the
Speaker 1: United States, and how unique that difference is. Well, you've
Speaker 1: got sell signals on the foot, see the CAC, the docks,
Speaker 1: the Italian market, Spain and Switzerland. Uh so there there
Speaker 1: clearly has been a pattern of distribution in those countries.
Speaker 1: Whether or not they can grip at some point and
Speaker 1: turn up is questionable with those monthly cell signals in place.
Speaker 1: But the US is still in the lead. And uh
Speaker 1: of course the interest rate perspective is also intriguing. If
Speaker 1: you're interested covering that, well, we know we do we
Speaker 1: cover into come on, Louise, we cover interest rates a
Speaker 1: little bit. Do we have a true breakout on tenure
Speaker 1: or thirty year or they within the Yamada range absolutely breakout.
Speaker 1: We've we've been suggesting that a little tick above three
Speaker 1: for the tenure was a breakout. You have eight to
Speaker 1: ten year basing that's taken place in these duh in
Speaker 1: these um treasuries also for the two year. And we
Speaker 1: know that reversals from falling rate cycles to rising rate
Speaker 1: tacles take time because they've all experienced deflationary pressures. Historically
Speaker 1: it's been two to fourteen years, and here we are
Speaker 1: eight to ten years, and I think it's a very
Speaker 1: valid change. We're now in a new rising rate cycle. So, Louise,
Speaker 1: I want to watch you about this because so many
Speaker 1: people have a different level and they plot the thirty
Speaker 1: year bull market in treasuries and they try and identify
Speaker 1: the point where we have a real breakout, where the
Speaker 1: bull market is over. Do you have that point in mind?
Speaker 1: And how far through it are we? It was three
Speaker 1: three percent has been the the threshold for the thirty
Speaker 1: and for the ten and you're clearly through it. I
Speaker 1: think you have our report from this month and there's
Speaker 1: a very interesting study showing that we've now put in
Speaker 1: the first lower lower in price, higher low in field,
Speaker 1: and that signifies to us the point which the trend
Speaker 1: has change. John, we gotta be careful because lose your
Speaker 1: model will hang up on us. If that's the case.
Speaker 1: And if you take and you're gonna love this, John,
Speaker 1: if you take a three box horizontal account and you
Speaker 1: get to some high yield of Louisia Mada two yields
Speaker 1: finally compete with dividends. Forget about Louisia model Louise if
Speaker 1: you're a fundamental person, is higher yields finally going to
Speaker 1: compete with dividend and the assumption of dividend growth. Well,
Speaker 1: I certainly think at this point that a conservative investor
Speaker 1: could move into a two year note, if not a
Speaker 1: one year bill where you're getting two point five, and
Speaker 1: compare that to some of the yields, and then think
Speaker 1: about whether or not your stockings having difficulties. I would
Speaker 1: rather move to the safety of a short end. You
Speaker 1: don't want to go long end when you're moving into
Speaker 1: a rising interest rate cycle. You don't want the ten yere,
Speaker 1: you don't want the thirty year because if you go
Speaker 1: with a one year or a two year and they come,
Speaker 1: do you can roll that money into a higher yield
Speaker 1: at that point in time in tense Consluisia Mata thumb
Speaker 1: up on gold or down down? Okay, there you go, Okay,
Speaker 1: neutral best but down that's fair. Luisa Manta, Thank you
Speaker 1: so much. Louisa Manta Technical service. We're really just brilliant.
Speaker 1: Were brilliant. No, we protect the copyright John of our notes.
Speaker 1: But she's like old school, like the old trends distribution.
Speaker 1: She said, an eight year base in the tenure yield.
Speaker 1: Spend the whole day talking about fundamentals. It's nice. John
Speaker 1: Farrell and Tom came from her studios in New York.
Speaker 1: We said, good morning FM Washington, where Jordan Robertson is
Speaker 1: taking a victory lap with Michael Reiley. He is an
Speaker 1: author of a forever changing article on cyber attacks America
Speaker 1: in our naivete of the Chinese Jordan. There's about eight
Speaker 1: ways to go here. John Farrell has three or four
Speaker 1: of them's own. I want to focus on one thing.
Speaker 1: You have a pregnant sentence early in your Business Week
Speaker 1: article where you basically say operatives of part of the
Speaker 1: People's Liberation Army. The p l A to me is
Speaker 1: in a museum display up at the met in ninety eight,
Speaker 1: like Red Guardish and all that. Obviously I'm wrong. Who
Speaker 1: are operatives of the People's Liberation Army? Sure as uh yeah,
Speaker 1: as the story shows, you know, U S Intelligence agencies
Speaker 1: have attributed this attack, the hardware modification attack, to a
Speaker 1: unit of the p l A that specializes in hardware modification.
Speaker 1: And you know the n s A. Here in the
Speaker 1: U S. We we have units that do these kinds
Speaker 1: of things too, but the differences in China, you know,
Speaker 1: you have the manufacturing base for the for the worldwide
Speaker 1: you know, the global computer supply chain, computer equipment and
Speaker 1: supply chain. So from what we understand, this is a
Speaker 1: very specialized unit of the p l A. Uh that,
Speaker 1: in addition to doing cyber you know, having cyber capabilities, uh,
Speaker 1: you know, specializes in manipulating hardware. So the cyber hardware synthesis,
Speaker 1: I mean, other than the fact that John Farrell looks
Speaker 1: a lot like Daniel Craig, I mean it's out of
Speaker 1: a Bond movie or it's what's his name, Keno Reeves
Speaker 1: as I pronounced it right, the guy in the matrix question.
Speaker 1: But come on, it's science fiction. Are these guys in uniform?
Speaker 1: Are they peeky engineers who went where at Caltech? But
Speaker 1: I want to last you about that, just how difficult
Speaker 1: it is to access the manufacturing process of some of
Speaker 1: these goods, and at one point they infiltrate it that
Speaker 1: process to get this chip into the hardware. Yeah. One
Speaker 1: of the things that we've encountered in reporting this story
Speaker 1: is people here are reporting, they say, why would you
Speaker 1: go to those lengths And the answer is if you're China. Well,
Speaker 1: the answer is because you can. You know, if you're
Speaker 1: China and you're trying to infiltrate highly sensitive, highly secured
Speaker 1: government or corporate networks, you know, that's really the only
Speaker 1: justification for going to these lengths. I mean, just to
Speaker 1: be clear, the Chinese government has no incentive to do this.
Speaker 1: For your mass market consumer devices, they would get caught,
Speaker 1: it wouldn't be targeted. But if you're trying to infiltrate
Speaker 1: highly sensitive, highly secure facilities, that's really the only thing
Speaker 1: that justifies the time and effort. To one example in
Speaker 1: Lockeed Martin, I believe is not in your reporting, correct me?
Speaker 1: If I'm wrong to go to the lockeed Martin website
Speaker 1: and John, they've got a thing called the F thirty
Speaker 1: five Lightning Do which is a jet. So if you
Speaker 1: got a little microchip on a board at any given company, John,
Speaker 1: aren't you going to get the blueprints the radar of
Speaker 1: the electronics that we're talking about access? They've got the acts, Jordan,
Speaker 1: they've got the access. Just in terms of a story
Speaker 1: and how this plays out, what did they do with
Speaker 1: that access? Do we have any idea what they did
Speaker 1: with that access? Sure? Yeah, well we know what they
Speaker 1: wanted to clarify. We know what they wanted to do
Speaker 1: with the access from some of the government sources we
Speaker 1: talked to. And the idea is this. You know, one
Speaker 1: of the things we encounter in this reporting is people say,
Speaker 1: why would you land on a commodity server? Super Micro
Speaker 1: makes ordinary blade servers, the pizza box sized servers that
Speaker 1: just processed data their commodities. Why would you want to
Speaker 1: land on those avers? And we've had intelligence folks tell
Speaker 1: us a server is actually the perfect staging area for reconnaissance, probing,
Speaker 1: uh and you know, and evaluating a network because because
Speaker 1: it's a commodity because nobody really looks there for a
Speaker 1: sophisticated attack. They look at the high value targets like
Speaker 1: a network switch and network we're out of the places
Speaker 1: that hackers really love to be. So the ideas this
Speaker 1: is a staging area to perform reconnaissance on target networks,
Speaker 1: to have kind of a stealth access point in and out.
Speaker 1: You know, especially if it's an Internet data center like
Speaker 1: Apple and Amazon run tons and tons of traffic are
Speaker 1: being pumped through those machines every every man of the day,
Speaker 1: so you can hide in that traffic. And the idea
Speaker 1: is you've got a backdoor. You've got multiple backdoors. You've
Speaker 1: gotten you know, dozens or potentially more ways into these networks.
Speaker 1: And that's that's not a it's it's a means to
Speaker 1: an end. It's it's a staging area. It's the first
Speaker 1: stage of the attack and the goal then is to
Speaker 1: get to more sensitive networks and to create a pathway
Speaker 1: into you know, places where sensitive corporate I p. S
Speaker 1: Is is stored, uh you know, or where there are
Speaker 1: you know, Elemental, one of the companies in the story
Speaker 1: that that found these chips. You know, they they their
Speaker 1: equipment helps run the CIA drone program they process and
Speaker 1: this is on their website. They process real time drone
Speaker 1: footage for the CIA and the Defense Department. Like you know,
Speaker 1: if you're China, you can land on one of those
Speaker 1: servers and get any little bit of data out of them.
Speaker 1: We don't have evidence that they landed on the CIA
Speaker 1: program servers, but that is a supplier. Elemental is a
Speaker 1: supplier to that program. That's a jackpot. That's the holy grail.
Speaker 1: It's worth taking the road. It's a fantastic piece of
Speaker 1: reporting that understand took you more than a year to
Speaker 1: put together. For our listeners that haven't been following this
Speaker 1: through the morning, there's some pretty strong denounced by the
Speaker 1: companies involved. Amazon, Apple, You've been very transparent about it,
Speaker 1: You've published those denials for our listeners that are skeptical.
Speaker 1: What do you say about the sourcing of your story
Speaker 1: and why you did publish it even with those really
Speaker 1: strong denials. Sure, thanks for the questions, A very good questions,
Speaker 1: very relevant. Yeah, Apple is the principal actors in our story. Apple, Amazon,
Speaker 1: super Micro, They've all denied the reporting very strongly. Now,
Speaker 1: as journalists, as Bloomber journalists, we take that very seriously,
Speaker 1: We've you know, circled back the sources. We've recircle back
Speaker 1: with sources. We've gotten more sources. And the reason we
Speaker 1: feel comfortable publishing this story is this is about a
Speaker 1: constellation of sources throughout the U S. Government and inside
Speaker 1: those victim companies, very senior insiders in those victim companies,
Speaker 1: Amazon and Apple both as well as across the US government,
Speaker 1: that corroborate this information. So we can't tell why a
Speaker 1: company chooses to deny, what the thinking behind it is.
Speaker 1: But you know, all we can do is present them
Speaker 1: with our facts and if they choose to deny, we
Speaker 1: waited for ponderance of evidence, and seventeen senior, highly placed
Speaker 1: sources throughout the government and these companies very highly, highly incredible,
Speaker 1: highly corroborated. Jordan Robertson regards to Michael Riley, congratulations. Look
Speaker 1: for a cover with a finger with a little baby
Speaker 1: microchip on it. It is from China. This is Bloomberg.
Speaker 1: One of our themes today, the journalism of Bloomberg Business
Speaker 1: Week of Jordan Robertson and Michael O'Reilly and their important
Speaker 1: story of other people's liberation. Army of China attached micro
Speaker 1: chips to motherboards on servers for thirty American corporations. With
Speaker 1: all of the illusions over to the Pentagon, the CIA,
Speaker 1: and our defense establishment, there is no one Pim Fox
Speaker 1: and I would rather speak to than Adam Siegel. He
Speaker 1: is with the Council and Foreign Relations. It's his cottage industry.
Speaker 1: The definitive book is The Hecked World Order. Adam thrilled
Speaker 1: to have you with us on this important day. I'm
Speaker 1: sure Jordan Robertson and Michael Reilly agree with me. Buried
Speaker 1: in your book. Traditional war is in military jargon primarily connectic.
Speaker 1: The point is to kill people and blow things up,
Speaker 1: while cyber attacks are often framed as part of cyber
Speaker 1: wars by the media. You cannot hold territory. What is
Speaker 1: the territory? Know? Once? Well, they are trying to gain
Speaker 1: information for competitive advantage and for political and military advantage,
Speaker 1: and so by being in hardware and software, they have
Speaker 1: gained access to all of that information. Do they have
Speaker 1: blueprints from ut X just to pick a company? Well,
Speaker 1: I don't. I think we're all gonna We're gonna question
Speaker 1: all of that now. Um. I mean, the the importance
Speaker 1: of the story is that people have been talking about
Speaker 1: the vulnerability of supply chain for a long time UM,
Speaker 1: and now here is just clear evidence that it seems
Speaker 1: to be happening. So any US tech company that has
Speaker 1: its supply chain in China, which is almost all of them,
Speaker 1: we're gonna have to seriously question if the Chinese have
Speaker 1: gained access to Adam Siegel, as the author of the
Speaker 1: Hacked World Order, how nations fight, trade, maneuver, and manipulate
Speaker 1: in the digital age. Can you draw an analogy between
Speaker 1: the use of the Internet and the u of the
Speaker 1: high seas in previous centuries. Well, I think for both
Speaker 1: there was a period when they were completely open to
Speaker 1: piracy and thest um and nation states often used privateers
Speaker 1: or pirates to pursue their goals. And China has certainly
Speaker 1: taken advantage of the fact that there are no international
Speaker 1: rules for cyber um and that you can use the
Speaker 1: People's Liberation Army or the Ministry of State Security, and
Speaker 1: they can often use criminal or underground hackers and and
Speaker 1: have possible deniability. So we are in a similar age
Speaker 1: where it has been very hard to control UM and
Speaker 1: where people have thought about cyberspace as a kind of
Speaker 1: a commons like the ocean, but it's one where there's
Speaker 1: a huge amount of conflict. UM that defines the space.
Speaker 1: You've written about how the government and the private sector
Speaker 1: need to enhance their current defenses, for example, two factor
Speaker 1: authorization to log into different systems, also to things such
Speaker 1: as absolute secure communications. Can we ever get there? Well,
Speaker 1: it's been slow going, UM, And you can see in
Speaker 1: the Bloomberg reporting UM that the private sector did cooperate
Speaker 1: in some cases with the federal government in helping unraveled
Speaker 1: this UM spy trail, but in other cases UM didn't
Speaker 1: share as much information and has kind of denied the accusation.
Speaker 1: So there's still different incentives in place, UM, and we
Speaker 1: certainly need to move faster to get the two sides
Speaker 1: to work to work better together, Adam. Within the reporting
Speaker 1: UH that Bloomberg did on this, and I'm going to
Speaker 1: assume to a pro like you, this is not new news.
Speaker 1: What exactly did the story confirm within the visibility of
Speaker 1: going back three and four years to the Obama administration
Speaker 1: and the Trump administration, the length of time of all
Speaker 1: this to a guy like you when you saw that article,
Speaker 1: what was new? Well, just the fact that we now
Speaker 1: can spit point to a specific case, a specific company
Speaker 1: and a and the and the actual chip that was
Speaker 1: doing the buying. Uh. As you said, the people in
Speaker 1: the cybersecurity community have been warning about this threat for
Speaker 1: a long time, but there were just no public examples.
Speaker 1: They are all existed in the world of classification or
Speaker 1: intelligence briefings. So to have this out in the open
Speaker 1: is just a massive change and will really shape the
Speaker 1: discussion about is it a good change? Is to get
Speaker 1: to the point, is the Pentagon having a good morning?
Speaker 1: I think they are. I think the problem is going
Speaker 1: to be for everyone is how you deal with the
Speaker 1: fallout because as the as the article rightfully raises, the
Speaker 1: question is going to be, what's going to happen to
Speaker 1: the U S tech industry because the supply chains are
Speaker 1: so dependent on China uh um and um. There's you know,
Speaker 1: the solution seems to be to remove the supply chain
Speaker 1: from China, but that that's going to be incredibly expensive
Speaker 1: and it's not clear it's going to be technically possible.
Speaker 1: Adam Siegel is the United States perceived as an exceptionally
Speaker 1: aggressive adversary when it comes to cyberspace. I think a
Speaker 1: number of countries certainly see that. And you know, after
Speaker 1: this note in Revelations, the revelations of the Contractor Edwards
Speaker 1: note in you know, certain types of behaviors of the
Speaker 1: US were shown to the rest of the world. China
Speaker 1: in particular took notice of that um and began to
Speaker 1: think about both um, what what it could do to
Speaker 1: become more secure from the US and then also you know,
Speaker 1: put ideas in its head about what type of operations
Speaker 1: it would like to conduct as well. Do you believe
Speaker 1: that countries that we believe to be friendly to the
Speaker 1: United States conduct cyber defense or cyber attack efforts against
Speaker 1: the United States, both private and public? Uh? They do? Uh?
Speaker 1: I mean, if you look at the rip board from
Speaker 1: the Office of Kunter Intelligence, they name a number of
Speaker 1: close to US allies and friends, including South Korea, France,
Speaker 1: and Israel is conducting cyber espionage against the United States. Uh.
Speaker 1: Many United States does the stand point honestly, it also
Speaker 1: spies on its spread now, so so this is important.
Speaker 1: Do we are we putting microchips on motherboards on servers
Speaker 1: of other countries? Have? Yeah? I mean the study revelations
Speaker 1: and as the report at the Bloomberg Reporting notes that
Speaker 1: the US prefers to interdict the product along the way
Speaker 1: UM and and insert something then so getting a specific
Speaker 1: server motherboard, not in the Chinese case of UM putting
Speaker 1: it in you know, many devices and hoping that it
Speaker 1: ends up into a specific supply chain. Speak of you
Speaker 1: can about the US Department of Defense Defense Security Service.
Speaker 1: What is the d s S do? Uh? It's to
Speaker 1: help defend and respond to attacks on military networks. UM
Speaker 1: and so it is working with Fibric Command and the
Speaker 1: National Security Agency UM and reaching out to the private sector,
Speaker 1: in particular the defense industry base to help them improve
Speaker 1: their security NETMA. Adam, thank you so much. Just thrilled
Speaker 1: to finish out our coverage today and surveillance uh and
Speaker 1: speak of you, Adam Single Folks is with the Council
Speaker 1: on Foreign Relations and he has just simply build up
Speaker 1: a franchise as a director of Digital and cybers based
Speaker 1: Policy at CFR. And again, Pim, the book, uh, you
Speaker 1: know when it came out was more than a splash
Speaker 1: the hacked world order. Thanks for listening to the Bloomberg
Speaker 1: Surveillance Pie podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud,
Speaker 1: or whichever podcast platform you prefer. I'm on Twitter at
Speaker 1: Tom Keene before the podcast. You can always catch us worldwide.
Speaker 1: I'm Bloomberg Radio