Thursday, August 07, 2014 - Surveillance Will Continue Until the Paranoia Stops

Surveillance Will Continue Until the Paranoia Stops
by Sinclair Noe

DOW – 75 = 16,368
SPX – 10 = 1909
NAS – 20 = 4334
10 YR YLD - .05 = 2.42%
OIL + .71 = 97.63
GOLD + 7.10 = 1314.00
SILV - .06 = 20.05

Normally, at least for the past 5 years, any dip has been seen as a buying opportunity. Lately, investors see a dip as reason to sell and ask questions later.

The Bank of England holds UK interest rates at a record low of 0.5% for another month. And the European Central Bank holds interest rates at 0.15% and announced they would keep rates low for an extended period of time. ECB President Mario Draghi warned there would be a "continued moderate and uneven recovery" in the eurozone. The annual inflation rate in the 18 countries of the eurozone was 0.4 percent in July, down from 0.5 percent in June; not quite deflation, but not headed in the right direction. Italy just announced its second consecutive quarter of negative GDP; which is the basic definition of a recession. Meanwhile, the website of the ECB has been hacked, and the hacker reportedly contacted the ECB and demanded a ransom for the stolen data.

The New York Times reported yesterday that a Russian crime ring had hacked more than a billion internet passwords, maybe more than 4 billion. It’s being called the biggest hack in history; which may or may not be accurate. Russian hackers are just a small part of the hacking world, about 2%. The major global hackers are Indonesia, China, the US, Taiwan, Turkey, and India. And while Russia may not constitute the same volume as other hackers, they make up for it in audacity; for example, the breach of the Target retail stores. And the recent tensions and sanctions between Russia and the US probably mean there will be no coordinated effort to crack down on international hacking. Of course, it might be argued that for true audacity, nobody can touch the NSA.

How dangerous is this hack? Hard to say. We still don’t know which websites were breached. We still don’t know how the hacked data will be misused. And we are being advised that the best thing to do is to change your password on various sites you use; which isn’t that difficult. There are, of course, companies that you can pay to provide cyber protection; coincidentally, these same companies are the ones that alert us to cyber problems; and I have a nagging suspicion some of them might actually create the problems in the first place. What this really does is to raise awareness that data hackers can collect almost anything, and digital security has been a weak spot in technological progress.

Perhaps braced by Moore’s Law, technology marches on; the journal Science reports that IBM researchers have developed a new computer chip they call TrueNorth.  The new chip was “designed to approximate the structure and function of the brain in silicon”, plus it is power efficient. The chip contains 5.4 billion transistors, yet draws just 70 milliwatts of power. By contrast, modern Intel processors in today’s personal computers and data centers may have 1.4 billion transistors and consume far more power, about 35 to 140 watts. The new chip weaves together all those transistors into an on-chip network of 4,096 neurosynaptic cores, producing the equivalent of 256 synapses. IBM has also tethered 16 of  these chips together in four four-by-four arrays, which collectively offer the equivalent of 16 million neurons and 4 billion synapses, showing that the design can be easily scaled up for larger implementations.

Think of the synapses as memory, and the neurons are the processor; working together they provide fairly complex pattern recognition, and what might be described as sensing capabilities. Right now, the chip is not real fast, but it can be strung together, and on a per watt basis, it really starts to fly. The low power consumption opens up a world of possible uses. This might be the chip that powers the internet of things, embedded in all sorts of devices and possibly revolutionizing mobile devices.

The big question is whether the chips can learn? Not yet, however IBM has already tested the chip’s ability to drive common artificial intelligence tasks, including recognizing images; TrueNorth was able to recognize things like people, cyclists, cars, buses, and trucks with about 80% accuracy. Keep in mind that this is a new chip, still in its early stages of development.  IBM is still investigating how to commercialize this processor and has made no commitments to either manufacture the chip itself or license the design out to others.

The problem with the idea of having even more devices than your smartphone and tablet gathering information for your convenience, of course, is the many ways all that data can be used against you. Traditionally, we think of the government as the invader of privacy, but as capabilities change, we see private corporations getting into the act. Last year the Wall Street Journal reported on new facial recognition technology; police could use an iPhone to take a photo, and then cross check the face in a criminal database; sounds good in the battle against terrorism, but the company that makes the technology wasn’t just considering sales to law enforcement, but also to the health care and financial industries. Yea, I don’t know exactly what those applications might be but I don’t think I like it.

Are health care companies going to start sensing every drop of sweat, every minute we work out, every time we puff a cigarette or sip a cocktail? Maybe we won’t even have to bother going to the doctor anymore. And what about the health insurance companies? Financial engineers believe they can pretty much put a price on anything. So what is your freedom worth? You need air, water, food, and relationships to survive. You want to go shopping, to the movies, to see friends. You have kids, romantic attachments, familial obligations. You like being able to travel, to explore, to watch TV. You need medical care. What are each of these worth? It’s a question that analysts are thinking about.

Or how about the school districts in Houston that require students to wear electronic tagging badges to improve security and increase attendance rates; the same electronic tagging badges formerly used to keep track of cattle.

The “Internet of Things” is probably the next Big Thing. How big? ABI Research estimates that over 30 billion devices will be connected to the Internet of Things by 2020; Gartner puts the number at 26 billion – not including 7.3 billion PCs, tablets, and smartphones. That’s a lot of internet-connected things, considering that there are “only” a little over 7 billion people on this planet, and many of those people are not connected to the internet, much less to electricity. And as technology increases and prices drop, in accordance with Moore’s Law, it opens up the possibility of connecting almost everything from the simple to the complex, and not only connecting, but sensing, monitoring, and controlling almost every facet of your work, home, and private life.

And then that brings us back to the hackers. How secure would all those embedded devices be in a world full of such things. You don’t need to break a code, it would be easier than ever to hack into everything you do, or think about doing. Don’t worry, I’m sure it will all work out fine, but the surveillance will continue until you stop being paranoid.

Some things never change. Bank of America is the latest big bank to work a deal with the Department of Justice. We’re still waiting for an official announcement but it looks like BofA has agreed to a $16 billion settlement for its role in the sale of toxic mortgage securities. The deal is reportedly for about $9 billion in cash and more than $7 billion in soft-dollar relief to consumers; things like loan mods or refi’s which they are supposed to be doing anyway; and this could still be a sticking point in the deal. The two sides continue to hammer out details and are still negotiating a statement of facts. For example, will BofA be forced to admit wrongdoing, and if so, will they actually describe what they did and who did it when they broke the law. Will they be able to deduct the fine from their taxes, thus sloughing off the burden onto taxpayers?

If or when the record deal goes through, Bank of America will have paid more than $50 billion in penalties and consumer relief in deals with government agencies, not including private investors, after acquiring subprime giant Countrywide and investment firm Merrill Lynch at the height of the crisis. And that raises the biggest question of all: how is it possible to cheat so many people out of so many billions without anybody actually breaking a law?

There is an interesting side case that is important to understand the BofA settlement. The bank had been low-balling the DOJ, offering to settle for maybe $3 billion, until last week, when Judge Jed Rakoff a federal judge in Manhattan ordered the bank to pay nearly $1.3 billion for selling 17,600 loans, many of which were defective. Bank of America had previously lost that case, which involved its Countrywide Financial unit, at a jury trial. Turns out, that going to trial was a very, very bad idea for BofA, and when Rakoff issued his ruling, the bank had no negotiating leverage in this case. The Department of Justice started preparing a suit to take to trial, and Bank of America returned to the negotiating table. The case before Judge Rakoff dealt with a Countrywide loan program known as the Hustle, which represented only a small fraction of the firm’s mortgage portfolio, meaning that penalties in cases dealing with larger programs could skyrocket.

Thursday, July 10, 2014 - If It’s Not One Thing…

If It’s Not One Thing…
by Sinclair Noe

DOW – 70 – 16,915
SPX – 8 = 1964
NAS – 22 = 4396
10 YR YLD - .01 = 2.53%
OIL + .59 = 102.88
GOLD + 8.70 = 1336.30
SILV + .32 = 21.52

We start today with the hottest stock in the world: CYNK Technology, ticker CYNK.  It is a one person company, which has something to do with a website, with headquarters in Belize, maybe. There is no indication of revenue, possibly about a million in losses. It had been trading for a couple of pennies, and then for no apparent reason it started trading higher. After closing at 6 cents on May 15 it began its surge with a 3,650% jump to $2.25 on June 17. The stock climbed as much as 49% to $21.95 earlier today in over-the-counter trading on volume of more than 380,000 shares before erasing its gain to close down 5.5% to $13.90, and a market cap of a little more than $4 billion. How and why did this happen? Nobody seems to have an answer, but I think it would be a very, very bad idea to do anything with this stock, just to be clear.

Se nao e uma coisa e outra coisa.

Which is Portuguese for “if it’s not one thing, it’s another thing.”

I’m sure somebody in Lisbon was fully aware of what was going on, and they were waving their arms and screaming about the bank that was ready to implode; and nobody paid any attention because there was so much else happening around the world. Iraq is fractured, bombs are flying in Israel, Germany is expelling a US spy, the Italian economy looks wobbly, Libya, Ukraine, Nigeria, Thailand, China. Pick a global hot spot, pick ten global hotspots, and I bet Portugal is not on the list.

Here’s the story: Espirito Santo International is a big conglomerate in Portugal; they missed a payment on some short-term debt this week. So, a couple of subsidiaries got clobbered, Espirito Santo Financial Group shares down 9%, and Banco Espirito Santo shares down 17%. Trading was halted.  The credit rating agency, Moody’s, cut the corporate credit rating to junk status, which is basically closing the barn gate after the cow gets out.

While I make no claim to any particular knowledge of the Portuguese banking system, the consensus is that this problem should not create a meltdown scenario; however, there has been a singe factor. Borrowing costs for Greece, Spain, and Italy bounced a bit higher. Again, this is not earth shaking, but it did cause a brief flash of realization that the banking problems of the past few years have not been corrected.

A couple of years ago the European Central Bank developed a plan for dealing with sovereign debt crises, the OMT or Outright Monetary Transactions program, but it has never been used and it probably wouldn’t apply even if the situation in Portugal started to create a meltdown scenario. So the fear out of Portugal is something called the “doom loop”; that’s the cycle in which weak banks lean on governments for support, draining public finances, which in turn drags down the banks with them.

A couple of years ago,ECB President Mario Draghi bought some time when he declared the central bank would do “whatever it takes”, and then they did nothing. So it was like a whiff of smoke that reminds you that never bought fire extinguishers, even after that little explosion in 2008, and the Greece fire in 2011.

And so, European stocks took a hit today, and that spread over to Wall Street, where the Dow Industrials started the day with a 180 point dip, until traders remembered – it’s Portugal. And then they decided that a little pullback following a 6 week rally was to be expected and Banco Espirito Santo is nothing to fear, even if you don’t have a fire extinguisher.

So, with the long-term memory of a dog chasing a squirrel, we move on to our next topic. After all, we live in a mobile-first and cloud-first world. So says Satya Nadella, the CEO of Microsoft; no he’s not the guy trying to buy the LA Clippers, he’s the guy who replaced Steve Ballmer. Nadella has sent out a really long email to all Microsoft employees outlining his vision for Microsoft. Over the years, Microsoft made a very large amount of money serving the PC world. Its Windows operating system and Office software generated the vast majority of its sales and profits, but now the personal computer is going the way of the typewriter. Microsoft used to talk about “a computer on every desk and in every home,” a vision it clearly succeeded in delivering. But what do you do when you’ve delivered that vision?

So Nadella writes: “Computing is ubiquitous and experiences span devices and exhibit ambient intelligence. Billions of sensors, screens and devices – in conference rooms, living rooms, cities, cars, phones, PCs – are forming a vast network and streams of data that simply disappear into the background of our lives. This computing power will digitize nearly everything around us and will derive insights from all of the data being generated by interactions among people and between people and machines. We are moving from a world where computing power was scarce to a place where it now is almost limitless, and where the true scarce commodity is increasingly human attention.”

There are a couple of interesting phrases in the mission statement from Nadella; he writes, “computing is ubiquitous” and also “ambient intelligence”. The idea that computers are ubiquitous is fairly easy to understand; just look around you; you probably have a smart phone close at hand; if you are in an office, you still have PCs, and don’t forget the computers in the printers and telephones, and thermostat, and electric meter. If you are driving right now, your car is a computing marvel. And if you are at home, check out the computer in your refrigerator, and dishwasher, and a dozen other gadgets and appliances. Another name for ubiquitous computing is the “internet of things”.

And the idea here is to connect machine to machine, and machine to human, and then human to human. We’ve been talking about that for a long time. The computers would be embedded in almost everything and everything would communicate seamlessly with everything else. We’re not there yet, but if you have questions about the internet of things, just ask Siri or Cortana.

All that computing power means we are surrounded by an ocean of data. The exploration of that data constitutes what Microsoft researchers call the “fourth paradigm”, exploration of data to discover new and interesting results to power a new generation of artificial intelligences. Microsoft Research head Peter Lee recently talked about some of the AI breakthroughs that were powering the new tools. Discussing the concept of “transfer learning,” he revealed that by training a speech recognition neural net on multiple languages, its performance improved with each new language, even on previously trained languages.

There are already apps that can infer context from our emails and documents and then deliver information we need, or might need, when we need it. We’ve already seen this in marketing and advertising; based upon your searches, the data programs can figure out whether you are getting married, pregnant, planning a vacation, or looking for a job; and then they deliver advertising that should grab your fancy and even calculate the probability of a purchase, putting the supply chain in motion, ready to send out drones to deliver your package with same day delivery, or even within the hour. It’s a little like the waiter anticipating when you want a coffee refill; that sounds like a simple task but it is incredibly complex and requires understanding the differences between correlation and causation. Computers are not good at that, but they’re getting better, or maybe they’re getting smarter.

As computing becomes more and more ubiquitous all those little computers, embedded in almost everything, are gathering data; and the neural networks are analyzing the data – watching and learning, and the data eventually becomes information, and the information becomes knowledge. And we end up with collective wisdom. At least that’s the idea.

We’re closer than you think. We already know that computing power grows exponentially. Moore’s Law basically says that technology performance indicators double every 18 months, which leads to incredible innovative applications only slightly bogged down by social acceptance. Not every innovation makes it into common usage because of concerns about privacy, lack of trust, reliability, or just information overload. Somewhere there is a huge scrapyard of abandoned apps.

There is an even larger ocean of smaller and more powerful embedded computers monitoring our actions and data and trying to figure out where we want to go, and then trying to figure out how to help us get stuff done. That’s the benign version. The version will a little less sugar coating involves a complete loss of privacy and subjugation before the robot overlords. Then again, in a world of CYNK Technology and Portuguese doom loops, maybe we deserve robot overlords.

Microsoft will have an earnings call next week, and we’ll likely learn more then. Today’s six page memo was big on building productivity, but that might also mean pink slips for many Microsoft employees; after all there are bound to be some redundancies following the Nokia acquisition. Nadella writes that "We will reinvent productivity to empower every person and every organization on the planet to do more and achieve more." But for all the talk of a brave new mobile first, cloud first world, don’t expect Microsoft to abandon the Xbox game console; it’s a money maker. Still, it is a fairly bold new direction for Microsoft, maybe the biggest vision change since Bill Gates ran the place.