Surveillance: Businessweek Scoop On China's Microchip Hack

our colleagues over at Bloomberg Business Week. A special shout out to Jordan Robinson and Michael Riley as they reveal how China used the smallest of chips in a hack that infiltrated some of the biggest companies in America. The attack by Chinese spies reaching almost thirty US companies by compromising America's technology supply chain. This all according to extensive

intervie used with government and corporate sources. And I'm pleased to say, Tom Keane, we're gonna be talking about this a little bit later in the program, So really looking forward to doing that a little bit later right here on Bloomblock Surveillance to get to the price action and

what's happening in markets. I'm also pleased to say that joining us here in New York is to buys the left of its city group, Global Markets Chief US equity strategist, Good morning to to Bias, good morning, how are you? Let's start with those yields ten years, thirty years, or breaking out what does it mean for the equity market. So, look,

we've been worried about this environment for a while. The economy is strong enough for wage pressures are starting to grow and probably growth in further based on some of our analysis, So this was kind of almost in the cards. However, um, how much flexibility is there in the equity market to handle this? In our sense is that you've had a range on equity ris premium since the financial crisis of

four to seven percentage points right. We're about four point four percent right now, so you have flexibility to get you to kind of about three and a half percent, offset by less risk premium because you believe the economy is growing beyond three and a half percent starts becoming more challenging on the tenure yield um, and I think that's where the pressure starts to evolve on on on valuation.

The chapter of the Fed Reserve out with I think a really important common in the last twenty four hours that he thinks we're a long way away from hitting the neutral, right, But the FED, what do you think of that? Subus? So look, I wonder how much and again I'm trying to get into the motive behind saying that. How much of that is moral suation trying to prevent um the yield curve going flatter and footing, And how how much is that kind of FED speak to to

force some steepening in the curve. I don't know his motive. I don't know if that is what he wanted to imply, But the FED historically has been able to utilize its language to kind of get its way in the market. If it didn't, then it can go into the market and actually use its toolbox and crowbar kind of forced the outcome. Do you care what Indian rupees doing? I mean, I know city groups, you know, got branches and bay

and you're selling toasters and all that. But I mean, the day after day John and I are watching e M blow up in you know, different ways, in different forms, and it seems like we're just rationalizing the revenue stream of Amazon or Apple or the other magic stocks. Doesn't a guy like you care about the knock on effects to e M. We have to worry about. I mean, one of the things that we watched, for example, is the dollar relative to the performance of US markets versus

e M. And what do you see? It's very tight over like thirty years. So anytime the dollar goes up, you tend to see outflows from emerging markets UM, and it puts meaningful pressure not just on the currencies one of the economies as well as that foreign direct investment kind of leaves in a often bumpy and an erratic way. So do I care about the rupie personally? Maybe if I'm planning a trip to the taj mahal Um. Do

we worry about it? From UM economic knock on effects to the US It's fairly small for US cutty markets. It's horrible if you're sitting in in the emerging markets equity world to bus when you look at US markets in a vacuum. And what I mean by that is just focusing on domestic issues. America looks great. The DP report yesterday was solid. The non manufacturing guy Sam was fantastic, and it looks like we're set up for a decent payrolls report. As well in a vacuum things look great.

When you look at things internationally, you just wonder how US markets are holding up so well to bias. So so I'm getting a lot of those questions actually, like why is the US? Yeah, so so one is the economy where we you know, keep in mind, probably sent of the SMP five revenues are US driven. If it's if it's for example, Asian sales of semi conduckers, it

really isn't. Those are products that are coming back here in the form of smartphones, tablets, computers, servers, et cetera, some apparently with rice like uh, espionage units on them. But the the the economy itself is for that's one thing. Number two, technology in particularly which is on the way to the SMP five um is phenomenal in terms of demand. And then lastly we have massive buyback activity. So that's that's kind of keeping us separate from the rest of

the world. Exacuity, can we do a Surveilla's clarification not a correction? Chris from New Jersey emails in and says, did Tobias mean the old Trump taj Mahal that is now the hard rock cafe in Atlantic city. I haven't been many many Exactly I want to go. You want to get back there? Okay, I just lose money. Needs to worry about the rupeat. If he wants to go to New Jersey, tell Chris actually has been replaced. Just keep that in minded New Jersey. That's why it time

to email. Oh god, I think it was a different Chris. I guess, but I don't care what. Maybe you don't understanding I literally do not understand the appeal of gambling. I really don't. Well, let's let's people think what you do is gambling. I mean, come on, so let me give you so far off? Can I can? I give me two very important statistical days. Okay, um, nearly seventy eight percent at the time. If you buy equities the SMP five hundred, you will be up a year later.

If you look back over fifty sixty years, if you go to a casino, there is a fifty six percent probability that you will lose money. Okay, how do you respond to the doubt chart? I have from two thousand seven that five of the thirty three stocks rather have outperformed Amazon, Visa, Nike, and there's two others. I can't remember right now, ge on the bottom clearly, but I use the SMP five. But if you don't gamble and get those five stocks, you don't get elpit, do you.

But if you bought the index, the Dow Jones Index, you would have been fine. If you're trying to I think for most individuals trying to pick that wonderful stock that's gonna make you ten times your money, you're you're probably gonna lose because that probably approach. You know, I always shove around with you. I own a few penny stocks. They did didn't start out that way. Um, so all of us will make a mistake buying stocks. But but if you're buying stocks in aggregate, it's it's a winning

combination over time. The statistics Aretty, thank you for so many things, but thank you for joining us this morning to bars Left City Group Global Markets chief US. Can you see that we're both you are troubled today on both of us were watching Leaves Canadians last night. We are talking about that one because in the real world, least Canadians really matters in certainly in Canada matters. And

when Toronto beats Montreal, it really hurts us. Montreal or Toronto, John Farroll and Tom Keane, And in terms of the diplomacy and the international relations of our Bloomberg Business Week effort on spying by China by elements of the People's Liberation Army by placing microchips on over boards that ended up being used by thirty American corporations, and illusions occurse

over to our defense and intelligence establishment. It is good to speak to the eleventh United States Ambassador to China, the gentleman from Montana, Max BACKUS Ambassador book is wonderful to have you with us up today. Many in government have known about these efforts by China for years. Bloomberg now publishes the history of this from two thousand fourteen and definitely two thousand fifteen bring us to the present right now. Is cyber attack, spying whatever you want to

call it from China? Is it a growing issue or is it a stable issue that's a growing issue, Um, It's probably one of the biggest issues we have. During the time I served UM in China, I pressed the government as hard as I could to try to admit that that made me a distinction between them for security purposes and science for commercial purpose. I couldn't even get

them agree to that. Finally we got the goods on them when we are able to document that one of their patriot companies, DTE was Transparent Technology against uh as a proliferation statute and that's akin to what they've been doing.

We also during the OPR investigation found it. So they sold about fifty million records of the US citizens, and we had the goods on them, and they didn't admit it, of course, but they did agree that we started to sanction them, that they agreed to the security agreements with with with US and which was there's five parts to it, namely to them. So that's good to first admit it. Okay,

we're spying, which just something about it. Right within this ambassador is the idea of what should be our approach. Things move slowly in the legislative body of a wor do we have time to go through a slow American process to protect our cyber technology or do we do we have to speed things up. We're gonna have to speed things up. I think this is the biggest problem we have, not just with China but frankly the world.

That is, we are behind the eight ball, we Americans. Um, it's just technology that's growing so quickly, and that's good. Uh reach a point where countries are going to have to realize that they we've got to home reach some kind of agreements otherwise it's it's gonna be wild. Wise.

I think we've got some problems with a line. So we'll have to apologize the technical difficulties with us this morning that there's an important interview and you could hear the heat there in the in the history that the ambassador Backus was directly involved in with z T E and z T is brought up in the store. Worry is sort of iteration one, and now this is iteration too.

So I think traditionally when we think about cyber protection at cyber warfare with thinking about the software Tom And what's interesting about Bloomberg's reporting today and reporting from our colleagues at Business Week, is this is about the hardware.

And of course, as everyone listening knows, a lot of this hardware is made in China, So what can you do to national that the hardware is made in But you nailed the luxury and I mentioned this on television and Kinneth Rogoff of Harvard ten years out front on this. We're addicted to the capitalism to the price theory of cheap stuff from China, whether it's you know, bow Tizer

or whatever. Well, guess what. Some of this stuff is important and involves espionage and that and my question the ambassador was going to be, Okay, if we don't make it in China, where do we make it in America? Which is President Trump's theme? And you hear a thundering silence, And if and if the hardware is compromise, what can you do? Tom? You're going to check every single life fund that's produced out of China. You're going to check every single chip that has produced out of China. Yeah.

I want to make clear that within the reporting and speaking with Jordan Robertson, that this is not about consumer goods and iPhones here, and I'm certainly not trying to infer that that's what this is about. What I'm saying, Tom, is that much of the hardware is produced there. So how on earth do you have some kind of cyber protection scheme, initiative policy that protects you from what has

happened and what our reporting reveals. And and again, as Max Park has said, there, we've negotiated and got nowhere and sort of you really wonder where it goes. And I would suggest that all Democrats, um would give a victory lap to the president for at least identifying the urgency and immediacy. Was with Secretary Ross about this, but I think it makes it very public. It makes it very public, and it comes want to day you that

we're expecting Vice President Mike pens to come. I'm glad you mentioned and layout allegations of Chinese election medaling in a harshly worded speech to expecting late today um Dan in Washington, Tom, so look out for that. One of our most popular guests over the years. Luisia Mata joins us now from Luisia Mata Technical Research. Louise, I'm just going to cut to the chase. You look at consolidation and distribution, the minute price changes that are seen in

point and figure charting. Can you be long equities today? We are growing much more cautious. I think I would be taking money off the table in the groups and stocks that are underperforming and that are showing monthly momentum sales signals, and we have more and more. Give us an example of those sectors. Does it include banking? Okay, yeah, it does include the financials, utilities of course, reads, materials, industrials s flirting with the cell signals, financials and staples

at this moment. And we have to see how the new consumer discretionary in the communications groups evolved, because what SMP did was not start them new with the the news the new sectors. Yeah yeah, yeah, they they encourage them and change the devices. We will see over time. In folks, I think all of you know that I'm in fully on board with point and figure charting, going back to and the I have no time function on

the X axis, Louise. What everybody wants to know is can you use traditional technical analysis to benefit on a bi hole cell basis with modern stocks like Apple Computer and particularly with Amazon of course, yeah, you mean the point and figure charts And what do they say then, okay, you could use them. What do they say right now? Well, the the Apple is continuing in an uptrend just the way it is on a bar chart. There. You know they have similarities and Amazon as well, so you you're

you're gonna hold those right now? Can you acquire new shares of Apple and Amazon? In particularly the idea that the market so underweight to Apple that they gotta they gotta level up by the end of the year. Well, the stock has been doing incredibly well. I mean, if you have no positions, I think you could probably nibble

a little. But things are getting quite extended, and given the fact that we're starting to see some underlying um starting to see over the past months of this year, we've been seeing negative divergences in new highs, new lows, and volume momentum and stocks above the two hundred day moving averages which now for the New York Stock Exchange has broken below and is a clear warning for the overall market. So the divergences have been going on for

several years, so we're getting closer and closer. What what would happen next? Which would concern us would be uh monthly momentum sell signals on our industries. The European industries are all on monthly sales. Most of the Asian that we follow are, with the exception of Japan and India.

Luisia Matta. In the last twenty four hours, it's been amazing split between large cap and small cap with small kept John correct me small cap self right smoke cap movie sound What do you mean, this is right in the heart of Luisia Mata's research. Note, why do you parse small, mid and large cap. Well, the small in the meter starting to roll over. They've been under performing, but now the prices are actually starting to roll over,

while the down the SMP have been inching higher. We still have upward potential in the down in the SMP. But I think one has to be growingly cautious than watching one sports individual stocks in the portfolios, because a lot of individual stocks around cell signals. Also, he's told to me about the sound signals you see abroad and the fact that you don't see that trend in the United States, and how unique that difference is. Well, you've got sell signals on the foot, see the CAC, the docks,

the Italian market, Spain and Switzerland. Uh so there there clearly has been a pattern of distribution in those countries. Whether or not they can grip at some point and turn up is questionable with those monthly cell signals in place. But the US is still in the lead. And uh of course the interest rate perspective is also intriguing. If you're interested covering that, well, we know we do we cover into come on, Louise, we cover interest rates a

little bit. Do we have a true breakout on tenure or thirty year or they within the Yamada range absolutely breakout. We've we've been suggesting that a little tick above three for the tenure was a breakout. You have eight to ten year basing that's taken place in these duh in these um treasuries also for the two year. And we know that reversals from falling rate cycles to rising rate

tacles take time because they've all experienced deflationary pressures. Historically it's been two to fourteen years, and here we are eight to ten years, and I think it's a very valid change. We're now in a new rising rate cycle. So, Louise, I want to watch you about this because so many people have a different level and they plot the thirty year bull market in treasuries and they try and identify the point where we have a real breakout, where the

bull market is over. Do you have that point in mind? And how far through it are we? It was three three percent has been the the threshold for the thirty and for the ten and you're clearly through it. I think you have our report from this month and there's a very interesting study showing that we've now put in the first lower lower in price, higher low in field, and that signifies to us the point which the trend has change. John, we gotta be careful because lose your

model will hang up on us. If that's the case. And if you take and you're gonna love this, John, if you take a three box horizontal account and you get to some high yield of Louisia Mada two yields finally compete with dividends. Forget about Louisia model Louise if you're a fundamental person, is higher yields finally going to

compete with dividend and the assumption of dividend growth. Well, I certainly think at this point that a conservative investor could move into a two year note, if not a one year bill where you're getting two point five, and compare that to some of the yields, and then think about whether or not your stockings having difficulties. I would rather move to the safety of a short end. You don't want to go long end when you're moving into

a rising interest rate cycle. You don't want the ten yere, you don't want the thirty year because if you go with a one year or a two year and they come, do you can roll that money into a higher yield at that point in time in tense Consluisia Mata thumb up on gold or down down? Okay, there you go, Okay, neutral best but down that's fair. Luisa Manta, Thank you so much. Louisa Manta Technical service. We're really just brilliant. Were brilliant. No, we protect the copyright John of our notes.

But she's like old school, like the old trends distribution. She said, an eight year base in the tenure yield. Spend the whole day talking about fundamentals. It's nice. John Farrell and Tom came from her studios in New York. We said, good morning FM Washington, where Jordan Robertson is taking a victory lap with Michael Reiley. He is an author of a forever changing article on cyber attacks America in our naivete of the Chinese Jordan. There's about eight

ways to go here. John Farrell has three or four of them's own. I want to focus on one thing. You have a pregnant sentence early in your Business Week article where you basically say operatives of part of the People's Liberation Army. The p l A to me is in a museum display up at the met in ninety eight, like Red Guardish and all that. Obviously I'm wrong. Who

are operatives of the People's Liberation Army? Sure as uh yeah, as the story shows, you know, U S Intelligence agencies have attributed this attack, the hardware modification attack, to a unit of the p l A that specializes in hardware modification.

And you know the n s A. Here in the U S. We we have units that do these kinds of things too, but the differences in China, you know, you have the manufacturing base for the for the worldwide you know, the global computer supply chain, computer equipment and supply chain. So from what we understand, this is a very specialized unit of the p l A. Uh that, in addition to doing cyber you know, having cyber capabilities, uh,

you know, specializes in manipulating hardware. So the cyber hardware synthesis, I mean, other than the fact that John Farrell looks a lot like Daniel Craig, I mean it's out of a Bond movie or it's what's his name, Keno Reeves as I pronounced it right, the guy in the matrix question. But come on, it's science fiction. Are these guys in uniform?

Are they peeky engineers who went where at Caltech? But I want to last you about that, just how difficult it is to access the manufacturing process of some of these goods, and at one point they infiltrate it that process to get this chip into the hardware. Yeah. One of the things that we've encountered in reporting this story is people here are reporting, they say, why would you go to those lengths And the answer is if you're China. Well,

the answer is because you can. You know, if you're China and you're trying to infiltrate highly sensitive, highly secured government or corporate networks, you know, that's really the only justification for going to these lengths. I mean, just to be clear, the Chinese government has no incentive to do this. For your mass market consumer devices, they would get caught,

it wouldn't be targeted. But if you're trying to infiltrate highly sensitive, highly secure facilities, that's really the only thing that justifies the time and effort. To one example in Lockeed Martin, I believe is not in your reporting, correct me? If I'm wrong to go to the lockeed Martin website and John, they've got a thing called the F thirty

five Lightning Do which is a jet. So if you got a little microchip on a board at any given company, John, aren't you going to get the blueprints the radar of the electronics that we're talking about access? They've got the acts, Jordan, they've got the access. Just in terms of a story and how this plays out, what did they do with that access? Do we have any idea what they did with that access? Sure? Yeah, well we know what they

wanted to clarify. We know what they wanted to do with the access from some of the government sources we talked to. And the idea is this. You know, one of the things we encounter in this reporting is people say, why would you land on a commodity server? Super Micro makes ordinary blade servers, the pizza box sized servers that just processed data their commodities. Why would you want to

land on those avers? And we've had intelligence folks tell us a server is actually the perfect staging area for reconnaissance, probing, uh and you know, and evaluating a network because because it's a commodity because nobody really looks there for a sophisticated attack. They look at the high value targets like a network switch and network we're out of the places

that hackers really love to be. So the ideas this is a staging area to perform reconnaissance on target networks, to have kind of a stealth access point in and out. You know, especially if it's an Internet data center like Apple and Amazon run tons and tons of traffic are being pumped through those machines every every man of the day, so you can hide in that traffic. And the idea

is you've got a backdoor. You've got multiple backdoors. You've gotten you know, dozens or potentially more ways into these networks. And that's that's not a it's it's a means to an end. It's it's a staging area. It's the first stage of the attack and the goal then is to get to more sensitive networks and to create a pathway into you know, places where sensitive corporate I p. S Is is stored, uh you know, or where there are you know, Elemental, one of the companies in the story

that that found these chips. You know, they they their equipment helps run the CIA drone program they process and this is on their website. They process real time drone footage for the CIA and the Defense Department. Like you know, if you're China, you can land on one of those servers and get any little bit of data out of them. We don't have evidence that they landed on the CIA program servers, but that is a supplier. Elemental is a

supplier to that program. That's a jackpot. That's the holy grail. It's worth taking the road. It's a fantastic piece of reporting that understand took you more than a year to put together. For our listeners that haven't been following this through the morning, there's some pretty strong denounced by the companies involved. Amazon, Apple, You've been very transparent about it, You've published those denials for our listeners that are skeptical.

What do you say about the sourcing of your story and why you did publish it even with those really strong denials. Sure, thanks for the questions, A very good questions, very relevant. Yeah, Apple is the principal actors in our story. Apple, Amazon, super Micro, They've all denied the reporting very strongly. Now, as journalists, as Bloomber journalists, we take that very seriously, We've you know, circled back the sources. We've recircle back

with sources. We've gotten more sources. And the reason we feel comfortable publishing this story is this is about a constellation of sources throughout the U S. Government and inside those victim companies, very senior insiders in those victim companies, Amazon and Apple both as well as across the US government, that corroborate this information. So we can't tell why a company chooses to deny, what the thinking behind it is.

But you know, all we can do is present them with our facts and if they choose to deny, we waited for ponderance of evidence, and seventeen senior, highly placed sources throughout the government and these companies very highly, highly incredible, highly corroborated. Jordan Robertson regards to Michael Riley, congratulations. Look for a cover with a finger with a little baby microchip on it. It is from China. This is Bloomberg.

One of our themes today, the journalism of Bloomberg Business Week of Jordan Robertson and Michael O'Reilly and their important story of other people's liberation. Army of China attached micro chips to motherboards on servers for thirty American corporations. With all of the illusions over to the Pentagon, the CIA, and our defense establishment, there is no one Pim Fox and I would rather speak to than Adam Siegel. He is with the Council and Foreign Relations. It's his cottage industry.

The definitive book is The Hecked World Order. Adam thrilled to have you with us on this important day. I'm sure Jordan Robertson and Michael Reilly agree with me. Buried in your book. Traditional war is in military jargon primarily connectic. The point is to kill people and blow things up, while cyber attacks are often framed as part of cyber wars by the media. You cannot hold territory. What is

the territory? Know? Once? Well, they are trying to gain information for competitive advantage and for political and military advantage, and so by being in hardware and software, they have gained access to all of that information. Do they have blueprints from ut X just to pick a company? Well, I don't. I think we're all gonna We're gonna question

all of that now. Um. I mean, the the importance of the story is that people have been talking about the vulnerability of supply chain for a long time UM, and now here is just clear evidence that it seems to be happening. So any US tech company that has its supply chain in China, which is almost all of them, we're gonna have to seriously question if the Chinese have gained access to Adam Siegel, as the author of the Hacked World Order, how nations fight, trade, maneuver, and manipulate

in the digital age. Can you draw an analogy between the use of the Internet and the u of the high seas in previous centuries. Well, I think for both there was a period when they were completely open to piracy and thest um and nation states often used privateers

or pirates to pursue their goals. And China has certainly taken advantage of the fact that there are no international rules for cyber um and that you can use the People's Liberation Army or the Ministry of State Security, and they can often use criminal or underground hackers and and have possible deniability. So we are in a similar age where it has been very hard to control UM and where people have thought about cyberspace as a kind of a commons like the ocean, but it's one where there's

a huge amount of conflict. UM that defines the space. You've written about how the government and the private sector need to enhance their current defenses, for example, two factor authorization to log into different systems, also to things such

as absolute secure communications. Can we ever get there? Well, it's been slow going, UM, And you can see in the Bloomberg reporting UM that the private sector did cooperate in some cases with the federal government in helping unraveled this UM spy trail, but in other cases UM didn't share as much information and has kind of denied the accusation. So there's still different incentives in place, UM, and we certainly need to move faster to get the two sides

to work to work better together, Adam. Within the reporting UH that Bloomberg did on this, and I'm going to assume to a pro like you, this is not new news. What exactly did the story confirm within the visibility of going back three and four years to the Obama administration and the Trump administration, the length of time of all this to a guy like you when you saw that article,

what was new? Well, just the fact that we now can spit point to a specific case, a specific company and a and the and the actual chip that was doing the buying. Uh. As you said, the people in the cybersecurity community have been warning about this threat for a long time, but there were just no public examples. They are all existed in the world of classification or intelligence briefings. So to have this out in the open is just a massive change and will really shape the

discussion about is it a good change? Is to get to the point, is the Pentagon having a good morning? I think they are. I think the problem is going to be for everyone is how you deal with the fallout because as the as the article rightfully raises, the question is going to be, what's going to happen to the U S tech industry because the supply chains are

so dependent on China uh um and um. There's you know, the solution seems to be to remove the supply chain from China, but that that's going to be incredibly expensive and it's not clear it's going to be technically possible. Adam Siegel is the United States perceived as an exceptionally aggressive adversary when it comes to cyberspace. I think a

number of countries certainly see that. And you know, after this note in Revelations, the revelations of the Contractor Edwards note in you know, certain types of behaviors of the US were shown to the rest of the world. China in particular took notice of that um and began to think about both um, what what it could do to become more secure from the US and then also you know, put ideas in its head about what type of operations

it would like to conduct as well. Do you believe that countries that we believe to be friendly to the United States conduct cyber defense or cyber attack efforts against the United States, both private and public? Uh? They do? Uh? I mean, if you look at the rip board from the Office of Kunter Intelligence, they name a number of close to US allies and friends, including South Korea, France,

and Israel is conducting cyber espionage against the United States. Uh. Many United States does the stand point honestly, it also spies on its spread now, so so this is important. Do we are we putting microchips on motherboards on servers

of other countries? Have? Yeah? I mean the study revelations and as the report at the Bloomberg Reporting notes that the US prefers to interdict the product along the way UM and and insert something then so getting a specific server motherboard, not in the Chinese case of UM putting it in you know, many devices and hoping that it ends up into a specific supply chain. Speak of you can about the US Department of Defense Defense Security Service. What is the d s S do? Uh? It's to

help defend and respond to attacks on military networks. UM and so it is working with Fibric Command and the National Security Agency UM and reaching out to the private sector, in particular the defense industry base to help them improve

their security NETMA. Adam, thank you so much. Just thrilled to finish out our coverage today and surveillance uh and speak of you, Adam Single Folks is with the Council on Foreign Relations and he has just simply build up a franchise as a director of Digital and cybers based Policy at CFR. And again, Pim, the book, uh, you know when it came out was more than a splash the hacked world order. Thanks for listening to the Bloomberg

Surveillance Pie podcast. Subscribe and listen to interviews on Apple Podcasts, SoundCloud, or whichever podcast platform you prefer. I'm on Twitter at Tom Keene before the podcast. You can always catch us worldwide. I'm Bloomberg Radio