The Cyber-Hacking of America Is Going to Cost Us Big Time

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We've been warning for some time now that cybersecurity would emerge as one of the top issues to track.

Indeed, in column we published on February 1st , we even predicted that the cyber-hacking of America - especially from China, Russia and Iran - would turn into one of the top stories of 2013.

And that's precisely how it's turning out.


Just last week, The Washington Post reported that a brand new National Intelligence Estimate (NIE) has concluded that the United States "is the target of a massive, sustained cyber-espionage campaign that is threatening the country's economic competitiveness."

Not surprisingly, given recent news events, the chief culprit has been identified as China.

NIE reports are classified documents that are prepared for U.S. policymakers and represent a consensus view of the U.S. intelligence community. The fact that an NIE was prepared on this particular topic underscores just how seriously the global cyber-hacking issue is being taken in Washington.

The Post story relied on unnamed sources that reporter Ellen Nakashima said were familiar with the contents of this particular report.

According to Nakashima, the NIE report "describes a wide range of sectors that have been the focus of hacking over the past five years, including energy, finance, information technology, aerospace and automotives ... the assessment does not quantify the financial impact of the espionage, but outside experts have estimated it in the tens of billions of dollars."

The NIE report is just the latest in a fusillade of headlines that have riddled the news since we last talked to you about this. For instance:

  • Earlier this month, Iran broadcast clips of what it claimed was encrypted video footage extracted from the surveillance cameras of the state-of-the-art Lockheed Martin RQ-170 Sentinel unmanned aerial vehicle (UAV) it says it seized back in December 2011. The Iranian military claims its "cyber-corps" actually "spoofed" the unmanned airplane's avionics, and induced the ship to land 140 miles inside its own territory. (The U.S. military disputed the claim and said the UAV crashed because of a malfunction.) The aircraft - which aviation buffs dubbed "The Beast of Kandahar" because of its aggressive, futuristic look - represents front-line technology. Now Iran claims it is reverse-engineering the airplane and stealing its secrets.
  • Last week, the ultra-secret U.S. Federal Reserve was forced to admit it had been the victim of a "hack attack" after the group Anonymous claimed responsibility via a Super Bowl Sunday Tweet. Anonymous claimed it had compromised 4,000 bankers' credentials on a private computer system the Fed uses to communicate with bankers in emergencies. It also grabbed secret forecasts the Fed uses in policymaking decisions.

The NIE report names three other countries - Russia, Israel and France - that it alleges have hacked America in pursuit of economic booty.

But the report makes clear that the cyber-spying efforts of this trio are dwarfed by the moves allegedly made by China.

(Beijing vehemently denies the allegation, and says it neither engages in, nor condones, illegal computer hacking.)

Why should we - as individual investors - care about this? I mean, isn't this just something that the folks down at the Pentagon need to sort out?

The fact is, you should care a great deal about this, and not just for military or patriotic reasons.

The cyber-hacking of America affects each and every one of us.

Nakashima, the reporter for The Post, actually summarized it quite eloquently when she wrote that "cyber-espionage ... once viewed as a concern mainly by U.S. intelligence and the military, is increasingly seen as a direct threat to the nation's economic interests."

In other words, the innovations, trade secrets and competitive advantages we lose through an unchecked reign of cyber-espionage will grind away at Corporate America's market share and profits - which, in turn, will savage U.S. stock prices.

Initially, we'll all feel the pinch when we see how that share-price erosion has savaged our retirement holdings - and even our life savings.

And we all know what happens when Corporate America sees its profits, market share and stock prices hit the skids - it fires people ... en masse.

(As a former journalist, I don't go for all those euphemisms companies try to employ to divert attention from the human toll that results from mass job cuts. These aren't "layoffs," because the companies have no intention of "calling the workers back," like in the old days. Nor will I use the terms "downsizing," "reduction-in-force" (RIFs), or "right-sizing." When these folks get cut, they're fired - and the jobs won't come back.)

Washington is responding. But you have to wonder just how effective those responses will be.

The options open to the Obama administration include formal protests, the expulsion of diplomatic personnel, the imposition of travel and visa restrictions, and complaints to the World Trade Organization (WTO).

Not exactly awe-inspiring stuff.

In late January, Pentagon officials said they were working on a big expansion of their cybersecurity forces. The plan there is twofold: First, counter the incursions that could cripple our infrastructure, economy and national security; and, second, take the battle back to America's cyber-enemies.

That strategy would require a 444% increase in the U.S. Department of Defense's Cyber Command - boosting its ranks from 900 now to an estimated 4,900 when the expansion is completed, The Washington Post reported back then.

But that plan, too, is somewhat suspect.

Although defense officials said the Pentagon is "constantly looking to recruit, train and retain world class cyber-personnel," they also conceded that finding, training and keeping such a big group of hyper-qualified specialists would be a huge challenge - if not an outright impossibility.

Nevertheless, "the threat is real and we need to react to it," William J. Lynn III, a former deputy defense secretary who worked on the Pentagon's cybersecurity strategy, told The New York Times.

Let's hope we can.

This is another one of those seminal issues - like the ongoing affair in the South China Sea - that we'll keep watching for you.

That way you'll stay ahead of the curve ...

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About the Author

Before he moved into the investment-research business in 2005, William (Bill) Patalon III spent 22 years as an award-winning financial reporter, columnist, and editor. Today he is the Executive Editor and Senior Research Analyst for Money Morning. With his latest project, Private Briefing, Bill takes you "behind the scenes" of his established investment news website for a closer look at the action. Members get all the expert analysis and exclusive scoops he can't publish… and some of the most valuable picks that turn up in Bill's closed-door sessions with editors and experts.

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