Monthly Archives: February 2013

GRU vs. cyberwarfare

My post, via

Over the past decade I have become more concerned about cyberattacks to U.S. defenses, industry, infrastructure and my own companies’ IT systems. As a Gainesville resident for 39 years and a former city planning director, I am also very concerned about cyberattacks against the city, Gainesville Regional Utilities and the systems that make up “command centers” for our governmental infrastructure within the city.

About two years ago an Iranian cyberwarfare group attacked the IT system of the Saudi Arabian national oil company Aramco. This attack destroyed more than 30,000 individual computers, all internal networks, the storage capacity for the information technology of that company and its ability to recover its information. This was not well publicized, as most cyberattacks are not publicized. Aramco was able to renew its IT system but at great expense and great loss of income.

A recent cyberattack was made on the Federal Reserve System. This attack retrieved the computer passwords used by bankers and banking institutions to obtain access to the Federal Reserve’s IT system, placing our monetary supply at risk. This was in fact an attack by a belligerent power against the finances of the U.S. and the entire world.

Last May, I attended a conference at the U.S. Naval Academy in Annapolis. One of the main presentations was from the newly appointed department head for the Department of Cyber-Warfare at the academy. His department is teaching a class for the entering plebe class (freshman class) and one to the first-class midshipmen (senior class). Those classes are the limits of the department’s capabilities at present. He emphasized that within three years there would be an academic major provided for midshipmen in cyberwarfare. An entirely new building will house this department.

The computers within the department are not connected to the Internet nor are they even connected to the academy’s intranet. The department does this so there can be no hacking into its programs or systems.

There are thousands of attempts each day to hack into the computers of the Defense Department and Central Intelligence Agency, among other federal departments and agencies. The Defense Department and other agencies responsible for national defense have thousands of “troops” involved in identifying cyberattacks and countering them. Most of these attacks originate from China, Iran, countries of the former Soviet Union and such non-state belligerents as al-Qaida.

The easiest way to destroy the ability of the United States to defend itself from a paralyzing “first strike” is to attack two sectors of our economy that are poorly defended. An attack against our financial markets would throw the entire world economy into chaos and could make the great recession of 2008 look like a minor financial fluctuation.

The second and most important sector of the economy that is at risk is the U.S. electrical grid. We all remember the blackout of 2002 when one transformer or circuit switch in Ohio brought down most of the grid in the entire Northeast United States for about a day.

We, the owners of Gainesville Regional Utilities, need to know if there has been a national emphasis on protecting the infrastructure grid for electrical power. One strength of our electrical system is that electrical power can be transferred from one utility to another depending upon demand. However, this interconnection is one of the major dangers.

Grids are controlled by stations that permit power to flow from one utility to the next. If a cyberattack were to be made upon one or more of these centers, the U.S. grids could be brought down and equipment could be destroyed. The U.S. would be placed into a situation that it has not been in since the turn of the 20th century, when most of the country was not served by an electrical system.

Think of what would happen to industry, transportation, health care and the other sectors of the great American economy. Manufacturing industries would be shut down until energy could be restored. Traffic signals around the U.S. would be nonfunctional and traffic would gridlocked in urban areas. All transportation would come to an end once the fuels available to each vehicle were consumed and if there was no electricity to pump fuels at service stations. You can imagine the problems with health care, education and all the other sectors of the economy that depend on electricity.

My concern for GRU is whether it has a plan for the effects of a cyberwarfare attack upon the electrical grids. The City Commission, as the GRU board of directors, must ensure that senior management will immediately look into this issue.

A cyber-defense bill has never made it through Congress. With the stalemate in Congress, I believe that it is imperative as a progressive community, like Gainesville, to immediately address this issue. We will all face cyberwarfare and the effects of attacks as this form of warfare becomes more prevalent in the future. Gainesville needs to act before it is engulfed in the international cyberwarfare that is presently in its beginning stages.

Samuel Mutch lives in Gainesville.

Markets are Surging, Is Now the Time to Increase Risk? A Prospective on Investing

February 2013.

With major stock markets climbing back to within a few percentage points of their record highs in 2008, many investors are just now increasing risk by adding more stocks to portfolios.  Certainly, recent mutual fund flow data reported by Investment Company Institute show investors are loading-up on stock mutual funds at rapid rate.

By itself, a spike in equity fund flows may be viewed as a contrary indicator, with a negative influence on future returns.  That is the contrarian point of view to which many “investment advisors” were proponents of prior to the Great Recession.  Theoretically, when so many investors are bullish, they have already bought, which leaves relatively few new buyers.  Any bad news could cause a stampede of sellers, without enough off-setting buyers.  In this scenario, prices cannot help but decline. 

However, there is a great amount of pent-up demand for the market and stocks after five years of a recession.  That also means there is cash in peoples’ pockets which is making 1.0% to 1.5% in returns if they are lucky.       

It seems many investors are chasing performance, investing in the asset classes that did well in the recent past. Many investors missed much of the move up in stocks since the Great Recession in 2008, because they were overly fearful.  Now some of these investors run the risk of getting back in near the high point of the Market.  Not surprisingly, “buying high” after a market rally is not a strategy recommended by most successful investors.  It can be a recommendation of investment advisers who only want to make a buck from their clients.

At this time, organizations, like the Gainesville Charitable Foundation, may be inclined to chase the markets higher by increasing exposure to risky assets. This is NOT a prediction of pending market doom or a recommendation to sell all stocks. Positions in equities (stocks) maintain should make-up a healthy allocation in most investment portfolios. My suggested approach includes the following:

  • Disregard the elation that comes along with market rallies
  • Dodge the urge to “buy high”
  • Be ready to buy at the next “panic in the market”
  • Stick to your long-term market plan for the percentage of assets in each type of investment

For now, the trend is definitely to the upside.  Should stock prices continue higher, the Gainesville Charitable Foundation should be poised with a portfolio that will participate.

The Gainesville Charitable Foundation must determine the direction it wishes to go.  Don’t listen to people who make their money churning the account of the Gainesville Charitable Foundation.  The Gainesville Charitable Foundation board of directors must be pleased with the overall strategy during the 2012 year of investing.  Compare the Gainesville Charitable Foundation’s portfolio with the market indicators.   Did Gainesville Charitable Foundation generally benefit from last year’s and January 2013’s strong market?  What does the Gainesville Charitable Foundation believe were the soundest asset allocation decisions it made over the past thirteen months?

 It is important to note that there can be many good reasons to consider increasing risk.  Not all risk is bad.  Most investors need to accept some level of risk to achieve their financial goals. The circumstances of the Gainesville Charitable Foundation may very well make it prudent to shift towards a more aggressive portfolio.  If so someone needs to assist the board of directors to make that switch.  I believe the key is to focus on a long-term strategy based on research, not emotional factors such as fear and greed.  I also don’t believe the “black box” approach but a real investment strategy than which the investment adviser   

 

Major Markets

Total Returns

 

1-Month

12-Month

Vanguard Total Bond Index Fund

-0.72%

2.40%

Vanguard 500 Index Fund

5.18%

16.61%

iShares Russell 2000 Index Fund

6.24%

15.71%

Vanguard Total International Index Fund

3.34%

13.81%

Source: Morningstar (data as of 1/31/2013)

The index funds in this chart are provided for informational purposes only and should not be used as the basis for making an investment decision.