Cyber Attacks: Will They Grind Commerce To A Halt?

In my article "Looking Forward: a Return to Normalization", I posited an economy on the mend. Yet, it assumed as always that no "Black Swans" would be swooping down upon us causing economic turmoil or a threat to the international monetary system. So I thought I'd point out the one Black Swan that is circling the world today that is bothering me.

A monetary system is built on trust. It functions because people count on the fact that they can make transactions in good faith. They needn't worry much about theft, fraud, the lack of compliance or execution. Such occurrences are the exception, not the rule. Whether under a gold standard or fiat standard, the one thing all functioning money and monetary systems have had in common historically, is acceptability and reliability.

When we go to a store, we don't ask "I wonder whether my check will be accepted, or my credit card, or my debit card?" We assume it will. And as merchants, we don't ask whether the amount of money paid to us is collectable or not. We assume it is. But what if we didn't?

What if we were suddenly suspicious that the money we were paid was counterfeit, or that the checks we accepted were uncashable, or that the credit and debit cards we accepted were fraudulent? Needless to say transactions would stop. Commerce would stop. The economy would stop. Such a scenario is unthinkable. The problem is it has begun.

The attack on Target Corporation, (TGT) that affected 40 million card users is just the latest. (Revised to as much as 110 million users late Friday 1-10-14). But unlike past cyber-attacks it didn't stop there; it momentarily spread to Walgreens which temporarily stopped accepting credit and debit cards as payment. If such hacking continued and attacks managed to affect other major retailers, such as Wal-Mart Stores Inc, (WMT) or Macys Inc, (M), many more companies would have stopped accepting credit cards. This would have spread quickly to the banking system which would protect itself by placing limits on credit or withdrawing credit use entirely.

Without credit, people would run to their ATM's to get cash to pay for immediate needs like prescription drugs, food, and gasoline. But the ATM's are limited as we saw on the run in Cyprus. Soon they would not have enough money to supply the enormous new demand for cash. People would go into their banks to withdraw their money from their checking and savings accounts.

But there too, the cash would be limited since banks only hold small amounts of cash on hand. This would leave millions, in fact most of us, without the ability to purchase goods. Checks could be used, but would merchants accept them? And how many of us have immediate and sufficient funds in our accounts? How much cash do we have in our wallets? Without credit, and when our immediate cash runs out, we have no money. This would quickly spread to other nations as scarred individuals fear their own ability to get money. Imagine a world without money.

This is the mother of all Black Swan scenario's.

It is a bleak scenario and seemingly not very likely, yet as we speak, our vital electronic systems are under attack. Cyber-attacks are estimated to number in the hundreds of millions of attempts per day! And the hackers are becoming more and more successful now affecting tens of millions of people at a time.

It's not just the retail use of debit and credit cards, and therefore bank transactions that are in jeopardy, it's the Internet in general. An attack on the grid that causes blackouts and shutdowns could bring commerce to a halt. Physical attacks have already occurred recently in Arkansas and California, leaving tens of thousands of US citizens immobilized. And war games to fend off cyber-attacks are being planned for by the North American Electrical Reliability Council (NERC) in anticipation of future attempts. The NYSE and other stock exchanges and financial institutions around the world are in full defense mode to protect their client's accounts. The Pentagon and the Defense Department have reported cyber break-ins recently. And our Air Traffic Control System is vulnerable according to the US Air Force. Meanwhile personal information is being stolen on a massive scale daily and nothing, it appears will stop it.

In a recent Market Update to my subscribers, I warned:

"It isn't just hackers we have to fear, which is bad enough; it's a growing vulnerability of Internet use at a time when we are more dependent on the Internet than ever. Constant breakdowns due to age, disrepair, foreign espionage, and just plain ignorance and human error are becoming chronic. If it continues, it could jeopardize the monetary system and its functioning not only here in the United States, but around the world. This would be the Black Swan of all Black Swans. It would lead to a breakdown in the ability to trade domestically as well as internationally. Such a breakdown would likely lead to a world-wide depression".

Because of this growing threat I recommend that everyone should increase the amount of cash and gold and silver coins they have on hand.

The worse-case scenario portrayed above is all hypothetical speculation of course, but flash crashes, power outages, trading halts on stock and commodity exchanges, the specter of long lines as people wait for a retailer or bank's computers to come back on line, are not. They are all becoming more common place. Technology is a wonderful thing, but one has to wonder whether our dependency on it has out stripped our ability to control it?

As a full time investor, I won't underestimate this new and growing threat's ability to affect the stock market if the threat should increase. If the financial security of the nation or the present monetary system's vulnerability is even hinted at, a fifteen hundred point drop in the market, in a day, is not out of the question. Investments in the resource sector could also soar. In fact, it is already becoming a new stealth "safety play". To some extent, gold and silver is paralleling the run into security stocks that protect against cyber threats. Fire Eye is one such company soaring on its move to consolidate this new industry into a growing force. But so are many gold and silver stocks, up some 10-20% since the Target episode.

It appears we are entering an era where safety and security may well be selling at a premium once again. This alone has the potential to launch a new precious metals bull market.

(Update: Home Depot's computers went down this week as customers waited in line. Only cash was being taken as payment. I awoke today to Scottrade on-line trading being down and watched as stocks fell and I personally was helpless to trade. And The NASDAQ just announced a halt in options trading that lasted 18 minutes. Trading resumed, but what damage was done to traders in the meantime? Gold responded with a 15 dollar spike higher. This is getting serious.)