The Grand Illusion – EMP

The Grand Illusion – EMP

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By Robert Rotella, CEO, Rotella Capital Management, Inc.

What does the 3 letter acronym EMP stand for? My guess is most people don’t know but then why is it important for markets? I will let you decide.

EMP stands for electromagnetic pulse. It can be both natural and man-made. For example a lightning bolt or solar flare can create an EMP. Machines can be built or bought which can generate EMP’s. Why this is important is simple. EMP’s can be destructive and powerful enough to bring down the entire electrical grid and many electrical devices in a nation. No electricity for anything. Not even if you have a backup generator because it could potentially destroy anything that generates, carries, or uses electricity.

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Natural EMP’s occur all the time but large powerful ones are fortunately rare. The Carrington event of 1859 was the most recent significant occurrence when a solar storm erupted and ejected a coronal mass which hit earth’s magnetosphere creating one of the largest geomagnetic storms ever observed. Damage was actually minimal for a simple reason. There were few electrical devices. It is hard to know how often an event like the size in 1859 might occur. EMP’s happen often but generally with far less magnitude. However a large solar coronal mass similar in size to the 1859 event occurred in 2012 but fortunately just missed the earth.

The Commission to Assess the Threat to the United States from Electromagnetic Pulse (EMP) Attack told Congress in 2014 that an EMP attack could result in the deaths of 9 out of 10 Americans mainly due to starvation and illness with the inevitable breakdown of society. A member of the Commission Dr. Peter Vincent Pry told Congress: “A natural EMP catastrophe or nuclear EMP attack could blackout the national electric grid for months or years and collapse all the other critical infrastructures – communications, transportation, banking and finance, food and water – necessary to sustain modern society and the lives of 310 million Americans.”

Every country faces this problem. The approximate cost to mitigate this threat is estimated to be $2 billion for the U.S. This could probably fix most of the problem and it amounts to far less than 1/10 of 1 percent of the current U.S. budget. It is certainly far less than the amount of graft, corruption, and pork barrel projects currently being lost and certainly much less than the “aid” we give to many of our “allies” and terrorists alike around the world for at best dubious reasons.

What has Congress, the President, or the Department of Homeland Security (DHS) done about this? Other than hold meetings about this the government agencies have essentially done nothing. Christopher Currie who is the director of Homeland Security at the US Government Accountability Office presented his findings in a report noting the DHS has not acted on any of the proposals suggested in the Commission’s original report.

But perhaps we should not be so harsh in our assessment of the government and consider both the words and actions of the DHS to determine if it has tried to be proactive on this matter. For example the DHS acknowledged this threat in 2012 and concluded that they needed to study it more before taking action. However their subsequent actions are quite interesting after the 2012 study. In 2013 they made an announcement to purchase in the next 4 or 5 years approximately 1.6 billion rounds of ammunition which might cost about $2 billion. Even if it doesn’t the cost of the guns and ammunition will certainly go well beyond $2 billion. That is over 5 bullets for each citizen. Some of the ammunition includes hollow point bullets which are generally prohibited in war because they are so lethal but apparently fine for use on American citizens. And this comes when our President wants its law abiding citizens to give up all weapons. The Grand Illusion continues.

Why does this matter beyond our safety? There are many that feel that central banks can engineer us out of market crashes. What will the Fed do when electronic banking immediately ceases and every market in the U.S. comes to a catastrophic halt without warning? I suppose since the markets won’t trade this will be the permanent solution for any future market drop. But then perhaps it won’t matter as we will have more pressing needs anyways.

Some scoff that this is an overblown threat. However given the fact that this has naturally happened before, almost happened again in 2012, as well as the real possibility of an internal terrorist act (real or false flag), or an external attack in war shows this is a serious danger. The question is not if it will happen but when.

With concerns like this why worry when most stock markets are still near all-time highs? I am writing this letter in South Carolina where fighting in the Civil War began at Fort Sumter. I recently visited a southern plantation and wondered if the people living there could imagine how in little more than 4 years a world full of happiness and life could collapse so swiftly to abject misery and death. An intense EMP is not the only thing that could have catastrophic consequences on the US economy. Technology is a double edged sword. As we become increasingly dependent on technology and enjoy its benefits we also increase our risks to the downside since we don’t always understand its inherent risks. However if we refuse to acknowledge and deal with the known risks multiple Black Swans will become far more probable and collapse inevitable. In the meantime enjoy the party while it lasts as the hangover could be apocalyptic.

When I was a kid I used to hear the song “God Bless America” sung with pride and reverence. I don’t hear it much anymore but when I do the sense is more one of sincere plea and outright desperation.

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