May 31, 2016

How bank networks amplify financial crises: Evidence from the Great Depression

How financial networks propagate shocks and magnify recessions is of interest to both scholars and policymakers. The financial crisis of 2007-8 convinced many observers that financial networks were fragile, and while reforms are underway, much remains to be learned about how and why connections between financial firms matter for the macroeconomy. Indeed, the complexity and sheer number of linkages has made it particularly challenging to formulate empirical estimates of their role in amplifying downturns.

Economic theory suggests many channels through which networks may transmit shocks (Allen and Gale 2000, Cabellero and Simesek 2013) and empirical research has provided some evidence of contagious failures flowing through interbank markets, particularly for the recent financial crisis in the US and Europe (Puhr et al. 2012, Fricke and Lux 2012). History should have a lot to say about the role of networks in contributing to the severity of financial crises, but it is a surprisingly lightly studied aspect of earlier periods of financial turmoil – even for well-researched episodes such as the Great Depression. This lacuna exists despite the fact that financial networks of the past may be simpler in structure, thus making it somewhat easier to identify empirically how aggregate variables, such as lending, were affected when linkages were disrupted.

In a recent paper, we document how the interbank network transmitted liquidity shocks through the US banking system and how the transmission of these shocks amplified the contraction in real economic activity during the Great Depression (Mitchener and Richardson 2016). The paper contributes to the growing literature on financial networks and the real economy, illuminating both a mechanism for transmission (interbank deposits) as well as a source of amplification (balance-sheet effects). It also introduces an additional channel through which banking distress deepened the Great Depression and complements existing research on how bank distress during the Great Depression influenced the real economy.

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May 30, 2016

China Sends Yellen Another Warning, Fixes Yuan At Lowest In Over Five years

We got an early hint of what the PBOC would do tonight on Friday and Saturday, when as we reported, an unprecedented volume burst of bitcoin buying out of China, sent the digital currency soaring to the highest level since 2014.

To be sure, we had expected sailing would not be smooth for the FX market, when on Friday afternoon, after Yellen's' unexpectedly hawkish comments at Harvard, which sent the USD surging, we predicted a stormy sea for the Monday Yuan fix:

That is precisely what happened when moments ago the PBOC set the official exchange rate of the onshore Yuan lower by nearly 0.5%, from 6.5490 to 6.5794, the lowest fixing in more than 5 years, or February 2011.

Which brings us to a post we wrote last Wednesday, when according to Daiwa, "Round Two Of China Capital Outflows Is About To Begin." The highlights:

For the answer keep an eye on the offshore Yuan: if the selling and shorting resumes in earnest without an intervention by the PBOC, the events from August and January are about to deja vu themselves, all over again.

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May 27, 2016

6 Giant Corporations Control The Media, And Americans Consume 10 Hours Of ‘Programming’ A Day

If you allow someone to pump hours of “programming” into your mind every single day, it is inevitable that it is eventually going to have a major impact on how you view the world.  In America today, the average person consumes approximately 10 hours of information, news and entertainment a day, and there are 6 giant media corporations that overwhelmingly dominate that market.  In fact, it has been estimated that somewhere around 90 percent of the “programming” that we constantly feed our minds comes from them, and of course they are ultimately controlled by the elite of the world.  So is there any hope for our country as long as the vast majority of the population is continually plugging themselves into this enormous “propaganda matrix”?

Just think about your own behavior.  Even as you are reading this article the television might be playing in the background or you may have some music on.  Many of us have gotten to the point where we are literally addicted to media.  In fact, there are people out there that become physically uncomfortable if everything is turned off and they have to deal with complete silence.

It has been said that if you put garbage in, you are going to get garbage out.  It is the things that we do consistently that define who we are, and so if you are feeding your mind with hours of “programming” from the big media corporations each day, that is going to have a dramatic affect on who you eventually become.

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May 26, 2016

Quantitative Easing And The Corruption Of Corporate America

To be precise, today’s dangers emanate from our nation’s boardrooms, where officers and executives have authorized an era of reckless abandon in the form of share buybacks. In the event the word ‘hyperbolic’ just came to mind, the ramifications of a lost generation of investment in Corporate America should not be lightly dismissed. This trend, above all others, has weakened the foundation of U.S. long term economic growth.

The real question is whether those who have facilitated the malfeasance will be held accountable. Before the launch of the second iteration of quantitative easing (QE2) that the Fed voted to implement on November 3, 2010, Richard Fisher, to whom yours truly once answered, raised serious concerns. An October 7, 2010 speech before the Economic Club of Minneapolis was the venue.

The contextual backdrop is key: Just weeks before at Jackson Hole, Ben Bernanke had unleashed the mother of all stock market rallies by hinting that QE2 was indeed coming down the FOMC pipeline. The hawks were understandably hopping mad as the debate on the inside was anything but settled. Fisher indicated as much, albeit with notoriously diplomatic panache:

“In my darkest moments I have begun to wonder if the monetary accommodation we have already engineered might even be working in the wrong places. Far too many of the large corporations I survey that are committing to fixed investment report that the most effective way to deploy cheap money raised in the current bond markets or in the form of loans from banks, beyond buying in stock or expanding dividends, is to invest it abroad where taxes are lower and governments are more eager to please.”

Six years on, corporate leverage is hovering near a 12-year high and domestic capital expenditures have plunged. In the interim, reams of commentary have been devoted to share buybacks and with good reason. Companies reducing their share count have, at least in recent years, been where the hottest action is, courtyard-seat level action.

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May 25, 2016

The Global Monetary System Has Devalued 47% Over The Last 10 Years

We have argued the inevitability of Fed-administered hyperinflation, prompted by a global slowdown and its negative impact on the ability to service and repay systemic debt. One of the most politically expedient avenues policy makers could take would be to inflate the debt away in real terms through coordinated currency devaluations against gold, the only monetize-able asset on most central bank balance sheets. To do so they would create new base money with which to purchase gold at pre-arranged fixed exchange prices, which would raise the general price levels in their currencies and across the world to levels that diminish the relative burden of debt repayment (while not sacrificing debt covenants).

The odds of this occurring seem to have risen, judging by the gold prices. Table 1 looks at gold performance over one, five and ten years in terms of the fifteen currencies representing the fifteen largest economies (about 77% of global GDP). The bold figures at the bottom show gold’s performance weighted for GDP.

Gold is mostly quoted in US dollars, but it is also implicitly valued at each point in time in all currencies (as is everything that may be bought or sold across the world), simply by applying cross exchange rates to its USD price. Table 1 shows the experience of gold holders around the world has been quite different. A Russian would have had the currency he receives his wages in devalued to gold by almost 370% over the last ten years. Or, he could have generated a 370% gain by converting his ruble savings into gold. Anyone else in the world would also show a 370% gain by having owned gold and having been short the ruble.

Meanwhile, gold in dollar terms, as it is quoted for capital market participants given London and US exchange dominance over fungible gold trading, is up far less – about 94%. (This performance also represents gold performance for currencies pegged to the dollar, like the Saudi Arabian riyal.) Gold in Chinese yuan terms and Swiss franc terms are only about 57% higher over the last ten years.

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May 24, 2016

We're In The Eye Of A Global Financial Hurricane

The only "growth" we're experiencing are the financial cancers of systemic risk and financialization's soaring wealth/income inequality.

The Keynesian gods have failed, and as a result we're in the eye of a global financial hurricane.

The Keynesian god of growth has failed.

The Keynesian god of borrowing from the future to fund today's consumption has failed.

The Keynesian god of monetary stimulus / financialization has failed.

Every major central bank and state worships these Keynesian idols:

1. Growth. (Never mind the cost or what kind of growth--all growth is good, even the financial equivalent of aggressive cancer).

2. Borrowing from the future to fund today's keg party, worthless college diploma, particle board bookcase, stock buy-back, etc. (oops, I mean "investment")--a.k.a. deficit spending which is a polite way of saying this unsavory truth: stealing from our children and grandchildren to fund our lifestyles today.

3. Monetary stimulus / financialization. If private investment sags (because there are few attractive investments at today's nosebleed valuations and few attractive investments in a global economy burdened with massive over-production and over-capacity), drop interest rates to zero (or below zero) to "stimulate" new borrowing... for whatever: global carry trades, bat guano derivatives, etc.

Here is my definition of Financialization:

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May 23, 2016

SEC Conference Features Former Official Calling for Fraudsters to be Protected from Career Harm

The SEC showed its true colors yet again at a panel at Stanford Law School at the end of March, although not as dramatically as last year. In last spring’s SEC panel at Stanford, the then head of examinations, Andrew Bowden, made such fawning remarks about private equity, including repeatedly saying he’d really like his son to work in the industry, that he resigned three weeks after we publicized the segment. Nevertheless, this conference was another demonstration of depth of regulatory capture at the agency.

As before, the real action came in when the audience members asked questions. They were all fielded by Andrew Ceresney, a former Debevoise & Plympton partner, now head of enforcement. We’re going to look at two questions in succession.

This one, the second in the Q&A section, has an individual investor reiterating objections that Elizabeth Warren, as well as SEC commissioners Kara Stein and Luis Aguilar, made about the SEC’s practice of being far too willing to waive an automatic sanction, that of the loss of “well known security issuer” status for serious violators. Kara Stein’s stinging 2015 dissent to a Deutsche Bank waiver gives a flavor for how the SEC is all too willing to go easy in the face of criminality:

With these WKSI advantages comes a modicum of responsibility. WKSIs must meet the very low hurdle of not being ineligible. This means that, among other things, they have not been convicted of certain felonies or misdemeanors within the past three years. In granting this waiver, the Commission continues to erode even this lowest of hurdles for large companies, while small and mid-sized businesses appear to face different treatment.

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May 20, 2016

The Shift To A Cashless Society Is Snowballing

Love it or hate it, cash is playing an increasingly less important role in society.

In some ways this is great news for consumers. The rise of mobile and electronic payments means faster, convenient, and more efficient purchases in most instances. New technologies are being built and improved to facilitate these transactions, and improving security is also a priority for many payment providers.

However, as Visual Capitalist's Jeff Desjardins explains, there is also a darker side in the shift to a cashless society. Governments and central banks have a different rationale behind the elimination of cash transactions, and as a result, the so-called “war on cash” is on.


The Federal Reserve estimates that there will be $616.9 billion in cashless transactions in 2016. That’s up from around $60 billion in 2010.

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May 19, 2016

China Sends Hawkish Fed A Message - Devalues Yuan Near 2016 Lows

Just as we warned was probable, The PBOC sent a message loud and clear to the newly hawkish Fed following today's surge in the dollar after the minutes were released. With the 2nd biggest daily devaluation since the August collapse, China pushed the Yuan fix against the USD down to its lowest since early February - barely above the January lows. As we warned earlier, the China-Panic trade looms loud now as turmoil appears all that is left to stop The Fed unleashing another round of liquidity-suckiong rate hikes sooner than the market wants.

All eyes have been firmly focus on the Yuan's move against the USD but in fact the Yuan has been falling non-stop against the world's major currencies...

The critical issue now is that the U.S. dollar is appreciating again. The
Bloomberg Dollar index is up 2.8% in the last two weeks and another 2%
wouldn’t be an unreasonable consolidation in the context of it dropping
more than 7% in the previous three months.

That previous dollar slide distracted from the fact that yuan depreciation never abated. Against the basket, it’s been weakening at an average rate of almost 1.2% per month for the last five months.

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May 18, 2016

Working 60 Hours A Week At 3 Part-Time Jobs And Still Living Paycheck To Paycheck

What can you do when you are working 60 hours a week at three part-time jobs and it is still not enough?  In America today, many people have taken on more than one job in a desperate attempt to make ends meet, but they still come up short at the end of the month.  And those that are actually working are the fortunate ones, because in one out of every five families in the United States nobody has a job.  There are more than 100 million working age Americans that are currently not employed (yes this is true), and as I pointed out yesterday, job cut announcements by major firms are currently running 24 percent ahead of last year’s pace.  But unemployment is just part of the overall problem.  There is this growing misconception out there that if you “have a job” that you must be doing okay.  Unfortunately for the growing number of “working poor” in America, that is not true at all.

Just consider the case of 55-year-old Erlinda Delacruz.  At one time she had a good full-time manufacturing job, but then her factory closed down.  Millions of other Americans have also seen their good paying jobs sent out of the country in recent years, and yet our politicians refuse to do anything about it.  Today, she works 60 hours a week at three different part-time jobs and she still makes less than she once did at the manufacturing plant…

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May 17, 2016

Hedge Funds Want a Pony, Um, Permanent Capital, as More Investors Exit

The latest fantasy, even as funds are facing high levels of redemptions when super-low and negative rates ought to make them on of the places to be, is that they should get even better terms. Their pet ask is “permanent capital” as in really long lockups. Yes, and I would like to have a pony. When times are tough, vendors give concessions rather than increase their demands. There’s no indication that the fund managers who want to tie up investor money are prepared to give a big break commensurate with the loss of liquidity, like considerably lower fees.

The Financial Times story does point out that many funds now have monthly redemptions, which looks like a symptom that the fundraising environment has become more difficult than hedgies want to admit. In the early 2000s, only fledging funds offered monthly liquidity; quarterly was the norm, and some funds could limit redemptions to once a year. Monthly redemptions can be highly disruptive, since investors will be tempted to use the hedge fund as a source of liquidity independent of fund performance. Having investors sell (and put funds back) on short notice not only makes it hard to run an investment strategy (which assets do you sell?) but it can lead to cascading sales. If one investor sells enough, it may put another investor at over 10% of fund assets, which is prohibited by the investment policies of many institutional investors. So that investor will have to sell to get back down to 10%, which has the potential to trigger more partial exits.

However, there is a world of difference between getting away from disruptive monthly liquidations and “permanent capital.” George Soros, one of the fathers of the hedge fund industry, always ran his funds with the view that he could liquidate them readily if needed. Despite his successes, he’d never seemed to have forgotten his childhood experience of fleeing the Nazis. Being able (in theory) to shutter his business and take his winnings on short notice was important to his sense of security.

Yet we hear unsubstantiated claims that hedge funds are just about to become the place to be:

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May 16, 2016

Hedge Fund Comeuppance: Firms Hunker Down, Start to Cut Fees as Investors Wise Up and Withdraw Money

Some Masters of the Universe are having their wings clipped. Hedge fund have continued to charge rich fees even as their results not only became more correlated with stocks but have undershot them. In other words, they’ve repeatedly failed to deliver on their raison e-etre: superior results, or failing that, useful diversification.

Investors, who’ve historically been dazzled by the promise of hedge fund alchemy, are finally realizing that what they have bought is dross and have finally decided enough is enough. In late 2014, CalPERS stunned the investor community by saying it was exiting hedge funds. Last month, the New York City pension system said it was terminating its $1.7 billion program. The Illinois State Board of Investments decided to cut its hedge fund commitments by $1 billion in 2016, while AIG said it will trim its $11 billion allocation by 50%. The New York Post reported that the $3.2 trillion industry could see as much as $500 billion in withdrawals this year.

These gloomy forecasts come on the heels of the marquee annual hedge fund conference, the SkyBridge Alternatives at the Bellagio in Vegas. But even a bad year does not look all that bad from Hedgistan. From Institutional Investor:

… industry titans rubbed shoulders with business legends like T. Boone Pickens, political heavyweights such as John Boehner and Hollywood celebrities including Will Smith and Ron Howard. But despite the A-list delegates and luxe environs — some 2,000 conference guests enjoyed lavish pool parties, VIP dinners, private concerts with the Killers and the Wailers, a pop-up salon and free spin classes — the mood this year was almost somber. And it’s easy to see why: After years of mediocre aggregate performance, followed by a terrible first quarter, hedge fund managers are enduring withering criticism from investors. And some of these investors are voting with their feet.

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May 13, 2016

Unemployment Claims Spike Again As We Get More Scientific Evidence The Middle Class Is Shrinking

As the U.S. economy slows down, we would expect to start to see evidence of this in the employment numbers, and that is precisely what has begun to happen.  During the week before last, initial claims for unemployment benefits jumped by 17,000, which was the largest increase that we had seen in over a year.  Well, last week we witnessed an even bigger spike.  Seasonally adjusted initial claims shot up 20,000 more to a total of 294,000.  Of course it makes perfect sense that more Americans are applying for unemployment benefits, because firms are laying people off at a much faster pace these days.  Just a couple days ago I reported that job cut announcements at major firms are running 24 percent higher this year compared to the first four months of last year.  So we should fully expect that the number of Americans seeking unemployment benefits will continue to accelerate.

Personally, I am a bit surprised by how quickly these numbers are getting worse.  The following comes directly from the Department of Labor

In the week ending May 7, the advance figure for seasonally adjusted initial claims was 294,000, an increase of 20,000 from the previous week’s unrevised level of 274,000. This is the highest level for initial claims since February 28, 2015 when it was 310,000. The 4-week moving average was 268,250, an increase of 10,250 from the previous week’s unrevised average of 258,000.

For a long time, initial claims for unemployment benefits were running quite low, and this was one of the few bright spots for the U.S. economy.

Unfortunately, that is now changing, and this is just more confirmation that a significant economic slowdown has already started.  For many more numbers that back up this claim, please see my previous article entitled “11 Signs That The U.S. Economy Is Rapidly Deteriorating Even As The Stock Market Soars“.

But whether the economy has been doing good or bad in recent years, the long-term trend of the decline of the middle class in America has continued unabated.

This week, we got even more evidence that the middle class is steadily disappearing from the Pew Research Center

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May 12, 2016

What Will The Global Economy Look Like After The "Great Reset"?

A very common phrase used over the past couple years by the International Monetary Fund’s Christine Lagarde as well as other globalist mouthpieces is the “global reset.” Very rarely do these elites ever actually mention any details as to what this “reset” means. But if you take a look at some of my past analysis on the economic endgame, you will find that they do, on occasion, let information slip which gives us a general picture of where they prefer the world be within the next few years or even the next decade.

A few goals are certain and openly admitted. The globalists ultimately want to diminish or erase the U.S. dollar as the world reserve currency. They most definitely are seeking to establish the International Monetary Fund’s Special Drawing Rights basket system as a replacement for the dollar system; this plan was even outlined in the Rothschild run magazine The Economist in 1988. They want to consolidate economic governance, moving away from a franchise system of national central banks into a single global monetary authority, most likely under the IMF or the Bank for International Settlements. And, they consistently argue for the centralization of political power in the name of removing legislative and sovereign barriers to safer financial regulation.

These are not “theories” of fiscal change, these are facts behind the globalist methodology. When the IMF mentions the “great global reset,” the above changes are a part of what they are referring to.

That said, much of my examinations focus on these macro-elements; but what about the deeper mechanics of the whole scheme? What kind of economic system would we wake up to on a daily basis IF the globalists get exactly what they want? This is an area in which the elites rarely ever comment, and I can only offer hypothetical scenarios. I am basing these scenarios on the measures that the establishment most obsessively chases. If they want a particular social or economic change badly enough, the signs become obvious.

Here is what the world would probably look like after a global economic reset...

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May 11, 2016

11 Signs That The U.S. Economy Is Rapidly Deteriorating Even As The Stock Market Soars

We have seen this story before, and it never ends well.  From mid-March until early May 2008, a vigorous stock market rally convinced many investors that the market turmoil of late 2007 and early 2008 was over and that happy days were ahead for the U.S. economy.  But of course we all know what happened.  It turned out that the market downturns of late 2007 and early 2008 were just “foreshocks” of a much greater crash in late 2008.  The market surge in the spring of 2008 was just a mirage, and it masked rapidly declining economic fundamentals.  Well, the exact same thing is happening right now.  The Dow rose another 222 points on Tuesday, but meanwhile virtually every number that we are getting is just screaming that the overall U.S. economy is steadily falling apart.  So don’t be fooled by a rising stock market.  Just like in the spring of 2008, all of the signs are pointing to an avalanche of bad economic news in the months ahead.  The following are 11 signs that the U.S. economy is rapidly deteriorating…

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May 10, 2016

China Trade And The Inevitability Of Systemic Reset

Throughout 2014 and even into 2015, the word “decoupling” was resurrected to try to calm growing unease about the direction of global growth. It’s first broad usage was during the first part of the Great Recession, as economists were sure that emerging markets then would be able to weather the “slowdown” of 2008 believed at that time confined to the US and Europe. It was an absurd suggestion but perfectly consistent with orthodox economics and its idea of closed systems.

When the word was brought back in 2014, it was under seemingly far more happy circumstances. China was acting curiously and places like Brazil were wrote off as if they had their own problems, maybe even big problems, but the US, Europe, and even Japan were supposed to be finally back on track. Again, the idea of closed systems propelled this “logic.” As I wrote in September 2014 under the headline China Profoundly Disagrees with FOMC Assessments:

That more than suggests not only a widespread slowdown, but also why Brazil and Australia are enthralled by recession. The larger question in a world obsessed by some ephemeral and eternally positive “global growth” construct (at least economists as they are in setting forward predictions about specific growth regimes) is how that Chinese slowdown fits within more unique circumstances about specific systems. When the first vestiges of Chinese production deceleration became apparent in early 2014, it seemed very curious to the mainstream because everything about “global growth” was headed in the “right direction.”

Since China’s economy was built to manufacture everything global growth could buy, it set up this major disagreement. How could industry in China be decelerating sharply and to lower and lower levels while economists saw only economic achievement for the US and the other developed markets? If economists were right particularly about the US, then they would have to explain why rapid US growth had suddenly forgotten to buy much from China.

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May 9, 2016

HSBC’s London Gold Vault: Is This Gold’s Secret Hiding Place?

HSBC’s main gold vault in London regularly comes under the media spotlight for a number of reasons. These reasons include:

a) the HSBC London vault stores a very large amount of gold on behalf of gold-backed Exchange Traded Funds, primarily the well-known SPDR Gold Trust (GLD)

b) along with the Bank of England vaults and JP Morgan vault, the HSBC vault is one of the 3 largest gold vaults in London

c) the location of the HSBC vault in London is not publicised and so the secrecy creates intrigue

d) HSBC every so often throws out some visual or audio-visual media bait about the vault, most famously in the case of CNBC’s Bob Pisani and his camerman and producer visiting and filming inside the actual vault

Despite all of the above, no one seems to have ever tried to figure out where this gold vault is actually located. Until now.

In some ways HSBC has done a very good job keeping the location of its London gold vault under wraps. The main challenge is where does one begin to look for a vault in London from scratch. At first it would appear that there is nothing in the public domain pointing to the HSBC vault location. This is not entirely true however. The gold bullion activities of HSBC in London stem from two companies that over time became part of the HSBC group. My approach was to start by thinking about which London locations HSBC used to be based at. I took this approach because it became obvious that the HSBC London gold vault being used was still a battered looking old vault space in 2004 and 2005, which was after the entire HSBC company had moved to its spanking new London headquarters in Canary Wharf by 2003.

In New York, the location of the HSBC Bank USA precious metals vault in Manhattan is well-known and is even listed in CFTC documents such as here. The vault is at 1 West 39th Street, SC 2 Level , New York, New York 10018 , which is the same building as 450 Fifth Avenue, which is the former Republic National Bank building that HSBC took over in 1999-2000. This Republic building at 450 Fifth Avenue, when it was being built, “had special vault requirements that reportedly added significantly to the project’s cost“. So its hard to see why HSBC makes such a big deal of not revealing its London vault location.

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