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Bernard's Top 10: Japan's lost quarter century; China's (very) eventual day of debt reckoning; 'A sham trust from the start'; Australia's negative gearing battle between the old and the young; Clarke and Dawe; John Oliver

Bernard's Top 10: Japan's lost quarter century; China's (very) eventual day of debt reckoning; 'A sham trust from the start'; Australia's negative gearing battle between the old and the young; Clarke and Dawe; John Oliver

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must read is #5 from George Magnus on Chinese debt.

1. Japan's lost quarter century - Last week's surprise admission of defeat by the Bank of Japan when it decided not to increase its stimulus has got a lot of people rethinking their 'central bank put' assumptions.

Ambrose Evans Pritchard curdles the blood with this piece on Japan's debt-deflationary spiral. As prices keep falling, the real value of the debt gets even bigger, particularly in a per-capita sense as Japan's population falls.

I'm always a bit wary of predictions of doom in Japan. It seems to have functioned pretty well for the last 20 years and remains rich and stable. Sure, the debt gets bigger and the growth won't come, but it's amazing how long you can make debt last with negative interest rates.

It can't be that bad. Their unemployment rate is 3.2% and there are 1.3 jobs for every applicant. Europe would kill for that problem.

But here's Ambrose in good form:

The Japanese economy is contracting again, caught in a debt-deflation vice. Growth has been negative for four of the last eight quarters.  What was once a ‘Lost Decade’ is turning into a “Lost Quarter Century” with no remedy in sight.

“Their options are diminishing. I can’t see any way out of the debt-trap, and it is an acid test for the western world,” said Neil Mellor from BNY Mellon.

Public debt is rising fast on a shrinking economic base, pushing the public  debt ratio to an estimated 250pc of GDP this year. “The debt will never be ‘repaid’ in the normal sense of the word,” said Lord (Adair) Turner from the Institute for New Economic Thinking.

Olivier Blanchard, the former chief economist for the International Monetary Fund, warned recently that country is nearing the end-game as the pool of domestic funding for the bond market starts to dry up and the Japanese treasury is forced to rely on much more costly capital from global investors.

 

2. 'People don't trust their balance sheets' - Australian­Super’s chief investment officer Mark Delaney is wary of China's economy, and he has an office in Beijing that has looked at investing there and decided against investing for now.

Here's why, as The Australian reported:

“China has been in a downturn for two years. Profit growth has been terrible and asset prices have been very expensive. It hasn’t been a very good cyclical environment to be involved in.”

But he said there was also concern about the credit bubble in China with its growing levels of government debt as well as questions about the bad debt exposure of the country’s banks.

He said Chinese bank shares were only selling at single digit multiples of their returns “not because they don’t make a lot of money, but because people don’t trust their balance sheets”.

“No one really knows how this is going to be sorted out.”

3. Trouble brewing - These details in the Australian's report were the most eye-opening, particularly given the latest round of the usual lending-for-apartments stimulus that has gone on in China in the March quarter:

The International Monetary Fund estimated that China may have as much as $US1.3 trillion ($1.7 trillion) in loans to borrowers who did not have enough income to meet their repayments. It estimated this could mean potential losses of as much as 7 per cent of China’s gross domestic product.

In its latest Global Financial Stability Report, the IMF estimated that loans “potentially at risk” could reach 15.5 per cent of total bank commercial lending — some three times the level reported by the Chinese bank regulator.

4. Squirt and hope - Rowan Callick reports the latest lending surge in China may have to be reversed. And then what?

Rosealea Yao, an analyst with Beijing-based Gavekal Dragonomics, says: “The huge surge in both housing prices and mortgage lending in the first quarter of 2016 certainly looks very frothy and very risky, even if it has helped alleviate short-term worries about growth.”

She asks: “Has China salvaged growth only by inflating a housing bubble?

“How much tolerance the government has for this debt-price spiral is thus a crucial question for judging how long the nascent construction cycle will last.

“Historically, the government has usually intervened to prevent housing prices from rising too fast, as they present a political as well as an economic problem. Therefore it is very likely the authorities will in coming months move to cool down both overall credit growth and excesses in the frothiest housing markets. If they do not, a bigger boom-bust cycle will result.”

5. This can't go on for ever - George Magnus is another one worried about China's latest credit squirt to revive economic growth. He says it can't last forever and he reckons lending is currently growing 25-30% per annum to grow the economy by 6-7%. Hmmm. Those numbers won't add up for long.

The share of total credit in the economy is approaching 260 per cent and, on current trends, could surpass 300 per cent by 2020 — exceptional for a middle-income country with China’s income per head. The debt build-up must sooner or later end — and when it does it will have a significant impact on the global economy.

Back in 2008, as the western financial crisis spread, China tried to insulate itself with a big credit stimulus programme to counter factory closures and an accompanying return of millions of migrants to the countryside. By 2011 the growth rate had peaked. Its decline was led by a fall in investment in property, then manufacturing. Subsequent stimulus measures have not al­tered the trend for long — but one constant is a relentless build-up in the in­debtedness of property companies, state enterprises and local governments.

6. Extending the day of reckoning - Magnus says the eventual moment when someone has to recognise the bad debts could be extended. After a lot of pretending.

For now, China’s credit surge seems to have stabilised the economy after a sharp slowdown around the turn of the year. The property market has picked up, attracting funds from a stock market that has fallen out of favour with investors after pronounced instability in the middle of last year and early in 2016. The volume of property transactions has risen and prices have re­bounded, especially in the biggest cities.

Timing the end of a credit boom is more luck than judgment. There is no question that lenders own bad loans, reckoned unofficially by some banks and credit rating agencies to amount to about 20 per cent of total assets, the equivalent of around 60 per cent of GDP. These will have to be written off or restructured, and the costs allocated to the state, banks, companies or households. Yet in a state-run banking system, where loans can be extended and there are institutional obstacles to realising bad debts, the day of reckoning can be postponed for some time.

7. 'A sham trust from the start' - As reported by Sam Sachdeva, and Anne Gibson a High Court judge criticised John Key's personal lawyer, Ken Whitney, in a 2014 ruling on the creation of a trust for a bankrupted Las Vegas property developer (Rod Nielsen) who wanted to develop a project in Albany north of Auckland:

In the ruling, Justice Wylie concluded: "In my judgment, the Rosebud Trust was a sham trust from the outset.

"The intention from the outset was to mislead, to conceal Mr Nielsen's identity and to enable him to carry on business in this country, notwithstanding his bankruptcy."

The Prime Minister said he had complete faith in his lawyer, who said this in court:

When asked during cross-examination if he had concerns around setting up structures to allow a bankrupt to continue in business, Mr Whitney told the court: "No, not particularly. It's a common thing for people to do. It may not be morally as white as it could be but it's normal practice."

Mr Key has also reassured New Zealanders that New Zealand's trust sector was completely transparent and cooperative with our tax authorities if they or overseas tax authorities wanted information.

Here's what the High Court ruled on Mr Whitney's activities around transparency and cooperation with the authorities:

According to the judgment, Mr Nielsen used the trust to enter as a partner into Auckland's Albany Heights housing development. In negotiations Mr Nielsen wrote to his partners citing advice from Mr Whitney that said Rosebud was set up so he would "not show up on the trust deed". According to Justice Wylie: "Indeed, Whitney accepted in cross-examination that this was done to maintain secrecy as against all parties, including the Official Assignee."

When approached by the Official Assignee, who was probing Mr Nielsen's bankruptcy, Mr Whitney twice failed to respond. Nine months after the initial request, and faced with a threat of summons if he failed to comply voluntarily, Mr Whitney said he had no information.

Justice Wylie, in commenting on the level of disclosure, said: "Whitney did not disclose the existence of the Rosebud Trust to the Official Assignee, notwithstanding the breadth of the initial request in October 2009, the further request in July 2010 and the more pressing demand on 19 August 2010. Nor did he volunteer that [Nielsen and his wife] had been appointed discretionary beneficiaries of that trust."

8. Negative gearing - The debate over negative gearing is heating up over the Tasman because Labor wants to stop it so landlords can no longer offset their rental losses against their personal income. This has been much harder to do here since the abolishment of LAQCs.

Here's Bernard Keane at Crikey on the intergenerational wealth battle at the heart of the issue:

Australia’s tax system, which is heavily skewed in favour of property investors and against those trying to access housing to live in, will remain intact if the Coalition has its way. That will preserve an environment in which — especially in Sydney and Melbourne — younger people and low-income earners are condemned to perpetual renting, so high are house prices in areas of economic opportunity. Turnbull and Co. have, like so many politicians before them, taken the side of home owners and investors against younger Australians looking to buy a house.

This isn’t merely an issue of fairness for younger people and low-income earners. It is economically and socially dislocative; to access jobs and other economic opportunities, young people and low-income earners must work in areas where they can’t afford to buy, meaning they rent forever or spend much of their time trapped in gridlocked infrastructure trying to commute. And services that need low- and middle-income earning employees — healthcare, childcare, aged care — struggle to attract staff because the people they would normally recruit live dozens of kilometres and 90 minutes away by car.

Sound familiar?

9. Totally Clarke and Dawe - An Australian voter fesses up to voting for someone.

10. Totally John Oliver on Puerto Rico's debt crisis - Seriously.

And I hope we don't have too many of these in the nether regions of our comment sections.

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29 Comments

The Japanese government may be able to prop up the Nikkei in the short term by printing money but the deep malaise that characterises Japan is worsening.

'The numbers are glaring. Japan’s overall suicide rate is roughly 60 percent higher than the global average, a 2014 World Health Organization report noted. In 2014 alone, 25,000 Japanese people took their own lives — roughly 70 suicides every day. Last year, suicide was the leading cause of death for Japanese children between the ages of 10 and 19. Among teens and young adults ages 10–24, there are roughly 4,600 suicide deaths in each year, and another 157,000 instances of hospitalization for self-inflicted injuries.'

http://wilsonquarterly.com/stories/the-mystery-behind-japans-high-suici…

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NZ also has a high suicide rate and youth suicide has been relatively high compared to other OECD countries.

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I agree, J.C. There's no need to look as far as Japan if you're looking for social malaise. Last year (June 2014 – May 2015), New Zealand's suicide toll was the highest since records began. Suicide is second only to car accidents as the main cause of death among young people (aged 15-24), and NZ has the highest suicide rate amongst OECD countries for females aged 15-24. On average two young people die every week as a result of suicide. Each week, a further 26 intentionally harm themselves. As The Guardian, 19 Oct 2015, reported, ‘The figures – which are nearly twice the annual road toll – means New Zealand has the second highest rate of youth suicide in the OECD'.

And here's something else close to home. The police recorded a family violence investigation on average every five and a half minutes in 2014. The same statistics assert that 76% of family violence incidents are not reported to the police. Source: http://areyouok.org.nz/family-violence/statistics/ As Al Jazeera reported, 29th Dec 14, under the headline “Domestic Violence ‘Epidemic’ in New Zealand”: ‘According to the New Zealand Family Violence Clearinghouse, a research group at Auckland University, more than 800,000, or 35 percent of New Zealand's population, have experienced physical or sexual violence by an intimate partner. When psychological or emotional abuse is included, the figure increases with 55 percent of women reporting violence from their spouse or partner.’

Plenty else to ponder. We also, by most accounts, have the third highest per capita use of methamphetamine (P) in the world. We have an exploding incidence of rheumatic heart disease, respiratory and other infectious diseases, all usually associated with impoverished, third world living conditions.

I recognise these are painful statistics to rehearse. But we too need to look at some of the social collateral that seems to come with a single-minded focus on 'growing the economy'.

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the aussie election is turning into a have and have nots election, it will be interesting to see which way this one swings

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Trying a different tack; is the current economic malaise rooted in a fundamentally flawed economic model which essentially places banks at the center of the universe? Look at the basics, our deposits in banks are the banks money not ours - we are just unsecured creditors, banks are keen to loan to businesses and debt is taught at universities as being good because it means banks have oversight of your business to ensure it is sound, BUT as our dairy sector has shown us, banks actually don't care if your business is sound, they only care that they can protect their money by getting their claws into your assets, this also translates in personal borrowings be they mortgage or other. Thus should we be looking at ways to change this model and make banks just another business? make them accountable, don't let them claim our money as theirs?

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yes and no. Yes we have a flawed economic model, you cannot grow for ever. No the problem is lack of cheap energy plus financial misfeasance on top to make it a real mess.

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I agree you cannot grow forever on a finite world, there are very clear boundaries, but i'm not sure about your argument re cheap energy. The financial malfeasance goes without saying, most banks and many business leaders are just crooks. On the energy question, the ideal would be a universally available free or very cheap energy, but the economic model we used, likely driven by the banks, has seen energy in all it's forms privatised and that malfeasance playing a big part now. but we must also be aware that there are often hidden costs in energy. for example when oil first began to be used, it was not foreseen how destructive it's mass uptake would be on the world. The risks associated with nuclear energy are well known, but the fear of those risks has seen that form of energy to be almost completely unacceptable anywhere now, despite technology likely being able to provide very safe reactors. but could these be provided on a smaller scale to suit smaller applications? Solar is not yet efficient enough or reliable, and the same goes for wind. What are the options?

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It amuses me that most people seem to subconsciously assume the universe is made for us and obviously will provide us with a cheap clean alternative to oil and coal.

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Cheap energy actually has two meanings.

Firstly there is the numerical value (usually of a fiat currency) placed on the unit of energy. That usually bears little resemblance to the actual value of the energy. For instance, a car tank of petrol valued at $100 might move the vehicle several hundred kilometres in a few hours. A person pushing the same vehicle might take several weeks to cover the same distance: how many people would do several weeks hard labour for $100?

Secondly, there is the matter of how much energy is consumed to acquire useable energy. In the early days of oil a few days of drilling with hand equipment could result in a thousands-of-barrels-a- day gusher; nowadays much larger amounts of energy are expended to acquire much smaller returns.

'What are the options?'

There are none that will maintain anything like the current rate of energy consumption.

We are headed 'straight off the cliff', both in terms of future available energy and in terms of the effects previously-consumed fossil fuels are having.

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PS the ppl selling mortgages frankly I think only care about one thing, their annual bonus, after that it isnt their problem.

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Wouldn't it be nice to be able to ignore (say) IRD for ten months, then (apparently) lie and get away with it.

It seems like a different law for some. . .

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Re:#1Olivier Blanchard, the former chief economist for the International Monetary Fund, warned recently that country is nearing the end-game as the pool of domestic funding for the bond market starts to dry up and the Japanese treasury is forced to rely on much more costly capital from global investors.

This is reality for the Japanese banking system, right now. The explanation is plain for all to see in the cross currency basis swap quotes. The question is, why is hard to secure, expensive USD rollover funding required - China? Read more

The discount offered to U.S. dollar holders to borrow yen for five years in the swap market reached a record 102.5 basis points on March 8 and was at 89 on Wednesday. The Aussie-dollar cross currency basis swap is at 19, giving investors in Australia the combined benefit of both rates in a JGB asset swap. Read more.

Without doubt, the domestic arms of large Japanese G-SIBs are rolling in QQE Yen reserves at their respective BoJ accounts to offer in exchange for USD, via swap contracts.

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Interesting reads as always, if, for me at least, a little challenging to understand at times.
It seems to me that the "dollar shortage" could also be consistent with a "Yen surplus", where the Japanese government and related financial institutions (culturally I believe Japan Inc is more one entity than the old Soviet Union, or the Chinese levels of government) are furiously printing money by the trillion, and buying whatever they can while they can get away with it. If they have to take a 1% hit in nominal values on the way, no real harm as they've printed the money, and can always print more if they need to, while the transactions help keep the Yen at a competitive exchange rate. So Japanese pension funds and individuals are ending up with vast swathes of the world's assets, and the only debt is to themselves. Can they end up in an Icelandic situation? I don't think so, as their economy and current account are large enough to keep any currency moves within manageable levels so there won't ever be a run on Yen in an economy collapsing way.

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A simple conclusion claims it signifies the end of the "yen carry trade" - hence cheap funding for outside of Japan asset values.

Conclusions are difficult due to a lack of disclosure surrounding these deal types. Since Mr Spencer replaced the departed Mr. Orr as a deputy governor at the RBNZ he suspended public disclosure of the pre-funding of interbank cash settlement accounts via currency swaps - that is our domestic banks borrow USD and swap if for RBNZ pen stroke created NZD - I understand the lame excuse at the time was a possible confusion with rare currency intervention trades.

Moreover, details are so hard to retrieve, apparently, the RBNZ suspended collection of foreign NZD bond issuance which is nearly always associated with cross currency basis swap trades involving our banks hedging foreign wholesale funding. I refer primarily to credit wrapped supranational Uridashi, Kauri and Eurokiwi note issuance.

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I can't see the problem that Blanchard et al see. Japan does not have a current account deficit, therefore it is free to create yen and buy up yen denominated debt as it sees fit. The only constraint is the willingness of the US, China and Europe to tolerate yen depreciation. It seems they did threaten Japan in the last G7 meeting and so the BOJ has not increased their debt buying rate any further. The BOJ has so far bought 30% of Japanese government debt and are steadily hoovering up the rest at a rapid rate. Debt owned by the BOJ is effectively cancelled, although the charade is maintained that the government's left pocket still owes its right pocket.

Where exactly is the problem for Japan? Is there a danger of a sudden adjustment in the yen? I really don't see it. The problem is when China and Saudi break their currency pegs and send an earthquake around the world.

Great link by the way. It suggests that the next crisis comes from a debt default somewhere in China that cascades around the worlds banks.

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dp

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Where exactly is the problem for Japan?

They have built up a "dollar" rollover funding dependence that is increasingly hard to execute - the 5 yr USD/JPY cross currency basis swap quote certainly reflects as much. And despite $billion rolling through that highly negative swap quote it remains so, thus the demand is not met regardless of the illiquidity cost.

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Suggesting the problem is deep in the debts of the Japanese banks, not in government debt at all. Complicated stuff for my simple brain. The funding costs of borrowed dollars would seem to be from the strains upon the Yuan currency peg.

Interesting mention of Eygpt, which is another unfolding disaster. Was a country of 30 million with oil to export in exchange for wheat. Now a country of 90 million (?) that imports oil and wheat. Scary as. What does Europe do when Eygpt implodes?

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But I thought central banks rescue or at least extend a helping hand to their domestic banks?

Much the same seems to have happened in a small way this week.

Some central bank is in receipt of USD 1.2 billion via liquidity swaps from the US Federal Reserve for the week ending 4/5/16, where zero was reported last week. View section 2

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Point taken, the BOJ is presumably very tight with the Japanese banks almost to the point of being different departments of the same entity.

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All good points by Roger and Stephen H. Egypt is indeed a worry. 82 million people already close to the poverty line, with no real export industry (and blowing up a Russian plane will not have helped their tourist industry) and the Saudis with no money left to fund them in exchange for adherence to their particular brand of Islam. Central Banks cannot fix those problems.

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Regarding the article #7 refers to:

"When it was put to Mr Whitney that the words 'In the presence of...' required that he be present when Mr Nielsen signed it, Mr Whitney offered the explanation that he had 'taken it to mean also if you know the person's signature and you've discussed it with them and they acknowledge it then that's fine'.

Yet this My Whitney, aka John Key's lawyer, is explicitly described by John Key: "I don't deal with people unless they're highly ethical and they do things well."

For everything to make sense, one can only assume John Key doesn't actually understand ethical behavior, and would define 'highly ethical' as: "someone who does what's best for themselves at the expense of others".

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Whitney is not actually a lawyer !!!
http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=116…
Gave up his registration not that long ago apparently. Lawyers doing such work don't do that easily. So the question is. Was it completely voluntary ? Or was he strongly advised too ?

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#7. handcuffs for Mr Whitney for that one in my view. What a shocker. And Neilson ???. Ask for stories about him in Queenstown. What other dodgy clients does Mr Whitney have ? ......

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I've just had a skim through of the judgment - you can find it on Judicial Decisions Online. It's horrifying.

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#4. Dike cartoon by Body. Cartooning at its best.

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"No, not particularly. It's a common thing for people to do. It may not be morally as white as it could be but it's normal practice."

Seems like lawyers are fair game for being tarred, about the way they conduct their affairs.
Bravo..Now our lawyers' reputation is also fixed along with the country's.

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The "pretty legal" statement by Steven Joyce sums it up really..

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It is Friday again..Funny that...

Talking of Lawyers reminds me of a little risque joke. It may be risque, it is probably legal, as about no one in particular. it may be truthful, but is it....really, really ....Ethical......... to repeat it. I stole it from someone else.

Oh well it is Friday...so here goes...

You be the Judge.

Two lawyers had been shipwrecked on a desert island for several months. The only thing on the island was a tall coconut tree that provided them their only food. Each day one of the lawyers would climb to the top to see if he could spot a rescue boat coming.

One day the lawyer yelled down from the tree "WOW, I just can't believe my eyes. There is a woman out there floating in our direction." The lawyer on the ground was skeptical and said "You're hallucinating; you've finally lost your mind."

But within a few minutes, up to the beach floated a stunningly beautiful young woman, face up, totally naked, unconscious, without even so much as a ring or earrings on her person.

The two lawyers went down to the water, dragged her up on the beach and discovered that she was alive, warm and breathing. One said to the other "You know, we've been on this Godforsaken island for months now without a woman. It's been such a long, long time. Do you think we should, well, you know...screw her?

"Out of WHAT?!?" asked the other lawyer.
-----------------------------------------------------------------------------------------------
I say...
Never employ a shyster lawyer, way to "risky"...under any circumstances.
Plus, if a Politician and a Banker and money is involved, steer well clear.

Another non funny joke, too near the truth is..

"How can Defense Lawyers live with themselves defending heinous crimes, they know their client did"....

In luxury mate, in absolute... luxury...and probably on Legal Aid...it is a growth industry....courtesy of the Taxpayer.

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