Why Is Gold Tanking?

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The coronavirus continues to take its toll on the stock market.

If you were expecting a major recovery today after yesterday’s bloodbath, you were very disappointed.

Stocks opened higher this morning but soon fell back into red territory again, where they stayed throughout the day.

The Dow ended up losing another 879 points today after yesterday’s 1,031-point hammering.

The S&P and Nasdaq were also big losers today, down 98 and 256 points respectively.

For investors accustomed to “buying the dip,” this is quite a change. As noted macroeconomic analyst Mohamed El-Erian said earlier today:

I understand the inclination to buy on the dip. I understand that the path of least resistance in this market is to bounce up… but I stress, this is different.

Meanwhile, the all-important 10-year Treasury yield fell to a record low this morning as investors continue to pour into safe-haven assets.

The 10-year yield dropped to 1.32%, falling beneath its previous record low of 1.325%, which it set in July 2016 following Brexit.

That means the bond market is projecting a poor outlook for the global economy. And over the long haul, the bond market has an excellent track record of being right.

Gold was down big today, losing $45.20. But that’s not because of gold itself. It’s all about the falling stock market.

When you think about it, it doesn’t make sense.

After all, if investors are fleeing for safety, which we’re seeing in the Treasury market, why wouldn’t they be buying up gold as well?

Gold was up close to $30 yesterday, before the price began dropping late in the day.

Here’s the likely reason why gold is falling right now when it should be rising…

With the stock market plummeting, hedge funds and other institutional investors have had to suddenly raise cash to meet margin calls on their positions in the equity markets. And they had to get the cash from somewhere.

Gold is a very liquid asset that can quickly be traded for cash.

They can either sell the actual gold bullion they own or they can unload their positions in gold ETFs (like GLD).

So my estimate is that they dumped their gold positions to raise the money. And that’s been driving the listed gold price lower.

It has nothing to do with gold’s fundamentals, which are actually very strong. Demand is increasing, central banks are hoarding record amounts of gold and new supplies are dwindling.

That’s a recipe for skyrocketing prices, and the bull market in gold is still very much intact.

The latest selling is just a quirk of the market, in which institutions have to raise cash in order to cover their positions when the market’s dropping.

Again, it has really nothing to do with gold itself. This is just a temporary blip.

If you haven’t bought gold yet, this is an ideal opportunity to scoop up gold at a bargain-basement price. Or, if you already own gold, to stock up on more.

For gold at least, it’s an ideal opportunity to “buy the dip.”

Gold is going much, much higher.

I’m not sure how many more opportunities like this we’re going to see. I urge you to take advantage of it while you can.

Regards,

Jim Rickards
for The Daily Reckoning

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“1984” Has Come to China

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You’re probably familiar with George Orwell’s classic dystopian novel Nineteen Eighty-Four; (it’s often published as 1984). It was written in 1948; the title comes from reversing the last two digits in 1948.

The novel describes a world of three global empires, Oceania, Eurasia and Eastasia, in a constant state of war.

Orwell created an original vocabulary for his book, much of which is in common, if sardonic, usage today. Terms such as Thought Police, Big Brother, doublethink, Newspeak and memory hole all come from Nineteen Eight-Four.

Orwell intended it as a warning about how certain countries might evolve in the aftermath of World War II and the beginning of the Cold War. He was certainly concerned about Stalinism, but his warnings applied to Western democracies also.

When the calendar year 1984 came and went, many breathed a sigh of relief that Orwell’s prophesy had not come true. But that sigh of relief was premature. Orwell’s nightmare society is here today in the form of Communist China…

China has most of the apparatus of the totalitarian societies described in Orwell’s book. China uses facial recognition software and ubiquitous digital surveillance to keep track of its citizens. The internet is censored and monitored. Real-life thought police will arrest you for expressing opinions opposed to the government or its policies.

Millions of Chinese have been arrested and sent to “reeducation” camps for brainwashing (the lucky ones) or involuntary organ removal without anesthetic (the unlucky ones who die in excruciating pain and are swiftly cremated as a result).

While these atrocities are not going to happen in the U.S. or what passes for the West these days, the less extreme aspects of China’s surveillance state could well be. And while you might not be arrested for expressing unpopular opinions or challenging prevailing dogmas (at least not yet), you could face other sanctions. You could even lose your job and find it nearly impossible to find another.

You can certainly be banned from social media…

Anything seems to go on social media (primarily Facebook, Twitter, Instagram, Snapchat, YouTube and a few other platforms) — unless you’re a conservative personality or politico. That’s where the censorship begins.

Many conservative social media participants have had their acco‌unts closed or suspended, not for threats or vulgarity but for criticism of “progressive” views (albeit criticism with some sharp edges).

Meanwhile, those with progressive views can say almost anything on social media, including the implicit endorsement of violence. But nothing happens.

Other conservatives report being the targets of “shadow banning.” That’s where your acco‌unt is open and seems to operate normally, but unbeknownst to you, much of the network is being blocked from seeing your posts and popular features such as “likes” and “retweets” are being truncated and not distributed.

It’s like being a pro athlete who finds out the stadium is empty and no tickets are being sold. That’s bad enough. But Twitter took the war on conservatives a step further.

Well, one of the most widely followed acco‌unts on Twitter is none other than Donald J. Trump’s, with 68 million followers. President Trump uses Twitter to announce policy initiatives and personnel changes and to offer pointed criticism of political opponents. It’s a major platform for him.

Last month Trump issued a tweet that identified the so-called “whistleblower” of the Ukraine phone call that led to his impeachment. That’s not as big a deal as it sounds because everyone in Washington knew who the whistleblower was (you can look his name up on the web), and he wasn’t even a real whistleblower because he didn’t meet statutory requirements.

Still, Twitter blocked Trump’s tweet. Twitter blamed a temporary system “outage,” but that claim was highly suspicious. Later, Trump’s tweet was restored, but the original acco‌unt that Trump linked to had been deleted. No one ever said that politics was fair.

But Twitter’s blatant interference in the election could have adverse consequences for the company in Trump’s second term.

And a few social media companies are now de facto censors, taking over the job from the government. Given their massive media footprint, they wield extraordinary influence over the American public.

They’re in essence becoming propaganda outfits.

It’s not just here of course. Canada, for example, is actively pursuing digital surveillance to track the activities of law-abiding citizens.

A report for the Bank of Canada says that financial information gathered from digital transaction records could be used for “sharing information with police and tax authorities.”

If all transactions are digital (including credit and debit cards), authorities can track your whereabouts, buying habits, restaurant choices and much more. They could also reveal your political orientation and personal associations.

It’s not difficult to imagine the police and tax authorities using that power to make life extremely difficult for those who criticize the government or sacred ideologies like “climate change.” If you think that sounds extreme, some have actually advocated jailing climate change “deniers.”

Do you think I’m making that up?

Well, the executive director of an outfit called Climate Hawks Vote said “Put officials who reject science in jail.”

The Nation also ran an article called, “Climate Denialism Is Literally Killing Us: The victims of Hurricane Harvey have a murderer — and it’s not the storm.”

“How long,” its author asked, “before we hold the ultimate authors of such climate catastrophes accountable for the miseries they inflict?”

And Robert F. Kennedy Jr. said the Koch brothers “should be in jail,” “with all the other war criminals.”

Well, David Koch has since died, so he’ll escape Kennedy’s justice.

But their “war crimes” consisted of funding organizations that question the climate change alarmism the media  is constantly feeding us.

But guess what? There’s plenty of hard scientific evidence that refutes the alarmist view. This article isn’t the venue to get into it, but the scientific case against climate alarmism is much stronger than the case for it.

But if you dissent against the official view, today’s tech censors will silence or marginalize you, no matter how valid your point.

The problem is, the trend is moving very quickly in this direction and it’s difficult to stop. And sophisticated surveillance technology to monitor citizens is already in place…

For example, cameras with the latest surveillance technology can spot and match millions of faces in real time with an accuracy rate of over 99%. They’re touted as anti-terrorism and anti-crime tools, which they certainly are.

But as Stalin’s ruthless secret police chief Lavrentiy Beria said, “Show me the man and I’ll show you the crime.” It’s easy to see that power being abused to target everyday citizens.

(By the way, Beria would ultimately prove his own point, as he was later arrested and executed for treason).

And actually, many people welcome intrusive surveillance technology on the grounds of convenience. As an example, look at microchipping, where people are injected with a small microchips beneath their skin. Microchipping has been associated with an Orwellian nightmare in which Big Brother constantly monitors your every move.

Well, over 4,000 Swedes have already happily volunteered to have it done.

In addition to acco‌unt information that negates the need to carry cash or credit cards to pay for goods, these chips can contain personal information. It’s all happened fairly quickly. Just a few years ago, the very idea of it would have sent chills down the spines of most people.

But that’s how fast Big Brother can go from nightmare to reality, and appear benign or even beneficial.

Big Brother’s on full display in China right now, but he could be on his way here before too long.

Regards,

Jim Rickards
for The Daily Reckoning

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Bloodbath!

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Here is the butcher’s bill:

The Dow Jones Industrial Average — down 1,031 points today…

The S&P 500 — down 112 points…

The Nasdaq Composite — down 355 points.

CNBC, by way of explanation:

Monday’s moves came as investors watch developments surrounding the coronavirus outbreak that was first reported in China but has spread rapidly in other countries especially South Korea and Italy, which reported a spike in the number of confirmed cases in recent days.

South Korea raised its coronavirus alert to the “highest level” over the weekend, with the latest spike in numbers bringing the total infected to more than 750 — making it the country with the most cases outside mainland China.

Meanwhile, outside of Asia, Italy has been the worst affected country so far, with more than 130 reported cases and three deaths.

Gold, meantime, was up nearly $30 today as investors fled for safety.

But late in the day someone — or something — jettisoned out some $3 billion of gold futures.

Thus, gold ended up gaining only $14 by closing whistle.

Who… or what… emptied all that paper gold into the market?

We do not know at this point. But we have put our top men on the case.

What about Treasuries? How did 10-year Treasury yields act today?

They dropped to 1.356% this afternoon — and so fell within hailing distance of their record lows. Only in July 2016 were 10-year yields lower, at 1.318%.

One more slip on the ladder… and “look out below.”

This is according to Mr. Ian Lyngen, BMO Capital’s director of U.S. rates strategy:

The most important number in the U.S. Treasury market has become 1.3180% — the all-time record-low yield mark set in the aftermath of Brexit. If that level is breached, look out below.

We will indeed — look out below, that is.

And what is this crossing our vision on a downward heading?

It is the 30-year Treasury yield.

The 30-year Treasury yield did plummet to record lows today — to an anorexic 1.814%.

Not in its entire history has the 30-year Treasury bond offered such a slender yield.

Impossible — but there you have it.

Have markets lost their nerve… or recovered covered their senses?

If they have lost their nerve, upcoming Federal Reserve easing will likely stiffen their spines.

We are supremely confident it is coming. In fact…

Former president of the Federal Reserve Bank of Minneapolis — Narayana Kocherlakota — presently urges his former mates to cut rates 25-50 basis points without delay.

They should not wait for their March meeting to “deal with this clear and pressing danger.”

We allow for the possibility…

With today’s whaling, both Dow Jones and S&P have handed back all their gains since Jan. 1.

And the worst of the bloodspill is not over, argues Opportunistic Trader CEO Larry Benedict:

“The second-largest economy in the world is completely shut down. People aren’t totally pricing that in. It seems like there’s much more to come.”

This fellow believes the stock market may be entering a 10–15% “correction.”

But the stock market is an ingenious device constructed to inflict the greatest suffering upon the most people within the least amount of time.

And so today it served its high and moral purpose.

The intelligent investor — says the shade of Benjamin Graham — “is a realist who sells to optimists and buys from pessimists.”

Lately the realists have been selling to the optimists. That is, selling to the lemmings…

Thus The Seattle Times informs us:

“Mom and Pop Are on Epic Stock Buying Spree With Free Trades.”

More from which:

Small investors are back. In a big way.

Their fingerprints are on Apple’s staggering rally. They piled into Tesla as it tripled, and turned speculative fliers like Virgin Galactic into some of the most heavily traded shares in the country…

U.S. households are turning more optimistic on the stock market. According to the latest sentiment reading from The Conference Board, the share of respondents expecting stocks to rise in the next year advanced to 43.1% in January, the highest since October 2018.

Online trading platforms that offer free trading have sugared the “deal”… and called the lemmings closer to the cliff.

The Times cites Sundial president Jason Goepfert:

When you take a bull market and juice it with zero commission trading, we can expect it to generate interest among retail acco‌unts. That, it did. Retail traders have become manic.

Few are manic today we hazard.

Buy when there’s blood in the streets, argues the old market wheeze.

Here is your chance.

Do you have the nerve?

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Coronavirus Slams Chinese Economy

This post Coronavirus Slams Chinese Economy appeared first on Daily Reckoning.

How bad is the coronavirus pandemic in China? It’s worse than the Chinese government knows and worse than the world believes.

Here are the official statistics on the coronavirus (technically COVID-19) as of today: There are 75,685 confirmed infections worldwide, with 98% of that total in China alone. Of those cases, 82.5% are in the single province of Hubei, mostly centered in the city of Wuhan, with 11 million residents.

Of the over 75,000 worldwide cases, there have been 2,236 deaths; that’s a mortality rate of roughly 2.5%. If a 2.5% mortality rate sounds low, it’s not. That’s roughly comparable to the Spanish flu pandemic of 1919–20 that killed 50 million people by some estimates.

IMG 1

Coronavirus has reached pandemic proportions in China. Over 60 million people are locked down, which means they cannot leave their homes except once every three days to buy groceries. Streets are empty, stores are closed, trains and planes are not operating. The Chinese economy is slowly grinding to a halt.

While the disease has been predominately centered in China, and Wuhan in particular, there have been significant outbreaks in Singapore (58 cases), Hong Kong (56 cases), Thailand (33 cases) and Japan (29 cases including one fatality). Approximately 218 cases have been identified among those trapped on cruise ships where all passengers are under quarantine. Fifteen cases have been identified in the United States.

These statistics barely scratch the surface of what is happening with coronavirus in China. There is good reason to believe that the actual incidence of the virus may be five–10 times the official numbers.

Tencent (a popular internet search and social media platform in China) reported on Feb. 1, 2020, that actual infections were 154,000 and deaths from the disease were 24,589. (A screenshot of the Tencent release is shown below; source: Taiwan News).

The infection figure was approximately 10 times what the official figure was on the same date.

The death toll was more than 300 times the official figure. Applying this death toll to total infections gives a fatality rate of 16%, which is over seven times the official fatality rate.

IMG 2

There is no reason for a high-profile platform such as Tencent either to fabricate data or incite panic. It is reasonable to conclude that these figures are close to actual data. The Tencent posting was suppressed by the Chinese government within minutes of what may have been an accidental release of accurate data.

The preeminent U.K. medical journal The Lancet also published an article on Jan. 31, 2020, using hard data (city populations, incidence of travel, estimated transmissibility, etc.) and a reliable SEIR model (susceptible, exposed, infected, resistant).

That article estimated total infections of 75,815 in Wuhan as of Jan. 25. That figure is 17 times the official figure of 4,400 available on Jan. 27. The multiple of the estimate by The Lancet to the official figure is roughly in line with the multiple of the Tencent release to official data five days later.

Using either The Lancet or Tencent as a baseline suggests that the official infection and death rates are grossly understated.

Anecdotal evidence is consistent with the view that official data are materially understated.

Many bodies have been picked up off the streets and sent for cremation without blood samples or autopsies. It is highly likely that these victims died from coronavirus but are not included in official counts because no tests were performed.

Authorities are running out of body bags and refrigerated trucks, so bodies are simply being wrapped in plastic sheets and hauled away in ordinary vans.

A shortage of face masks, latex gloves and testing kits has also emerged. This means that doctors and medical personnel are highly susceptible to infection. It also means that patients who complain of fever and difficulty breathing are sent away because officials have no way to test them for coronavirus.

These developments simultaneously inflate the number of infected and deflate the official count.

The story gets worse. Wuhan, the city that is ground zero for coronavirus infections, is also the location of the sole bioweapons laboratory for the Chinese military and Chinese Communist Party.

One of the scientists at the laboratory is Zhengli Shi, a virologist. Shi formerly worked at a laboratory at the University of North Carolina, where he engineered a hypervirulent bat-based coronavirus that bears a striking resemblance to the COVID-19 coronavirus, including gene sequences not found in nature.

These linkages at least suggest that the outbreak of the coronavirus in Wuhan may be linked to an accidental release of the virus from the biological weapons laboratory located there.

If this thesis is correct, the coronavirus may be difficult to contain with vaccines or drug therapies since it would have been engineered to be highly resistant to such treatments.

What impact will the coronavirus pandemic have on the Chinese economy and global supply chains, especially in the technology sector?

Right now my models are telling me that the impact of coronavirus on the Chinese economy is orders of magnitude greater than most analysts estimate. In fact, the Chinese economy, second largest in the world, may be grinding to a halt.

The following excerpt from an article by Ambrose Evans-Pritchard in The Telegraph on Feb. 12, 2020, tells the tale:

Property sales in 30 big cities released every day… have collapsed to zero and have yet to show a flicker of life.

Property is a slow-burn issue compared to ruptured manufacturing supply chains, but by March it will start to bite for developers with dollar debts on Hong Kong’s funding market. Companies deemed “stressed” (borrowing costs above 15%) have to repay $2.1 billion of offshore dollar notes next month. Standard & Poor’s says they rely on a constant flow of sales to cover past debts.

Some 25 provinces and municipalities were supposed to go back to work this week but this clashed head on with virus control measures. Companies may not reopen plants unless they can track the exact movements and medical data of each worker and comply with a 14-day quarantine period where necessary (we now learn the incubation may in fact be 24 days). Officials dare not be lenient after Xi Jinping’s latest tirade.

The Guangzhou authorities have ordered plants to remain closed until early March in large parts of the city with warnings of ferocious penalties. Apple supplier Foxconn has yet to restart its core iPhone plants in Zhengzhou and Shenzhen. Just 10% of its workers have turned up. Caixin reports that Foxconn may wait until March before restarting.

Meanwhile the near complete shutdown of Shanghai’s manufacturing hub in Songjiang belied early claims that 70% of plants were going back to work.

This article contains valuable vignettes of what is happening in China, but they barely scratch the surface. An even bigger story is the extent to which the disruption in China from coronavirus is not only slowing the Chinese economy but is also disrupting global supply chains and slowing output around the world.

IMG 3

This chart prepared by the Johns Hopkins University based on official data provided by China and other nations shows the total number of confirmed cases of coronavirus infection as of Feb. 14, 2020 (orange line). Wall Street was encouraged by a prior update that showed 44,700 confirmed cases. Then cases increased by over 15,000 in a single update. The resulting near-vertical slope of the graph blew up Wall Street wishful thinking and triggered a downdraft in stock markets worldwide. As of Feb. 15, confirmed cases had increased to 64,447. The pandemic is far from under control and spreading quickly.

Production shutdowns in China are reducing exports of high-tech inputs from South Korea, Japan and Germany. Likewise, the extreme reductions in exports from China (due to plant closures) are hurting sales by European and U.S. distributors and retail outlets.

Independent of production and sales bottlenecks, there are massive transportation bottlenecks as vessels and crews are quarantined or refuse to enter Chinese ports at all.

The tech sector may be the hardest hit of all. In addition to coronavirus disruption, the U.S. Department of Justice last week indicted China’s largest telecommunications device and network provider, Huawei, on racketeering charges.

The Pentagon also reversed a prior determination and agreed that the Commerce Department can put Huawei on an export control list, which prohibits sales of processors and other high-tech components to Huawei by U.S. firms.

These measures are certain to invite retaliation by China against U.S. firms in the tech supply chain.

This story isn’t going away anytime soon.

Regards,

Jim Rickards
for The Daily Reckoning

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Not Over by a Long Shot

This post Not Over by a Long Shot appeared first on Daily Reckoning.

Are you tired of hearing about the coronavirus? Well, you shouldn’t be because it’s a serious situation with global consequences.

Markets have been following the spread of the coronavirus (COVID-19) closely for good reason.

The Chinese economy, second largest in the world, is shutting down in stages. In affected areas, streets are empty, stores are closed, planes and trains are not running.

Over 60 million people are “locked down,” which means they are confined to their homes and can only leave once every three days to buy groceries (if they can find any due to hoarding).

The effects go far beyond China because of global supply chains. If Chinese factories are closed, they are not buying components from South Korea, Japan and Germany. Likewise, if Chinese factories are closed, they cannot supply finished goods to U.S. buyers.

The result is that factories and sales are also slowing in developed economies.

Still, markets are taking a measured view. Some epidemic models showed the disease would peak in April 2020 and tail off quickly from there.

The other assumption was that any dip in the Chinese economy would be made up later in the year so that the total impact would be minimal when viewed on an annual basis.

All of those assumptions were blown-up in a matter of minutes in the late evening of Wednesday, Feb. 12.

In a single update, 14,840 new infections were reported, moving the total from 45,000 to about 60,000 cases.

This did not mean that 14,840 people were infected in one day.

It meant that China suddenly became more transparent and decided to include existing cases using more valid diagnostic criteria.

But the change did move the official statistics closer to the amount shown in a leak on Tencent (that showed about 150,000 infections) and a Lancet (a preeminent medical journal) model-based input that also estimated about 150,000 cases.

Officially, China has reported 118 new deaths, bringing the number of (official) deaths nationwide to at 2,236.

China has also reported 1,109 new confirmed cases, dramatically up from 349 cases the previous day.

And now, for the third time in eight days and the second time in 24 hours, Chinese officials made changes to how they count coronavirus cases.

When asked if he thought the virus will be contained, World Health Organization director Tedros Adhanom Ghebreyesus said, “The window of opportunity is narrowing, so we need to act quickly before it closes completely.”

The bottom line is that the disease is worse than Wall Street believed, the economic damage is greater and it will take longer to get the disease under control. Stock prices fell after the news was reported.

As more bad news dribbles out, that stock price adjustment has further to fall.

Regards,

Jim Rickards
for The Daily Reckoning

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2020 Forecast for Markets & Elections

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Just because impeachment is almost over and it’s an election year does not mean that Congress won’t be the scene of anti-Trump activity. Congress is set to keep up the pressure on Trump on a daily basis, and the attacks will continue.

Investors should not be shocked if the House impeaches Trump a second time.

There’s no legal limit on the number of times a president can be impeached or the number of articles of impeachment that can move forward. The House impeached Trump in 2019 on bogus claims that aren’t even crimes. If they did it once, they can do it again.

Some of the new charges being floated include whether it was legal for Trump to order the killing of mastermind terrorist Maj. Gen. Qasem Soleimani. The killing was clearly legal since Soleimani had officially been declared a “terrorist” under the Authorization for Use of Military Force Act (AUMF) and Iran had been declared a state sponsor of terrorism.

Both designations allowed the U.S. legally to kill a terrorist on foreign soil who was planning terrorist acts against the U.S. Obama had used the same legal rationale to kill hundreds of terrorists in Pakistan, Afghanistan and Yemen.

Still, Democrats are claiming that this was an “assassination,” which is illegal under U.S. law. You can expect congressional hearings and possible impeachment charges along these lines this spring.

Another potential impeachable offensive consists of violations of the Emoluments Clause of the U.S. Constitution alleging that Trump profits when foreign diplomats stay in his hotels. He doesn’t; Trump returns any revenues to the U.S. Treasury.

The House of Representatives can also be expected to hold hearings on alleged Trump “money laundering” in connection with property development in Russia. There’s no evidence of this, but that won’t stop Democrats from making the allegation.

Trump’s relationship with Deutsche Bank and its financing of his hotels and other properties including the identities of third-party investors will also come under scrutiny.

Other anti-Trump efforts will include hearings to get testimony from Secretary of State Mike Pompeo related to the Soleimani killing and testimony from former National Security Adviser John Bolton related to the Ukrainian military aid that triggered the first impeachment.

New matters related to Ukraine are also emerging in connection with reported Russian hacking of Burisma, the Ukrainian company that paid Hunter Biden (Joe Biden’s son) millions of dollars for a no-show job for which he was unqualified.

Somehow Democrat critics of Trump can’t get enough of the Russian collusion allegations, even though the Mueller investigation showed no connection at all between Russia and Trump.

All of these matters (Soleimani, property finance, Ukraine and War Powers in Iran) may form the basis for new articles of impeachment against Trump.

This could play out over the course of the spring and summer just as the campaign season is heating up. This may be designed to stir up the Democrat base, but it will probably have the opposite effect of increasing turnout of Trump supporters.

With or without new articles of impeachment, the congressional hearings, bogus claims and anti-Trump rhetoric will continue without relief. Trump will stay on track, but markets may weary of the uncertainty and be worn down by the hyperbolic rhetoric.

Alongside the drama of impeachment and the scandals yet to be revealed, we still have the economy and stock market for investors to focus on. And right now they’re looking good for Trump.

There is almost zero risk of a recession in the next three months and less than a 20% chance of a recession before November. That’s good news for Trump because a recession (or lack of one) is the single strongest indicator of whether an incumbent president will be reelected.

The probability of Trump’s reelection is roughly the inverse of the probability of a recession before the election. If recession odds are 20%, then Trump’s reelection odds are roughly 80% (with adjustment for various factors).

Each month that goes by reduces the odds of a preelection recession even further, which means that Trump’s reelection odds go up. Trump should have a 90% chance of winning by Election Day absent extreme and unexpected economic shocks in the next nine months.

Trump’s chances are also helped by the weakness of his opponents. Americans have shown no appetite for the kind of socialism being touted by Bernie Sanders and Elizabeth Warren. Pete Buttigieg lacks African-American support, which is indispensable for a Democrat. Joe Biden lacks energy and is exhibiting some cognitive problems that will raise serious doubts among voters and hurt his debate performance.

What about the Fed?

The Fed will cut interest rates at least once before the election. This rate cut will not happen at the March or April FOMC meetings because that’s too soon after the Fed told markets it was hitting the “pause” button last December.

The rate cut will not happen in the July or September FOMC meetings because that’s too close to the election and the Fed does not want to appear to be tipping the scales in favor of one party or the other. The Fed will be on hold from July until after the election.

Through a simple process of elimination, the Fed will cut rates in June.

The Fed’s reasons for the rate cut (which markets do not expect) will not be explicitly to help Trump’s reelection (although that will be one consequence). The reason will be to provide an insurance policy against disinflation and recession. The Fed knows its hands will be tied until December, so it will provide a rate cut just to be on the safe side.

A June rate cut will give another boost to stocks, which should continue to perform well. As the election approaches and Trump’s victory becomes more apparent, stocks will gather momentum in expectation of four more years of lower taxes, less regulation and a pro-business environment.

Gold will also get a boost from another rate cut. This comes on top of continued strong buying from Russia, China and Iran and flat output by miners. Geopolitics play a big role in gold prices as a “flight to quality” trend emerges during each overseas crisis. The coronavirus has been a major factor that has taken gold past $1,600 an ounce. The next crisis will send gold even further.

But how might this November’s election affect the political balance in Congress?

As things stand today, not only will Trump be reelected but Republicans should hang onto control of the Senate and possibly retake the House of Representatives. Control of the White House and the Senate alone gives Republicans control of judicial appointments (including one or two more Supreme Court Justice seats) and control of treaties.

Retaking the House will be more difficult but not at all impossible. Presidents typically lose seats in the House in their first midterm election after winning the White House. Trump’s losses in 2018 were actually fewer than Clinton’s in 1994 (when Newt Gingrich led Republicans to the majority for the first time since 1955) and Obama’s in 2010 (when the tea party arose to reject Obama’s policies).

There were 31 Democrats elected in 2018 in districts that Trump had won by five or more points in 2016. All but two of those Democrats voted in favor of impeachment. One of those two has since switched to the Republican Party.

Today, the Republican Party holds 197 seats in the House. Control of the House requires 218 seats. The Republicans need a net gain of 21 seats to take control of the House. With 30 highly vulnerable Democrats (because of impeachment) and demonstrated coattails on the part of President Trump, picking up 21 of those 30 seats (while holding all existing seats) seems well within reach.

A Republican clean sweep of the White House, the Senate and the House with ongoing control of the Supreme Court and other judicial appointments is the most likely outcome for November 2020.

But, there will be a lot of land mines exploding between now and then. Call it another year of living dangerously.

Regards,

Jim Rickards
for The Daily Reckoning

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Are They Going to Impeach Trump Again?

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The Democratic candidates held another debate last night. Michael Bloomberg took a lot of heat from the others, and he did not handle it well. He showed real weakness for the first time.

Joe Biden, meanwhile, put in a strong performance last night. We’ll have to see if he can generate any momentum from it. After Iowa and New Hampshire, his campaign is in serious trouble.

Speaking of Iowa, they still haven’t resolved that mess…

The Iowa caucus was officially over on Feb. 3. But it’s not over yet and may never be over.

The conduct of the caucus was one of the biggest fiascos in modern political history and the repercussions are still being felt. You probably know the story by now.

A caucus is not a primary election. It’s a physical gathering of voters at about 1,600 precinct locations such as school gyms and similar venues around the state.

That’s a limiting factor right away because many voters don’t have the flexibility to show up at an appointed time and place. Voters organize in groups backing a certain candidate.

An initial count of support for each candidate is taken. Candidates’ groups who have less than 15% of the total are then told they can either go home or switch sides (with less than 15% support you get zero delegates).

Voters then reorganize — for example, a Biden supporter can switch to Liz Warren — and a second count is taken.

That second count is then used in a mathematical formula to assign delegates for the Democratic convention.

The number of delegates for each candidate is not proportional to votes in the second count because some precincts are overweighted. Got it?

Don’t worry; neither does anyone else. That system is nuts. But it gets worse…

A new mobile phone app was created to send in results. The app had never been used in actual voting and it crashed.

Precinct organizers were told to phone in results. The phone lines were jammed and organizers couldn’t get through. That didn’t matter because party officials in the central locations were told to leave their mobile phones outside.

Others could not get online. Some did not know how to use spreadsheets. TV network anchor desks were on the air with nothing to report.

Candidates were robbed of bragging rights, both on caucus night and in the days leading up to the New Hampshire primary on Feb. 11. Iowa results dribbled out over days in a way that seemed intentionally designed to hurt Bernie Sanders.

Finally, the chair of the Iowa Democratic Party resigned in disgrace.

As of now, it is reported that Bernie Sanders won the most votes in the first and second alignments, but Pete Buttigieg got the most delegates because of the quirky math formula.

But even that reported result is not final because a “re-canvass” recount is underway.

The biggest loser was not among the candidates. The biggest loser was the Democratic Party itself.

Commentators were quick to ask how Democrats can run the economy if they can’t even count votes in Iowa. Good question.

But could they be so dumb as to actually try to impeach Trump again?

If the Democrat effort to impeach Trump was grounded in political hatred rather than constitutional law, why would the Democrats not do it again?

The answer is that the impeachment efforts are not stopping.

House Democrats are already planning hearings on Trump’s reassignment of Lt. Col. Alexander Vindman and his firing of Ambassador Gordon Sondland, both of whom provided anti-Trump (but incompetent, irrelevant and immaterial) testimony during Adam Schiff’s unconstitutional impeachment show trial.

Trump also reassigned Vindman’s twin brother, Yevgeny, for subversive activities in the National Security Council.

Other avenues of anti-Trump inquiry include an expected appeals court ruling that may require testimony from former Trump White House counsel Don McGahn, further inquiry into Russian collusion allegations (the hoax that won’t die), possible violations of the Emoluments Clause (despite court rulings dismissing partisan lawsuits against Trump) and pursuit of testimony from John Bolton that was not part of the Senate trial.

In short, there is no shortage of fake allegations on which to base a new impeachment.

We can’t be certain there will be another impeachment this year, but it cannot be ruled out. Impeachment hearings could begin again this spring ahead of a new impeachment vote this summer and a trial in August just in time for the Republican convention.

Another possibility is Trump wins a second term (likely, in my view) and the Democrats keep control of the House, in which case another impeachment in 2021 is a high probability.

This is bad for the country and is actually bad for Democrats, as shown in the polls. Yet the Democrats seem to be the last to know.

Regards,

Jim Rickards
for The Daily Reckoning

P.S. It’s the Democrats’ worst nightmare.

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“Conservative Economics”

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We learn of the pending birth of a new organization — American Compass by title.

Its existence will serve one high and noble purpose, claims executive director Oren Cass:

“Helping American conservatism recover from its chronic case of market fundamentalism.”

Just so. Yet we were unaware that American conservatism was down with the disorder.

American conservatism congregates broadly under the Republican Party’s tent.

This same Republican Party gives few symptoms of the virus described…

A Chronic Case of Market Fundamentalism?

It might suffer a slight wheeze, a sniffle, a light cough, perhaps a rare gag — but no chronic or debilitating symptoms.

Its core temperature never exceeds 99.2 degrees of Fahrenheit.

These fellows may argue that a 39% rate represents a dangerous flirtation with socialism, a menace to American liberty and civilization.

But a 36% top marginal tax rate is nearly freedom itself.

Government spending may safely consume 20% of the gross domestic product, they allow. But should it exceed 23%… poor Adam Smith would do 100,000 revolutions in his grave.

We exaggerate for effect, perhaps. But we believe the central case is sound…

Cleaning up the Whorehouse

We believe most conservative anti-government enterprise aspires to “clean up the whorehouse,” while “keeping the business intact”… in libertarian Frank Chodorov’s unimprovable words.

Consider one example exquisitely in point…

The late Butler Shaffer was a retired professor of law at Southwestern University.

Here he recalls the 1964 Republican National Convention — where a modern Patrick Henry, Barry Goldwater, thundered in defense of liberty. But in reality?

I sat in the Cow Palace in San Francisco as part of my state’s delegation to the Republican National Convention (i.e., the Goldwater Convention)… Afterward, I was enjoying a drink at the top of the Mark Hopkins Hotel with one of Goldwater’s advisers. I asked: “Now that Goldwater has the nomination, let us suppose that he gets elected president. What do you think he would do to begin cutting back on federal government power?”

“What do you mean?” my acquaintance answered. I reminded him of Goldwater’s book The Conscience of a Conservative, wherein he proposed eliminating a few government programs (federal involvement in education being one area).

The other man answered: “Don’t be absurd: If Goldwater gets elected president, the most we would hope to accomplish would be to slow down the rate of growth of government.”

That is, to tidy up the cathouse… while “keeping the business intact.”

And that was under the firebrand Goldwater. What could you possibly expect of feebler conservatives?

The business has remained intact ever since. Indeed, it has expanded to dimensions truly pornographic…

Not so Conservative

Market fundamentalism holds a disdainful view of government deficits. Yet…

Did not presidents Ronald Reagan, George Walker Bush, George Herbert Walker Bush, Donald Trump — Republicans all — vastly expand deficits?

And was it not a Republican who shook off deficits entirely?

They do not matter, said he.

Did not the Republican-held Senate vote to uphold the Patient Protection and Affordable Care Act — Obamacare — when presented the opportunity to scotch it?

As we recall, it did.

Many of these same gentlemen and ladies insist health insurance providers cover “preexisting” medical conditions…

Not Exactly Market Fundamentalism

These fine people may be the soul of compassion.

And the mandate itself may be more humane than humanity itself. It may even count as the “right thing to do.”

Yet market fundamentalism it is not. It wars against the most elemental concept of insurance.

As well demand fire insurance once the house has burned to the earth, or life insurance when the body is in the morgue.

And we might remind the aforesaid Mr. Cass…

The Obamacare mandate to purchase health insurance has a close relative, a kissing cousin, in an earlier proposal by the conservative Heritage Foundation.

Freedom Isn’t Enough

Yet Mr. Cass is somewhat ruffled that all conservative “thinks tanks” labor incessantly to:

Advance the principles of “limited government, free enterprise and individual liberty” or “free markets and limited, effective government” or “free enterprise, limited government, individual freedom” or “individual liberty, limited government, free markets” or “economic choice and individual responsibility” or “individual, economic and political freedom, private enterprise and representative government.”

Please understand — this fellow has no heat against any of these. To the contrary!

“Without question,” he affirms, “those principles are vital.”

But he insists they are unequal to the times in which we live. He argues these times instead require a “conservative economics.”

A Manifesto

What precisely constitutes a conservative economics, Mr. Cass?

Conservative economics will take seriously the effects of social and market forces on each other. It will concern itself with the pernicious effects that high levels of economic inequality can have on the social fabric, the market’s functioning and people’s well-being, regardless of absolute material living standards…

Conservative economics will also accord equal respect to the concerns of capital and labor, rather than claiming that whatever is best for shareholders in the short run will eventually prove best for workers as well. It will favor collective worker representation that affords real influence in setting the terms and conditions of employment over the fiction that individual employees enjoy the freedom to each negotiate their own terms. It will be aware that cheerfully abandoning the world’s industrial supply chains to Asia was, is and always will be irresponsible.

Many details of this conservative economics remain dim, to us at least.

More of the Same

But we are certain conservative economics equals:

More government poking, harassing, bossing, wrenching, manhandling and roughhousing.

In two words… more government.

In four additional words, more of the same.

That is, it will not leave you to tend your own affairs.

This Cass fellow means the best in the world, we are convinced of it.

But if he is so hot about “the pernicious effects that high levels of economic inequality can have on the social fabric, the market’s functioning and people’s well-being, regardless of absolute material living standards”…

Why not have a go at the Federal Reserve? Why not put the thing on trial?

A Report Card on “Unconventional Monetary Policy”

Its war on interest rates has vastly prospered the asset-owning classes — the rich. It has worked very little benefit for Americans residing on what is called Main Street.

In 2018 Deutsche Bank released what it terms “a report card for unconventional monetary policy.”

“Unconventional monetary policy” of course refers to quantitative easing, zero interest rates, negative interest rates and the devil and the rest of the tools in the central banker’s deepening kit.

Deutsche Bank examined their impact on several metrics of economic performance around the world.

The telling results, as summarized by analyst Daniel Lacalle:

1. In eight of the 12 cases analyzed, the impact on the economy was negative.

2. In three cases, it was completely neutral.

3. It only worked in the case of the so-called QE1 in the U.S. and fundamentally because the starting base was very low and the U.S. became a major oil and gas producer.

For emphasis:

In 11 of 12 instances… “unconventional monetary policy” proved either negative or insignificant.

And eight of the 12 proved outright negatives.

We enter the following graphic into the record as evidence of central bank futility:

IMG 1

Meantime, the total market cap of the United States stock market presently rises to 158% of United States GDP — a record high.

What about “cheerfully abandoning the world’s industrial supply chains to Asia”?

Trade and the End of the Gold Standard

Well, Mr. Cass, we suggest you broaden your inquiry.

America abandoned the world’s industrial supply chains to Asia long ago.

But you can blame the United States dollar as much as traitorous corporations…

In the mid-1970s, Richard Nixon scissored the dollar’s final tether to gold.

The gold standard, a poor imitation in its dying days, nonetheless kept the balance of trade in a range.

A nation running a persistent trade deficit placed its gold stocks at risk. The more foreign goods came in… the more domestic gold went out.

The ersatz dollar removed all checks.

America no longer had to produce in exchange for goods… or fear for its gold.

Scraps of paper, rolling off an overworked printing press, became America’s primary production.

Ream upon ream went abroad in exchange for goods — real goods.

The international division of labor was opened to hundreds of millions, particularly peasants from the labor-rich fields of China.

What does “conservative economics” have to say about all this?

Little, we suspect.

The Real Whorehouse

It is far easier to dragoon the American people with this law, to club them on the head with that law, to shove them this way or that way.

Which is — incidentally — precisely what any “progressive economics” would promise.

We prefer economics instead — that is, economics without adjectives.

Or if you must have one… sound economics.

But that would require, in our telling, cleaning out the Federal Reserve as it presently exists.

That is, cleaning out the whorehouse itself.

And both sides are determined to keep that business intact…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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Too Many Eggs in Too Few Baskets

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Never before have so many owed so much… to so few.

We refer not to Sir Winston Churchill and the Battle of Britain. We refer instead to the Federal Reserve and stock market.

Set aside the latest coronavirus rattles…

The market has been on a gorgeous spree since Mr. Powell and his mates reopened the liquidity spigots last January.

But only a very few stocks account for its joy. These are the wagon-pullers of this market, the draft horses hauling the laggards along.

We refer to Apple, Microsoft, Alphabet (Google’s parent company), Amazon and Facebook.

The Heavy Lifting

These combined behemoths boast a market cap in excess of $4.1 trillion — over 10% of the stock market’s overall $34 trillion.

When they move, they drag the market along. And moved they have…

Apple has returned some 112% this past year. Microsoft has gained over 75%. Alphabet has added perhaps 20%. Amazon has gained roughly 25%. Facebook has put in a 44% advance.

You hear references to the top 1% of Americans? These represent the top 1% of stocks.

These mighty five account for virtually all of last quarter’s S&P earnings upside. Wash them out — and the S&P’s earnings amounted to naught.

And as SocGen data hound Andrew Lapthorne informs us…

S&P net income actually plunges 7.5% if you minus out the contributions of these five colossi.

We should not be surprised, then, that the vast majority of S&P components have taken in their sails… and reduced their stock buybacks.

The Rich Get Richer

Mr. Lapthorne reveals that buybacks outside the mighty five plunged 32% last quarter.

But these titans?

Their buybacks increased 10.5% over the same space. Buybacks tend to inflate — artificially — the stock price.

Is it then a wonder that these stocks presently outpace the broader market by the largest margin ever… as Lapthorne informs us?

It is no wonder whatsoever.

But what if these wagon-pullers pull up lame?

All the Market’s Eggs in Five Baskets

CNBC:

These mega tech firms have been the front-runners in this record-long bull market as investors bet on superior growth and dominant market share in their respective industries. They were the biggest contributors to the market’s historic gains last year and the trend shows no signs of stopping in 2020. However, multiple Wall Street strategists are sounding alarms on the increasing dominance of Big Tech, warning of a potential pullback in the stocks ahead.

Consider, for example, Apple…

The coronavirus has taken a deep bite of this Apple.

Much of their gadgetry rolls out of Chinese factories. Yet the coronavirus has these factories running far beneath capacity.

And Apple has closed the doors on all 42 of its Chinese stores. None has reopened.

Apple is shaving down first-quarter revenue projections in consequence.

What is more, the woes may continue…

Falling Inventories

A certain Bill Lu directs Asian semiconductor research at UBS. From whom:

The impact starts looking bigger and bigger, and in the coming weeks, the impact will grow. Inventory is low in the smartphone supply chain.

What if the coronavirus extends its siege into the second quarter, the third… the fourth?

We issue no prediction of course. We merely raise possibilities. Meantime…

The total market cap of the United States stock market presently rises to a stratospheric 158% of United States GDP.

That is a record — never has the market tested dizzier heights.

But if investors — or the computer algorithms — drop the Apple, gravity should give the overall market a good hard tug…

The Higher They Rise, The Farther They Fall

Again, a mere handful of stocks are doing a majority of the pushing. Apple is one of them.

But if a mere handful of stocks push the market higher… they can also drag it in the other direction.

As reports Goldman Sachs:

“Narrow bull markets eventually lead to large drawdowns.”

Compounding the trouble is the strategy of “passive investing.”

Passive, because it rises or falls with the gravitational tide.

After the 2008 near-collapse, the Federal Reserve emptied in oceans of liquidity.

The tide rose — and all with it.

The Facebooks, Apples, Amazons, Googles and Microsofts of this world have led the way up.

Much of Wall Street poured into these stocks… put its feet up, loafed… and let gravity take it to record highs.

“Fundamentals” no longer mattered. The Federal Reserve has rendered them quaint.

The Death of Fundamentals

And so the Federal Reserve has blown an artificial bubble. Laments analyst Sven Henrich of NorthmanTrader:

A market that never discounts any reality by force of constant intervention is by definition an artificial bubble.

Central banks have made a mockery of price discovery and the free flow of capital.

All markets are now are a central bank policy chase operation…

Only the outperformance of the mighty five has masked the warts within:

The larger market of stocks is in a much larger earnings recession already and five stocks have been masking it all.

Five stocks are the safe haven in a market that’s been forced to chase yield and growth where it can find it…

And so global markets are at all-time highs with Japan in a recession, Germany at 0% GDP growth and the second-largest economy in the world [China] with 330% debt to GDP at a virtual standstill.

All is peace while the tide rises… and gravity lightens. But the danger is this, as we have written before:

When the tide recedes… it recedes with fearful vengeance.

And gravity dramatically reasserts its dominion.

Panic Selling Begets Panic Selling

The same handful of stocks that hauled markets up on one tide can drag them rapidly down on another.

Panic selling begins. And panic selling begets panic selling — which begets panic selling.

The result is a delirium.

It is this panic selling that gave the Dow Jones an impossible 22% whaling on 1987’s “Black Monday.”

Explains Jim Rickards:

In a bull market, the effect is to amplify the upside as indexers pile into hot stocks like Google and Apple. But a small sell-off can turn into a stampede as passive investors head for the exits all at once without regard to the fundamentals of a particular stock…

The technical name for this kind of spontaneous crowd behavior is hypersynchronicity, but it’s just as helpful to think of it as a herd of wildebeest that suddenly stampede as one at the first scent of an approaching lion. The last one to run is mostly likely to be eaten alive.

Jim closes with a thumping conclusion:

“This is one more reason why the next stock market crash will be the greatest in history.”

Let the record reflect:

That history includes 1929… 1987… 2000… 2008.

And five stocks may well lead the way down next time…

Regards,

Brian Maher
Managing editor, The Daily Reckoning

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“Mandate of Heaven” in Jeopardy

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The U.S. markets are closed today for Presidents Day. If you have the day off, I hope you’re enjoying your long weekend.

But one event is taking center stage in the world that affects not only basic survival for millions of people, but the health of the global economy overall.

Of course, I’m talking about the coronavirus outbreak currently playing out before our eyes in China.

China’s economy was slowing substantially before the outbreak of the highly contagious and deadly virus last fall. This slowing was the predictable result of excessive debt levels, Trump’s retaliation in the trade wars, and China’s encounter with what development economists call the “middle-income trap.”

Developing economies can grow at double-digit rates as they move from low-income (about $3,000 annual per capita income) to middle-income (about $10,000 annual per capita income).

The main requirements are limits on corruption, a large pool of available labor, and an attractive legal environment for foreign direct investment. Once investment is used for infrastructure and labor is mobilized, large-scale basic manufacturing can commence.

This powers growth and the accumulation of hard currency reserves from export earnings.

The difficulty begins when an economy tries to move from middle-income to high-income (about $18,000 annual per capita income). That move requires more than cheap labor and infrastructure investment. It requires applied technology to produce high-value added products.

Only Taiwan, South Korea and Singapore have made this transition, (excluding Japan after World War II, and oil-exporting nations).

This explains why China has been so focused on stealing U.S. intellectual property.

Trump has been closing that avenue. China cannot generate the needed technology through its own R&D. China is stuck in the middle-income trap and a slowdown in growth is the inevitable result.

The story gets worse for China.

As of Friday, the total reported number of people infected by the coronavirus was 64,435. And the death toll was up to 1,383, including three people outside of China.

Those figures are official statistics released by China and other countries around the world where the virus has spread.

However, there is substantial medical, anecdotal, and model-based evidence that the actual infection rate and death rate may be ten to twenty times higher than those official statistics.

Over 60 million Chinese in several major cities are under “lock-down” where individuals are confined to their homes and may only leave once every three days to buy groceries.

Streets are empty, stores are closed, trains and planes are not moving, and factories are shut. The Chinese economy is slowly grinding to a halt.

This not only affects China’s economy as a whole, but the contagion filters down into individual companies that are dependent on China both for supply chain inputs and final sales.

And it will have a rippling effect on the U.S. economy also. This story has a long way to run.

Regards,

Jim Rickards
for The Daily Reckoning

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