#Yellen

Waking up to a horror of our own creation

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Some will say I am a pessimist. I’d prefer to be called an optimist with experience. At only age 16 (in 1987) I realized the destructive power financial markets had on the family home. Those memories were etched permanently. We weren’t homeless or singing for our supper but things sure weren’t like they use to be. It taught me much about risk and thinking all points of view rather than blindly following the crowd. That just because you were told something by authority it didn’t mean it was necessarily true. It was to critically assess everthing without question.

In 1999, as an industrials analyst in Europe during the raging tech bubble, we were as popular as a kick in the teeth. We were ignored for being old economy. That our stocks deserved to trade at deep discounts to the ‘new economy’ tech companies, no thanks to our relatively poor asset turnover and tepid growth rates. The truest sign of the impending collapse of the tech bubble actually came from sell-side tech analysts quitting their grossly overpaid investment bank salaries for optically eye-watering stock options at the very tech corporations they rated. So engrossed in the untold riches that awaited them they abandoned their judgement and ended up holding worthless scrip. Just like the people who bought a house at the peak of the bubble telling others at a dinner party how they got in ‘early’ and the boom was ahead of them, not behind.

It was so blindingly obvious that the tech bubble would collapse. Every five seconds a 21 year old with a computer had somehow found some internet miracle for a service we never knew we needed. The IPO gravy train was insane. One of my biggest clients said that he was seeing 5 new IPO opportunities every single day for months on end. Mobile phone retailers like Hikari Tsushin in Japan were trading at such ridiculous valuations that the CEO at the time lost himself in the euphoria and printed gold coin chocolates with ‘Target market cap: Y100 trillion.’ The train wreck was inevitable. Greed was a forgone conclusion.

So the tech bubble collapsed under the weight of reality which started the most reckless central bank policy prescriptions ever. Supposedly learning from the mistakes of the post bubble collapse in Japan, then Fed Chairman Alan Greenspan turned on the free money spigots. Instead of allowing the free market to adjust and cauterize the systemic imbalances, he threw caution to the wind and poured gasoline on a raging fire. Programs like ‘Keep America Rolling’ which tried to reboot the auto industry meant cheaper and longer lease loans kept sucking consumption forward. That has been the problem. We’ve been living at the expense of the future for nigh on two decades.

Back in 2001, many laughed me out of court for arguing Greenspan would go down in history as one of the most hated central bankers. At the time prevailing sentiment indeed made me look completely stupid. How could I, a stockbroker, know more than Alan Greenspan? It was not a matter of relative educations between me and the Fed Chairman, rather seeing clearly he was playing god with financial markets.  The Congressional Banking Committee hung off his every word like giddy teenagers with a crush on a pop idol. Ron Paul once set on Greenspan during one of the testimonies only to have the rest of the committee turn on him for embarrassing the newly knighted ‘Maestro.’ It was nauseating to watch. Times seemed too good so how dare Paul question a central bank chief who openly said, “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.”

We all remember the horrors of the collapse of Lehman Brothers and the ensuing Global Financial Crisis (GFC) in September 2008. The nuclear implosions in credit markets had already begun well before this as mortgage defaults screamed. The 7 years of binge investment since the tech bubble collapse meant we never cleansed the wounds. We would undoubtedly be in far better shape had we taken the pain. Yet confusing products like CDOs and CDSs wound their way into the investment portfolios of local country towns in Australia. The punch bowl had duped even local hicks to think they were with the times as any other savvy investor. To turn that on its head, such was the snow job that people who had no business being involved in such investment products were dealing in it.

So Wall St was bailed out by Main St. Yet instead of learning the lessons of the tech bubble collapse and GFC our authorities doubled down on the madness that led to these problems in the first place. Central banks launched QE programs to buy toxic garbage and lower interest rates to get us dragging forward even more consumption. The printing presses were on full speed. Yet what have we bought?

Now we have exchange traded funds (ETFs). Super simple to understand products. While one needed a Field’s Medal in Mathematics to understand the calculations of a CDO or CDS, the ETF is child’s play. Sadly that will only create complacency. We have not really had a chance to see how robots trade in a proper downturn. ETFs follow markets, not lead them. So if the market sells off, the ETF is rapidly trying to keep up. Studies done on ETFs (especially leveraged products) in bear markets shows how they amplify market reactions not mitigate them. So expect to see robots add to the calamity.

Since GFC we’ve had the worst post recession recovery in history. We have asset bubbles in bonds, stocks and property. The Obama Administration doubled the debt pile of the previous 43 presidents in 8 years. Much of it was raised on a short term basis. This year alone, $1.5 trillion must be refinanced.  A total of $8.4 trillion must be refinanced inside the next 4 years. That excludes the funding required for current budget deficits which are growing despite a ‘growing economy’. That excludes the corporate refinancing schedule. Many companies went out of their way to laden the balance sheet in cheap debt. In the process the average corporate credit rating is at its worst levels in a decade. Which means in a market where credit markets are starting to price risk accordingly we also face a Fed openly saying it is tapering its balance sheet and the Chinese and Japanese looking to cut back on US Treasury purchases. Bond spreads like Libor-OIS are already reflecting that pain.

Then there is the tapped out consumer. Unemployment maybe at record lows, yet real wage growth does not appear to be keeping up. The number of people holding down more than one job continues to rebound. The quality of employment is terrible. Poverty continues to remain stubbornly high. There are still three times as many people on food stamps in the US than a decade ago – 41 million people. Public pension unfunded liabilities total $9 trillion. Credit card delinquencies at the sub prime end of town are  back at pre-crisis levels. We could go on and on. Things are terrible out there. Should we be in the least bit surprised that Trump won? Such is the plight of the silent majority, still delinquent after a decade. No wonder Roseanne appeals to so many.

A funny comment was sent by a dyed-in-the-wool Democrat, lambasting Trump on his trade policies. He criticized the fact that America had sold its soul for offshoring for decades. Indeed it had but queried that maybe he should be praising Trump for trying to reverse that tide, despite being so late to the party. Where were the other administrations trying to defend America all this time? Stunned silence.

Yet the trends are ominous. If we go back to the tech bubble IPO-a-thon example. We now have crowd funding and crypto currencies. To date we had 190 odd currencies to trade. Of that maybe a handful were liquid – $US, GBP, JPY, $A, Euro etc – yet we are presented with 1,000s of crypto currency choices. Apart from the numerous breaches, blow ups and cyber thefts to date, more and more of these ‘coins’ are awaiting the next fool to gamble away more in the hope of making a quick buck. Cryptos are backed by nothing other than greed. Yet it sort of proves that more believe that they are falling behind enough such they’re prepared to gamble on the biggest lottery in town. One crypto used Wikipedia as a source for its prospectus.

Yet the media remains engrossed on trying to prove whether the president had sex with a porn star a decade ago, genderless bathrooms, bashing the NRA, pushing for laws to curtail free speech, promoting climate change and covering up crime rather than look at reporting on what truly matters – the biggest financial collapse facing us in 90 years.

There is no ‘told you so’ in any of this. The same feelings in the bones of some 30 years ago are back as they were at the time of Greenspan and Lehman. This time can’t be avoided. We have borrowed too much, saved too little and all the while blissfully ignored the warning signs. The faith and confidence in authorities is evaporating. The failed experiment started by Greenspan is coming home to roost. This will be far worse than 1929. Take that to the bank, if it is still in operation because you won’t be concerned about the return on your money but the return of it!

It only takes one to prove me wrong

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“No amount of experimentation can ever prove me right; a single experiment can prove me wrong.” – Einstein

Einstein meant that all the consensus in the world won’t mean he’s correct. It only takes one person to prove him wrong. It wasn’t surprising to see social media share Stephen Hawking’s prognosis on Trump leaving the Paris Climate Accord. More tellingly most overlooked the zany assumptions made in Hawking’s comments (250 degrees C temps and climate like Venus) and focused on who he was attacking. Seriously do you honestly believe that the earth’s temperatures will reach that if you relied on your own logic on this planet?As the coldest temperature in 110 years was recorded in rural NSW Australia overnight no one said boo. Had it been the hottest temperature in 110 years the media would be spewing global warming stories all week.

Last week we had former UN climate chief Christiana Figueres warn that the next three years will be crucial to stopping the worst effects of global warming. Let’s not forget that climate change is so critical to Figueres that she thinks gender inequality should be tackled at the same time and she openly discussed discrimination against males when it came to hiring in her department. Still talking of the climate alarmist letter she co-signed warning of catastrophe why don’t they analyze the “ground breaking” Paris Climate Accord they all laud when those responsible for 75% of the world’s CO2 emissions aren’t taking urgent action? China won’t peak out on CO2 until 2030, India has dozens of coal fired power on the drawing board over coming decades and Russia’s 4-page commitment is worthless. “Ah yes but they are signatories!” I heard many chant in response to the Paris Climate Accord. They might as well have signed a whiteboard in a non marking pen for what it is truly worth.

The Paris Climate Accord is essentially a system which makes as much sense as you quitting smoking on my behalf. How do I benefit exactly? Paying for air I can’t breathe. The Paris Climate Accord is nothing but a mechanism for wealth distribution controlled by a bloated UN which wishes to add more to its ridiculous budget and offices despite claims it is slimming down!

“The latest U.N. regular budget, while superficially smaller than the previous budget, made no fundamental programmatic or structural adjustments—e.g., reducing permanent staff, freezing or reducing salaries and other benefits, and permanently eliminating a significant number of mandates, programs, or other activities—that would lower the baseline for future U.N. budget negotiations.[10] Despite the Secretary-General’s proposal to eliminate 44 permanent posts, the 2012–2013 budget actually increased the number of permanent posts by more than a score compared with the previous budget. The failure to arrest growth in U.N. employment, salaries, and benefits is especially problematic because personnel costs account for 74 percent of U.N. spending according to the U.N.’s Advisory Committee on Administrative and Budgetary Questions (ACABQ).[11] Without a significant reduction in the number of permanent U.N. posts or a significant reduction in staff compensation and related costs, real and lasting reductions in the U.N. regular budget will remain out of reach.”

However what did Hawking say that makes his words credible? That is like saying Fed Chair Janet Yellen should be believed for saying we won’t see another financial crisis in our lifetimes. Let’s just accept it because many don’t know better. I haven’t seen the most rabid climate alarmists make a 250 degree claim. 98% of climate models to date have drastically over-predicted the extent of warming. The UNIPCC has been embroiled in so many scandals, climb downs and corrections that it can’t be relied on as a credible body. Many of the lead authors in the UN Climate bible have little experience in their fields and an investigation showed that  gender and minority status were given priority over ability in the investigative teams on each chapter. This is openly admitted by the UNIPCC as Donna La Framboise’s Delinquent Teenager’ highlighted,

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So if an internal survey that has been written up by the IPCC itself criticizing the process how can anyone put any validity in the argument?

Ahh but NOAA has told us that warming is getting worse. How could NASA lie? Oh the same NOAA that was subpoenaed after refusing to turn over emails related to an internal whistleblower who claimed the data had been homogenized (aka manipulated).

As argued many times before, human consumption patterns do not reflect the fear. SUV sales continue to grow as a % of sales, air travel is predicted to double by 2030 and sales of Tesla’s in HK or Norway fall off a cliff if generous tax incentives aren’t given to the wealthy to subsidize their virtue signaling.  This isn’t to doubt Hawking’s intelligence but Yellen, Greenspan, Bernanke, Kuroda and Draghi aren’t dummies either but it doesn’t preclude them from making mistakes and being wrong.

Oh, and for those that believe Hawking’s claims of rising sea levels the price of beachfront properties in a Sydney is preposterously high and even in Mauritius homes prices are still buoyant. Actions not words. Then we can always believe the immortal words of Australia’s former Climate Commissioner Tim Flannery who warned us that the waves would lap the 8th story of apartment blocks on the coast. He lives in a waterfront property himself. Actions not words.

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Yellen’s Fedtime stories

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US Fed Chair Janet Yellen uttered perhaps some of the most bizarre words to come out of a central banker. So much so that Alan Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” seems almost comprehensible by comparison. Yellen told an audience that she believes we won’t see another severe financial crisis in our lifetimes. Either Ms Yellen is not long for the world or denial is running deep within her veins. One of her own FOMC board members (James Bullard) wrote a piece on why the Fed needs to trim its balance sheet from $4.47tn to around $2.5 trillion) so they can prepare for the next horror that awaits.  Even Minnesota Fed Reserve Bank President Neel Kashkari said the likelihood of another financial crisis is 2/3rds. We have a world with debt up to its eyeballs and global interest rate policies that have only led to the slowest post slowdown growth in history. The signs of a global slowdown are becoming ever more obvious even in the US. Slowing auto sales and rising delinquencies are but one signal. The imminent collapse of so many public pension funds another.

Had she not seen the European Commission’s decision to let Italy spend up to 17 billion euros to clean up the mess left by two failed banks? The news is not only another whack for Italian taxpayers but a setback for the euro zone’s banking union, and a backflip for the EU’s stance on non-standard bailouts. The Italian government wound down Banca Popolare di Vicenza and Veneto Banca, two regional lenders struggling under the weight of non-performing loans which averages 20% across the nation and up to 50% in the south. Intesa Sanpaolo bought the banks’ good assets for one euro, and was promised another 4.8 billion euros in state aid to deal with restructuring costs and bolster its capital ratio. Italy’s taxpayers get to keep the bad loans, which could end up costing them another 12 billion euros. Even the Single Resolution Board — whose purpose is to take the politically difficult decision of whether to close a bank out of the hands of governments — chose not to intervene.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.

The Bank of Japan has no plans to cut back on the world’s largest central bank balance sheet. It continues to Hoover up 60% of new ETF issues at such an alarming pace it is the largest shareholder of over 100 corporates. Then there is the suggestion of buying all $10 trillion of outstanding JGBs and convert them into zero-rate (+miniscule annual service fee) perpetuals.

Australia’s banks are now the most loaded with mortgage debt globally at 60% of the total loan book.  Second is daylight and third Norway at 40%. Private sector debt to GDP is 185%. We have a government who can’t tighten its belt basing its budget on rosy scenarios that will be improbable. Aussie banks have been slapped with a new tax and with the backdrop of a rising US rate environment, the 40% wholesale funded Aussie banks will be forced to accept higher cost of funds. That will be passed straight onto consumers that are already being crushed under the weight of mortgages. One bank survey by ME Bank in Australia said that 1/3rd would struggle to pay a month’s mortgage if they lost their jobs.

Had Ms Yellen forgot to read the St Louis Fed’s survey which revealed that 45% of Americans can’t raise $400 in an emergency without selling something? USA Today reported that 7 out of 10 Americans have less than $1,000 in savings to their name.

“Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account…Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.”

So Chair Yellen, we are not sure what dreamland you are living but to suggest that we won’t see another financial crisis in our lifetime almost guarantees it will happen. The Titanic was thought unsinkable until history proved otherwise. Money velocity is not rising and every dollar printed is having less and less impact. I thought it nigh on impossible to surpass the stupidity of Greenspan but alas you have managed it.

If the Fed were surgeons you’d never want them operating on you

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In Fed Chairman Janet Yellen’s speech at  Jackson Hole she said the following:

“The shaded region, which is based on the historical accuracy of private and government forecasters, shows a 70 percent probability that the federal funds rate will be between 0 and 3-1/4 percent at the end of next year and between 0 and 4-1/2 percent at the end of 2018. 2 The reason for the wide range is that the economy is frequently buffeted by shocks and thus rarely evolves as predicted. When shocks occur and the economic outlook changes, monetary policy needs to adjust. What we do know, however, is that we want a policy toolkit that will allow us to respond to a wide range of possible conditions.”

It seems Yellen is trying to suggest a consensus of “private and government” forecasts. Does the Fed not trust its own research that it needs to justify a gap wide enough to fit a 747 through? It’s concerning. It’s group think. 70% confidence in statistical terms is effectively zero. Statisticians usually talk of 95% and 99% confidence intervals. 70% is a joke and basing it on a consensus makes it even more ridiculous. If I gave such forecasts as a financial analyst I’d be fired. If the Fed were surgeons you’d never get them to operate on you.

How could anyone possibly think the Fed has the first clue what it is doing? Japan has been going through typhoons recently and the Fed chart must have taken its inspiration from the Japanese Buteau of Meteorology.

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The Fed’s number one role is to drive confidence in business and consumer behaviour. The US economy is at stall speed. The last three quarters have nose dived. Business investment is rock bottom. as l’ve mentioned before, businesses invest because they see a cycle, not because rates are low.

Yellen’s went on:

“The Global Financial Crisis and Great Recession posed daunting new challenges for central banks around the world and spurred innovations in the design, implementation, and communication of monetary policy.”

So again Yellen only proved central banks have colluded in their group think. “Challenges”? “Innovations in communication”? That almost topped  the comment from the FOMC minutes in July where it said “monetary and fiscal policy is far better prepared for large positive shocks than negative ones”

Then there was this cry for help:

“As I will argue, one lesson from the crisis is that our pre-crisis toolkit was inadequate to address the range of economic circumstances that we faced. Looking ahead, we will likely need to retain many of the monetary policy tools that were developed to promote recovery from the crisis. In addition, policymakers inside and outside the Fed may wish at some point to consider additional options to secure a strong and resilient economy.”

I’d argue the policy tool kit is more inadequate now than in 2008.  Moreover even the Fed thinks it might be too optimistic

“Of course, this analysis could be too optimistic. For one, the FRB/US simulations may overstate the effectiveness of forward guidance and asset purchases…Finally, the simulation analysis certainly overstates the FOMC’s current ability to respond to a recession, given that there is little scope to cut the federal funds rate at the moment”

In closing perhaps we should be worried that the group thinking central banks are likely to depend on each other for more clueless guidance such as broadening the types of toxic waste it can shove on its balance sheet:

“On the monetary policy side, future policymakers might choose to consider some additional tools that have been employed by other central banks, though adding them to our toolkit would require a very careful weighing of costs and benefits and, in some cases, could require legislation. For example, future policymakers may wish to explore the possibility of purchasing a broader range of assets.”

We should be gravely concerned when we read between the lines. Zero confidence and it is being more widely understood by the day.

The Central Banker’s karaoke song

Alan G

I was listening to World Party’s ‘Ship of Fools‘ today and thought a few changes to the lyrics would be quite apt for Central Bankers to sing…

We’re setting sail
To the place on the map where the economy  we think we can turn
Drawn by the promise of inflation and growth
By the light of the currency we burn
Drawn by the promise of the cycle from negative rates
Not the gold or the savings or pearls
It’s the place where we keep all the printing presses we need
We sail away from the plight of the world on this trip baby
Pay, they will pay tomorrow
They’re gonna pay tomorrow
They will pay tomorrow
Save us, save us from tomorrow
They don’t want to sail with this ship of fools, no no
Oh, save us, save us from tomorrow
They don’t want to sail with this ship of fools, no no
They want to run and hide

Right now
Lies and hope are gonna drive them over the endless sea
We will leave them drifting in the shallows
Drowning in the debts of history
Travellin’ the world, we’re in search of hope
But I’m sure we’ll build their Sodom like we knew we would
Using all their good people for our galley slaves
As our deflating boat struggles through the warning waves
But they will pay, they will pay tomorrow
They’re gonna pay tomorrow
They gonna pay tomorrow
Save us, save us from tomorrow
They don’t want to sail with this ship of fools, no
Oh, save us, save us from tomorrow
They don’t want to sail with this ship of fools, no
Where’s it comin’ from or where’s it goin’ to?
It’s just a, it’s just a ship of fools

It’s official – the Fed’s Yellen has lost the war on monetary policy

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One of the most terrible aftermaths of the Global Financial Crisis (GFC) is that financial services companies have had to make serious dents into staff numbers to cut costs. Now for all of the ‘bankster’ arguments that have been made, the GFC has also meant decently paid but intelligent workers have been replaced with green graduates with no history or understanding of cycles. So as a result we are getting more misunderstandings.

These intern-esque kind of knowledge bank stood out because markets became happy that Ms Yellen is unlikely to raise rates because the US economy is sicker than people thought. You don’t say? See PMI and US non farm payrolls.

I might cynically say that the rate rise in December to 0.37% by the Fed was a headfake. It was trying to bluff markets into believing that the underlying economy was stronger than it really was. Isn’t it striking that employment has fallen off a cliff and PMI is a deflated balloon since. So for such a measly rise in rates to make out ‘inflation was coming down the pipe’ you might ask yourself is the economy so sensitive to punt change?

This is the argument I continue to make. Central banks have lost not only the battle but the war on monetary policy. They have spent all their ammo. For markets to cheer today at Yellen not raising rates from ‘stuff all’ to ‘peanuts’ should be a massive red flag. It is a perfect example of how dumbed down market participants have become. This is called believing one’s own bullshit.  Had Yellen raised rates markets should have cheered because of what that would have said something more concrete about real underlying strength.if she cut rates that would have spooked markets more. Standing pat was the only option.

Look at the ECB. Markit showed Eurozone manufacturing activity hit a 3-mth low. The Chief Economist of Markit wrote, “New orders grew at the slowest rate for over a year as demand showed signs of waning both within the euro area and further afield. Not surprisingly, companies remain reluctant to build capacity and take on extra workers, lacking signs of any imminent upturn in demand…France and Greece remain the key areas of concern, both seeing manufacturing contracting again in May. Worryingly, however, growth has also slowed sharply in previously fast-growing countries such as Spain, Italy and Ireland, meaning there are now no signs of robust manufacturing growth evident across the regionThe overall slowing of manufacturing activity confounds expectations that recoveries will accelerate on the back of the ECB stimulus announced earlier in the year.Hopes remain pinned on forthcoming corporate bond purchases and new tranches of ultra-cheap bank loans from the ECB providing an extra boost in coming months.” Ireland hit a 34 month low followed by Spain at a 7-mth low.

So market participants need to wake up to realities here. Yellen’s remarks to me are yet more confirmation to remain very bearish. To mask it in words like the “Fed is in no rush” is not so much to do with fine tuned Fed planning but sheer fear. If you look closely you should be able to see the whites of their eyes. This is the prelude to panic stations. Don’t forget money velocity continues to slow!

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So that is why under-performing assets like Gold are really the more sensible safe haven!

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Before I forget Europe is even worse…on velocity…almost 5 euro needed to create 1 euro of GDP.

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