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About That Rate Hike...

Tyler Durden's picture




 

Authored by Mark St.Cyr,

On Wednesday of this week (December 16, 2015 to be precise) The FOMC committee at the Federal Reserve is slated to follow through on the 2nd most anticipated, telegraphed, jawboned, as well as hand-wrung policy dictates to end the now maligned zero-bound policy, and raise rates ever so slightly by 25 basis points. Some Fed. officials have publicly stated that many around the world are calling for them to “just do it.” Sure they were. Maybe a few weeks ago. But as we get closer to the actual moment where “should” turns to “will?” Things change, and change fast. Especially when that change looks awfully familiar as what transpired last time the global markets held its collective breath. i.e., As the market held its breath – all the air began streaming out of the balloon.

So once again we await the results for the monetary policy game of “Will they? – Won’t they?” The issue this time? The consequences may be in fact a little more costly than previously. For the world is a much changed place than what is was just this past September. And looking back less than 90 days later, it seems raising then may have been a cakewalk as compared to now. Like I said, “A lot has changed over the last few months.” And they all point to the same thing: Potential for disaster.

One thing that’s changed and yet remains the same? China. What’s changed is things seem to have taken a turn for the worse. What hasn’t changed? The blatant ham-fisted style of dealing with its monetary and market fiascos via its politburo.

A few weeks back I wrote in an article “Dec. 16th A Date Which Will Live On In Monetary Infamy”

“Well, don’t look now, but there indeed looks to be trouble brewing on the global stage (or should I say “international developments”) that could turn out to be just as big of a headache to the Fed’s reasoning’s on whether or not to “just do it.” Just one of those issues is – once again: China.”

And guess what has transpired since? Not only has the Asian markets nearly mirrored what took place during that period. China itself has done things far more damaging to their own credibility of making their markets more transparent and stable. This time they’ve devalued their currency via backroom operations more frequently in moves that are causing outright consternation across the for-ex markets.

 

The inclusion into the SDR (Special Drawing Rights) Basket which was supposedly a coveted milestone awarded as to assign stability and confidence seems to have done anything but. As a matter of fact it seems to have done quite the opposite. Adding to this the PBoC signaled just the other day their intention to loosen the Yuan’s peg to the $Dollar. How’s that going to work for a Fed. rate hike? Can anyone say “importing deflation via Made In China?” And here the Fed. is said to be all worried about inflation. I wonder if we’ll see “Ooopsy” in any of the corresponding releases via the Fed. minutes. I’m of the belief that word is going to come front-of-mind quite a lot over the next few months. We’re now seeing just how much turmoil waiting for the “right moment” Fed. style is about to unleash.

Another actuality which shouldn’t be lost on anyone is just how many top Chinese business leaders or market participants have suddenly gone missing. If one is perceived in any way as not towing the Party’s line (which is what happens in communist countries which far too many forget China is) whether they are talking negative, selling shares, cashing out, or a myriad of other factors deemed “improper” by the politburo – they are gone. Gone as in: Are they still alive?

But not to worry we’ve heard from many a next in rotation fund manager appearing in the financial media. “Their markets are just fine. They’re working out issues that come with any growing economy. After all, don’t forget China’s economy and GDP is still growing some 6% plus! We wish we had such growth!! And now they’re moving from manufacturing to a service economy, Oh, the riches to be had by all, Just back up the truck and BTFD!”

Sure thing. After all, what’s a little market turmoil when you can just “ghost” those you decide are the cause of any selling or market turmoil. And even if they aren’t, that’s OK too. For as Mao stated “You have to break a few eggs to make an omelet.” And that’s when millions were “ghosted.” So what’s a few business leaders for the sake of “the markets” hmmm?

And that’s just China. Or, should I say the “international developments” excuse implied last time the Fed. was going to “just do it” and didn’t. How about a few other real international developments taking place this time that weren’t so front and center last time. e.g. Nearly every other Developed as well as other EM nation whose economy is linked heavily to commodities. With some EM’s looking into the real possibility of returning to Frontier statuses if there’s even further calamity in the markets. That catalyst being the now collapsing commodities market.

Today, if you are a nation that’s tied to commodities – your economy is either in turmoil, or, outright free-fall. Saudi Arabia for one is burning through reserves at a pace only equaled with their oil output. Canada is suddenly finding itself at the precipice of an economic tailspin. The once driving economic hot-spots such as Alberta , and Saskatchewan have been particularly hard hit, and the worst is far from over as the price of oil continues to fall to levels many suggested would never be seen again in generations.Yet; not only are they here. They seem to be going even lower.

Brazil? Disaster, and getting worse by the day. Venezuela? Worse. And I haven’t even mentioned problems such as in Puerto Rico, Mexico, and a few others. However, let’s do mention Europe. e.g., The EU, and specifically Mario Draghi and the ECB.

Not more than two weeks ago Mr. Draghi took to the media as to announce what the market presumed to be an even more dovish toned statement. i.e., More QE in one form or another. The issue? They didn’t get it – and the markets fell in unison.

Once again in less than 90 days since the August plunge the markets reacted in similar fashion and many market participants found out what the meaning of “liquidity” meant when playing in this HFT fueled world supposedly “full of it.” Only when Mr. Draghi came out the next day at a speech at the Economic Club of New York™ to reassure (or triage the rout) stating “We are ready at any time to re-calibrate our array of tools” did the markets reverse rewarding the parasitic, algorithmic, headline reading, stop running, HFT programs to front-run his soothing tones and vaulted the markets upwards.

When pressed after his speech by other participants if he had iterated these passages as to help quell market fears. He responded at first with some push back, only to relent at the same time stating, “No…not really. Well, of course.” Welcome to monetary policy 2015 style. If you need reminding just how adulterated and far the markets have come. You needn’t look any further. Only this time – they aren’t staying there. They’re falling, and falling quickly. What’s worse? The Euro is climbing if not outright spiking upwards crushing many carry trades where the carnage is still yet to be felt, as well as fully identified. However, there are clues to just how bad it is under the surface.

Unprecedented losses in hedge funds caused other ECB members such as Ewald Nowotny to state “I think it was really a massive failure of market analysts.”  Yes it was. Problem was the markets thought the ECB were not only going to keep the pipes open – they’d turn the valve up to 11! And why wouldn’t they when the ECB continued to give soundbites as late as Nov. 2nd such as: Nowotny says, “ECB has to act as inflation target to be missed.” Massive failure indeed is all I’ll say.

The entire Euro-Zone is in chaos with many of its member states not only arguing about national sovereignty. They are literally beginning to once gain erect barricades and border crossings that were once thought never to be seen again. Yet, there they are. Again.

The Syrian refugee crisis is bringing out old tensions and new fears across Europe. Greece is finding out the hard way just how much of its sovereignty it did indeed relinquish when it signed it away to EU oversight for loans. My how costly those interest payments seem today. Think Portugal and Spain are going to do the same as they begin demanding better terms? In this current light? I dare say – I think not. You think Germany has more solid ground to put a halt to such demands today? Give that scenario a thought through while remembering the ongoing Volkswagen™ scandal, as well as demanding millions more refugees be accepted into member states with their own 50% youth unemployment. I believe Mr. Schäuble would be in-store for a little unwanted Schadenfreude during discussions this time.

Then there’s Russia. You know, that other communist country that is currently engaged in a real kinetic engagement in Syria. A country whose leader has basically called out the U.S. for outright manipulation, and the root cause of all the Middle East turmoil and militant uprising. The same country whose leader, and military have made it known they are “To strengthen Russian nuclear forces” while simultaneously launching cruise missiles from a sub into Syria. Add to this, that Turkey (a NATO ally) has subsequently shot down a Russian fighter jet. Does one think a mishap (any mishap) is possible that may launch WW3? How about a monetary one? Think it’s implausible or lunacy? I would urge you to think again, as well as quite carefully. For it’s not as far-fetched as one might first think.

Back in October I proposed this very idea that a monetary policy action could in fact be construed by other nations as an outright act of war if the situations presented themselves in just the right way, at just the wrong time. Whether or not it was intentional the results could be the same. Here’s a passage to reiterate:

“With the way the current global markets are now predisposed to HFT – If one wanted to put a hurt on a presumed or proposed adversaries economy; why wait for sanctions to be reimposed or, tightened or, a number of other financial weapons that need to be brought for a vote or, announced or, whatever: when it could be done today through various other means with only a nod-of-the-head.”

The premise of such an idea at that time was shouted at as being “preposterous!” However, let me now add a detail that no one. And I mean, no – one thought would happen. Especially in these turbulent moments. To wit:

“The IMF Just Entered The Cold War, Forgives Ukraine’s Debt To Russia”  And just how do you think this was viewed last week in Putin’s war council deliberations? Better yet, how do you think it’s going to be viewed when it’s contrasted against the Fed. raising interest rates against a backdrop of every other DM across the globe devaluing theirs in a response to an outright commodity driven rout crushing not only those economies, but also swelling government burdens causing social unrest?

 

An interest rate hike here by the U.S. Federal Reserve could in fact be a catalyst that all but crushes their current fragile economies outright. Remember, this will be needed to be thought through enlisting the eyes of one Vladimir Putin. You know, the one installing ICBM’s where we also have forces. And had a plane shot down by one of our ally’s. Think he’s going to look at this as “Oh well, the Fed. had to save its credibility. Pass the vodka?”

Which brings us back to the first player – who is also a co-player with the last in the same arena: China.

China as of what has been demonstrated publicly sides with Russia, not the U.S. And has also been moving its alliances with others that we are now having difficulties with. i.e., Iraq and more. And it will also be China’s economy that may suffer just as bad as Russia if and when the Fed. raises rates. Yep, nothing to see here. Move along. thanks for stopping by. As we can now see the Fed. knew exactly what it was doing by delaying all these years. For this sure looks like the absolute best time to “just do it.” Right?

This is where the Fed. now finds itself. Here they were. Just holding policy lines doing what they in their Ivory Tower contemplated and the so-called “smart crowd” insisted they do. And now the saying of “Between a rock and a hard place” might be an understatement. The world sits atop a tinderbox fueled by monetary policies that created them and awaits a match that could set it off in a blaze of who knows what. All in short order.

Unless they don’t do anything except try their best Draghi impersonation and declare, “They too are once again at the ready to do what ever it takes!” Except – just not now. Or worse. They do raise – and near immediately need, and do issue – QE. At that point who knows which is worse. For what it won’t be, is:

Predictable.

 

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Sun, 12/13/2015 - 17:03 | 6918683 Boris Alatovkrap
Boris Alatovkrap's picture

16 December, 2015 "Should is turn to will"

There is no will.

Sun, 12/13/2015 - 17:05 | 6918685 The Juggernaut
The Juggernaut's picture

It is no coincidence that the century of total war coincided with the century of central banking.”   -  Ron PaulEnd the Fed

Sun, 12/13/2015 - 20:28 | 6919480 Boris Alatovkrap
Boris Alatovkrap's picture

That is why is call "Crime of Century", no?

Sun, 12/13/2015 - 17:04 | 6918687 Boris Alatovkrap
Boris Alatovkrap's picture

<-- Fed is announce "No Rate Hike"

<-- Fed is not announce "Rate Hike"

Sun, 12/13/2015 - 17:21 | 6918740 Amish Hacker
Amish Hacker's picture

"There is a time to laugh and a time not to laugh, and this is not one of them."

Inspector Clouseau

Sun, 12/13/2015 - 17:36 | 6918802 TheSecondLaw
TheSecondLaw's picture

The results to your poll, Boris, confirms my suspicion that many people here on ZH cannot read.

Sun, 12/13/2015 - 21:14 | 6919648 sun tzu
sun tzu's picture

The fed is market data dependent. If the markets crash on M-T then no rate hike followed by 500 pts on the DOW. Great shorting opportunity. If the market is up or stable, then rate hike, following by a tantrum and some dovish fed comments to stabilize the markets. 

Sun, 12/13/2015 - 17:04 | 6918688 kizell
kizell's picture

The fed has to raise to 0.25 at this point.  To not do so would prove that market sell offs the week before will force their decision every time, and it will show just how scared they are.  But it doesn't matter, if the market tanks with a rate hike, just unleash helicopter money until the market heals.  It can do this with every rate hike in the future too.  It is why the stock market will never collapse again with the feds easy money policy at their fingertips. 

Sun, 12/13/2015 - 17:10 | 6918699 Boris Alatovkrap
Boris Alatovkrap's picture

Please, you are not worry. Plenty of time is remain before Wednesday for distraction and excuse not for raising Fed Rate. In mean time, practice facial expression for surprise and disbelief.

Sun, 12/13/2015 - 17:18 | 6918729 stant
stant's picture

IMF can no longer say pretty please to save duetche bank , and others. Better have thier shit wired tight now cause its coming

Sun, 12/13/2015 - 19:29 | 6919274 ISEEIT
ISEEIT's picture

You funny.

Me NOT gay.

Sun, 12/13/2015 - 17:07 | 6918694 ENTP
ENTP's picture

No matter what they do on Wednesday, they can never normalize rates.  It isn't a China problem or a Eurozone problem or a Terrorist problem or a Fed problem, it is a math problem.

Sun, 12/13/2015 - 21:02 | 6919158 ThroxxOfVron
ThroxxOfVron's picture

There wouldn't BE a math probem if the system were allowed to function as designed: by allowing market forces to prevail, with recognizing and accepting defaults, prosecuting criminals -instead of bailouts and counterfeiting, accounting rules suspensions, deferments of prosecution.

Sun, 12/13/2015 - 21:15 | 6919656 sun tzu
sun tzu's picture

4% rates would completely wreck the global economy

Sun, 12/13/2015 - 17:08 | 6918695 css1971
css1971's picture

It'll be FINE! What could possibly go wrong?

Sun, 12/13/2015 - 17:08 | 6918696 Id fight Gandhi
Id fight Gandhi's picture

I will be shocked and surprised if they DO raise this week.

 

Sun, 12/13/2015 - 17:09 | 6918698 H H Henry P P P...
H H Henry P P P Paulson's picture

How quickly do you think the Fed will reverse course and announce QE4 after they raise rates?  If the markets incur a 2008 crash, maybe the Fed will reverse course in as little as a week after the rate hike because the people will ask for it that quickly when they see their accounts dropped 50%

Sun, 12/13/2015 - 17:14 | 6918717 kizell
kizell's picture

I was thinking along those lines too.  QE following each rate hike.....As a matter of fact, that may be the only way to increase rates in the future.  Either that, or debt forgiveness, but I don't know if there is anything currently in place to make that an option. 

Sun, 12/13/2015 - 18:12 | 6918958 BiPolarFrenchman
BiPolarFrenchman's picture

They wouldn't do that because they would destroy their credibility in the process.  

 

My guess is that they raise rates, then open up large swaps with ECB and BOJ - get them to PPT US markets.

Sun, 12/13/2015 - 21:16 | 6919661 sun tzu
sun tzu's picture

QE4ever comes before next summer

Mon, 12/14/2015 - 00:33 | 6920359 napper
napper's picture

QE4 has been underway for almost a year now. NO?

Sun, 12/13/2015 - 17:11 | 6918703 PutinLover
PutinLover's picture

In all likelihood the Fed will raise rates on December 16.  Is it possible the Fed will hold off?  Of course.  Meanwhile, Russia needs to raise rates to 25% to stanch the stampede out of the ruble.  

Sun, 12/13/2015 - 18:15 | 6918974 hungrydweller
hungrydweller's picture

Exactly.  It is ALWAYS about containing Russia.  If we raise by only a tiny fraction and cause the ruble to decline drastically, it will force action.  That action may not be so pretty.

Sun, 12/13/2015 - 17:10 | 6918704 The Duke of New...
The Duke of New York A No.1's picture

The US economy is printing only a 5% unemployement rate .... if the FED doesnt raise rates with a 5% print - eveyone (even the CNBC cheerleaders) will know the unemployement numbers are heavily cooked.

Sun, 12/13/2015 - 18:28 | 6919035 The Duke of New...
The Duke of New York A No.1's picture

The FED has previously said a 6.5% unemployement rate would be the threshold to start rate normalization .... we are at 5% now; way past the FED's own 6.5% threshold number... NO MORE EXCUSES.

Sun, 12/13/2015 - 17:11 | 6918705 Uncle Tupelo
Uncle Tupelo's picture

When does Dancing With The Stars start the next season?

Sun, 12/13/2015 - 21:17 | 6919668 sun tzu
sun tzu's picture

You can keep up with the Kardashians for now.

Sun, 12/13/2015 - 17:13 | 6918712 surf@jm
surf@jm's picture

Well, I should just put a gun to my head and pull the trigger,,,,,,The James Quinn optimism club....I was thinking of joining, but I didn`t think I had a chance......

Sun, 12/13/2015 - 17:13 | 6918715 VWAndy
VWAndy's picture

Step right up! Place your bets. Easy money right? Just buy the dip.

 My guess the next Fed chair is the Shamwow guy.

Sun, 12/13/2015 - 18:16 | 6918983 hungrydweller
hungrydweller's picture

Nope, just another tribe member.

Sun, 12/13/2015 - 17:14 | 6918716 coast
coast's picture

Why do politicians and bankers all wear the same clothes?  slacks, a tie and jacket...dear lord, is it like when they use to all wear wigs? or how saudi wears those ridiculous head toppings?   Now dont get me wrong,  the suits and hats from the 30"s were kinda cool, zoot suits lol, and cowboy hats were kinda cool....well, as long as both of the above were smoking a cigarette.:-)

 Ok. back to rate hike...They will raise rates when they are ready to implode the system...are they ready yet?  I dunno..And yes, they are stuck between a rock and a hard place...But they have been here before.  And they found their escape.

My final word on this post is why dont we just all STFU, maybe share a few songs, and just wait a few more days to find out...I am sick of this shit.

I got two youtubes for ya...."brett dennen aint not reason"....for music....the other is "caravan to midnight Jim Willie"....for some cool economic substance...

Sun, 12/13/2015 - 17:14 | 6918718 Amish Hacker
Amish Hacker's picture

The problem is, when you go around bragging about how big your johnson is, sooner or later someone will demand that you put your cards (and your johnson) on the table.

Sun, 12/13/2015 - 17:15 | 6918720 surf@jm
surf@jm's picture

Heres my conspiracy theory.....The FED will raise, so to cause economic collapse, and then Obama can declare martial law, and come get your guns.....

Sun, 12/13/2015 - 17:52 | 6918863 Hitlery_4_Dictator
Hitlery_4_Dictator's picture

No doubt about it one bit. They know it's about to go down so they are ramping up the gun grab. Getting insane up in here. 

Sun, 12/13/2015 - 19:34 | 6919291 ISEEIT
ISEEIT's picture

Sounds like you smoke marijuana?

Mon, 12/14/2015 - 01:49 | 6920505 surf@jm
surf@jm's picture

Nope.....Only fools invest in a business, thats still a federal crime.....As soon as the political winds change, watch the federal prosecutions of pot shops commence..........Never trust the government.......

Sun, 12/13/2015 - 17:21 | 6918742 Usurious
Usurious's picture

 

trav777

''Credit.Must.Grow.

There is no other way.

Fractional BS and synthetic debt allowed them to run this thing almost a decade after it would have already collapsed on its own.  It's tried to already 3 times in the past 10 years...hasn't anyone noticed?

The real economy ran out of steam and the synthetic one took over the baton of credit growth.  And they piled leverage atop leverage, constructing CDOs even of tranches of other CDOs.  Yeah, supersenior tranches of CDOs composed of equity tranches of other CDOs, synthetic CDOs based upon the payment streams from CDSs, themselves tranched, and then squared up again, with leverage built right into the instrument.

Again, rice...chessboard.  You have to double the shit each square, that's the rule.  So $40T in credit outstanding must become $80T, then $160T, then $320T.''

http://www.zerohedge.com/article/pimco-sees-uk-rating-downgrade-probabil...

Sun, 12/13/2015 - 19:36 | 6919296 ISEEIT
ISEEIT's picture

Nice.

-:)

Sun, 12/13/2015 - 17:22 | 6918743 One Solution
One Solution's picture

Time to raise rates and burn the place to the ground.

Three days to get stocked up.

Sun, 12/13/2015 - 17:25 | 6918753 seek
seek's picture

The Fed is near zero credibility. If they don't hike, it goes to absolutely zero credibility. They're far more concerned about credibility than consequences.

Either way, I think most of the world knows this is the last decision of any significance where they, rather than the markets, make the choice. Even with the controlled market there's so many animal spirits chasing for yield in a NIRP/ZIRP environment it's only a matter of time before they break out of their cages.

Sun, 12/13/2015 - 21:19 | 6919677 sun tzu
sun tzu's picture

Nobody cares. It's a race to the bottom. They will keep shorting paper gold and silver to make things appear stable

Sun, 12/13/2015 - 17:29 | 6918764 Tor.19
Tor.19's picture

I had a bush that was the anchor for the landscaping  in front  of my house.   It was ok but after 4  years  I decided to have the landscaper come back and do some more work.  The yard looked great BUT he chopped off a bunch of branches from the bush.  I thought he killed it....UNTIL the following year when the bush exploded with more branches and green leaves than it ever had  before.

This is what the FED needs to do.  RAISE rates which will cut off the dead branches that are being held up with ZIRP.  Once the branches (or dead  wood) is removed the economy will return to  growth. 

Sun, 12/13/2015 - 17:31 | 6918775 Cautiously Pess...
Cautiously Pessimistic's picture

I fear that the FED's bush is an artificial plant.

Sun, 12/13/2015 - 21:25 | 6919700 sun tzu
sun tzu's picture

Everytime I trim my bush it comes back thicker and stronger too

Sun, 12/13/2015 - 17:43 | 6918823 Dark Daze
Dark Daze's picture

OK, so we know ZH doesn't like the Chinese. Nor do they like Brail, or Argentina, or Russia, or......you get the picture. So I was just reading how the Russians have SUCCESSFULLY negotiated the collapse in oil prices and the collapse in the ruble. Then I read that credit is actually expanding again in China, albeit at a somewhat lower rate of $50B US per month. The US on the other hand is trapped in deficit spending and zero interest rates while continuing to feed the captured MSM with BS stories about how wonderful things are or that a 220 Trliion fiscal gap doesn't really matter. The problem is China, or Russia, or Canada. No, the problem is the US, who, after over 50 years of playing with unbacked currency have found themselves in exactly the position that most historical figures said they would find themselves in, bankrupt, but still holding on to the keys to castle.

Time to drain the moat and scale the walls.

Sun, 12/13/2015 - 21:26 | 6919707 sun tzu
sun tzu's picture

You believe numbers from the Chinese govt? I suppose you believe US unemployment is really 5% too.

Sun, 12/13/2015 - 17:44 | 6918829 arbwhore
arbwhore's picture

Rand just popped 5% on news of new FM.

Sun, 12/13/2015 - 18:53 | 6919004 buzzsaw99
buzzsaw99's picture

nobody has given me any reason why they would want to raise rates except that everything is fake and so they must fake a tightening cycle to make it look real.

the rest of the world has weak ass currencies and economies

they don't want the stock market to go down.

they don't want to "roil the markets"

they know the banks' asset books stink to high heaven

oil prices and commodities are collapsing due to a fed induced glut

the time to raise rates was over a long time ago.

there isn't any wage pressure the jobs suck ass.

real estate is rolling over

the budget deficit is climbing again

 this is all just a fucking shit show that would collapse under its own weight if the fed would just stfu for a few quarters.

edit: if i had the inclination the above list of reasons for not tightening could easily double in length. personally i would love to see it all crash and burn into a smoldering heap but that will happen no matter what "they" do so it hardly matters.

Sun, 12/13/2015 - 19:10 | 6919218 HopefulCynic
HopefulCynic's picture

Raise the damn rate!! I am SHORT on everything!

Sun, 12/13/2015 - 19:38 | 6919304 ISEEIT
ISEEIT's picture

Fuck it.

Mon, 12/14/2015 - 04:13 | 6920646 jcdenton
jcdenton's picture

Honestly, the rate hike debate is irrelevant. Quadrillions in derivatives are already unraveling as we converse. Oil is heading for $20 / barrel before year end 2016. There is only one possible human savior for the continuation of temporal society, and it is the same that did avert WW3 in 1990 with the General Agreement on Cooperation between the United States of America and the Russian Federation ..

 

https://app.box.com/s/hfgvcqg7gqh7i27at6sv53ywu87lwarp (Read Me First)

I challenge any here to produce a better alternative. And do understand that Putin's boss in the last days of the cold war, was Amb. Lee Wanta. Putin was paid cash via Wanta to perform certain deeds for Wanta for President Reagan. Putin as former Lt. Col. GRU, and former Vice Premier of the USSR / RF ..

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