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ECB Preview: The First Taper, But Don’t Call It That

ECB Preview: The First Taper, But Don’t Call It That

Summary

ECB policy announcement due Thursday 9th September; rate decision at 12:45BST/07:45EDT,…

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This article was originally published by Zero Hedge
ECB Preview: The First Taper, But Don't Call It That

Summary

  • ECB policy announcement due Thursday 9th September; rate decision at 12:45BST/07:45EDT, press conference 13:30BST/08:30EDT
  • Consensus looks for a slowdown in the pace of PEPP purchases during Q4
  • A decision on the future of PEPP is not expected to take place at the upcoming meeting
  • Economic forecasts are set to see upgrades to 2021 growth and inflation. 2023 inflation is set to remain sub-target

OVERVIEW: As Newsquawk writes in its ECB preview, the ECB is set to stand pat on rates whilst leaving the size of the PEPP envelope unchanged at EUR 1.85 tln. Focus for PEPP will instead fall on the Q4 pace of purchases which is set to be lowered from the current "significantly higher" level of EUR 80bln/month. Those looking for clues on the future of PEPP when it concludes in March next year are set to be disappointed with the matter seemingly not on the table for the upcoming meeting. The press conference will likely see President Lagarde caution that any slowing in the pace of purchases for PEPP will not be regarded as a "taper" as purchases are not on track to reach zero and policymakers will vow to maintain favorable financing conditions. Spoiler alert: it is a taper, as the recent blowout in bund yields has amply demonstrated. The accompanying economic projections are set to see upgrades to 2021 growth and inflation. 2023 inflation is set to remain sub-target.

Nomura's visual forecast of the ECB's tapering is below.

PRIOR MEETING: As expected, the ECB stood pat on rates and the sizes of its bond-buying operations (PEPP and APP). In its newly formatted policy statement, the Governing Council adjusted forward guidance on interest rates to reflect its new symmetric 2% inflation target vs. its previous “close to, but below 2%” approach. One of the more interesting nuances of the statement was that its inflation mandate will be targeted via actual inflation outcomes and that rates will remain at present or lower levels until “it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon”. Emphasis on the projection horizon and on a durable basis was received dovishly by the market, alongside the ECB stressing that the medium-term outlook for inflation is still well below the Governing Council’s target. Sources in the immediate aftermath noted dissent from Weidmann and Wunsch on the new guidance due to the length of the commitment and lack of clarity on a potential exit strategy. Those looking for any clues on the future of the PEPP and APP purchases were left disappointed, with the statement reaffirming that PEPP will run until at least the end of March 2022 and, in any case, until it judges that the coronavirus crisis phase is over whilst forward guidance was maintained on APP. That said, sources the following day noted that policymakers were not expecting to make a decision on the future of PEPP bond purchases in September given the persistent uncertainty posed by the pandemic. Instead, a decision in October or December was seen as more likely. On the economic outlook, the ECB judged that the recovery remains on track with activity seen returning to precrisis levels by Q1 2022, that said, the Delta variant posed a source of uncertainty for the outlook.

RECENT DATA: On the inflation front, Eurozone Y/Y CPI in August rose to a ten-year high of 3.0% from 2.7% with a pronounced jump in the core (ex-food and energy) reading to 1.6% from 1.4%. Note, economists still anticipate inflation to slip back below the ECB's 2% target in early 2022. Q2 GDP metrics released since the prior meeting revealed Q/Q growth of 2.0% vs. the 0.3% contraction seen in Q1. Survey data for August saw the Eurozone-wide IHS Markit Composite PMI reading slip to 59.0 from 60.2 with the report noting ".. another strong quarter-on-quarter rise in GDP is on the cards for the third quarter, and we’re certainly on track for the eurozone economy to be back at pre-pandemic levels by the end of the year, if not sooner". Unemployment in the Eurozone fell to 7.6% in July from 7.8% as reopening efforts in the region continued to pick-up and furlough schemes suppress the headline metric. In terms of COVID milestones, the EU Commission recently announced that 70% of the EU population is now fully vaccinated against the virus.

RECENT COMMUNICATIONS: Given the summer break at the ECB, rhetoric up until the past few weeks had been relatively light. However, more recently, interjections from officials have helped shape expectations for the upcoming meeting. Comments from Chief Economist Lane drew attention after noting that it is too early to discuss the conclusion of PEPP (a viewpoint echoed by Villeroy and Kazaks) at the upcoming meeting, adding that such a conversation should take place in the Autumn. Furthermore, Lane downplayed the decision for Q4 purchases under PEPP as a "local adjustment". Lane also stuck to his assessment that upside pressures in inflation are transitory whilst citing the absence of large increases in wages; a viewpoint that was later echoed by Stournaras. Elsewhere, VP de  Guindos suggested that the accompanying economic forecasts could be upgraded whilst noting that the Delta variant is not having as great an impact as the Bank had projected four months ago. De Guindos went on to note that "If things start to return to normal, as is currently the case, the extraordinary measures will have to be gradually withdrawn. - We are not there yet, but we are gradually and continually moving towards that point". Hawkish members of the GC have been vocal ahead of the meeting with Knot stating that the outlook may allow slower ECB stimulus and PEPP to conclude in March, whilst Holzmann suggested the central bank is in a position to think about reducing pandemic aid.

RATES: From a rates perspective, consensus looks for the Bank to stand pat on the deposit, main refi and marginal lending rates of -0.5%, 0.0% and 0.25% respectively. Current forward guidance notes that rates will "remain at their present or lower levels until it sees inflation reaching two per cent well ahead of the end of its projection horizon and durably for the rest of the projection horizon, and it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term.". Market pricing is not indicative of a move in rates by the ECB any time soon.

BALANCE SHEET: Although the size of the PEPP envelope is set to be left untouched at EUR 1.85tln, market participants are focused on the level of purchases set to be carried out in Q4, and what will happen to the Bank’s emergency bond-buying when the program draws to a close. On the former, the June meeting saw a rollover of the level of purchases in Q2 into Q3 (at circa EUR 80bln/month), which were conducted at a "significantly higher pace than during the first months of the year."

This time around, a poll by Bloomberg News suggests that purchases could be slowed to around EUR 50bln/month. Such a reduction would see the ECB use up most of its EUR 1.85tln envelope with just EUR 70bln not used. In terms of specific house views, UBS expects the Executive Board will opt to slow the pace of purchases to EUR 50-60bln, which would be “roughly on par with the pace in Q1, which [chief economist] Mr Lane remarked was also ‘pretty high’.” Barclays (who expect purchases to slow to EUR 60-70bln/month) suggests that the "significantly higher" line within the statement could be replaced by something along the lines of "“slightly higher than during (or close to) the first months of the year”. The ECB has been given cover to make such a decision given that financing conditions in the Eurozone are perceived to be easier than at the time of the June meeting. Note, Lane has already downplayed the upcoming decision as a "local adjustment." Furthermore, Lagarde will likely caution that any slowing in the pace of purchases for PEPP will not be regarded as a "taper" as purchases are not on track to reach zero and policymakers will vow to maintain favourable financing conditions. With regards to “life after PEPP,” those looking for any clues on this are likely to be left disappointed, with Lane already noting that it is too early to discuss the conclusion of PEPP, and discussion on the matter is set to take place in the Autumn. When the PEPP concludes, consensus expects the APP to be bolstered to a monthly purchase amount of EUR 40bln/month; this time around the pace of purchases is set to be held at EUR 20bln/month.

ECONOMIC PROJECTIONS: For the accompanying economic forecasts, UBS looks for an upgrade to the 2021 GDP projection from 4.6% to 5.0% amid the strong performance seen in H1. Next year’s projection is set to see a modest downgrade to 4.6% from 4.7% amid softer-than-anticipated spill overs from H2 2021, whilst 2023 should remain at 2.1%. On the inflation front, UBS expects 2021 to be upgraded to 2.1% from 1.9% with 2022 and 2023 set to be raised by 10bps each to 1.6% and 1.5% respectively with the latter projection still below-target for the ECB.

  • Current Inflation Projections (Jun'21): 2021 at 1.9% (prev. 1.5%), 2022 at 1.5% (prev. 1.2%), 2023 at 1.4% (prev. 1.4%)
  • Current GDP Projections (Jun'21): 2021 at 4.6% (prev. +4.0%), 2022 at 4.7% (prev. +4.1%); 2023 at 2.1% (prev. +2.1%)

Finally, courtesy of ING, here is a scenario analysis of what to expect tomorrow:

Tyler Durden Wed, 09/08/2021 - 22:40

Economics

Biden’s Vax Mandate To Be Enforced By Fining Companies $70,000 To $700,000?

Biden’s Vax Mandate To Be Enforced By Fining Companies $70,000 To $700,000?

By Adam Andrzejewski, CEO/Founder of OpenTheBooks.com; originally…

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Biden's Vax Mandate To Be Enforced By Fining Companies $70,000 To $700,000?

By Adam Andrzejewski, CEO/Founder of OpenTheBooks.com; originally published in Forbes

President Joe Biden didn’t just announce a Covid-19 vaccine mandate on companies employing 100 or more people, he plans to enforce it.

On Saturday, Speaker Nancy Pelosi’s House quietly tucked an enforcement mechanism into their $3.5 trillion “reconciliation” bill, passed it out of the Budget Committee, and sent it to the House floor.

Buried on page 168 of the House Democrats’ 2,465-page mega bill is a tenfold increase in fines for employers that “willfully,” “repeatedly,” or even seriously violate a section of labor law that deals with hazards, death, or serious physical harm to their employees.

The increased fines on employers could run as high as $70,000 for serious infractions, and $700,000 for willful or repeated violations—almost three-quarters of a million dollars for each fine. If enacted into law, vax enforcement could bankrupt non-compliant companies even more quickly than the $14,000 OSHA fine anticipated under Biden’s announced mandate.

The Biden Administration has already started implementing its vaccine mandate enforcement blueprint:

  • The Occupational Safety and Health Administration (OSHA) set precedent this summer and published an emergency Covid-19 rule in the Federal Register taking jurisdiction over and providing justification for Covid-19 being a workplace hazard for healthcare employment.

  • Early in September, Biden announced his 100-or-more employee Covid-19 vaccine mandate and tasked OSHA with drafting an enforcement rule to exert emergency vaccine compliance authority over companies with 100 or more employees.

  • The legislative provision that passed the Budget Committee raises the OSHA fines for non-compliance 10 times higher – and up to $700,000 for each “willful” or “repeated” violation. Speaker Nancy Pelosi has not announced when the House will vote on the reconciliation bill that includes the new OSHA fines.

  • If the legislation is enacted, OSHA could levy draconian fines to enforce Biden’s vaccine mandate, a move that could rapidly bankrupt non-compliant companies. The Biden mandate affects employers collectively employing an estimated 80 million workers.

The Democrats are playing hardball.                      

President Biden embraced an aggressive stance earlier this month when he challenged Republicans who are threatening lawsuits over what they decry as his federal overreach: “Have at it. … We’re playing for real here. This isn’t a game.”

The Legislation

The provision tucked in the House reconciliation budget bill (on page 168) that increases OSHA fines reads:

SEC. 21004. ADJUSTMENT OF CIVIL PENALTIES.

(a) OCCUPATIONAL SAFETY AND HEALTH ACT OF 1970.—Section 17 of the Occupational Safety and Health Act of 1970 (29 U.S.C. 666) is amended—

(1) in subsection (a)—

  (A) by striking ‘‘$70,000’’ and inserting ‘‘$700,000’’; and

(B) by striking ‘‘$5,000’’ and inserting ‘‘$50,000’’;

(2) in subsection (b), by striking ‘‘$7,000’’ and inserting ‘‘$70,000’’; and

(3) in subsection (d), by striking ‘‘$7,000’’ and inserting ‘‘$70,000’’

That provision would change existing law relating to OSHA’s enforcement fines, the very same section of law whose fines OSHA referenced in its June Covid-19 healthcare worker rule and is likely to use again to enforce its forthcoming vaccine compliance rules.

The Existing Law

29 U.S.C.§ 666 lays out OSHA enforcement fine levels. The 1970-enacted law reads:

29 U.S. Code § 666 - Civil and criminal penalties

(a) Willful or repeated violation Any employer who willfully or repeatedly violates the requirements of section 654 of this title, any standard, rule, or order promulgated pursuant to section 655 of this title, or regulations prescribed pursuant to this chapter may be assessed a civil penalty of not more than $70,000 for each violation, but not less than $5,000 for each willful violation

(b) Citation for serious violation Any employer who has received a citation for a serious violation of the requirements of section 654 of this title, of any standard, rule, or order promulgated pursuant to section 655 of this title, or of any regulations prescribed pursuant to this chapter, shall be assessed a civil penalty of up to $7,000 for each such violation [emphasis added].

Each year, OSHA adjusts these penalties for inflation, so for 2021, the fines are not actually capped at $70,000 and $7,000, but $136,532 and $13,653 per violation. If House Democrats get their way, by enacting the page 168 changes, those fines would increase to $700,000 for willful and repeated violations and $70,000 for serious violations.  

Section 654, cross-referenced in the OSHA enforcement penalty code, outlines the law requiring workplaces to be “free from recognized hazards” causing harm or death:

29 U.S. Code § 654 - Duties of employers and employees

(a) Each employer

(1) shall furnish to each of his employees employment and a place of employment which are free from recognized hazards that are causing or are likely to cause death or serious physical harm to his employees;

(2) shall comply with occupational safety and health standards promulgated under this chapter.

(b) Each employee shall comply with occupational safety and health standards and all rules, regulations, and orders issued pursuant to this chapter which are applicable to his own actions and conduct [emphasis added].

OSHA has already published a rule this year claiming Covid-19 is a workplace hazard, and the agency is using this provision of law to assert and enforce its authority. It is likely the new rule to enforce Biden’s mandate will also use this authority, and by extension use the fines upon enforcement.

Huge Crippling OSHA Fines, Likely By Design

The crippling change described on page 168 of the Democrats’ bill isn’t a typo or a clerical error. It was inserted by design and, likely, with the hope that no one would notice before Democrats ram the bill through Congress.

If enacted, it could bankrupt a whole host of companies that do not believe they should have to comply with the Biden administration’s mandate or harbor the cost of intrusive, weekly tests.

In its June 2021 emergency rule affecting health care workers, OSHA complained it was having a hard time motivating employers with its paltry $13,653 fine:

“OSHA has been limited in its ability to impose penalties high enough to motivate the very large employers who are unlikely to be deterred by penalty assessments of tens of thousands of dollars, but whose noncompliance can endanger thousands of workers …”

The Critics

Some have openly discussed businesses defying the mandate and taking their risks with OSHA fines. For example, Rep. Chip Roy (R-TX) tweeted that businesses “should openly rebel” against any OSHA rule.

It’s one thing to defy a $14,000 fine. It’s quite another to risk incurring hundreds of thousands of dollars in fines. One or two disgruntled employees, for example, could bring an employer $70,000-$140,000 in OSHA fines. If considered “willful,” as per Rep. Roy’s tweet — just three “violations” could quickly become a $2.1 million OSHA fine.

Conclusion:

If its provision becomes law, the Biden administration may force American businesses to choose between vaccinating their employees, testing them weekly for Covid-19, or going bankrupt under crippling OSHA fines.

In September, Biden warned the tens of millions of Americans who have declined vaccination against Covid-19, “We’ve been patient. But our patience is wearing thin, and your refusal has cost all of us.”

Now the Democrats in the House are hoping to make employers foot the bill for that “cost” in the form of fines and bankruptcy.

Republicans might want to read page 168 of the Democrats’ bill. After all, as we like to say at OpenTheBooks.com, the text of the bill is online in real time.

Tyler Durden Tue, 09/28/2021 - 22:05
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Economics

US Hog Herd Hit By Largest Monthly Drop Since 1999

US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to…

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US Hog Herd Hit By Largest Monthly Drop Since 1999

US hog herds experienced the most significant monthly drop in two decades, according to new data from the USDA. The reason behind the drop is because farmers decreased hog-herd development over the last year due to labor disruptions at slaughterhouses plus high animal feed. 

USDA data showed the US hog herd was 3.9% lower in August than a year ago. It was the largest monthly drop since 1999 after analysts only expected a decline of about 1.7%, according to Bloomberg

On Monday, hog futures soared in Chicago after the news of tightening supply. Since contracts hit a seven-year high in June, they have plunged from $120 to $80 but have since recovered in recent days to $90. 

Supply chain woes at slaughterhouses, and declining cold pork storage in US warehouses, have pushed up pork consumer prices to record highs. 

Farmers are experiencing a challenging environment of skyrocketing feed prices and other commodity prices used to maintain and growing pig herds, along with the labor disruptions at slaughterhouses that sometimes force them to cull herds. 

Soaring supermarket meat prices have been devastating for working-poor families who allocate a high percentage of their incomes to basic and essential items. The Biden administration spent most of the year ignoring the dramatic increase in food prices and only addressed the issue earlier this month by blaming meatpackers. The administration even had the nerve to say that if meat prices are taken out of the equation, troubling grocery inflation would be lower. 

To sum up, shrinking hog herds means pork prices will stay high. 

Tyler Durden Tue, 09/28/2021 - 20:25
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Economics

Volatility Roars Back

The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like…

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The surging 10-Year Treasury yield spooks tech investors … watch out for Evergrande default volatility… another debt ceiling showdown

It’s like when you’re flying, feel a few jolts of turbulence, then see the “seatbelt” sign flash on.

Investors are experiencing some market turbulence – and buckling up is probably a good idea.

There are three things troubling markets right now. Let’s look at them to get a sense for how significant they might be.

As I write Tuesday morning, the markets are deep in the red thanks to the soaring 10-Year Treasury yield.

After falling under 1.2% in early August, the yield on the 10-Year Treasury has been pushing higher over the last two months.

That “push” turned into a full-blown “leap” last week, as the yield jumped from roughly 1.3% to over 1.5% as I write.

I’ve circled this one-week spike of about 18% on the chart below.

Source: MarketWatch.com

This is significant because the yield on the 10-Year Treasury is a major barometer for how traders are feeling about the market and inflation-risk.

A rising yield also serves as a major headwind for technology stocks. Given this, it’s no wonder that our hypergrowth tech expert, Luke Lango, has been monitoring this surge.

From Luke’s Early Stage Investor update yesterday:

The 10-year Treasury yield broke above 1.5% today, continuing its sharpest ascent since February.

Yields have now risen about 20 basis points since the Fed’s meeting last week, as investors are bracing for the Treasury market’s biggest buyer to become a seller before year-end.

This move makes sense, and more importantly, it’s nothing to worry about.

***Why Luke is urging a levelheaded response

Luke points out that while yields might have further to climb, they should return to lower levels due to a handful of reasons.

Back to Luke with those details:

The fact of the matter is that yields were too low, so now they’re correcting higher, but they won’t go much higher from here because there are structural forces in place that will keep them lower for longer.

For one, you have secular deflationary pressures via the expansion and improvement of productivity-boosting and cost-reducing technologies, like automation, artificial intelligence, and virtualization platforms.

For another, you have persistently strong demand for risk-free assets from risk-adverse funds like pension funds – in a market where “cash is trash” and valuations are a bit too stretched to attract major allocations from these risk-adverse funds.

You also have the fact that the labor market will face long-term headwinds from automation technology threatening to disrupt large swaths of the labor market. That will put a floor on how low the unemployment rate can go, which will keep the Fed on the sidelines.

Not to mention, the Fed serves the U.S. government, and the U.S. government has accumulated a lot of debt over the past few years (especially the past 24 months) … so, in order to keep interest payments low for its “boss,” the Fed is incentivized to keep rates lower for longer. Same with every other central bank in the world, for that matter.

Long story short, there are simply too many secular forces at play here for yields to rise much higher. Make no mistake. They will move higher. But at a very slow and gradual pace

The second reason why Luke isn’t alarmed by the yield spike is because he’s focusing on what matters – the long-term growth story, along with earnings.

Back to Luke:

Near-term movements in the yield curve will dictate near-term price action.

But the long-term value of our stocks will be driven by the long-term earnings growth trajectories of our companies.

So long as our companies produce lots of earnings over the next few years, our stocks will move higher – regardless of where yields end up.

Even though the long-term is what matters, for now, the short-term is volatile – and painful. But Luke stresses this is a temporary problem that’s actually an opportunity:

All in all, things look great.

Let the yield volatility resolve itself in the coming weeks. Let tech stocks chop around. Buy the dip when the volatility settles.

Let’s move on to the second source of today’s volatility.

***The threat of a broader fallout from Evergrande is also worrying investors

Let’s begin with yesterday’s update from our Strategic Trader team of John Jagerson and Wade Hansen:

The Evergrande situation in China is continuing to put traders on edge.

A default seems very likely, and most of the world’s major financial institutions have material direct or indirect exposure to that risk.

To make sure we’re all on the same page, Evergrande is an enormous Chinese real estate company that is failing to meet its debt payments.

Last Thursday, the troubled company missed an $84 million payment. It owes another $47.5 million tomorrow.

The broader fear is that this could be a “Lehman Brothers” meltdown for China. Real estate makes up roughly 30% of the Chinese GDP, so a collapse would have a very real impact on their broader economy. It’s reported that Evergrande alone helps sustain more than 3.8 million jobs each year (directly employing about 200,000).

Yesterday, legendary investor, Louis Navellier, also updated his Accelerated Profits subscribers on this situation. Here he is speaking to this broader fear:

A housing bust would have a pretty big impact on the Chinese economy.

Some economists are even predicting that if Evergrande fails, it could cause China to slip into a recession — and, of course, these fears are part of the reason why the stock market sold off hard last Monday.

The good news is neither Louis nor our Strategic Trader team believe significant economic contagion from a default will reach the U.S. However, we could be in for market volatility. Given this, it’s impacting where John and Wade will be looking for trade set-ups.

Back to their update on this note:

We should be cleareyed about the risks and potential for volatility as we get closer to 3rd quarter earnings season in October.

We expect volatility to rise, and we don’t plan on targeting any trades in energy or basic materials, but we also don’t see much risk of a major drawdown yet.

As I write Tuesday, the latest news is that Beijing is urging government-owned property developers to buy up some of Evergrande’s assets. So, it’s not a direct bailout, though it’s a bailout.

From Reuters:

Authorities are hoping, however, that asset purchases will ward off or at least mitigate any social unrest that could occur if Evergrande were to suffer a messy collapse, they said, declining to be identified due to the sensitivity of the matter.

We’ll update you as events unfold here, but don’t be surprised if markets suffer another mini-panic if we get bad news from China.

***Finally, partisan politics could upset markets

The debt ceiling deadline is this Friday.

Last night, Senate Republicans voted against a House-backed bill that would have suspended the debt limit. They objected to how the bill was attached to a broader spending bill pushed by Democrats.

From Bloomberg:

Without a shift in position by one of the two parties, the decision to combine the temporary funding measure and the debt ceiling leaves the U.S. on course for a government shutdown and defaults on federal payments as soon as next month.

According to the Bipartisan Policy Center, without a suspension or raising of the ceiling, there will be a risk of default between Oct. 15 and Nov. 4.

Moody’s Analytics suggests that a prolonged shutdown, were it to happen, would cause another recession, destroying approximately $15 trillion in household wealth and 6 million jobs.

Our politicians are aware of this and don’t want to be responsible, so what we’re seeing is partisan brinksmanship. However, the closer we get to Friday without that solution, the greater the risk of more market volatility.

But remember, we saw this in 2011, when the debt ceiling showdown led to a downgrade in U.S. AAA sovereign credit, and again in 2018 as U.S./China trade tensions were growing. Both times brought plenty of anxious hand-wringing, yet both times we moved past it.

Bottom-line, fasten your seatbelt as these three issues work themselves out. It could get worse before it gets better – but it will get better.

Have a good evening,

Jeff Remsburg

The post Volatility Roars Back appeared first on InvestorPlace.

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