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Dear Fed, It’s Not “Really Hard to Spot Bubbles”

Dear Fed, It’s Not “Really Hard to Spot Bubbles”

Here are some visual aids to help the Fed spot the housing bubble.

Minneapolis Fed President Neel Kashkari was the latest Fed official to claim in an essay – thus following in the time-honored footsteps of former Fed Chair Ben Bernanke – that “spotting bubbles is hard,” that the Fed cannot see them, and that if it could see them, it shouldn’t do anything to stop them because it had only “limited policy tools,” and because “the costs of making policy mistakes can be very high.”

But it’s OK to use these “limited policy tools” to inflate the greatest bubbles the world has ever seen and then preside over the damage they cause to the real economy before they even implode.

Neither Kashkari nor anyone else working at the Treasury Department in 2006 – when they were tasked by Secretary of the Treasury Hank Paulson to look for signs of trouble because they were “due for some form of crisis,” as he writes – could see any bubbles, not even the housing bubble although it was already beginning to deflate.

“It is really hard to spot bubbles with any confidence before they burst,” Kashkari writes, specifically naming stock prices and house prices. “Everyone can recognize a bubble after it bursts, and then many people convince themselves that they saw it on the way up.”

So here are some visual aids I put together for Kashkari and other Fed governors. It will help them “spot” the beautiful housing bubbles in the US – because bubbles really aren’t hard to recognize before they burst, if you want to recognize them.

What’s hard to predict accurately is when they’ll burst.

…click on the above link to read the rest of the article…

 

All Heck Breaks Loose in Toronto’s House Price Bubble

All Heck Breaks Loose in Toronto’s House Price Bubble

“It’s fear.”

During the first two weeks in May, according to preliminary data from Toronto Real Estate Board, home listings surged 47% from the same period last year even as sales plunged 16%. The average selling price dropped 3.3% from April – and this, after a 33% year-over-year spike in home prices in March and a 25% surge in April. Something is happening to Toronto’s blistering house price bubble.

Canada’s largest alternative mortgage lender, Home Capital Group, which focuses on new immigrants and subprime borrowers turned down by the banks, is melting down after a run on its deposits that crushed its funding sources. The industry is worried about contagion.

At the same time, the provincial government of Ontario announced a slew of drastic measures, including a 15% tax on purchases by non-resident foreign investors to tamp down on the housing market insanity that left many locals unable to buy even a modest home.

It comes after Bank of Canada Governor Stephen Poloz warned in April that home prices are in “an unsustainable zone,” that the market “has divorced itself from any fundamentals that we can identify,” that there was “no fundamental story that we could tell to justify that kind of inflation rate in housing prices,” and that “It’s time we remind folks that prices of houses can go down as well as up. People need to ask themselves very carefully, ‘Why am I buying this house?”’

A few days ago, Moody’s Investors Service downgraded Canada’s six largest banks on concerns over their exposure to the housing bubble and household indebtedness that ranks among the highest in the world.

Now even the relentlessly optimistic industry begins to fret:

…click on the above link to read the rest of the article…

Catalonia Threatens Spain with “Financial Bloodbath”

Catalonia Threatens Spain with “Financial Bloodbath”

On Monday El Pais published leaked excerpts from what it claims to be the Catalonian regional government’s road map to independence. The secret document includes a plan for the region to unilaterally break away from Spain should its citizens be prevented from holding a referendum on independence in the fall.

It provoked a fierce backlash from Madrid. “This proposal is an unacceptable attempt to blackmail the state,” Spain’s Prime Minister Mariano Rajoy said in a hastily convened press conference. Spain’s defense minister María Dolores de Cospedal likened the plot to a coup d’état. In the meantime, Madrid continues to refuse to even entertain the idea of allowing a referendum on Catalan independence, despite the fact that in just about every survey of the last few years 80% of Catalans, including many unionists, have requested one.

It would mean the loss of 25-30% of Spain’s gross domestic product (GDP), says Spain’s Minister of the Economy, Luis de Guindos. And that’s something the government “will never let happen.”

But Catalonia knows it has a card up its sleeves: its tick-tocking debt bomb. Catalonia can no longer issue its own debt and depends on the central government’s national liquidity fund (FLA, for its Spanish acronym) for about 60% of its funds. As ratings agency Fitch warned in April last year when it sent Catalonian debt even deeper into junk territory, the region has grave liquidity problems that will require “proactive management” and “close collaboration with the central state ” — something that’s clearly not on the cards any time soon.

…click on the above link to read the rest of the article…

So China’s Authorities Crack Down on Housing Speculation?

So China’s Authorities Crack Down on Housing Speculation?

Who’s Behind China’s Wild House Price Bubble? State-Owned Property Developers, Funded by State-Owned Banks.

Beijing’s municipal government summoned representatives of state-owned property developers on Monday and told them to stop hyping the already overheated housing market, according to the portal, Chinese Real Estate Business (CREB), cited by Reuters.

State-owned property developers, funded by state-owned banks, have been a major force in inflating home prices as they bid aggressively for land to gain market share. According to CREB, state-owned developers bid for nearly half of the most expensive land in China during the first five months of 2016. And that trend has continued. But after the meeting with the municipal government of Beijing, these firms may be forced “to change their land strategy.”

Telling state-owned developers to stop hyping, as CREB put it, “operational and market activities” would be the latest effort to crack down on property speculation gone wild in China. It would come on top of the numerous other ways local and central authorities have tried to curb this speculation, without success so far.

Today, the National Bureau of Statistics reported that new home prices in 70 cities surged 11.3% in March year-over-year. It was the 18th month in a row of year-over-year gains. Prices jumped 19% in Beijing and 16.8% in Shanghai (chart by Trading Economics):

On a monthly basis, new home prices rose 0.6%, the fastest in four months, up from 0.3% in February. Of the 70 cities in the index, 62 experienced a month-to-month price gain, up from 56 cities in February, once again defying expectations of a slowdown. Prices jumped the most in Haikou (2.6%), Sanya (2.5%), and Guangzhou 2.3%), followed by other second- and third-tier cities, to which the speculative fire has been spreading.

…click on the above link to read the rest of the article…

Toronto House Price Bubble Goes Nuts

Toronto House Price Bubble Goes Nuts

Based on fundamentals? You gotta be kidding.

Residential property sales in Greater Toronto soared 17.7% year-over-year to 12,077 homes, according to the Toronto Real Estate Board (TREB). New listings jumped 15.2% to 17,052. Prices for all types of homes, based on the MLS Home Price Index Composite “Benchmark,” soared 28.6%. The “average” selling price soared 33.2%!

That average selling price of C$916,567 is up from C$688,011 a year ago. Over the past five years, it has doubled!

The heavenly manna was spread across the spectrum. For condos, the average price in Greater Toronto soared 33.1% to C$518,879; for townhouses it soared 32.9% to C$705,078; for semi-detached houses, 34.4% to C$858,202; and for detached houses, 33.4% to C$1,214,422.

Even the house price bubble in Beijing cannot compete with this sort of miracle; new house prices there increased only 22% year-over-year in February. And Sydney’s fabulous house price bubble just flat out pales compared to the spectacle transpiring in Toronto, with prices up only 19% in March.

Vancouver has its own housing bubble to deal with. But there, the government of British Columbia has tried to tamp down on wild speculation with various measures, including a transfer tax aimed squarely at foreign non-resident investors, with “mixed” success.

Now the great fear in Toronto’s real estate circles is that the government of Ontario might impose similarly cruel and unusual punishment on the participants in this spectacle. Some measures are on the table, with folks wondering how to stop the bubble from inflating further and causing even greater harm to the real economy when it deflates, as all bubbles eventually do.

They’re reluctant. It seems they want to see how BC’s measures are washing out in Vancouver. The central government too is trying to fine-tune some macroprudential measures, but they’ve had absolutely no effect on Toronto’s housing bubble.

…click on the above link to read the rest of the article…

Housing Bubble in Sydney Soars to New High, Politicians Promote Scheme to Bitter End

Housing Bubble in Sydney Soars to New High, Politicians Promote Scheme to Bitter End

“Buy property in Sydney and you’re ‘pretty well set for life’”: Government to first-time buyers.

How far can a desperate government go to keep the whole overleveraged edifice of a housing bubble from tumbling down and doing God-knows-what to the economy and the banks? Australia is trying to find out.

The housing bubble in Sydney and Melbourne, by now among the top in the world, is taking on grotesque proportions, not only in price increases, but also in political pronouncements. So much of the economy depends on this bubble that no politician can imagine bringing it down to earth.

Prices for all types of homes in Sydney jumped 19% in March year-over-year, according to CoreLogic, with houses up nearly 20% and “units” (we’d call them condos) up 15%. Sydney’s home prices have nearly doubled since 2008.

In Melbourne, overall home prices jumped 16%, with houses up 17%, and condos up 5%. The index for all dwellings in Canberra and Hobart also rose in the double-digits. In Adelaide and Brisbane, prices rose in the mid-single digits. Perth and Darwin showed declines in the 4.5% range.

The CoreLogic index is not based on sales pairs, such as the Case-Shiller index in the US, or on median prices, but on its own “hedonic methodology,” which, like the other two methods, has plenty of critics.

The government has its own Residential Property Price Indexes. The latest edition, released on March 21, was for Q4 2016, so a little slow. Based on the median price, the index for Sydney jumped 10.3% and for Melbourne 10.8%.

Real estate is highly leveraged, and household debt is at an all-time high. Wages even in Sydney haven’t risen at the same pace. So the inevitable is beginning to happen.

…click on the above link to read the rest of the article…

Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

Here’s Why Italy’s Banking Crisis Has Gone Off the Radar

Just how many banks are insolvent? Turns out, a lot! But elections are coming up.

For a country that is on the brink of a gargantuan public bailout of its toxic-loan riddled banking sector, or failing that, a full-blown financial crisis that could bring down the European financial system, things are eerily quiet in Italy these days. It’s almost as if the more serious the crisis gets, the less we hear about it — otherwise, investors and voters might get spooked. And elections are coming up.

But an article published in the financial section of Italian daily Il Sole lays out just how serious the situation has become. According to new research by Italian investment bank Mediobanca, 114 of the close to 500 banks in Italy have “Texas Ratios” of over 100%. The Texas Ratio, or TR, is calculated by dividing the total value of a bank’s non-performing loans by its tangible book value plus reserves — or as American money manager Steve Eisman put it, “all the bad stuff divided by the money you have to pay for all the bad stuff.”

If the TR is over 100%, the bank doesn’t have enough money “pay for all the bad stuff.” Hence, banks tend to fail when the ratio surpasses 100%. In Italy there are 114 of them. Of them, 24 have ratios of over 200%.

Granted, many of the banks in question are small local or regional savings banks with tens or hundreds of millions of euros in assets. These are not systemically important institutions and can be resolved without causing disturbances to the broader system. But the list also includes many of Italy’s biggest banks which certainly are systemically important to Italy, some of which have Texas Ratios of over 200%. Top of the list, predictably, is Monte dei Paschi di Siena, with €169 billion in assets and a TR of 269%.

…click on the above link to read the rest of the article…

Why No One’s Going to Drain this Swamp

Why No One’s Going to Drain this Swamp

The Financial Sector threw $2 Billion at Congress during the Election. Biggest Spenders? Not the Banks.

The Financial Sector – whose products, risk-taking, and shenanigans blew up the sector and everything around it during the Financial Crisis – has finally gotten the memo in a serious way: During the past election cycle (2015-2016), it doused the members of the US Congress with a record amount of money to “influence decision making” and get what they want: deregulation, handouts, and subsidies.

So how much? Over $2 billion.

That’s over $3.7 million per sitting member of Congress, according to a report released today by Americans for Financial Reform. The $2 billion tab fell into two categories:

  • Campaign contributions by companies, trade associations, and individuals associated with the financial sector: $1.104 billion. This was “almost twice that of any other specific business sector.”
  • Lobbying expenses by 460 financial sector entities: $898 million

“The financial sector is by far the largest source of campaign contributions to federal candidates and parties, and the third largest spender on lobbying,” the report explains, based on data by the Center for Responsive Politics (CRP), which tracks campaign contributions reported to the Federal Elections Commission (FEC) and lobbying expenditures reported to the Senate Office of Public Records.

This “Financial Sector” includes commercial banks, S&Ls, credit unions, finance and credit companies, securities and investment firms, accountants, and “miscellaneous finance.”

But actual amounts are much higher:

  • Entities often report this data “many months late”; contributions and lobbying expenses reported after February 8 are not included in the report.
  • “Financial Sector,” as defined by the CRP, excludes some trade associations and companies with a “very substantial financial interests,” such as the US Chamber of Commerce, which lobbies extensively on financial issues, and the National Auto Dealers Association (NADA) which lobbies on policy regarding auto loans.

…click on the above link to read the rest of the article…

It Gets Ugly in Brazil

It Gets Ugly in Brazil

The price of corruption.

In a stunning deterioration, the unemployment rate in Brazil spiked to 12.6% in the rolling three-month period through January, a record in the new data series going back to 2012, according to Brazil’s statistical agency IBGE. Up from 11.8% in the three-month period through October. Up from an already terribly high 9.5% a year ago. And more than double the 6.2% in December 2013.

Economists had expected the unemployment rate to rise to 12.4%. After three years of underestimating the political, fiscal, and economic fiasco in Brazil, they’re still underestimating it.

For example, by the end of 2015, the consensus forecast for unemployment by the end of 2016 was 9.1%, according to Focus Economics. On average, economists essentially expected the unemployment rate to remain flat for the year. A huge miss, when in fact the unemployment rate soared by 3.1 percentage points in the four quarters through January.

At the time, they figured that the unemployment rate would drop to 8.8% by the end of 2017. It is now clear that it would take a miracle to accomplish that.

The report also pointed out:

  • The number of unemployed soared by 34.3% year-over-year to 12.9 million persons (Brazil has a total population of 210 million).
  • The number of employed dropped by 1.9% year-over-year, or by 1.7 million to 89.9 million people.

This chart shows the unemployment rates of the three-month rolling periods. Note the brutal jump in January (via Trading Economics, red marks added):

Here are the sectors that shed the most workers compared to the same quarter last year:

  • General industry: -7.4% (-897,000 workers)
  • Construction: -9.6% (-755,000 workers)
  • Agriculture, livestock, forestry, fishing and aquiculture: -4.6% (-434,000 workers)
  • Domestic services: -3.5% (223,000 workers)

Employment rose only in lodging and food services: +8.7% (+393,000 workers). The remaining sectors maintained stable employment.

…click on the above link to read the rest of the article…

 

How Much Money Laundering is Going On in the Housing Market? A Lot

How Much Money Laundering is Going On in the Housing Market? A Lot

Answers trickle in. Tough luck for New York, San Francisco, Miami…

“I am shocked – shocked – to find that money laundering is going on in here!” – Borrowed and twisted from Casablanca.

The US Treasury Department’s Financial Crimes Enforcement Network (FinCEN) announced on Thursday that it would extend for another 180 days a “temporary” program that was due to expire on Thursday, and that it had originally kicked off in January 2016 and expanded in July, to identify and track secret homebuyers who hide behind shell companies and “other opaque structures” for the purpose of money laundering.

And it has already gleaned some insights.

The US housing market has been a perfect platform to launder large amounts of money, no questions asked. Brokers, banks, and other industry professionals played along. There were no reporting requirements. Everyone in the world knew it. And they came to launder their cash by buying expensive homes.

But FinCEN, via its evocatively named Geographic Targeting Orders (GTO), wants to know who these opaque homebuyers are. To find out, the GTOs “temporarily require US title insurance companies to identify the natural persons behind shell companies used to pay ‘all cash’ [i.e. without bank financing] for high-end residential real estate in six major metropolitan areas.”

FinCEN is soliciting the help of title insurance companies “because title insurance is a common feature in the vast majority of real estate transactions,” and these companies can provide “valuable information about real estate transactions of concern.”

In its July announcement, when the program  was expanded from two metros – Manhattan and Miami Data – to six metros, FinCEN Acting Director Jamal El-Hindi wouldn’t say to what extent money laundering was involved, but he did throw in a tantalizing tidbit: “The information we have obtained from our initial GTOs suggests that we are on the right track.”

…click on the above link to read the rest of the article…

Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Whatever Happened to Inflation after All This Money Printing? It Has Arrived!

Workers, bondholders, savers get sacked. So what would Yellen do?

Consumer prices surged 0.6% in January from December, double the consensus forecast of a 0.3% rise. The sharpest monthly increase since February 2013, according to the Bureau of Labor Statistics.

Energy prices jumped 4% month over month, including gasoline which jumped 7.8%. Food prices edged up 0.1%. Within this group, “food at home” was unchanged, but prices for “food away from home” – restaurants, taco trucks, and the like – rose 0.4%. In just one month, the prices of apparel rose 1.4%, of new vehicles 0.9%, of auto insurance 0.8%, of airline fares 2.0%. Shelter rose “only” 0.2%, as the national numbers are now feeling the downward pressure on rents in some of the most expensive rental markets in the US.

This chart  shows just how sharp that jump in monthly price increases is, compared to recent years:

Compared to January a year ago, consumer prices as measured by CPI-U surged 2.5%, after having already jumped 2.1% in December. The rate of inflation has now accelerated for the sixth month in a row. It has surged one full percentage point over the past four months and hit the highest rate since March 2012:

So-called core inflation – which excludes food and energy – jumped 2.3% in January from a year ago. The consensus expected 2.1%. So you can’t just blame the rising costs of energy. This “core” measure of price increases has been above 2% since November 2015. Even during the Financial Crisis, when overall year-over-year CPI dipped briefly into the negative, core CPI remained in positive territory.

However much these inflation measures may understate actual increases in the costs of living that people experience in their daily lives, even those understated measures are now beginning to exude a lot of heat. And afterwards, the consensus will say that no one saw this coming.

…click on the above link to read the rest of the article…

Italy’s Banking Crisis Is Even Worse Than We Thought

Italy’s Banking Crisis Is Even Worse Than We Thought

The insider blame game has begun.

In this late winter of generalized discontent, it is not easy to pinpoint just where the biggest threat to Europe’s increasingly flimsy union lies, so intense is the competition. One obvious contender is the Eurozone’s third largest economy, Italy, which faces a banking crisis, an economic crisis, a debt crisis, and a political crisis all at the same time.

The country’s Five Star Movement is gaining momentum both in the polls and in its efforts to call for a referendum on euro membership. In the meantime, Italy’s newly installed government wants — indeed, needs — to bail out a growing number of banks but has neither the money nor the political capital to do so.

Things had gotten so bad that the country’s two bad banks (Atlante I and Atlante II), ostensibly created to stabilize the financial system, were themselves on the verge of collapse. Turns out that things are even worse than we had thought, following a blistering tirade on Tuesday from Italy’s bad banker-in-chief, Alessandro Penati.

“There is no clear vision of the problem and no strategy,” Penati told a financial conference in Milan, according to Reuters. He said he was virtually working alone on rescues that had revealed “horror stories” within some banks.

In short, the insider blame game has begun.

Penati, whose boutique asset management firm, Quaestio Capital Management, was chosen to oversee the supervision of Atlante in late 2015, directed much of his ire at the banks themselves, in particular Italy’s two largest financial institutions, UniCredit and Intesa Sao Paolo. Atlante’s investors had, he said, shown “zero long-sightedness,” after declining to invest more in the fund, which has used 80% of its money to rescue two mid-sized banks in northeast Italy — Veneto Banca and Banca Popolare di Vicenza. Both these lenders now need more capital.

…click on the above link to read the rest of the article…

UBS Warns: Spain’s “Most Italian Bank” Runs Out of Options

UBS Warns: Spain’s “Most Italian Bank” Runs Out of Options

The bank-bailout business rages on.

During the first week of 2017, Spain’s “most Italian bank”, Banco Popular, got off to a flying start as its stock outperformed all other major Spanish banks. By Jan 5th its shares had even crossed the €1-line for the first time in nearly a month. But Popular’s New Year fairy tale was not made to last.

Its upward momentum, if that’s the right term, was brought to a halt by a bombshell report from UBS that concludes that Popular’s stock, which already lost three-quarters of its value last year and is down over 90% since 2008, is still overvalued by 20%. In less than an hour, Popular’s shares were back under a euro. That’s life in the penny-stock lane.

According to the report, Popular has a provision deficit of €1.9 billion. In other words, it has nonperforming loans and other toxic assets on its books whose losses would amount to €1.9 billion. But it has not yet booked (or “recognized”) those losses. If it did finally recognize those losses, it could end up with a €2.4 billion capital gap. That’s the equivalent of roughly 60% of its current market cap.

The UBS analysts acknowledged that their previous forecast of the bank’s capacity to absorb loss provisions had been “too optimistic”, with the new estimates showing a lower coverage ratio (46% compared to the previous 50%) and capital ratio (10% instead of 10.8%).

UBS also poured cold water on the idea of Banco Popular further expanding its bad-debt provisions, since doing so would “permanently depress” its profitability, limiting its capacity to create new capital and increasing its regulatory risk. This is bad news for a bank that continues to drown in its own toxic soup eight years after the burst of Spain’s mind-boggling real estate bubble.

…click on the above link to read the rest of the article…

Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Who Exactly Benefits from Italy’s Ballooning Bank Bailout?

Italy’s third largest bank, Monte dei Paschi di Siena, is not insolvent, according to the ECB; it just has “serious liquidity issues.” It’s a line that has already been heard a thousand times, in countless tongues, since some of the world’s largest banks became the world’s biggest public welfare recipients.

In order to address its “liquidity” issues, Monte dei Paschi (MPS) is about to receive a bailout. The Italian Treasury has said it may have to put up around €6.6 billion of taxpayer funds (current or future) to salvage the lender, including €2 billion to compensate around 40,000 retail bond holders.

The rest will come from the forced conversion of the bank’s subordinated bonds into shares. According to the ECB, the total amount needed could reach €8.8 billion, 75% more than the balance sheet shortfall originally estimated by MPS and its thwarted (but nonetheless handsomely rewarded) private-sector rescuers, JP Morgan Chase and Mediobanca.

All these events conform to a well established script. The moment the “competent” authorities (in this case, the ECB and the European Commission) agree that public funds will be needed to prop up an ostensibly private financial institution that is not too big to fail but nonetheless cannot be allowed to fail, the bailout costs inevitably soar.

And this is just the beginning. According to Italy’s Finance Minister Pier Carlo Padoan, the Italian government has already authorized a €20-billion fund to support Italy’s crumbling banking sector, with up to eight regional banks lining up for state handouts. In addition, MPS plans to issue €15 billion of new debt to “restore liquidity” and “boost investor confidence,” as several Italian newspapers reported on today. That debt will be guaranteed by the government and its hapless taxpayers.

…click on the above link to read the rest of the article…

Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Bank Bailout Balloons, Tab for Italian Banking Crisis Soars

Monte dei Paschi di Siena sinks deeper into the mire.

Over the Christmas holidays, when no one was supposed to pay attention, and when the markets were closed, the bailout costs of Monte dei Paschi di Siena, the third largest bank in Italy, and the center of the Italian banking crisis, suddenly jumped by 75% to €8.8 billion ($9.2 billion)!

Just how immense the black hole inside of a bank really is remains unknown until the bank collapses entirely and the pieces are sorted out. No one wants to know, especially not bank regulators. But when banks are teetering, and a bank bailout, or rather a bondholder bailout is being discussed, the aspects of that hole begin to emerge, and the hole keeps getting bigger the longer someone looks at it.

Earlier this year, the ECB’s stress tests of 51 large European banks determined that Monte dei Paschi was the shakiest among them. The ECB gave the bank until the end of 2016 to raise enough capital or contemplate the prospect of being wound down.

Last week, after Monte dei Paschi failed to work out a private-sector rescue deal led by JP Morgan, a taxpayer bailout was moved to the front burner. The bank’s shares and bonds were suspended from trading until the details of the bailout would emerge. This came after two prior capital increases from the private sector in recent years had failed to fill the holes. Each time, gullible investors had gotten crushed.

On Friday, the Italian government decided to shanghai its taxpayers into bailing out the bank’s bondholders with only a small haircut for holders of certain junior bonds. The decree it approved to that effect was based on the assumption that a €5-billion bailout – a “precautionary recapitalization” – would be needed.

…click on the above link to read the rest of the article…

Olduvai II: Exodus
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Olduvai
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Olduvai II: Exodus
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Olduvai III: Cataclysm
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