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The Fed’s QE-Unwind is Really Happening

The Fed’s QE-Unwind is Really Happening

Fed’s assets drop to lowest level in over three years.

The Fed’s balance sheet for the week ending December 6, released today, completes the second month of the QE-unwind. Total assets initially zigzagged within a tight range to end October where it started, at $4,456 billion. But in November, holdings drifted lower, and by December 6 were at $4,437 billion, the lowest since September 17, 2014:

“Balance sheet normalization?” Well, in baby steps. But the devil is in the details.

The Fed’s announced plan is to shrink the balance sheet by $10 billion a month in October, November, and December, then accelerate the pace every three months. By October 2018, the Fed would reduce its holdings by up to $50 billion a month (= $600 billion a year) and continue at that rate until it deems the level of its holdings “normal” – the new normal, whatever that may turn out to be.

Still, the decline so far, given the gargantuan size of the balance sheet, barely shows up:

The Fed is unloading its Treasuries alright.

As part of the $10-billion-a-month unwind from October through December, the Fed is supposed to unload $6 billion in Treasury securities a month plus $4 billion in mortgage-backed securities (MBS) a month.

The Fed doesn’t actually sell Treasury securities outright. Instead, it allows some of them, when they mature, to “roll off” the balance sheet without replacement. When the securities mature, the Treasury Department pays the holder the face value. But the Fed, instead of reinvesting the money in new Treasuries, destroys the money – the opposite process of QE, when the Fed created the money to buy securities.

This happens only on dates when Treasuries that the Fed holds mature, usually once or twice a month.

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

Fed Tightens, “and so far, Nothing Has Blown Up”

Fed Tightens, “and so far, Nothing Has Blown Up”

Gundlach frets about bonds during QE unwind, rate hikes, tax cuts, and rising deficits.

“A tax cut will reduce revenue and it will grow the deficit and therefore, it will probably grow bond supply, and perhaps boost economic growth,” DoubleLine Capital CEO Jeffrey Gundlach said on an investor webcast on Tuesday. And if it does, “it is going to be bond unfriendly.”

And possibly in a big way.

It’s a “strange environment” for cutting corporate taxes as the economy is already in its eighth year of expansion, he said, according to Reuters, which reported the webcast. He reiterated his prediction that the 10-year Treasury yield could reach 6% over the next “four years or so.”

Let that sink in for a moment. The last time the 10-year Treasury yield was at 6% (on the way down) was in August 2000! Four years from now, 6% would be a two-decade high-water mark.

“I don’t think it is at all strange to think we can tack on something like 75 basis points, on average, with volatility of course, per year for the next four years or so,” he said.

The 10-year yield is currently 2.36%, and sliding, as opposed to the shorter maturities whose yields have surged: the three-month yield reached 1.30% today and the two-year yield jumped to 1.83%, the highest since September 2008.

When bond yields rise, bond prices fall by definition. The 10-year yield is still very low. But if it rises from this level to 6% over the next few years, there will be a lot of wailing and gnashing of teeth along the way by bond investors, and it’s not going to be a fun time for a bond-fund manager to navigate this environment.

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

 

Bank of Japan Tapers (Quietly), QE Party Over

Bank of Japan Tapers (Quietly), QE Party Over

No flashy announcement, to avoid alarming the markets.

After years of blistering asset purchases, the Bank of Japan disclosed today that it held a total of ¥521.6 trillion in assets as of November 30, including Japanese Government Bonds (JGBs), gold, corporate bonds, Japanese REITs, equity ETFs, loans, etc. That is quite a pile, so to speak. It amounts to about 96% of Japan’s GDP.

By this measure, the BOJ’s balance sheet dwarfs the Fed’s balance sheet, which amounts to 23% of US GDP. When it comes to QE, no one can hold a candle to Japan. Its holdings of JGBs alone rose to ¥443.6 trillion. Its balance sheet looks like a typical post-Financial-Crisis central-bank balance sheet on steroids (chart in trillion yen):

There a couple of differences compared to other central banks: One, the BOJ started QE long before anyone even called it “QE,” but in 2013, it really got going, and those giant moves made the prior periods of QE look minuscule. And two, the BOJ actually unwound some of its earlier QE starting in late 2005 but soon gave up on it.

Now something else has been happening: Starting in December 2016 – the month the Fed raised rates and a few months after some Fed governors started to kick around the idea publicly that QE should be unwound – the BOJ began to curtail its asset purchases.

In other words, it began to “taper.” Assets are still increasing but at a much slower rate. During peak QE – the 12-month period ending December 31, 2016 – it added ¥93.4 trillion (about $830 billion) to its balance sheet. Over the 12-month period ending November 30, 2017, it has added “only” ¥50.8 trillion to its balance sheet. Though that’s still a good chunk of money (about $450 billion), that addition is down 46%.

This chart shows the 12-month change in the balance sheet in trillion yen, going back to the Financial Crisis:

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

US Demand for Electricity Falls Further: What Does it Mean?

US Demand for Electricity Falls Further: What Does it Mean?

Layoffs at GE Power, for example.

The weekend started Friday night with layoff news from GE’s power division, in two locations.

First, there was Greenville County, South Carolina, where GE Power is one of the largest employers with 3,400 workers.

“Based on the current challenges in the power industry and a significant decline in orders, GE Power continues to transform our new, combined business to better meet the needs of our customers,” GE’s statement said in flawless corporate speak: “As we have said, we are working to reduce costs and simplify our structure to better align our product solutions, and these steps will include layoffs.”

GE Power has not disclosed the number of workers that are part of this layoff. The facilities make large gas turbines and turbine generator sets used by power plants. The plant also makes wind turbines.

Then there was GE Power’s facility in Schenectady, New York, which announced the layoff of an undisclosed number of employees, blaming “a significant decline in orders.”

GE Power has a problem: Electricity consumption in the US peaked in 2007 and has declined since, despite population growth of about 24 million people over the 10 years and despite economic growth.

The chart below, based on data from the Department of Energy’s EIA, shows annual electricity generation from 2001 through 2016. Note the growth in generation through 2007, the plunge during the Financial Crisis, the recovery, and the uneven decline since:

This trend continues in 2017. On Friday, the EIA released its Electric Power Monthly, with power generation data through September 2017. Over these nine months, electricity generation has fallen by 2.6% compared to the same period a year ago. Part of the year-over-year drop in August and September was due to the damaged electric grid in the areas affected by Hurricanes Harvey and Irma.

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

Inflation Surges as Economy Bogs Down in Mexico

Inflation Surges as Economy Bogs Down in Mexico

In the last week, the governor of the Bank of Mexico (or Banxico), Augustin Carstens, stepped down in order to take over the reins as general manager of the Bank for International Settlements in Basil, Switzerland, while Finance Minister José Antonio Meade, handed in his resignation to run as the presidential candidate for the governing PRI party in next year’s general elections.

Despite the fact that the country’s two most senior public financial officials have left their posts within days of one another, and though the Mexican stock index is down about 9% from July, the markets still seem pretty sanguine.

But that doesn’t mean that problems are not stacking up.

Earlier this year Carstens felt compelled to postpone by five months his departure from Banxico, which was initially scheduled for May, in the hope that his continued presence would help steady investor nerves as well as tame inflation, which began soaring after the government’s one-off hike in gas prices at the beginning of this year.

It didn’t quite work out that way. Despite the Bank of Mexico’s policy rate of 7%, consumer prices in Mexico hit a higher-than-expected annual rate of 6.6% in the first two weeks of November. “Obviously, the final photo of my mandate isn’t the best,” Mr Carstens told the FT.

While inflation has surged, economic growth remains sluggish compared with many other countries, including Mexico’s direct neighbor to the north. Banxico is forecasting growth this year of 1.8% to 2.3%. But even that may end up proving to be optimistic after it was revealed this week that third-quarter gross domestic product had shrunk by 0.3% compared with the previous quarter, as manufacturing declined more than expected. It was the first quarter-to-quarter GDP contraction since Q4 2015.

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

US Gross National Debt Jumps $723 billion in 12 Weeks, Yellen “Very Worried about Sustainability of US Debt Trajectory”

US Gross National Debt Jumps $723 billion in 12 Weeks, Yellen “Very Worried about Sustainability of US Debt Trajectory”

But only a few lost souls in Congress care.

Even as lawmakers are trying to cobble together a tax-cut bill that would cut revenues by $1.5 trillion over ten years, the gross national debt has spiked $723 billion over the past 12 weeks since Congress suspended the “debt ceiling.” It just hit $20.57 trillion, or 105% of GDP.

Over the past six years, since November 2011, the gross national debt has surged nearly 40%, or by $5.8 trillion. Back in 2011, gross national debt amounted to 95% of GDP. Before the Financial Crisis, it was at 63% of GDP. There are no signs that the relentless rise in the debt is slowing down. On the contrary – the tax cuts are going to steepen the curve:

In the chart above, note the last three debt-ceiling fights – the flat lines in 2013, 2015, and 2017, followed each time by an enormous spike when the debt ceiling was lifted or suspended, and when the “extraordinary measures” with which the Treasury keeps the government afloat were reversed.

And the Fed is getting increasingly nervous about the “sustainability” of this debt.

There are only a few lawmakers left in Congress that have a sense of fiscal responsibility. One of the lost souls is Senator Bob Corker, a Republican from Tennessee, who, to address his anxieties about the deficit and the debt, wants to add a provision to the tax-cut bill that would raise taxes automatically if the economy doesn’t hit certain growth targets in the future. This “trigger” is designed to slow by a smidgen the relentless rise of the national debt. He has come under withering criticism for it from Republican lawmakers and conservative lobbying groups.

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

Stock Market Lazes Happily on a Powerful Time Bomb, and the Fed Begins to Worry

Stock Market Lazes Happily on a Powerful Time Bomb, and the Fed Begins to Worry

Pointing at “excesses,” “distortions,” and “imbalances.”

Margin debt in the stock market hit another record, $561 billion at the end of October, up 16% from a year ago, the New York Stock Exchange reported on Tuesday. Margin debt and the stock market move together. And even on an inflation-adjusted basis, the surge has been breath-taking.

This chart shows margin debt (red line, left scale) and the S&P 500 (blue line, right scale), both adjusted for inflation to tune out the effects of the dwindling value of the dollar over the decades (chart by Advisor Perspectives):

Stock market leverage is the big accelerator on the way up. Leverage supplies liquidity that has been freshly created by the lender. This isn’t money moving from one asset to another. This is money that is being created to be plowed into stocks. And when stocks sink, leverage becomes the big accelerator on the way down. When stocks are dumped to pay down margin debt, the money from those stock sales doesn’t go into another asset and doesn’t sit around as cash ready to be deployed and it doesn’t go into gold bars either. It just disappears.

Even the Fed is now worried about margin debt and a slew of other factors not related to consumer price inflation but to assets, asset prices, and debt.

The latest was Dallas Fed President Robert Kaplan on Monday who, in discussing financial and economic imbalances, specifically addressed the “record-high levels” of margin debt.

His premise is that “there are costs to accommodation in the form of distortions and imbalances,” and when “excesses ultimately need to be unwound, this can result in a sudden downward shift in demand for investment and consumer-related durable goods.” Kaplan:

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

Spain’s Third Biggest Bank Just Made it Harder to Get Cash

Spain’s Third Biggest Bank Just Made it Harder to Get Cash

War on Cash bogs down, despite best efforts of government, banks, and credit card companies.

Spain’s third biggest lender, CaixaBank, has just launched a pilot project in Madrid aimed at limiting cash services in their branches to less than three hours a day, from 8:15 am to 11 am. After that point, all cash operations, including the settlement of bills and cash withdrawals and deposits, must be conducted through an ATM.

Caixabank is not the first Spanish bank to try out such a scheme, but it is the biggest. Spain’s fourth largest lender, part state-owned Bankia, has removed all cash services from select branches (including my local branch), forcing customers to withdraw or deposit cash at the ATM or travel further afield to another branch that still offers cash services.

It’s part of a broad trend. Bank branches are increasingly becoming so-called “customer advisory points,” where the primary role of branch staff is to sell customers a myriad financial products, many of them no doubt risky.

Those same customers are forced to perform many of the more rudimentary bank operations (cash withdrawals and deposits, transfers, payment of bills…) themselves, either at the ATM or online. It’s a great way of getting your customers to do your work for you while also cutting back on staffing costs.

pain’s banking industry has already witnessed a savage cull of branch and office staff since the financial crisis began as many banks collapsed while those left standing closed many of their branches. In 2016 the total number of workers in the sector was 189,280 — 81,605 fewer than in 2009. What’s more, it’s a trend that shows little sign of ending, especially with most other banks almost certain to follow CaixaBank and Bankia’s lead in paring back their cash services.

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

 

Whose Private-Sector Debt Will Implode Next: US, Canada, China, Eurozone, Japan?

Whose Private-Sector Debt Will Implode Next: US, Canada, China, Eurozone, Japan?

Canadians, fasten your seat-belt. Here are the charts.

The Financial Crisis in the US was a consequence of too much debt and too much risk, among numerous other factors, and the whole house of cards came down. Now, after eight years of experimental monetary policies and huge amounts of deficit spending by governments around the globe, public debt has ballooned. Gross national debt in the US just hit $20.5 trillion, or 105% of GDP. But that can’t hold a candle to Japan’s national debt, now at 250% of GDP.

And private-sector debt, which includes household and business debts — how has it fared in the era of easy money?

In the US, total debt to the private non-financial sector has ballooned to $28.5 trillion. That’s up 14% from the $25 trillion at the crazy peak of the Financial Crisis and up 63% from 2004.

In relationship to the economy, private sector debt soared from 147% of GDP in 2004 to 170% of GDP in the first quarter of 2008. Then it all fell apart. Some of this debt blew up and was written off. For a little while consumers and businesses deleveraged just a tiny little bit, before starting to borrow once again.

But the economy began growing again too, and debt as a percent of GDP fell to a low 148% in Q1 2015. It has since picked up steam, growing once again faster than the economy, and now is at 151.7% of GDP, back where it was in 2005. This chart shows US private sector debt to the non-financial sector, in trillion dollars (blue line, left scale) and as a percent of GDP (red line, right scale):

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

The Next Italian Bank Threatens to Topple

The Next Italian Bank Threatens to Topple

Sharp Dose of Deja Vu for Italy’s Teetering Banks.

In a speech that did little to calm investors’ nerves, Italy’s finance minister said yesterday that he was “strangely optimistic” about Italy’s economic outlook. Senior eurocrats in Brussels are far from convinced. “Italy’s accounts are not improving,” blasted European Commission Vice-President Jyrki Katainen at a press conference yesterday.

The financial situation in Italy, according to Katainen, is due to get worse with Italy’s deficit in 2018 now predicted to be €3.5 billion more than previously stated by Paolo Gentiloni’s administration in the spring. “The only thing I can say in my name is that all Italians should know what the real economic situation in Italy is,” he said.

That real economic situation includes the fragile health of the nation’s banking system which continues to teeter on the edge despite the controversial rescue last summer of Monte dei Paschi di Siena (MPS) and the resolution of the Popolare di Vicenza and Veneto Banca, which left over 40,000 businesses in Italy’s wealthy Veneto region starved of credit.

It’s pretty clear that investor concerns about the health of Italy’s toxic debt-laden banking system have not been put to rest. Today’s developments will hardly have helped steady nerves after mid-sized lender Carige, with assets of €26 billion, scuttled a capital increase demanded by European authorities when it failed to get the backing of a banking consortium led by Credit Suisse, Deutsche Bank, and Barclays to underwrite the deal.

In a statement, Carige said it had called a board meeting on Thursday morning to discuss “the next steps.” The shares of Genoa-based Carige, which had already lost roughly half its value over the past year, were suspended on Milan’s stock exchange. They closed on Wednesday at €0.17 a piece. The board had fixed a price of €0.10 euro per share for a capital hike of €560 million demanded by regulators.

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

Why Core Inflation is Rising & What it Means for Fed Rate Hikes

Why Core Inflation is Rising & What it Means for Fed Rate Hikes

Yellen was right to brush off “transitory” factors of “low” inflation.

Consumer prices, as measured by CPI for October, rose 2.0% year-over-year. A month ago, CPI increased 2.2%. The Fed’s inflation target is 2%, but it doesn’t use CPI, or even “Core CPI” – which excludes the volatile food and energy items. It uses “Core PCE,” which usually runs lower than CPI, and if there were an accepted measure that shows even less inflation, it would use that. But it does look at CPI, and there was nothing in today’s data to stop the Fed from raising its target rate in December.

The Core CPI rose 1.8%, up a tad from September’s 1.7% increase. Core CPI has been above 2% for all of 2016 and through March 2017. In the history of the data going back to the 1960s, Core CPI had never experienced “deflation.” But when Core CPI rates retreated in the spring through August, along with other inflation measures, a sort of panic broke out in the media:

But the retreat was repeatedly brushed off as “transitory” by Fed Chair Janet Yellen and other Fed governors, starting in June, when they vowed to continue raising rates “gradually” and proceed with the QE unwind. Yellen had specifically pointed at a few of those “transitory” factors. These factors are now turning around. Core prices have re-accelerated their increases.

One of the “transitory” factors Yellen had pointed out specifically was telephone services, which includes the monthly costs that consumers pay for their smartphones and landlines. Those costs had plunged as a price war among wireless carriers broke out in 2016. This summer, the CPI for wireless services plunged as much as 13% year-over-year. Consumers loved it, but it couldn’t last.

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

Auto-Loan Subprime Blows Up Lehman-Moment-Like

Auto-Loan Subprime Blows Up Lehman-Moment-Like

But there is no Financial Crisis. These are the boom times.

Given Americans’ ceaseless urge to borrow and spend, household debt in the third quarter surged by $610 billion, or 5%, from the third quarter last year, to a new record of $13 trillion, according to the New York Fed. If the word “surged” appears a lot, it’s because that’s the kind of debt environment we now have:

  • Mortgage debt surged 4.2% year-over-year, to $9.19 trillion, still shy of the all-time record of $10 trillion in 2008 before it all collapsed.
  • Student loans surged by 6.25% year-over-year to a record of $1.36 trillion.
  • Credit card debt surged 8% to $810 billion.
  • “Other” surged 5.4% to $390 billion.
  • And auto loans surged 6.1% to a record $1.21 trillion.

And given how the US economy depends on consumer borrowing for life support, that’s all good.

However, there are some big ugly flies in that ointment: Delinquencies – not everywhere, but in credit cards, and particularly in subprime auto loans, where serious delinquencies have reached Lehman Moment proportions.

Of the $1.2 trillion in auto loans outstanding, $282 billion (24%) were granted to borrowers with a subprime credit score (below 620).

Of all auto loans outstanding, 2.4% were 90+ days (“seriously”) delinquent, up from 2.3% in the prior quarter. But delinquencies are concentrated in the subprime segment – that $282 billion – and all hell is breaking lose there.

Subprime auto lending has attracted specialty lenders, such as Santander Consumer USA. They feel they can handle the risks, and they off-loaded some of the risks to investors via subprime auto-loan-backed securities. They want to cash in on the fat profits often obtained in subprime lending via extraordinarily high interest rates.

Subprime borrowers are perceived as sitting ducks. They’ve been turned down, and they’re aware of their bad credit, and they often think they have no other options. And so they often end up with ludicrously high interest rates on their loans, which these borrowers, because of the ludicrously high interest rates, have trouble servicing.

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

US to Import Inflation from Japan, China, South Korea

US to Import Inflation from Japan, China, South Korea

Even from Japan – whose export producer prices are soaring.

The oil price collapse that started in 2014 pushed down input costs that companies – the “producers” – faced. And producer price indices, which measure inflation further up the pipeline, plunged. But this is over. And the biggest export powerhouses in Asia that have ballooning trade surpluses with the US, show how.

The Producer Price Index in Japan – the “Corporate Goods Price Index,” as it’s called there – jumped 3.4% in October compared to a year ago, after already climbing an upwardly revised 3.1% in September, the Bank of Japan reported on November 13. It was the tenth month in a row of year-over-year gains and the highest annual rate since September 2014, by which time the collapsing energy prices were mopping up any inflationary pressures (chart via Trading Economics):

On a monthly basis, the index rose 0.3% from September. But excluding “extra charges for summer electricity,” the index jumped 0.6% month-over-month.

The biggest movers: Nonferrous metals prices soared 22.4% year-over-year, petroleum and coal products 15.8%, iron and steel 9.7%, and chemicals and related products 3.6%.

On the negative side of the ledger there wasn’t much activity: prices for electrical machinery and equipment edged down -1.1%, for business oriented machinery -0.4%, and production machinery -0.3%.

Export prices in October jumped 9.7% year-over-year in yen terms and 3.8% in contract-currency terms. Export prices of Metals and related products soared 25.8% in yen terms and 17.7% in contract-currency terms. Chemical and related produces soared 16.3% and 11.8% respectively. Other primary products and manufactured goods prices jumped 10.3% and 4.2%. All three of them soared in double-digit percentages just from September!

Japan has exported $101 billion in goods to the US so far this year.

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

The Price of Chaos Rises in Spain

The Price of Chaos Rises in Spain

The longer the toxic process between Catalonia and Spain drags on, the wider the gulf grows.

During a visit yesterday to Barcelona, the organizers of the Mobile World Congress, the world’s biggest mobile event, warned the City Council that unless the political situation stabilizes in Catalonia, they will be looking for an alternative venue after 2018. Barcelona has hosted the annual event every year since 2006 and it brings in billions of euros to the city each year, much of which ends up in the pockets of local taxi drivers, hoteliers, owners of bars, restaurants and brothels, Airbnb hosts and, last but not least, the thousands of professional pickpockets that flock to the city for the four day event.

John Hoffman, the chief executive of GSMA, the association that organizes the Mobile World Congress (MWC), could not have chosen a worst day to visit Barcelona. As part of a general strike to protest the incarceration of pro-independence ministers and leaders and the imposition of direct rule from Madrid, thousands of picketers had blocked dozens of roads across the region including the main freeway connecting Spain with France, causing massive traffic jams.

High-speed train links between Barcelona and France and Barcelona and Madrid were also put out of action after hundreds of protesters moved onto platforms and railway lines in Barcelona and Girona chanting ‘Freedom, Freedom.”

At midday thousands of protesters occupied Barcelona’s Sant Jaume square in front of the city’s town hall, a traditional assembly point for Catalonia’s separatist movement. The chant “Squatters, get out” rang out in allusion to the take-over by central government authorities of Catalonia’s regional government.

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

Financial Storm Clouds Gather Over Italy

Financial Storm Clouds Gather Over Italy

Wishful thinking may not be enough.

The financial markets have been exceedingly calm in Italy of late. At the end of October the government was able to sell €2.5 billion of 10-year debt at auction at a yield of 1.86%, the lowest since last December — an incredible feat for a country that four months ago witnessed a major bank bailout and two bank resolutions, and that has so much public debt that it spends €70 billion a year to service it, the world’s third-highest.

And there’s the ECB’s recent decision to slash its bond buying from roughly €60 billion a month to €30 billion as of Jan 1, 2018. Then there’s the over €432 billion of Target 2 debt the government owes the ECB, the growing likelihood of political instability as elections approach in 2018, the recent referendums for greater fiscal and political autonomy in Lombardy and Veneto and serious unresolved issues in the banking sector.

Monte dei Paschi di Siena may still be alive as a bank, but it’s not out of the woods. Last week its stock resumed trading after ten months of being suspended from Italy’s benchmark index, the FTSE MBE. Shares opened on Wednesday at €4.10, then rose 28% to €5.26. But it didn’t stick. On Friday, shares closed at €4.58.

It’s a far cry from the €6.49 a share the Italian government paid in August when it injected €3.85 billion into the bank to keep it alive. It spent another €1.5 billion shielding some of the bank’s junior bondholders, whose debt was converted into equity. As part of the rescue, the Tuscan bank was forced to present a plan to cut 5,500 jobs and close 600 branches until 2021, in addition to transferring 28,600 million euros in unproductive loans and divesting non-strategic assets. Investors clearly have their doubts.

…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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