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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Wed Sep 24, 2008 9:52 pm GMT Post subject: |
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I honestly thought that Massachusetts would bottom out this year.
When I made this recent prediction on April 25th, 2008, the mortgage rate was about 5.75% Shortly thereafter, it shot up to low to mid 6's.
http://www.bankrate.com/ ...truncated...
W.T.F. were they thinking when they increased mortgage rates? I mean didn't they need to unload a ton of inventory or otherwise eat it? Why would anyone other than someone desperate sell their place if their new cost of capital was almost a point and a half higher than what they'd already have?
So here's the deal, we've got this Government Intervention, and the government intervened with rates. What was weighed this Spring? I mean the Spring selling season is the most important, it was like they took their sails down when the wind was going to come. W.T.F. were they thinking. What was so important that they had raise rates?
When you weigh that decision to raise rates early this Spring, the FED was more concerned with inflation so he raised rates. Now they are going to have to deal with the affect of reducing liquidity too quickly.
Again, if the FED sets rates at say 5%, that means that a bank needs to have $5 in the bank and can lend out $95. So let's just say that 10 banks have $5 on hand, that gives them $95 each to lend out, so there's $475 of money to be lent right? Now, say the FED raises rates 1 point, each of the five banks have to get $1 more to put in the bank, because again, they need $5 before for 5%, now another new dollar to get to 6%'s $6. This sends everyone scrambling to get another buck.
Now it isn't just as easy as them dialing back their lending, because they might be committed on the $95 which was their limit before, now they need to increase to 6% of that $95 so you need to either earn or borrow 70 cents just to get to your reserve amount. Now if you have all 5 of the banks doing that they need to collectively get $3.5 to balance their reserve accounts.
Here's where Glass Steagall comes in.....
http://en.wikipedia.org/wiki/Glass-Steagall_Act
Before you could comingle a commercial bank with an investment bank. When they did this they got the Great Depression. Then FDR put this Glass-Steagall Act into place to separate them. In 1999, they repealed the Act and now, 8 years later, we're facing the prospects of another big Depression. Didn't take them long.
So back to the story, bedtime story..., anyway, the comingled investment/commercial bank needs money. Commercial needs a reserve amount to fill, that other $1 we were talking about because the FED increased the rate. Well guess what happens? They decide they need to sell some stocks to raise the money. Let's say they have a mutual fund that is for a specific industry, they might need to maintain 75% or so in that industry to meet SEC guidelines for that to be considered an "industry" fund. So let's say we're in a down market and something else that supplements that 75% is performing better and you have to buy more of the bad stuff (the sinking 75%) just to maintain the 75% amount, kind of like the reserve had to do. In a market in flux with rising interest rates with comingled banks, and then add in the derivatives that grew exponentially....
I think they raised rates too quickly and what we have now is worse than if they had kept rates low to catch the wind of the Spring Selling Season where they would have been in the best position to clear out inventory and sell homes at higher prices. The Boston FED was right earlier this year, falling home prices were key and the only way to have addressed that was to keep rates low. They are f-ing morons to have raised rates so aggressively this Spring.
If someone can give me an alternative reality that we may have faced otherwise that is worse, it might make me feel better.
When all those people with ARMS tied to LIBOR were looking to refinance, the credit was drying up because people had to populate their reserve rates and noone had the financial flexiblity to lend the amount necessary to get these folks from the ARMS to fixed rates.
Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened. |
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stillRenting Guest
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Posted: Thu Sep 25, 2008 12:34 am GMT Post subject: |
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The Fed does not control interest rate. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu Sep 25, 2008 12:51 am GMT Post subject: |
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john p wrote: |
W.T.F. were they thinking when they increased mortgage rates? |
That was the market, not The Fed. I believe that The Fed only controls the overnight inter-bank lending rate. Mortgage rates are determined by the other end of the yield curve, which The Fed can only influence indirectly. In fact, if The Fed were to keep the short-term rate that it does control too low, I would expect it to push up the other end of the yield curve (and mortgages along with it) because it will drive up inflation. I think that the market has been pushing up mortgage rates because they were too low earlier - risk was substantially under-priced, hence the current mess.
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stillRenting Guest
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Posted: Thu Sep 25, 2008 1:44 am GMT Post subject: |
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The fed controls the money supply by instructing the treasury to buy and sell Gov. bonds. They do this in hopes of affecting the money supply (think supply and demand) to affect the Federal funds rate (not mortgage rates) . In other words, they set a target for the Federal Funds rate and hope that they do it right. |
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Thu Sep 25, 2008 2:26 pm GMT Post subject: |
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I know there isn't a direct relationship, but with regard to the credit markets (available money to borrow) that certainly is affected by the reserve rates. The lower the FED rate, the more liquidity, the higher the FED rate, the less liquidity and less capable lending institutions will be to offer mortgages cheaply. When liquidity is in the mix, I think that the FED's rate does affect mortgage rates.
Lower reserve rates increases the amount of money that can be lent out. The more money in circulation, the less the value is of that medium of exchange (deflation of the dollar). The FED decided that it was better to quickly sponge up up liquidity and prevent inflation than to methodically and incrementally dial it back so it was less of a shock.
The FED rate and mortgage rates marched in lock step for a long time which is why most are under the impression that they are the same. I get it, but you can't wildly change the FED rate without it affecting things like mortgage rates.
In the end, the bedrock, like an auger drilling down to refusal, the load bearing bedrock is the taxpayer, and not every citizen is a taxpayer. The most important thing was to prevent the freefall of house prices. Having a steady hand at the wheel and maintaining low mortgage rates and increasing them moderately was the only way this glut of inventory was going to sell off. Nobody was going to sell their existing home if their cost of capital was a point and a half lower on their existing note, unless they had to.
Liquidity is like oil to an engine and they are afraid that the motor will sieze up.
So everyone that is hoping for houses to be more affordable, I was right there with you, but it needed to be done methodically and this current shock will screw us economically and be careful what you wish for because sure houses will be cheap, but you might not have your job and good luck finding good terms for capital if the yogurt hits the fan like it might. |
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Thu Sep 25, 2008 3:06 pm GMT Post subject: |
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http://www.bankrate.com/ ...truncated...
As you see, it was only until early this year that the two really divorced themselves (FED Rate and Mortgage Rates) from the general directional course of travel.
http://library.hsh.com/?row_id=90
I think people will argue that the market hit a saturation point for Mortgage Backed Securities and Bonds issued by Fannie Mae and Freddie Mac.
http://www.getrichslowly.org/blog/2008/01/31/are-mortgage-rates-tied-to-the-federal-funds-rate/
Quote: | GRS reader JerichoHill is an actual economist. When I asked for his comments, he noted, “Thirty-year rates are largely affected by the supply and demand of funds available for long-term loans, and by the anticipated inflation rate. If the Fed’s moves lead to expectations of higher inflation, guess what that would do? Raise mortgage rates!” |
http://www.ciovaccocapital.com/sys-tmpl/assetclassratecut/
Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu Sep 25, 2008 3:13 pm GMT Post subject: |
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john p wrote: | The most important thing was to prevent the freefall of house prices. |
I've got to disagree with that. I think keeping inflation contained should be (and perhaps is) the most important priority. Rising inflation leads to a vicious cycle of rising inflation expectations which can be very costly and time consuming to rein in. High inflation would be far more damaging to the economy than falling house prices. Controlling inflation is also explicitly part of The Fed's mandate, while protecting asset prices is not.
Also, housing prices haven't been in free fall (yet). It has been more of a slow bleed. Looking at it from the other side of the fence, it sure doesn't feel like The Fed has sped up the correction at all.
Quote: |
As you see, it was only until early this year that the two really divorced themselves (FED Rate and Mortgage Rates) from the general directional course of travel.
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Judging from that graph, it doesn't look like The Fed had anything at all to do with the mortgage rate increase in the spring. In fact, The Fed has been lowering its rate since sometime in 2007.
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Thu Sep 25, 2008 4:14 pm GMT Post subject: |
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Yes recently he has lowered, but look at the flight of stairs to the left of the recent numbers.
http://forexblog.oanda.com/wp-content/uploads/2008/06/us_federal_fund_target_rate2.png
now step back a bit
http://mortgageplanningabc.files.wordpress.com/2007/09/fed_and_mortgage3.gif
further back.
http://research.stlouisfed.org/fred2/series/FEDFUNDS
suffices to say they've taken us on the keynesian coaster
In my perspective I see a ton of liquidity flooded into the market before that steady upward staircase prior to 07, typically that would have fed equities, but because investors didn't have the taste for equities, mortgage back securites (something people felt you could touch i.e. property) was the rage. The inflection point was two fold, one equities were starting to be a bit more of a better value by comparison, and the first domino fell with respect to people foreclosing. The maturation of these bonds was predictable.
this is our point of departure Admin: When all those ARMS were going to be reset, what percentage of those ARMS were going to end up in foreclosure was a big deal. If a lower fixed rate were available, people could have been able to transfer to a fixed rate (a certain percentage may have been spared). Then, if someone couldn't make their payments, maybe they could have sold their homes and broken even if lower rates were available and affordability was there.
It didn't take much, Plymouth County has upticked slightly since early Spring according to Zillow. The more overpriced Counties in Mass had more steam to burn off.
I just saw all this money getting sucked up this tornado from cash, to M2, to these derivatives and hovering to this stratosphere waiting for Say's Law of stuff to appear so it could manifest it's way into wealth. I may be mistaken but that upward lift into derivates and the grounded people weighed down created a distance that wasn't optimum.
Admin, I think your view was that some elevation needed to burn off in the phantom valued derivatives and have that elevation come down to earth, and my view was that it was better to have some corrective inflation (wage inflation) to have the bottom move closer to the top.
I like my approach because it leads with the carrot and I'd rather see those that hustle get the rewards than to see them sit on a sailboat with no wind for a decade, that's wasted potential.
The really greedy ones don't need to be saved. I just think that if we've done the trickle down economics for the past 8 years, why not shake it a little and have some uplift in wages. Rich people call wage inflation bad, I see it as the manifestation of trickle down economics. The overall elevation of the water level had to do with the amount of money they flooded into the market. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu Sep 25, 2008 4:39 pm GMT Post subject: |
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John, I'm not arguing that the earlier rate changes from The Fed couldn't be a contributing factor to higher mortgage rates now. The stair-step increases aren't something which they did this spring, though (in fact, they were lowering their rate this spring). Your post from yesterday indicated that you felt your April prediction of Massachusetts bottoming out this year was blindsided by rate increases from The Fed. However, those rate increases occurred from 2004 - 2006. I don't want to fault you for making a wrong prediction especially when I made no prediction myself, I just don't think that The Fed can be blamed as a wild card given that the increases were several years old.
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Thu Sep 25, 2008 6:16 pm GMT Post subject: |
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http://www.bankrate.com/ ...truncated...
In April, the FED stopped lowering it for the most part, which signaled that they feared inflation.
I thought it should have continued downward because it signaled inflation which drove up the mortgage industry's forecast for inflation and their rate. Recently everytime the FED stayed flat, the rates seemed to go up and this long flat has just levered up the mortgage rates.
After rereading what I first wrote, I can understand some of everyone's confusion, but I still ask, what could be worse than what we've got right now? I think he should have stayed on the course to lower.
All I'm saying is either you do the trickle down deal or you don't. It seems like they have too much liquidity or too little and it seems the moves are so extreme and turbulent because of the abrubt changes.
Editor's Note: This post was edited to abbreviate a URL which was widening the page due to the way that the forum software lays out posts. No other changes have been made, and the URL still points to the original destination - only its display has been shortened. |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu Sep 25, 2008 7:00 pm GMT Post subject: |
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john p wrote: |
After rereading what I first wrote, I can understand some of everyone's confusion, but I still ask, what could be worse than what we've got right now? |
I think an inflationary spiral would be worse. Much worse. Maybe I need a deeper historical understanding, but a repeat of 1970's high inflation and high unemployment seems like it would be far worse than whatever it is that's bad about now. Unemployment and inflation are still relatively low. Asset price volatility, while not ideal, seems like the lesser of the available evils.
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Thu Sep 25, 2008 9:11 pm GMT Post subject: |
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If you were in Congress would you vote for this bailout? I'm not sure if I would.
Part of me thinks that we need to let people fail, but if government creates it's own wake and a rouge wave takes someone out, that's kind of like a regulatory taking in my mind.
We had Glass Steagall in place to create a firewall between commercial and investment banks. Because we repealed this, the fire/ risk spread from the high risk investment class tp lower risk classes.
In buildings we have Types of Construction and Use Groups. For example a single family use group can be built with an unprotected construction type, but an Assembly Use Group most likely has to be built with protected construction. The greater the square footage, and height and closer it is to other buildings or the lot line, the more protected it is required to be. Now, when you have separations between use groups and construction types, you have to detail it in such a way where the less restrictive construction type won't collapse and pull down the more restrictive/more protected type. This is professionalism, a way to classify and structure risk. When they repealled Glass Steagall they pretty much comingled risk with not so much risk.
The way I'm looking at it is what if the State Building Code allowed Assembly Uses to not be fire rated and there was a fire and people got killed. Would you blame the builders and architects who designed the project even if they did it to Code or would you put them on the hook for professional judgment at that point? I'm critical of the FED for being so heavy handed and creating such a turbulent situation.
Now imagine a flood. In site design we have contours that indicate feet above sea level. The USG Survey's identify a 10 year a 50 year and a 100 year storm flood level. Your flood insurance is typically based on if you're in a flood plain or not. You can pretty much tell where the flood lines will be by the contours around things like streams and rivers that overflow. Depending on the location of the source you often get localized flooding in areas where water get's temporarilly trapped in higher elevations, but pretty much the flood areas are predictable.
What I'm saying based on my own professional approach to containment of risk and identification and preparation of of degrees of site forces like floods, I'm surprised that the finance industry doesn't have these protections and containment of risk and they can't identify where the contours and fault lines of a potential predictable failure will occur. It's like they haven't a clue, they're more concerned with gouging each situation.
Part of my intitial question was that if the FED doesn't have a clue, why is he jerking the steering wheel and giving everyone an upset stomach? I mean look at his patterns: a steady staircase, and then a series of unpredictable levels, and who f-ing knows what he's going to do next. I say if you want government interation you'd better know what you're doing.
Do you have confidence that they have a clue and if not, do you think that they will have a clue about how to fix the situation. Have you thought through what might happen if they don't vote for this bailout? |
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admin Site Admin
Joined: 14 Jul 2005 Posts: 1826 Location: Greater Boston
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Posted: Thu Sep 25, 2008 9:56 pm GMT Post subject: |
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john p wrote: | If you were in Congress would you vote for this bailout? |
I'd vote "present."
Just kidding. I'm very glad I'm not in Congress, though. I really don't know if I would vote for it or not. I definitely would not have voted for it in its original form because it gave The Treasury a blank check with zero oversight or accountability. I haven't been following it close enough to know all the permutations that came into it since it ballooned from 3 pages to 42. I'd be a lot less uneasy about it if the plan was explicitly to buy at market prices as Buffet recommended, but Bernanke has indicated that purchases would likely be made higher than that.
I really don't think they have done a good job of communicating 1) why the bailout is necessary and 2) why their plan will work. It smells an awful lot like Weapons of Mass Destruction The Sequel. "You must act now and do exactly what we say or the results will be catastrophic." I've heard that one before and I'm not willing to give the administration the benefit of the doubt again. Maybe they have a legitimate case. I would want a lot more information before voting "yes" on this, though.
Quote: | The way I'm looking at it is what if the State Building Code allowed Assembly Uses to not be fire rated and there was a fire and people got killed. Would you blame the builders and architects who designed the project even if they did it to Code or would you put them on the hook for professional judgment at that point? |
I'd blame both. Plenty of dumb ideas are legal. If it's both dumb and dangerous, there is a good case for making it illegal, but being a dumb idea should be sufficient enough motivation to not do it independent of the legality.
Quote: | Do you have confidence that they have a clue and if not, do you think that they will have a clue about how to fix the situation. Have you thought through what might happen if they don't vote for this bailout? |
I think that Paulson and Bernanke have a clue, but I am not confident that this is something that they can fix. I would very much like to know what is likely to happen if the bailout doesn't pass as that might make the whole thing more palatable. However, it would probably be more useful to think about what will happen when it does pass given that the market at Intrade is giving it a 79.6% chance of passing by Tuesday.
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Fri Sep 26, 2008 2:29 am GMT Post subject: |
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From a business perspective the moral hazard at stake is that those that were responsible lost business.
Think about it, when an investment bank underwrote an IPO back during the stock market bubble and said, we think your stock is worth $50 a share based on fundamental analysis, and then the company gets a second quote from another investment bank that says they can get investors for $80 per share, the responsible fundamental underwriter lost money because the company that was issuing the IPO shopped around to get the best deal. In the Big Dig, the contractors that won work low-balled to win the award and then hit us up with change orders. The responsible bidders lost work and often times ended up being subcontractors to the irresponsible bidders that won the awards. Here, irresponsible lenders shopped around to find the best deal they could get so if you didn't offer one of those mortgages where you didn't have to declare income the irresponible borrower would keep looking until they found an irresponsible borrower.
http://en.wikipedia.org/wiki/Community_Reinvestment_Act#Clinton_Administration_Changes_of_1995
Quote: | Part of the increase in home loans was due to increased efficiency and the genesis of lenders, like Countrywide, that do not mitigate loan risk with savings deposits as do traditional banks using the new subprime authorization. This is known as the secondary market for mortgage loans. The revisions allowed the securitization of CRA loans containing subprime mortgages. The first public securitization of CRA loans started in 1997 by Bear Stearns |
Pretty much, the Clinton Administration forced lenders to lend money to the subprime market, and the only way it passed was that the lenders were allowed to securitize CRA loans. Basically, the banks said if you want us to lend money to these deadbeats you'd better back this up.
In all fairness, Bush in 2003 tried to reform this, and McCain did as well in 2005. Please check my old posts; I'm not a big Bush fan for sure, but the fact the the Democrats are gaining traction from this is ridiculous. Clinton's policy to remove Glass Steagall and the Community Reinvestment Act of 1999 under Clinton allowing the expansion of the subprime market and the securitization of their loans, and the fact that the Democrats shot down attempts for reform by Bush and McCain and the fact that Obama was greased by Fannie Mae and Freddie Mac by more than everyone but Chris Dodd is what screwed this all up. It is beyond me to see how Obama of all people is gaining political capital out of this, he was caught red handed with his hand in the cookie jar and his chief advisors for economics were tied to Fannie Mae and Freddie Mac.
http://www.govtrack.us/congress/record.xpd?id=109-s20060525-16&bill=s109-190
http://gatewaypundit.blogspot.com/2008/09/busted-ceo-of-fannie-mae-in-2005.html
Thanks for your input and time. |
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john p
Joined: 10 Mar 2006 Posts: 1820
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Posted: Fri Sep 26, 2008 2:01 pm GMT Post subject: |
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Just to be fair.
http://en.wikipedia.org/wiki/Gramm-Leach-Bliley_Act
The Republicans authored the repeal of Glass Steagall, but it was overwhelmingly voted for by both parties and not vetoed by Clinton.
It also says that in order to get Democrats to vote for this Repeal of Glass Steagall that they wanted the Community Reinvestment Act nonsense that allowed the securitization of subprime mortgages. |
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