Recession Soon?? What It Means For You & Your Portfolio!!
Summary
TLDRThis video delves into the concept of recessions, explaining their technical definition as two consecutive quarters of negative GDP growth. It explores indicators such as yield curve inversion and the Duncan leading index to predict recessions, and the Su rule to confirm them. The script discusses potential triggers for a severe economic downturn and how government spending and debt levels can influence the severity and duration of a recession. It also examines the varied impacts on jobs and investment portfolios, suggesting that while some industries may suffer, others could benefit from government infrastructure spending. The video concludes by highlighting the importance of active investment strategies in a potential stagflationary environment.
Takeaways
- 🌐 The global economy has been strained by high inflation and interest rates, leading to concerns about a potential recession.
- 📉 A recession is characterized by a slowdown in the economy, often resulting in job losses and significant market downturns.
- 👥 Unemployment and market crashes are practical effects of recessions, with the last major one occurring in 2007.
- 📊 Technically, a recession is defined as two consecutive quarters of negative GDP growth, which measures a country's economic output.
- 🤔 The National Bureau of Economic Research (NBER), a group of eight economists, unofficially determines recessions without clear criteria.
- 📈 The US economy technically experienced a recession in 2022 due to negative GDP growth, but it was not officially declared.
- 🔢 Predicting a recession involves assessing indicators such as the yield curve inversion and the Duncan leading index.
- 📈 The yield curve inversion occurs when short-term interest rates exceed long-term rates, signaling economic weakening.
- 🛑 The Su rule recession indicator suggests that recessions occur when unemployment rises rapidly compared to the previous four quarters.
- 📊 Real-time indicators like state unemployment rates and earnings reports from major companies can provide insights into the economy's health.
- 💼 The impact of a recession on jobs is typically felt most by industries closely related to consumption, such as retail, hospitality, travel, and manufacturing.
- 💰 The effects of a recession on portfolios depend on the assets held, with manufacturing companies potentially performing well due to infrastructure spending.
- 🏦 The severity of a recession could be influenced by factors in the financial system, such as commercial real estate and banking crises.
- 💵 High inflation combined with economic weakness could lead to stagflation, complicating the response to a recession and affecting asset performance.
Q & A
What is the current strain on the global economy?
-The global economy is currently under significant strain due to high inflation and high interest rates, which have led to concerns about an impending economic downturn or recession.
What is the practical effect of a recession?
-The practical effect of a recession is widespread job losses and massive losses in the markets, leading to economic hardship for many individuals and businesses.
What is the technical definition of a recession?
-The technical definition of a recession is two consecutive quarters of negative GDP growth, which translates to a 6-month period of economic decline.
What does GDP stand for and what does it measure?
-GDP stands for Gross Domestic Product, and it measures the economic output of a country, including consumer spending, investment, net exports, and government spending.
Why was there debate about the recession in 2022?
-There was debate about the recession in 2022 because although the US economy experienced a technical recession with GDP declining in the first two quarters, an official recession was never declared.
Who decides when the economy is in a recession in the United States?
-In the United States, the National Bureau of Economic Research (NBER), a nonprofit organization consisting of eight economists, decides when the economy is in a recession.
Why is the NBER's method of determining recessions controversial?
-The NBER's method is controversial because the criteria they use to determine a recession are unknown, and they have a history of announcing recessions long after they have started, which can be unhelpful for economic planning.
How can the yield curve inversion be used as a recession indicator?
-An inversion of the yield curve, where short-term interest rates are higher than long-term rates, is a popular recession indicator. It suggests that investors expect the economy to weaken in the future, which can lead to reduced lending, borrowing, and economic growth, eventually causing a recession.
What is the Duncan Leading Index and how does it predict recessions?
-The Duncan Leading Index is an economic indicator that looks at specific measures within the GDP figure, particularly those related to personal consumption and private investment. It compares these measures to broader GDP growth to predict economic conditions, and a falling ratio suggests that a recession may be on the horizon.
What is the Su Rule recession indicator and how does it work?
-The Su Rule recession indicator, named after economist Claudia Sahm, suggests that recessions tend to occur when unemployment in one quarter is rising faster compared to the last four quarters. It emphasizes the rate of change in unemployment as a key factor in predicting recessions.
How might the current fiscal spending in the US affect the prediction of a recession?
-The current fiscal spending in the US, which has been abnormally high due to various factors including upcoming elections, can distort economic indicators and make it more challenging to accurately predict a recession.
What are some real-time indicators that can be used to assess whether the US is in a recession?
-Some real-time indicators include unemployment by state, which is published monthly, and earnings reports from major retail outlets and fast food companies, which can provide insights into consumer spending habits and economic health.
What are the potential catalysts for a severe recession in the US?
-Potential catalysts for a severe recession in the US include issues in commercial real estate and banking, as well as fiscal problems caused by excessive government spending.
How might a recession affect different industries and job sectors?
-A recession typically affects industries closely related to consumption, such as retail, hospitality, travel, and manufacturing. However, the impact can vary, and some sectors, like infrastructure-related manufacturing, may continue to perform well due to government spending.
What could be the impact of a recession on an individual's investment portfolio?
-The impact on an individual's investment portfolio during a recession depends on the assets they hold. Stocks in industries most affected by the recession may suffer, while assets like bonds could rally as investors seek safety. However, if inflation is high, other inflation hedges like gold might be more suitable.
What is stagflation and why is it difficult to manage?
-Stagflation is a situation where the economy experiences both stagnation and high inflation at the same time. It is difficult to manage because measures to stimulate growth can exacerbate inflation, while measures to control inflation can lead to more economic weakness.
How might a recession affect the financial system and the value of bonds?
-A recession could lead to a decrease in the value of bonds if there is a need for higher yields to compensate for inflation. If bonds, which are a primary form of collateral in the financial system, lose value too quickly, it could potentially lead to a crisis in the global financial system.
What are some of the potential strategies governments and central banks might use to address a recession?
-Governments and central banks might use a combination of strategies such as reducing spending, restructuring debts, redistributing wealth, and printing money to address a recession. The challenge is to balance these tools effectively to deleverage the economy without causing further issues.
Outlines
📉 Understanding Recessions and Their Impact
The video begins by addressing the current strain on the global economy due to high inflation and interest rates. It explains what a recession is, its historical context, and its practical effects, such as job losses and market crashes. The technical definition of a recession is two consecutive quarters of negative GDP growth. The video mentions the 2022 technical recession in the US and discusses the role of the National Bureau of Economic Research (NBER) in officially declaring recessions. The lag in NBER’s announcements and the complexities of GDP data collection are highlighted, emphasizing the need for proactive measures.
🤑 Coin Bureau Deals: Crypto Discounts and Promotions
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📈 Indicators Predicting Recessions
The video discusses various indicators that predict recessions, focusing on the inversion of the yield curve, where short-term interest rates exceed long-term rates. This inversion suggests expectations of economic weakening. The video explains the lag effect of interest rate hikes by central banks, which typically takes about two years to impact the economy. The Duncan Leading Index is introduced as another indicator, focusing on personal consumption and private investment within GDP. This index's decline since 2021 suggests a potential recession in the near future.
📊 Su Rule and Real-Time Recession Indicators
This section introduces the Su Rule Recession Indicator, which predicts recessions based on rapid increases in unemployment. The Su Rule has accurately predicted past recessions but tends to trigger after a recession has started due to its reliance on lagging data. Real-time indicators such as state-level unemployment rates and earnings reports from major companies like McDonald's and Starbucks are also discussed. These indicators suggest that the US may have been in a recession since October 2023.
💼 Potential Severity of the Upcoming Recession
The video explores the potential severity of the upcoming recession, noting that a 2008-style recession is unlikely due to lower levels of floating-rate debt in the US. It discusses the concept of a rolling recession, where different sectors are affected at different times. Key potential catalysts for a severe recession include issues in commercial real estate, banking, and government fiscal policies. The video explains how government spending and borrowing could exacerbate inflation and impact the financial system.
📉 Effects of a Recession on Jobs and Portfolios
The video concludes by discussing the effects of a recession on jobs and investment portfolios. It highlights that jobs in retail, hospitality, and travel may be most at risk during a recession, while manufacturing jobs could be more secure due to infrastructure spending. For investment portfolios, the performance of different assets during a recession depends on the level of inflation. Bonds, commodities, and gold are discussed as potential safe havens, with the impact of stagflation complicating investment strategies. The video emphasizes the need for active investment management in a stagflationary environment.
Mindmap
Keywords
💡Recession
💡Inflation
💡Interest Rates
💡Unemployment Rate
💡Gross Domestic Product (GDP)
💡Yield Curve
💡Duncan Leading Index
💡Su Rule
💡Stagflation
💡Fiscal Policy
💡Asset Classes
Highlights
Global economy is under strain due to high inflation and interest rates, leading to concerns about a potential recession.
A recession is practically characterized by job losses and market downturns, with the last one occurring in 2007.
The debate over what constitutes a recession, with a technical definition being two quarters of negative GDP growth.
GDP measures economic output, including consumer spending, investment, net exports, and government spending.
The US experienced a technical recession in 2022, but it was not officially declared, leading to confusion.
The National Bureau of Economic Research (NBER), a nonprofit organization, decides if a recession has occurred, with unclear criteria.
NBER has historically announced recessions long after they started, which is not helpful for timely decision-making.
Predicting a recession requires digging into data beyond the official GDP growth figures.
An inversion of the yield curve is a popular recession indicator, signaling expectations of economic weakening.
The Duncan leading index uses specific GDP measures to predict recessions, suggesting a severe downturn may be ahead.
The Su rule recession indicator uses changes in unemployment rates to predict recessions, currently signaling weak economic conditions.
Unemployment by state is a real-time indicator that can suggest a recession when it's rising in all states.
Earnings of major retail and fast food companies can provide insights into economic health and potential recessions.
The US economy's size means that a US recession often leads to a global economic downturn.
The severity of a potential recession may be less than 2008 due to less floating rate debt and some segments of the economy remaining strong.
Commercial real estate and banking, along with government fiscal issues, could be catalysts for a more severe crisis.
In a recession, jobs in industries related to consumption are most at risk, while manufacturing may be less affected.
Portfolios holding stocks in affected industries will likely suffer, while commodities and certain government-funded sectors may perform well.
Bonds may rally in a recession as a flight to safety, but this depends on the level of inflation.
High inflation combined with economic weakness could lead to stagflation, complicating asset performance and requiring active investment strategies.
Transcripts
[Music]
over the last few years the global
economy has been under significant
strain because of high inflation and
high interest rates and it looks like
the cracks are finally starting to show
this has left some wondering when the
economic downturn AKA recession will
come others arguing that it's already
happened and a few believing that it may
never occur at all that's why today
we're going to to explain what a
recession is when it could begin and
what effects it could have on the
economy and the markets stay
tuned let's start with what a recession
is a recession happens when the economy
slows the Practical effect of a
recession is that lots of people lose
their jobs and the markets see massive
losses now the last recession arguably
occurred in 2007 and it resulted in an
unemployment rate of 10% and a market
crash of
55% now I say arguably because there's
been lots of debate about what counts as
a recession one popular adage states
that a recession is when your neighbor
loses their job and a depression is when
you lose yours the technical definition
of recession however is two quarters of
negative GDP growth for those unaware
each quarter is is 3 months long so 2 qu
equals 6 months as for GDP meanwhile it
stands for gross domestic product and
it's meant to measure the economic
output of a country GDP measures include
consumer spending investment net exports
and government spending keep that last
one in mind we'll come back to it in a
second as some of you will know the US
economy experienced a technical
recession back in 2022 that's because
GDP he declined in the first two
quarters of that year as such many have
argued that the recession already
happened I.E that it's now behind us the
catch is that an official recession was
never declared in 2022 so this begs the
question of who decides when the economy
is in a recession well in the United
States the answer is the National Bureau
of economic research or NB a nonprofit
organization ation what's crazy is that
just eight economists decide whether
there's a recession or not what's even
crazy is that nobody knows the criteria
they use so in other words a group of
eight people at a nonprofit decide
whether a recession has happened and
nobody knows how they make this decision
to add insult to injury the NBR has a
history of announcing a recession long
after it started it took them until
December 2008 to declare the 2007
recession by that point unemployment had
already risen to 7% and the stock market
had already fallen by
45% now obviously this lag isn't helpful
when it comes to figuring out what to do
with your job or your portfolio ideally
you want to know a recession is coming
before it happens so that you can adjust
accordingly in theory this is as easy as
assessing whether the economy has
experienced two quarters of negative GDP
or not however if you had followed this
approach back in 2022 then you still
would have been late that's because the
GDP data for q1 and Q2 didn't arrive
until August 2022 it takes months for
this data to come in meanwhile on the
flip side if you see that GDP growth is
increasing then you may be tempted to
change jobs or buy more assets expecting
the good times to continue the problem
there is that GDP includes government
spending which has gone off the rails in
the US and elsewhere presumably because
of all the upcoming elections the result
is not only that GDP has been abnormally
high but many of the other indicators
you would normally use to assess the
health of the economy have become
distorted because of fiscal policy for
instance unemployment remains low while
the average person simultaneously
struggles to find work in in practice
then predicting a recession and
assessing when we're in one requires
doing the work to dig into the data to
find the answers that's what we will do
next and at the end of the video we'll
examine how long a recession could last
if it comes as well as what it could
mean for your job and your portfolio and
if you're enjoying the video so far by
the way be sure to smash that like
button and subscribe to the channel so
you don't miss the next one and consider
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down
yeah okay so now that we understand what
a recession is and the effects it can
have on the economy and the market
markets we can take a closer look at
which indicators we can use to predict
when a recession could begin as you can
probably imagine there's no shortage of
such indicators and none of them are
perfect the most popular recession
indicator is an inversion of the yield
curve AKA short-term interest rates
being higher than long-term interest
rates for reference this isn't normal
normally long-term interest rates will
be higher than short term interest rates
to compensate lenders for the
opportunity cost when short-term
interest rates are higher than long-term
interest rates it basically tells you
that investors are expecting the economy
to weaken in the future funnily enough
these expectations of future weakening
essentially occur because central banks
have raised short-term interest rates
when central banks raise short-term
interest rates it makes it unprofitable
for most banks to lend this reduc
reduces lending and borrowing reducing
economic growth eventually causing an
economic contraction a recession it's
believed that it can take up to two
years for this so-called lag effect to
affect the economy now given that it's
been roughly 2 years since the Federal
Reserve started raising interest rates
we're nearing the upper bound of when
the lag effect should kick in and cause
a recession the caveat though is that
all that aforementioned fiscal spending
could be kicking the lag effect can even
further down the road more about that in
the description moving on now the key
takeaway with the yield curve inversion
is that it's unclear how long it takes
until it causes a recession even so it's
useful in so far as it tells you that
the conditions for a recession are in
place that means all we need is an
indicator that can give us some more
insight into the timing and severity
well one such indicator is called The
Duncan leading index which looks at
specific measures within the GDP figure
particularly those related to personal
consumption and private investment the
logic is that it's fundamentally these
areas of the economy that drive real
economic growth which does make sense
the Duncan leading index then takes
these specific measures and Compares
them to broader GDP growth to get a
sense of how much much of that headline
number is actual consumption and
investment versus Reckless government
spending when that ratio starts to fall
it suggests a recession is on the
horizon according to EPB research the
Duncan leading index started rolling
over in
2021 considering that it seems to have a
2 to fouryear lag then it could be
another year before the recession sets
in you might think this isn't useful but
it is because the severity of the
recession can be forecasted using this
indicator considering that the Duncan
leading index seems to be in freefall
this suggests that the upcoming
recession if it occurs could be severe
I'll quickly note that the Duncan
leading index we showed you here is a
modified version created by EPB research
the link to their video about it is in
the description anyways seeing as
leading indicators suggest that a
recession is indeed coming all we need
now is a few to tell us when it's
actually here well one of these is
called the Su rule recession indicator
it's named after Economist Claudia Sam
who found that recessions tend to occur
around the time that unemployment in one
quarter is rising faster compared to the
last four quarters this underscores
something that you always need to
remember when analyzing economic data
and that's that it's ultimately the rate
of change that matters if unemployment
is slowly rising or slowly falling then
it typically has a negligible effect if
it happens all at once though the
effects can be big as you can see the Su
rule has accurately predicted every
recession we've seen over the last few
decades and much sooner than the nbe the
catch is that the rule tends to be
triggered a few months after the
recession has already started this is
mainly due to the indicator using a
3month average the S rule is still worth
mentioning however because we can use it
to confirm when the economy is actually
in recession at least in the US for
confirmation that the US is in recession
the Su rule needs to be above
0.5 it's currently just under
0.4 and Rising steadily suggesting weak
economic conditions if the unemployment
rate for May Rises more when it's
published on the 7th of June then it
will be safe to assume that the psalm
rule will reflect that fact in a few
months time put differently it will
provide further confirmation that the US
economy is headed for recession mark
your calendars now as you might have
gathered most of these indicators are
inaccurate because they rely on lagging
data that's often revised unfortunately
there's no getting around this because
it takes time to gather data about the
economy and even more time to analyze it
particularly in the public sector
fortunately though there are a few more
real time indicators we can use to get a
sense of whether the US is in a
recession or not oddly enough one of
these is apparently unemployment by
state which is likewise published every
month for context unemployment means
that you're looking for work but can't
find any now according to former fed
adviser Daniel D Martino Booth when the
unemployment rate is rising in every
state then historically the US has been
in recession well the unemployment rate
in all 50 states Rose in October last
year as a result Danielle believes that
the US has been in recession since
October 2023 additional evidence for
this can be found in the earnings of
major retail outlets and fast food
companies such as McDonald's which had a
rare earnings Miss due to people being
unable to afford its food of course
McDonald's is supposed to be cheap yet
it's becoming unaffordable for many
Starbucks Pizza Hut and KFC were other
food chains that experienced an
unexpected contraction in earnings in Q2
what's strange though is that chipotle
managed to Buck the trend by beating
estimates macro analyst Jim biano
believes that this is because Chipotle
portions are large enough to eat for two
meals whatever the case by this point
you're probably wondering why we're
focused on the US well the short
explanation is that the US is the
world's largest economy as another
popular adage States when the US sneezes
the world catches a cold if the US goes
into recession the rest of the world
will too and worse anyhow knowing that a
recession could be imminent the next
step is to assess exactly how severe it
could be
assuming it happens at all if you've
been listening to lots of content about
recessions chances are that you've been
given the impression that the next one
will be as severe as
2008 this though seems unlikely at least
in the US that's simply because there
isn't as much debt more accurately there
isn't as much floating rate debt recall
the inverted yield curve and why it
predicts recessions besides making
lending and borrowing more expensive it
also makes existing loans more expensive
the thing is that only 11% of household
debt in the US is floating rate as of
2023 in plain English most of the
household debt in the US isn't being
affected by higher interest rates and
the same is true of corporate debt only
around 16% of corporate debt will need
to be refinanced in the next 2 years to
be clear this doesn't mean that the
average Aver person isn't struggling
they most certainly are however there is
a large portion of the US economy that
has been relatively unaffected by Rising
rates those with lots of cash are even
benefiting as they can earn over 5% on
their massive piles of money it seems
that the consequence of this Dynamic has
been a sort of rolling recession where
certain segments of the economy are
strong and others are weak White Collar
jobs are an easy example here big tech
companies continue to cut their
headcounts but homebuilders are or were
struggling to hire for there to be a
2008 style recession there would need to
be some major Catalyst like for instance
the collapse of Lian Brothers which
caused financial institutions to stop
lending to each other overnight today
there only seem to be two catalysts
commercial real estate and Banking and
the government itself now if you've
watched any of our videos about the
commercial real estate or banking crises
you'll know the two are intertwined the
tldr is that many small and medium-sized
Banks invested in Office Buildings which
have since become almost worthless due
to the increasing tendency to work from
home post pandemic while the collapse of
these small and mediumsized Banks
wouldn't be enough to cause a crisis the
resulting run on bigger Banks would be
this is precisely why the US US
Government bailed out Silicon Valley
Bank if it hadn't it could have caused
runs on other banks that would have
threatened the banking system and
speaking of the US government all the
spending that it's been doing to prop up
the economy has simultaneously created a
fiscal problem that could trigger a real
crisis to put things into perspective
the US government is apparently spending
as much as it does during recessions
only there isn't one makes you think in
any case a lot of this spending is being
financed by borrowing this involves
selling pieces of paper called bonds to
investors these contain a promise to pay
them back the borrowed amount plus
interest naturally there are concerns
that Bond investors will be less likely
to buy if this spending continues that's
just because this spending is likely
causing a lot of the inflation we're
currently seeing if it continues then
the value of $100 being lent at 5%
interest today may only be worth $80 in
real terms by the time it's paid back to
compensate for this Bond investors will
want higher yields the issue is that the
US government would have difficulty
paying these higher bond yields the
bigger issue though is that this would
translate to lower bond prices and US
bonds are the primary form of collateral
in the financial system if they lose
their value too quickly the Global
Financial system could implode barring
these two catalysts though the recession
is likely to be mild and shortlived if
it comes at all as we've learned it's
possible that we're already in it and
it's even possible that we're already
exiting it some countries such as the UK
are reportedly coming out of their
recessions per their Q2 GDP prints anywh
who this brings me to the big question
and that's what effect a recession would
have on the economy and the markets if
it occurs make no mistake these are two
very different things the former has to
do with your job and the latter has to
do with your portfolio now here is where
things get interesting historically the
economic effects of a recession have
been felt the most by those working in
Industries closely related to
consumption such as retail Hospitality
travel and Manufacturing this is why
many analysts focus on manuf facturing
related indicators to spot recessions as
with the unemployment rate though the
manufacturing indicators have been
warped by all the fiscal spending which
is focused on infrastructure development
more importantly this means that you're
unlikely to lose your job if you work in
manufacturing if a recession comes at
least on paper in case it wasn't clear
enough those of you working in areas
like retail hospitality and travel may
be at risk of losing your jobs but only
if there's a severe recession as I
mentioned a few moments ago a severe
recession is unlikely unless something
in the financial system or the economy
breaks note that this Catalyst doesn't
need to be domestic per se it could be
geopolitical food for thought now when
it comes to the effects that a recession
could have on your portfolio this really
depends on the assets that you hold it
goes without saying that if you hold
stocks belonging to companies in the
industries that are likely to be most
affected your portfolio will probably
take a beating again though the
exception is manufacturing where
companies could continue to perform well
due to infrastructure spending
regardless of any recession if you're
wondering which companies specifically
just look at what exactly governments
are spending money on microchips weapons
energy the list goes on similarly
Commodities could paradoxically perform
well during a Cession in so far as
they're used in the infrastructure
projects that governments are funding
assets such as bonds would probably
rally as there would be a flight to
safety from other assets namely risk
assets but this depends on inflation if
inflation is low when the recession
starts then bonds will perform well and
risk assets that are sensitive to money
printing like crypto would be the first
to Rally after the fud driven dip note
that there wouldn't even need to be any
money printing per se investors would
expect it
automatically but if we enter a
recession and inflation is high then
bonds may not be the safe haven to turn
to instead inflation Hedges such as gold
would be better options as a fun fact
investors tend to accumulate gold
leading up to Bare markets and
recessions say did you hear that gold
recently hit an all-time
high now in all seriousness inflation
could complicate things and when you
combine High inflation with economic
weakness you get stagflation which is
notoriously difficult to get hold of
that's because stimulus causes more
inflation whereas raising interest rates
to fight this inflation causes more
economic weakness this is extremely
important to point out because if you're
into crypto or other assets that benefit
from money printing you need to know
that this stimulus may not come right
away if the recession is coupled with
high inflation recall that it's assumed
that the money printer will just turn on
at the first sign of a recession aside
from the fact that this stimulus may not
come as quickly if there's High
inflation it may also not be as big as
investors expect this is because of what
I just mentioned a few moments ago the
risk of more inflation according to
famous hedge fund manager Ray Delio we
would likely see a mix of everything we
would see a combination of governments
reducing their spending restructuring
their debts redistributing wealth from
the rich to the poor and central banks
printing money as Ry highlighted in his
video about how the economy works these
tools will need to be balanced in order
to deleverage without issues the impact
on the markets in a stagflationary
environment will therefore be mixed and
it will require more active rather than
passive investment this is something
that's been predicted by many Market
analysts and this prediction seems to be
coming true if history is any indication
though we ain't seen nothing
yet and that's all for today's video
folks so if you learn something new be
sure to smash that like button to let us
know if you want to keep learning
subscribe to the channel and ping that
notification Bell and if you want to
help others learn about what a recession
is and whether it's coming share this
video with them as always thank you so
much for watching and I will see you in
the next one Aros Ari aen or goodbye
[Music]
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