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Uk Leaders Nearing Zugzwang?

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Its remarkable how the USA and the UK economies have diverged recently. In the USA which allowed the housing collapse, inflation is at ~1%. It is hovering at the 50 year low. This after QE 1, and half way through QE 2.0.. and of course lowering interest rates to 0-0.25%, and running a budget deficit of 12% of gdp. In addition the USA also has some nice GDP growth right now, running at around 3%.

If needs be the federal reserve and treasury in the USA have huge room left to print and borrow money. Like well into the trillions of dollars of room. (Which they will need a lot of money to bail out states, and keep unemployment benefits going, and throw in some stimulus)

Meanwhile in the UK things really are looking bleak. ~4% inflation right now, with it rising. The economy shrinking at ~1% a year. If inflation does keep rising the government will have to take steps to reign it in.. except they are in zugzwang, they can't reign it in, because the country is on the edge of a loan default death trap.

Flashback early 2009.. Why I supported Brown's massive printing, was I noted if we allowed a cascading default on the loans, the UK economy would definately collapse. See what happened with Ireland when they chose that path, and because they don't have a central bank to print the difference. Meanwhile if we printed it *might* still lead to a collapse but the immediate collapse was avoided. Then in the intervening time carry out a massive systemic reform. (which not even the slightest reforms have been made). The Coalition is instead debating mandating more gender equality on corporate boards.

But now they face a dangerous situation. If they keep printing now inflation could blow out of control. If they don't keep printing, the falling economic activity would lead to a cascading default on loans. I think in that situation the government will have to keep printing.. even if inflation was running at 30% a year. This would inflate away the debts, and inflate away the pension promises. (just lie about the real inflation for the purposes of indexing.)

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US inflation at 1%?

what with petrol up 23% and food stamps buying 10% less food and people even avoiding Walmart?

From Market Ticker

Here, for example, is the one-year national gasoline price chart from "Gas Buddy":

That's a 23.5% increase. The most-recent CPI index shows about 13.5% (January to January) which looks pretty close. The problem is that the CPI assumes you spend just 4.8% of your income on gasoline.

For someone who makes close to minimum wage, or $18,000 a year, their after-FICA income is about $1,400 monthly. That allows $67 a month for gasoline. At $3.31/gallon you can buy about 20 gallons of gas, which is roughly one fill-up in most mid-sized cars.

If your car gets 30mpg (and most older vehicles do not, especially in city driving) then you can go 600 miles in one month on that fuel. There are 20 working days (on average) in a month, so one can not travel more than 30 miles - both ways - in a workday.

Oh yeah, they also assume you spend just $28.70 a month in acquisition cost on a used vehicle (that is, if you buy a used car and keep it for two years before it dies, on the very bottom of the car-buying pile, you spend a mere $500 on that car's acquisition) and a laughable $21 monthly on maintenance, including tires, oil changes, repairs and parts.

All of these figures are, of course, laughable for people in the lower income strata, which is why ramps in commodity prices are so destructive to the standard of living for many Americans, say much less poor people in other nations.

Edited by Bloo Loo

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But now they face a dangerous situation. If they keep printing now inflation could blow out of control. If they don't keep printing, the falling economic activity would lead to a cascading default on loans. I think in that situation the government will have to keep printing.. even if inflation was running at 30% a year. This would inflate away the debts, and inflate away the pension promises. (just lie about the real inflation for the purposes of indexing.)

Interesting post aa3, while I disagree completely with most of what you say, you have been mostly correct so far in your predictions. Having read on here for a number of years that hyperinflation is going to start in the next few months and that I need to protect myself, I have to say that I think that this phoney war of steadily increasing inflation and interest rates at almost nothing will continue on for years. For most market participants, it is simply unthinkable that the UK and US will default, they have lived their whole lives with these two countries being the benchmark of financial safety. And because most market participants believe that the UK is a developed and mature economy with a trustworthy Central Bank, it is. Any collapse will be years away.

Printing with inflation at 30 percent would be Havensteinian surely? Any pretence at controlling inflation would be gone. Again though, even this theoretical situation would surely be years away.

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The UK and USA find themselves in the same position - buggered due to having exported all their manufacturing capacity abroad and trying to build a country on consumption predicated on ever-increasing levels of personal debt.

Fiddling with IRs is moot when you've no longer got the private sector jobs to service your populace (well you have for a while if you create credit and real estate bubbles - handily masking the problem for a while, and stuff your public sector with all your graduates with meaningless degrees).

Now the 18 year-old minimum wage worker armed with fistfuls of 0% APR credit cards is no longer prowling the shops and nail bars, it can be seen that we really don't have a great deal to offer.

PS I'll pre-empt the folk who'll tell me that we are the sixth largest manufacturing country in the world by saying - no we aren't. Because there's a difference between manufacturing carried out by British companies, and British manufacturing. The two are not the same. Think about it.

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Interesting post aa3, while I disagree completely with most of what you say, you have been mostly correct so far in your predictions. Having read on here for a number of years that hyperinflation is going to start in the next few months and that I need to protect myself, I have to say that I think that this phoney war of steadily increasing inflation and interest rates at almost nothing will continue on for years. For most market participants, it is simply unthinkable that the UK and US will default, they have lived their whole lives with these two countries being the benchmark of financial safety. And because most market participants believe that the UK is a developed and mature economy with a trustworthy Central Bank, it is. Any collapse will be years away.

Thanks. I agree with you that the fact that the UK is viewed as the gold standard of financial safety, that will mean it takes a lot longer to play out, than say Greece.

Printing with inflation at 30 percent would be Havensteinian surely? Any pretence at controlling inflation would be gone. Again though, even this theoretical situation would surely be years away.

I think they will have to move to obscuring it by complexity. Like a new asset liquidity scheme to help business lending, by allowing banks to transfer assets into it. Without it being clear where exactly the liquidity is coming from and how they plan to wind it down in the long run.

I am tempted to say it would be years away too.. but its always hard to know when these things break into crisis. Like look how relatively quickly Ireland imploded.

For the USA and possibly the UK another factor is foreign sovereigns may be willing to continue funding their debt, even if they believe it is past the point of no return. Just to keep stability in the world financial system for another decade or so, utnil they are strong enough to let them fail.

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snip

But now they face a dangerous situation. If they keep printing now inflation could blow out of control. If they don't keep printing, the falling economic activity would lead to a cascading default on loans. I think in that situation the government will have to keep printing.. even if inflation was running at 30% a year. This would inflate away the debts, and inflate away the pension promises. (just lie about the real inflation for the purposes of indexing.)

May I comment about a banking cascading default...which was the main threat used in the "Tanks on the streets" threat for the $700bn government direct bailout.

If an organisation defaults on its loan, thats bad news....A, the defaulter is in shit street, and B, the creditor is now out on expected cash income.

However, in the case of the banking system, excesses are loaned out every day, to other banks, investors, governments, etc etc, a never ending spiral of debts and investments.

OK..lets suppose I am a bank dealing with another bank, and I am expecting tommorrow a repayment from that bank of £1m....I get a call today, that that bank isnt going to make payment.

the threat goes like this...whoa, Im not getting paid tomoz, and I know that Ive got £1m to pay out tomorrow...where the hell do I get the money? Id better go bust too.

BUT, it doesnt work like that....how it works, is that I then look at ALL the loans I made to that bank, and I look at ALL the loans IT MADE TO ME....

Being a big bank, its extremely likely there is a large amount owing and coming back just with this one bank.

So, I say, sorry receivers, but Ive calculated that hey, you OWE Me big time, so Im not paying that loan back next Thursday, or the one Tuesday week.

and so it goes on...I then go to my FED, and borrow short term to cover any cash flow im short, using collateral which of course I have in stock as I am not overleveraged by statute.

All the other banks that lent to this dead bank will do the same....Indeed, we would all have lunch together and agree to cancel to whole lot out, give each other some time, and arrange to buy all the assets of the dead bank....using those of course as collateral for money from the FEDS.

much easier of course to have a bailout and save the bad bank of course.....for the bankers....and no redundency nastiness.

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US inflation at 1%?

what with petrol up 23% and food stamps buying 10% less food and people even avoiding Walmart?

From Market Ticker

Here, for example, is the one-year national gasoline price chart from "Gas Buddy":

That's a 23.5% increase. The most-recent CPI index shows about 13.5% (January to January) which looks pretty close. The problem is that the CPI assumes you spend just 4.8% of your income on gasoline.

For someone who makes close to minimum wage, or $18,000 a year, their after-FICA income is about $1,400 monthly. That allows $67 a month for gasoline. At $3.31/gallon you can buy about 20 gallons of gas, which is roughly one fill-up in most mid-sized cars.

If your car gets 30mpg (and most older vehicles do not, especially in city driving) then you can go 600 miles in one month on that fuel. There are 20 working days (on average) in a month, so one can not travel more than 30 miles - both ways - in a workday.

Oh yeah, they also assume you spend just $28.70 a month in acquisition cost on a used vehicle (that is, if you buy a used car and keep it for two years before it dies, on the very bottom of the car-buying pile, you spend a mere $500 on that car's acquisition) and a laughable $21 monthly on maintenance, including tires, oil changes, repairs and parts.

All of these figures are, of course, laughable for people in the lower income strata, which is why ramps in commodity prices are so destructive to the standard of living for many Americans, say much less poor people in other nations.

Yep those working poor are getting smashed. Better for them to basically go on benefits and get free food, free health care, welfare, and free housing. And not worry about driving to work and maintaining a car. And lets be honest if they are such low value work that only minimum wage is payable.. from a societal point of view it is not worth having them drive 60 miles a day to work. Its better to use that oil on something else and have the people stay home.. provided for.

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The UK and USA find themselves in the same position - buggered due to having exported all their manufacturing capacity abroad and trying to build a country on consumption predicated on ever-increasing levels of personal debt.

Fiddling with IRs is moot when you've no longer got the private sector jobs to service your populace (well you have for a while if you create credit and real estate bubbles - handily masking the problem for a while, and stuff your public sector with all your graduates with meaningless degrees).

Now the 18 year-old minimum wage worker armed with fistfuls of 0% APR credit cards is no longer prowling the shops and nail bars, it can be seen that we really don't have a great deal to offer.

PS I'll pre-empt the folk who'll tell me that we are the sixth largest manufacturing country in the world by saying - no we aren't. Because there's a difference between manufacturing carried out by British companies, and British manufacturing. The two are not the same. Think about it.

Agree 100%. Real capitalism.. the successfl kind is what Germany is doing. Gradual but relentless build up of industrial capital. You take out bank credit to expand productive capital, then use that capital to pay off the loans. Over time you get a whole fleet of capital plants.

And re-investing profits into more capital plant and capital in the form of research and development.

What I see in the US And UK is what I call 'debtalism'. Loading every company and person's balance sheets up with debt. So more and more of the revenues are going to simply pay interest on debt. And making it a ponzi by inflating asset prices with all this debt, so on paper there is a lot of 'capital'.

One path is the virtuous path to wealth. It takes a lot of hard work and a lot of time to build up. One is the get-rich-quick plan. Flip-this-house is a lot easier than build this house.

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May I comment about a banking cascading default...which was the main threat used in the "Tanks on the streets" threat for the $700bn government direct bailout.

If an organisation defaults on its loan, thats bad news....A, the defaulter is in shit street, and B, the creditor is now out on expected cash income.

However, in the case of the banking system, excesses are loaned out every day, to other banks, investors, governments, etc etc, a never ending spiral of debts and investments.

OK..lets suppose I am a bank dealing with another bank, and I am expecting tommorrow a repayment from that bank of £1m....I get a call today, that that bank isnt going to make payment.

the threat goes like this...whoa, Im not getting paid tomoz, and I know that Ive got £1m to pay out tomorrow...where the hell do I get the money? Id better go bust too.

BUT, it doesnt work like that....how it works, is that I then look at ALL the loans I made to that bank, and I look at ALL the loans IT MADE TO ME....

Being a big bank, its extremely likely there is a large amount owing and coming back just with this one bank.

So, I say, sorry receivers, but Ive calculated that hey, you OWE Me big time, so Im not paying that loan back next Thursday, or the one Tuesday week.

and so it goes on...I then go to my FED, and borrow short term to cover any cash flow im short, using collateral which of course I have in stock as I am not overleveraged by statute.

All the other banks that lent to this dead bank will do the same....Indeed, we would all have lunch together and agree to cancel to whole lot out, give each other some time, and arrange to buy all the assets of the dead bank....using those of course as collateral for money from the FEDS.

much easier of course to have a bailout and save the bad bank of course.....for the bankers....and no redundency nastiness.

I see what you are saying. But the legal process for the unwind of banks if the state did not bail hem out goes like this..

A. The Capital owners, aka shareholders are wiped out. Company tries to issue billions more shares in a dillution

B. The depositors are wiped out. In the USA there is a 100k government guaruntee but beyond that it is lost.

C. The bondholders mainly other banks start taking losses.

The loans are not zeroed out like you are saying. Eventually another financial institution or a new startup would be on the failed bank and take ownership of it. The mortgages the failed bank held would still be in force, - even if that same individual had their deposits wiped out.

If the now penniless debtor did not keep up with the payments, the new bank in charge could legally take possession of their property to make themselves whole.

Now I admit the government could change the rules around all this. But as it stands now that is the process. -There would be tanks on the street if that happened.

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I see what you are saying. But the legal process for the unwind of banks if the state did not bail hem out goes like this..

A. The Capital owners, aka shareholders are wiped out. Company tries to issue billions more shares in a dillution

B. The depositors are wiped out. In the USA there is a 100k government guaruntee but beyond that it is lost.

C. The bondholders mainly other banks start taking losses.

The loans are not zeroed out like you are saying. Eventually another financial institution or a new startup would be on the failed bank and take ownership of it. The mortgages the failed bank held would still be in force, - even if that same individual had their deposits wiped out.

If the now penniless debtor did not keep up with the payments, the new bank in charge could legally take possession of their property to make themselves whole.

Now I admit the government could change the rules around all this. But as it stands now that is the process. -There would be tanks on the street if that happened.

fair points, and I wasnt suggesting a zero out.

shareholders?....they take a risk...they lose.

Depositors, they take a risk, 4.8bn is available to them in the UK ( from other banks) to help out....deposit wisely is my advice.

Bondholders....professionals taking risks....shame.

losing your savings does not a penniless debtor make....losing a job however will do the job nicely.

and one bank?...one itty bitty bank?.....was the UK closed because NR broke?....no....the government chose to bail all parties except the owners....and many had gotten out a year before leaving the great unwashed to suffer and sue.

Of course, the biggest losses are in the investment banks.....One sees why now they dont want a return to Glass Seagull ( however its spelt)..bankers can rely on using private depositors as hostages.

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Its remarkable how the USA and the UK economies have diverged recently. In the USA which allowed the housing collapse, inflation is at ~1%. It is hovering at the 50 year low. This after QE 1, and half way through QE 2.0.. and of course lowering interest rates to 0-0.25%, and running a budget deficit of 12% of gdp. In addition the USA also has some nice GDP growth right now, running at around 3%.

If needs be the federal reserve and treasury in the USA have huge room left to print and borrow money. Like well into the trillions of dollars of room. (Which they will need a lot of money to bail out states, and keep unemployment benefits going, and throw in some stimulus)

Meanwhile in the UK things really are looking bleak. ~4% inflation right now, with it rising. The economy shrinking at ~1% a year. If inflation does keep rising the government will have to take steps to reign it in.. except they are in zugzwang, they can't reign it in, because the country is on the edge of a loan default death trap.

Flashback early 2009.. Why I supported Brown's massive printing, was I noted if we allowed a cascading default on the loans, the UK economy would definately collapse. See what happened with Ireland when they chose that path, and because they don't have a central bank to print the difference. Meanwhile if we printed it *might* still lead to a collapse but the immediate collapse was avoided. Then in the intervening time carry out a massive systemic reform. (which not even the slightest reforms have been made). The Coalition is instead debating mandating more gender equality on corporate boards.

But now they face a dangerous situation. If they keep printing now inflation could blow out of control. If they don't keep printing, the falling economic activity would lead to a cascading default on loans. I think in that situation the government will have to keep printing.. even if inflation was running at 30% a year. This would inflate away the debts, and inflate away the pension promises. (just lie about the real inflation for the purposes of indexing.)

You're commenting on deverging paths but you haven't pointed out where policies diverge. They don't, except in words alone in the last 4-6 months. Stimulus, QE, all done both sides of the pond.

The reason the USA can QE to its hearts content is the dollars status as the World currency - effectively they can print up and have it sent all over the place. We can't so we printed and now have accelerating inflation.

And I think you'd like to see more QE wouldn't you? That's always been your line up to now.

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Agree 100%. Real capitalism.. the successfl kind is what Germany is doing. Gradual but relentless build up of industrial capital. You take out bank credit to expand productive capital, then use that capital to pay off the loans. Over time you get a whole fleet of capital plants.

And re-investing profits into more capital plant and capital in the form of research and development.

What I see in the US And UK is what I call 'debtalism'. Loading every company and person's balance sheets up with debt. So more and more of the revenues are going to simply pay interest on debt. And making it a ponzi by inflating asset prices with all this debt, so on paper there is a lot of 'capital'.

One path is the virtuous path to wealth. It takes a lot of hard work and a lot of time to build up. One is the get-rich-quick plan. Flip-this-house is a lot easier than build this house.

Great post. I have never seen this discussed anywhere else, but it is a perfect example of the parasites killing the host. Why can the powers that be not see this?

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US inflation at 1%?

Agreed but UK is not 4% either. The point is that inflation in the UK is considerably more than in the US and EU.

Rest assured that if the UK was able to report an official inflation rate of 2% they would, if they report 4% it is that there simply is no way they can massage the figures anymore. So granted that inflation in the US might be 10% but inflation in the UK is 20%, so bottom line, inflation in the UK is considerably more than the rest of the developed world... (if we can call the UK developed that is)

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Agree 100%. Real capitalism.. the successfl kind is what Germany is doing. Gradual but relentless build up of industrial capital. You take out bank credit to expand productive capital, then use that capital to pay off the loans. Over time you get a whole fleet of capital plants.

And re-investing profits into more capital plant and capital in the form of research and development.

What I see in the US And UK is what I call 'debtalism'. Loading every company and person's balance sheets up with debt. So more and more of the revenues are going to simply pay interest on debt. And making it a ponzi by inflating asset prices with all this debt, so on paper there is a lot of 'capital'.

One path is the virtuous path to wealth. It takes a lot of hard work and a lot of time to build up. One is the get-rich-quick plan. Flip-this-house is a lot easier than build this house.

Agree

Keep borrowing till your competitor goes out of business, then take them over with more borrowed money, seemed to be the model a fears ago (still is for some?). Till what, who is the winner?

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Great post. I have never seen this discussed anywhere else, but it is a perfect example of the parasites killing the host. Why can the powers that be not see this?

You should have got here sooner, we've been discussing this for years. The only thing many of us got wrong was that we didn't expect the dangerous lunatics in power to go down the zirp / QE route at the credit apex.

Well except injin who pretty much nailed it.

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Great post. I have never seen this discussed anywhere else, but it is a perfect example of the parasites killing the host. Why can the powers that be not see this?

Im sure a tapeworm sees nothing wrong with taking a meal from its host.

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Great post. I have never seen this discussed anywhere else, but it is a perfect example of the parasites killing the host. Why can the powers that be not see this?

They are the parasites.

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You're commenting on deverging paths but you haven't pointed out where policies diverge. They don't, except in words alone in the last 4-6 months. Stimulus, QE, all done both sides of the pond.

The reason the USA can QE to its hearts content is the dollars status as the World currency - effectively they can print up and have it sent all over the place. We can't so we printed and now have accelerating inflation.

Thats a big, maybe the dominant factor. I did mention that the US allowed a HPC while Britain did not. Which caused a lot of deflationary pressure in America. Also the two nations have different regulations, different amounts of resources, different cultures, different capital going in.

And I think you'd like to see more QE wouldn't you? That's always been your line up to now.

Yes, but for Britain it appears there isn't much room left to QE now. Granted before I stopped QE I would increase the reserve requirement for banks and raise the BoE rate. But the powers that be wouldn't do that in a millions years, because it would limt how much the bankers could lend out.

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Depositors, they take a risk,

I believe the figures on bank savings are quite shocking, about 95% of the population have less than 5 grand in there. The reality of the bailouts was in the main to protect the wealthy minority, rather than the majority who, in reality, had very little to lose in the first place.

Of course the legend that was sold was that without the bailouts we would have unemployment, business closures and a debt crisis-

That god none of that happened...oh hang on... :ph34r:

Edited by wonderpup

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I believe the figures on bank savings are quite shocking, about 95% of the population have less than 5 grand in there. The reality of the bailouts was in the main to protect the wealthy minority, rather than the majority who, in reality, had very little to lose in the first place.

Of course the legend that was sold was that without the bailouts we would have unemployment, business closures and a debt crisis-

That god none of that happened...oh hang on... :ph34r:

Good point.. I remember when the American leaders were telling people how their plan would boost the stock market. Just had to take 10,000$ from every American family of 4 and the stock market would go up 20%.

Well the average American has something like 4,000$ in stocks.. lets call it 8,000$ for a married couple. A 20% increase would give them 1,600$.. at the cost of just 10,000$.

Same with savings as you pointed out. Most people don't have savings. We're talking about less than 5% of the population who has substantial savings. That financial breakdown in 2008 really was the moment of truth. Before 2008, the rich were claiming the moral high ground of earning their money fair and square through risk taking.. while the socialists were the bad guys violating natural law to redistribute money.

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I believe the figures on bank savings are quite shocking, about 95% of the population have less than 5 grand in there. The reality of the bailouts was in the main to protect the wealthy minority, rather than the majority who, in reality, had very little to lose in the first place.

You neatly choose to forget:

- retirees who have saved hard and not squandered their earnings;

- those compensated for losss of earnings in personal injury suits;

etc.

Your expropriation instincts would serve you well in communist N Korea, or perhaps Venezuela.

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Same with savings as you pointed out. Most people don't have savings. We're talking about less than 5% of the population who has substantial savings. That financial breakdown in 2008 really was the moment of truth. Before 2008, the rich were claiming the moral high ground of earning their money fair and square through risk taking.. while the socialists were the bad guys violating natural law to redistribute money.

Er, nobody thought savings were at risk other than from inflation. Most savers view interest as compensation for inflation risk, not default risk. If they thought there was default risk they'd have been demanding the appropriate yield , ie inflation plus default rate.

Edited by Sledgehead

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  • 312 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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