Weekly Report
Artem Karida
Educator | C-suite advisor | business strategy, innovation, and marketing expert
Weeks 05. January 30 - February 05, 2023
INDEX
Macroeconomic indicators
Analytics
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Macroeconomic indicators
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Analytics
Savings of American households
The depletion of savings supports the sustainability of consumer expenditure on goods and services by American families. The US savings rate during the last six months has been at an all-time low of 2.7 to 2.8%, matching the previous record set in 2005 (2.7%).
After the helicopter money spread, the savings rate increased to 16.8% in 2020 (an all-time high), then to 11.8% in 2021, which is close to the 1950–1970 period. The average savings rate from 2010 to 2019 was 7.3%.
What led to the decline in savings between 1980 and 2008? Artificial development of the consumer economy and all of its effects, such as the alteration of psychology and value orientations toward present consumption as well as the rise in inequality.
These dynamics show that the greatest group (the top 80% of the population in terms of income) does not have enough money to maintain a "typical," that is, the quality of living that is enforced and recognized in society with a mandated list of compliance features. You are compelled to completely empty your pockets as a result.
During the COVID crisis, net state assistance to the populace reached approximately 10% of average annual income (moving from minus 3.5% in 2019 to plus 6.5% by March 2021), and is currently at minus 5.5%.
Fiscal policy is tighter than in 2010-2019 but less so than in 2007-2008 when net state support was negative 7%. In 2022, the state withholds 2% more from income than it distributes compared to 2016-2019.
Real spending on goods and services per person in 2022 is 4.4% higher than it was in 2019 and up 0.7% from 2021.
In real terms, per capita income fell by 8.4% y/y in 2022 and was 2% lower than in 2019. Although the income trend was swiftly reversed by the state support switch closure and excessive inflation, things have improved since July as inflation has slowed.
Investment in technology in the USA
Investment in technology has outpaced all other types of investment in the US (equipment, residential and commercial real estate). The business's R&D costs, the creation and acquisition of patents, the creation of intellectual property, and the cost of software are all considered technological investments.
In Q2 2020, technology investment used to exceed all other investments, but this time the tendency is stronger and it's more likely than ever before that technology investment will be the majority of the US investment mix.
The "final bastion" was left in the form of machinery, equipment, and components when technology exceeded commercial real estate (including factories and industrial structures) in Q1 2008 and residential real estate a year later.
Any type of business vehicle, industrial machinery, machine tools, equipment, computers, and hundreds of other nomenclature of material assets, with the exception of capital structures, are included in the category "equipment," which also includes all tangible assets intended for the reproduction of capital (they are included in commercial real estate).
There is unquestionable leadership with a large margin if we break apart computers, servers, components, and everything else connected to electronics into a distinct category, then close it with technologies, naming the category "IT and R&D."
Computers are the only piece of commercial and industrial equipment that has increased since 2014.
The amount of investment in commercial real estate and infrastructure is at its lowest point since the 2009 financial crisis. A 25–30% slowdown in building and a 35–40% decline in house buying caused residential real estate to fall predictably to the level of 2015.
In the US, the physical world outside of IT is getting smaller. The digital economy, in all its varieties, is a rising sector. Contrary to sensitive and more unpredictable spending on equipment and infrastructure, the upward tendency does not degenerate into crises.
US price rises
Inflation in the US's goods sector is decelerating rapidly and may possibly be turning into deflation, while the services sector is sustaining the rise in prices as a whole. A deflator is used to compute real GDP, with different price indices used for each kind of GDP. What is the increase rate of prices, then?
The deflator for the total US GDP decreases from 7.6% y/y in the second quarter of 2022 to 6.3% in the fourth. Here, quarterly dynamics are also intriguing. Accordingly, during the fourth quarter of 2022, prices climbed by the general economic deflator by just 0.86% as opposed to 2% q/q in the first quarter, 2.2% by the second quarter, and 1.1% by the third.
Given that the average quarterly price rise rate from 2017 to 2019 was 0.5%, a price increase of 0.86% towards the end of 2022 is still significant, but a slowing is evident.
The Consumer Price Index, the Fed's primary benchmark, is declining from 6.6% y/y in mid-2022 to 5.5% y/y in 2022's final months.
After reaching heights of 1.5–1.8% from Q4 2021 to Q2 2022, the quarterly dynamics rapidly declined to 0.78% at the end of 2022 (the average quarterly price increase rate from 2017 to 2019 was 0.44%).?
The most obvious decrease in goods. Price increases in the overall commodity group decreased from 10% to 6%, and the quarterly dynamics saw their first deflation since the middle of 2020.
The pressure from unsecured demand, helicopter money, and the logistical collapse in 2020–2021 has been completely removed from commodities. Prices rose by an average of 2.36% each quarter between Q2 2021 and Q2 2022 as opposed to a quarterly deflation of 0.07% from 2017 to 2019.
Deflation was recorded at 0.37% qoq in Q4 2022, with non-durable goods down 0.13% and durable goods down 0.78% qoq.
The reverse pattern applies to services. Here, price growth quickens to 1.37 per cent each quarter (the highest level since 1986) and 5.3 per cent annually (the highest since 1984).
Deferred post-COVID demand, a significant labour scarcity, particularly in the low-income sector, which pushes wage growth and a decline in labour productivity, as well as limitations on the scaling of services, unlike products, are the causes of the increase in service costs.
Over 60% of the structure of consumer demand is made up of services.
Eurostat innovative сalculations
How much understates inflation in terms of GDP according to Eurostat? The GDP deflator adds up all prices in the economy (government expenditure, private consumption, consumer spending, exports, and imports), taking into account the variables that contribute to GDP production.
However, we won't be able to determine the severity of the divergence due to the absence of primary data and the weights of the deflator's components being encrypted. The consumer expenditure deflator may be compared to the official statistics on the consumer price index, the two indicators are fundamentally comparable and have a positive correlation.
What's the purpose? According to Eurostat, there is no crisis and the economy is reportedly expanding. It is well known that Europe has had the highest inflation rates in at least 40 years, but does Eurostat factor this inflation into GDP calculations? What is interesting to look at is this.
When the consumer spending deflator and the CPI are compared across the Eurozone, there is unquestionably a correlation (it cannot be otherwise). Starting in the middle of 2021, Eurostat started translating price increases into the deflator, but it turns out that this conversion is insufficient (to put it mildly) when measured by the CPI.
Real consumer spending is quite likely overstated by 1.8–2.1% as of Q3 2022 when the CPI climbed by 9.3% y/y but the consumer spending deflator only by 7.4%, a difference of almost 2% in favour of prices.
Are Eurostat's estimations getting more and more inaccurate? The CPI rise from December 2019 to September 2022 was 12%, whereas the deflator estimated a 10% price increase. This indicates that the 2% difference does not emerge annually but rather over a three-year period.
If we look at the period from 2017 to 2019, the CPI increased by 4.4% while the deflator increased by just 4%. According to the CPI, prices rose by 4.3% from January 2012 to December 2016, and by 4% using the deflator. A larger difference existed between January 2009 and January 2011, when the CPI increased by 5.5% and the deflator increased by 3.8%.
The CPI is often above the deflator with a variance of roughly 0.2 percentage points every year, and currently, about 2% per year, if we average the years 2009 to 2019. To put it another way, Eurostat, like other statistics agencies, approaches the work of calculating indicators with its own high degree of creativity.
What prices are used to determine Europe's GDP?
What is the official GDP conversion for the record industrial and consumer inflation in Europe? What prices are used to determine Europe's GDP? The application for total disdain for crisis processes sounds quite crazy, which makes the question fascinating.
Between June and December 2022, when the energy and inflationary crisis was at its worst, the GDP of the nations in the Eurozone increased by 1.9% year over year, and it increased by 2.4% from the pre-COVID era (December 2019).
The economy-wide deflator index for nations in the Eurozone increased by just 4.4% year over year in Q3 2022 and by 4% from January to September 2022 compared to the same period in 2021.
The deflator for the total GDP is crushed "to the ground," in contrast to the sky-high inflation rates experienced by industrial and consumer goods. Yes, the price level is at its highest point in 30 years, but it is not significantly higher than it was between 2000 and 2007 when the greatest price rise was at 2.7-9%.
While rising in tandem with the CPI, consumer inflation trails by roughly 2 percentage points. Growth of 7.4% by Q3 2022 and 6.2% year over year from January to September 2022.
The government consumption deflator index's growth of 4.1% in Q3 2022 and 3.4% in the first nine months, little inflationary pressure as seen in this sector.
After reaching a record of 10.5% in Q2 2022, the investment deflator index declines to 9.4%; from January to September, it increased by 10% year over year. From 2009 through 2021, the price increase will be 8 to 9 times faster than average.
Prices for imports and exports are both rising, but slowly, as of Q2 2022. As a result, export prices are rising by 13.5%, and by 13.3% in the first nine months. Import prices increased far more quickly, 19.6% in Q3 2022 and 19.1% year over year from January to September.
Where there is essentially no inflationary pressure, state consumption and investment make up roughly 20% of the GDP structure.
How is it that the population's expenditure on consumption climbed by 7.4%, investments increased by 9.4%, and imports decreased by 20%, yet the overall economic deflator came out to be 4.4%?
There is a link between import prices and predominant inflation. The inflationary picture for GDP components is more or less accurate and matches specific indicators, but the overall economic deflator raises significant concerns.
Inflation in Europe
Official inflation in the Eurozone has slowed down even further, coming in at 8.5% annually (these are the lowest price growth rates since June 2022). Since there was a 0.4% deflation in January and a cumulative price gain of only 0.7% (2.1% YoY) during the previous four months (compared to a 4.9% YoY growth in May 2022, or over 15% YoY), the inflationary momentum was reset in October 2022.
Energy and food were the two key factors that caused the significant price escalation. Energy costs continue to fall by 0.9% monthly, resetting the annual momentum from 41.5% in October 2022 to 17.2% in January 2023 as a result of energy subsidies containing price swings and the 30% and 40% declines in oil and gas prices, respectively (a drop of 4- 5 times for bulk purchases).
Inflation excluding energy is 7.3% year over year, up from 6.9% in October; in November, it was 7%; and in December, it was 7.2%. Food goods are the weak link since they continue to increase in price significantly despite the downward trend in wholesale prices over the previous nine months.
Food recorded a new record gain of 14.1% for the year, adding 1.4% monthly. For comparison, just 3.5% more money was spent on goods in January 2022. Food growth is equivalent to or even greater than it was in the 1970s for several European nations.
The annual rate of inflation, excluding energy and food, is 5.2%, which is slightly higher than the 5% seen in October-November and at the same level as in December. Only 2.3% more was added to this CPI category last year.
Annual growth rates for the group of products excluding energy jumped from 6.1-6.4% in October-December to 6.9% in January 2023 (2.1% yoy in January 2022). For the first time in a year, inflation in the services sector decreased by 0.2% month-to-month, resulting in an annual growth rate of 4.2% as opposed to 4.4% in December and 2.3% in January 2022.
Prices will be sustained by services and growing costs for non-energy items while energy is losing steam and will continue to decrease in 2023, while food prices will start to decline in the spring of that year.
According to the inflation structure, low-income populations in Europe took the most hit.
Fed rate and rhetoric
Powell stated in his speech that two further rate increases of 0.25 percentage points to 5.25% would be suitable, but this is not certain. The Fed will act in this manner if the data indicates the need to loosen financial conditions.
Powell "promised" not to lower interest rates this year, but he quickly added the caveat that we are quite flexible and will change our plans if necessary.
Powell is attempting to mislead market expectations by adopting the aggressive hawk persona while having spent his whole career life as a dove and creating current financial imbalances (including bubbles). It's all a bluff.
This entire show will go on until there are no outward indications of a crisis and no one from the "too big to fall" sector collapses under the weight of it all.
The degree of financial system stability is directly inversely correlated with the Fed's level of aggression. Any interruption, no matter how little, will cause the discourse to shift abruptly. The financial system's stability comes first in the hierarchy of concerns, much ahead of any effort to combat inflation.
Although to be fair, the stability of the overall debt structure is what causes the inflation problem, and the health of the financial system is directly impacted by the debt market in general. Without the other, the one does not exist.
It is clear from Powell's speech that the Fed thinks it has succeeded in stabilizing inflation expectations, which has helped to restore trust in its monetary policy, the stability of the monetary system, and therefore the dollar. Powell has never directly addressed this and will never do so, but the context makes it quite evident.
The Fed actually increased rates more quickly than any other central bank in industrialized nations, in an effort to induce capital inflows into the US by establishing an interest rate disparity with other currency regions. In a competitive comparison, the dollar zone's positions were stronger and more desirable than those of the euro, pound, or yen.
The Fed was working to restore faith in its capacity to regulate the crisis, which was the second significant issue. Any decline in trust, even the mere suggestion of the Fed exercising less control, will inevitably undermine the entire current design of the financial system.
In the event of systemic overload, capital will ineluctably begin to seek alternatives (search for financial substitutes, search for other places of capital investment), which would eventually lead to the creation of an unmanageable zone of instability. The dollar's value is declining due to capital flight, which is an entirely inflationary process. As the monetary component of inflation, inflation is the polar opposite of the indicator of confidence in the Fed's monetary policy.
领英推荐
Powell played the aggressive hawk while also being the dove from around June of last year until December to calm market worries and steady inflation expectations.
An excellent double game in theory. We have been successful thus far, and the job is excellent, but now a new, more difficult and fundamental process has started: the transfer of interest costs from rising rates to the economy. Wonder what the safety margin is for an economy that has been operating for 15 years on the false pretence of having access to limitless free money.
The game has just begun; it has not ended yet! Who is going to fall first?
The European Central Bank and the unknown
The ECB hiked three key interest rates by 0.5 percentage points, the sixth increase since July 27, when the ECB began tightening monetary policy.
As a result, the deposit rate became 2.5% (directly affecting the Eurozone's money market) and lending interest rates ranged from 3-3.25%.
These are the highest rates since November 2008 or nearly 15 years. Since the establishment of the ECB and the Eurozone, the maximum rate on deposit transactions was 3.75% from October 6, 2000, to May 21, 2001 (at the same time, ECB lending rates were 5.75%).
Prior to the 2009 financial crisis, the maximum deposit rate was 3.25% until November 2008, and the maximum lending rate was 5.25% from July to October 2008. As a result, the difference between current rates and the maximum on deposits was only 0.75 p.p.
Thus, by Eurozone historical standards, the current monetary policy is relatively restrictive, especially in light of the Eurozone's negative rates, which ran from June 2014 until July 2022. There is space for growth, but it appears that the subsequent iterations will be slower following the projected 0.5 p increase in March.
Lending rates have increased by 3 percentage points in half a year, the highest and fastest rate of growth in Eurozone history and the strongest shift in rates for Europe in 45 years.
Rates are projected to be 3.25% for deposits and 4% for loans in July 2023, putting a significant strain on the Eurozone monetary system, which has been accustomed to zero and negative rates for the last decade.
The ECB, like the Fed, is attempting to limit inflationary expectations in order to stabilize the debt market. The ECB plans to keep rates at a restrictive level for a significant period until inflation decreases or conditions prohibit further monetary policy tightening.
The ECB will reduce its securities portfolio by 60 billion euros by raising interest rates from March to June (15 billion euros per month).
As a result, the strategy is roughly fixed until July, and the ECB itself has no idea what will happen after then.
Absurd and illogical market euphoria?
Global stock markets are attempting to re-establish all-time highs (particularly in European markets), but market expansion cannot be sustained for various reasons.
High market multiples were maintained in 2021 in a different scenario - conditionally infinite and free liquidity in unlimited volumes on demand with stable low inflation. This is not the case.
In times of liquidity scarcity, resources might be concentrated in either bonds or equities. Bonds certainly have the upper hand.
What drives the stock market?
Rate growth will begin to have an impact on the balance sheets and cash flows of on-lending and low-margin economic agents beginning in the second quarter of 2023.
Risks are being balanced downward, taking current market levels and risk factor composition into account.
The current market frenzy is ridiculous and unwarranted. Reflects irrational expectations of monetary policy relaxation. However, financial conditions will ease if someone will fall, which is a market shock, or if inflation slows enough to return to the objective, which will take time, a very long time.
The labour market in the United States
In only one month, the United States added nearly 1.4 million jobs, the most since 2020. The total number of employees climbed by 517 thousand, but the BLS corrected the figures for the previous period for the better, discovering 813 thousand employees in the previous month.
According to previous data, the number of persons employed outside the agricultural sector was 153.7 million in December 2022, 154.5 million presently, and 155.1 million in January, resulting in a 1.3-1.4 million person discrepancy. According to the old data, the rise in employment in 2022 was 4.5 million, but the revised data showed a 4.8 million increase.
The labour market is in excellent shape. The divergence from the 2010-2019 trend has fallen to 4 million employed versus 6.7 million in January 2022, implying that the rate of employment growth is faster than in the decade preceding COVID.
The number of employed increased by 1.8%, or 2.8 million additional jobs, compared to the previous pre-Covid month (February 2020). At the same time, the private sector added 2.5% more jobs (3.2 million), while the public sector shed 2.1% more jobs (482 thousand).
Within the private sector, employment in the manufacturing sector has increased by 2.1% (435 thousand jobs) since February 2020, while employment in the service sector has increased by 2.5%. (2.7 million employees)
The most significant job gains in the service sector were in transportation, logistics, and warehousing, with a record 16.5% increase or nearly 1 million workers.
Professional and commercial services, which include lawyers, scientists, and administrative personnel, rose by 6.9% (almost 1.5 million employees) in the United States.
Service industries with low value-added per worker and cheap wages are in short supply. Thus, the cultural, sports, and entertainment industries shed 3.1% of their workforce (78 thousand), the catering sector shed 2.9% (416 thousand), and other services shed 2% (121 thousand).
The dollar system's liquidity
The Fed has been selling securities from its balance sheet in strict line with the plan since mid-December.
The Fed poured $372 billion in treasuries into the market from June 1, 2022, to February 1, 2023 (the sales plan in accordance with the schedule is $399 billion on February 1, 2023, i.e. 93% of the plan implementation).
The situation with MBS is exacerbated by a deeper deterioration of the MBS market against the backdrop of a real estate market collapse and the first signs of crisis processes in the mortgage market. MBS sales have totalled 82 billion since June 1, compared to 232 billion (35% of the goal).
Total securities sales for all time - 454 billion, with a target of 631 billion (the gap of 177 billion has stabilized since December).
Due to bond market pressure and insufficient liquidity, the Fed fell substantially behind in sales from June to September. The situation has now returned to normal, and sales are proceeding as planned.
With a net borrowing of $177 billion for the month, the US Treasury achieved its debt ceiling in January. According to my calculations, the US budget deficit in January was 56 billion, which is within the typical range for 2016-2018.
The US Treasury now possesses a $500 billion cash position, but placements are not viable due to the debt limit. The months of February and March are the toughest for the budget deficit. In these months last year, the deficit was 409 billion, with an average of 380 billion from 2017 to 2020.
In theory, they can scoop out the whole cash position in two months, but the budget balance is near zero from April to June due to a large surplus in April during the height of tax payments. Without placements, they can last until July.
So, in terms of the fiscal-monetary aspect, the balance is neutral. The Fed injects an average of 80-95 billion into the market per month, although this is offset by Treasury cash injections into the system.
The debt ceiling is not an issue. More money (350-450 billion) will enter the system from the Fed/Ministry of Finance in February-March than will be removed (190 billion). The cache will be empty by June, and it will have to actively borrow there - this will be an issue.
European customers
In December, the impact of the inflationary crisis (extreme rise in the cost of living) on European consumers became more obvious. Demand fell by 2.6% month on month, the most significant hit to retail demand since April 2021. (the last wave of covid lockdowns in Europe).
In general, only during lockdowns did monthly demand for goods fall more significantly throughout the last 30 years (from 1993 to 2022). It was in January 2021 (down 5.2%), November 2020 (down 4.8%), April 2020 (down 10.7%), and March 2020 (down 9.3%).
During the 2008-2011 financial crisis, the monthly fall never exceeded 2%, and it was instantly minus 2.6% for the EU-27 countries and minus 2.7% for the Eurozone. Surprisingly, the December slump contributed almost entirely to the annual fall, which was 2.5% in the EU and 2.8% in the Eurozone.
At the moment, this cannot be called a durable crisis because the decrease is so divided - the collapse in demand is concentrated in the segments most vulnerable to inflationary pressure. Food inflation in Europe reaches new highs, and this area of retail demand decreases the greatest - minus 6.6 and minus 6.9%, respectively.
The second item to consider is regional fragmentation. For example, retail sales in Germany are the lowest among the major European countries - there is a visible crisis, with a 6.6% loss compared to last year, and in France a 0.5% y / y decrease, and in Spain in general a 4.4% gain! Belgium experienced a 9.2% drop, while the neighbouring Netherlands experienced near-zero dynamics.
Poland is increasing at a 3% annual rate, Romania at a 5.3% annual rate, and Hungary at a 3.9% annual rate.
Third, the comparison point is fairly high. In 2021, a record was set for a retail turnover on a 10-year growth cycle, which amounted to over 25%, while retail sales were dropping from 2007 to 2012.
Despite the December drop, sales are 1.8% higher than in the pre-Covid period.
It will be interesting to see how Europe handles the inflationary crisis. The effect is evident, but it is not yet fatal. Retail sales account for over 42% of the whole consumption structure.
Long live the new King!
The United States is becoming a world leader in the export of oil, oil products, and gas, but how much money does this generate? When viewed through the lens of commodity groups, the mediocre numbers on the US trade balance (so order not to melt European allies) take on a different appearance.
Exports of products and services totalled more than $3 trillion in 2022, up from $2.55 trillion in 2021 when goods were $2.08 trillion / $1.76 trillion, and services totalled $924 billion / $795 billion.
Imports of products and services increased dramatically to $3.96 trillion in 2022 from $3.4 trillion in 2021, with goods imported by $3.28 trillion / $2.85 trillion in 2021, and services imported by $680 billion / $550 billion.
As a result, the trade deficit increased to $948 billion in 2022 (an all-time record deficit) from $845 billion in 2021, when there was a trade deficit of $1.2 trillion Against $1.09 trillion a year earlier and a services surplus of $243 billion, which is comparable to last year.
The US has dramatically improved its trade balance, with an average monthly deficit of $89 in the first half, revenues of $106 billion in March, and a deficit of $69 billion in the second half. So, what about petroleum and natural gas?
Thus, the United States exports $368 billion in oil, oil products, gas, and gas condensate, compared to $236 billion in 2021, and imports $304 billion in 2021, compared to $211.4 billion in 2021. The oil and gas industry's trade surplus expanded from $25 billion to a record $64 billion.
The oil and gas sector provided the United States with 17.6% of exports (a record percentage in history), compared to 13.4% in 2021, and oil and gas accounted for more than 40% of total export growth for the year ($132 billion in $324 billion).
The United States has unmistakably become a net exporter of oil and gas, as evidenced by international trade receipts. Gross oil and gas exports are nearly equivalent to Russian exports in 2022 and will exceed Russian exports in 2023, according to preliminary estimations.
The world of ambiguities
According to Argus, an international pricing service, Urals oil is about $38 per barrel, a $40 discount to Brent.
We can read Bloomberg, Reuters and any other mainstream media and everyone else writing about discounts, but one undeniable fact has emerged: according to Chinese customs, the average import price of Russian oil in December 2022 was $81 per barrel, well above the $60 ceiling, well above the average Urals price in December, and twice the quoted price by independent London-based Argus.
How can Chinese Urals be more expensive than Urals quotations? It's easy, because the grey market is not related to "official" prices, and real experts in the market know that Argus, by definition, cannot know prices, as this information is "non-public". So, why does the Russian Ministry of Finance compute the national budget based on the Urals below $50 per barrel, rather than $90+, resulting in the highest deficit at the start of the 2023 fiscal year? What about a grey budget that might be required to pay for something?
For example, Ben Lacock, co-head of the oil trading at the largest trading house Trafigura, recently reported that "about 400 ships carrying crude oil, or 20% of the world's fleet, switched from their main activities to "do Russian business". However, he claims that the shadow fleet has grown to 600 tankers in total. And no one disputes that Russian oil flows like a river - Bloomberg, NYT, CNBC, The Economist.
And if you suddenly do not trust China's customs, there are also Indian customs figures. They have not yet published data for December, but the average import price of Russian oil from March to November 2023 was $97 per barrel ($94 in China). All of these figures are available on customs websites in interactive tables. (If you don't know, the code for crude oil is 27090000, and the code for Russia is 344; you can also check Saudi Arabia (code 131) to compare).
What's the point of it all? If you do not have a thorough knowledge of what is being stated, avoid headlines and inferences based on them:
The world is filled with ambiguities...
THE END OF THE REPORT
Stay tuned.?
Regards, Negorbis.
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