World not ending: news at 11

Although Macro Man wrote yesterday of his aversion to stepping into the breach for Brazilian assets, he can still, in the immortal words of Mr. T, "pity the fool" who was lobbing out EWZ after hours on Wednesday.  Indeed, the price closed down only 1.58% on the day (and that largely due to the BRL, not stock prices), and never came within 70 cents of the levels trading after the downgrade on Wednesday.

This of course followed on from yesterday's aggressive selling of USD/CNH from Chinese banks (perhaps they'll repeat the trick today, though with CNH now so close to CNY, maybe not), taking the pair to its lowest level since the deval a month ago.  The hopeful/fearful forecasts of 6.80 or even 7.00 that were percolating around the market a few weeks ago now look fanciful at best, though of course with such a nice pullback anyone with dry powder looking for a hedge may decide to pounce soon.

The larger issue, however, is that the authorities have clearly shifted the bulk of their attention away from equities and towards the exchange rate as an instrument of public policy.   That such a strong show of force yesterday has come after, rather than before, the G20 is notable; Macro Man takes it as a signal of genuine intent.   This should prove to be a comfort for the rest of the world; after all, the Chinese equity market is largely an insular affair with little by way of immediate repercussions for the rest of the global economy.  (Yes, there is the potential for a wealth effect hit to consumption of luxury foreign goods, but then again the equity bubble blew and then popped so swiftly that there wasn't much time for a wealth related boost, either.)

The exchange rate, on the other hand, has a real impact on virtually every other country in the world for whom China is a competitor, a source of demand, or a source of supply.  As such, a commitment to stability should be viewed as a font of good news, even if other countries remain in the throes of currency adjustments, whether it's Brazil or South Africa or Indonesia.  After all, China did sustain a much more substantial strengthening of its real exchange rate (albeit from weak levels) than anyone else; it's to China's credit (and a bow to realpolitik) that it's not trying to race for the bottom.


Astute readers will note that many EM currencies began their long march towards oblivion at roughly the same time that the Fed first dropped hints of a desire to taper in the spring of 2013.  The long, drawn out process of trying to pull off the monetary band aid at a snail's pace has done little to mitigate the pain felt by the rest of the world; why the Fed thinks that continuing to tip toe around the monetary monster in the closet, rather than throwing the door open and exposing him for what he is, may be somehow beneficial for anyone is a question that leaves Macro Man scratching his head.

Similarly, this past Wednesday saw the largest number of corporate bond deals in nearly 5 years- actually since the immediate aftermath of the QE2 announcement.  To be sure, some of this represented pent-up demand from the last couple of volatile weeks.  Nevertheless, if things are so bad in markets that the Fed cannot hike this month, how come so many bond deals got done?

Maybe, just maybe, the world isn't ending...and won't if the Fed finally consummates the slowest build-up to an interest rate hike in recorded human history.  Indeed, one could argue that the easiest way to dispense with the angst over the tightening removal of some emergency accommodation is to simply get on with it.


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Anonymous
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September 11, 2015 at 7:20 AM ×

Agree, and a relief rally..... then you are on your own.

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Kavitha Ks
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September 11, 2015 at 7:49 AM ×

https://www.linkedin.com/pulse/unlock-her-legs-system-review-really-worth-krishna-raj

Before you get too far in your relationship, tell your date important things about you! You say you don't know how? Well, here are some tips which will help you to tell your date things they need to know about the real you.

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Nico G
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September 11, 2015 at 10:03 AM ×

thank you Kavitha i just told my wife i honestly need more poontang in my life and she just left me

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Anonymous
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September 11, 2015 at 10:16 AM ×

Hey Kavitha...just told my wife I found the sink more convenient rather than a trip to the loo, for the last 20 years, and she threw me out....

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Polemic
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September 11, 2015 at 10:21 AM ×

My wife already knows too much about me Kavitha.

Hope you are right MM. The greater proportion of the smartest of my friends are calling recession and stock (both equity and inventory) dump. Many saying the world has enough stuff and the inventory/sales figs for US would suggest they are right.


Someone needs to invent a new 'must have' product that is expensive to buy and labour intensive to make.

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Anonymous
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September 11, 2015 at 10:48 AM ×

FT: @Pol 10:21
I would vote for a "soft patch"; too soon to call for a recession
Whether the Fed hikes or not is irrelevant, what matters is that they will guide IR expectations lower at the next conference mentioning that risks have increased towards the downside for their growth expectations due to overseas turmoil...
It's not unlikely that we will have a government shutdown in October; it's perfect in terms of timing with the election still far from now; after all, the GOP benefitted mightily the last time they pulled that trick and with talks centering on planned parenthood funding, it's not easy to solve a binary standof by meeting halfway;
We need to take the lows in the spooz, it will be a cathartic experience before we grind higher for the next year or two

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Anonymous
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September 11, 2015 at 10:51 AM ×

FT: by the way, price action in PMs is rather puzzling these days....anyone knows if it could be related to autocallable notes issued 3 to 4 years ago?

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Anonymous
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September 11, 2015 at 10:54 AM ×

Sounds like "food".... Polemic at least decent food.

I really think The Fed has to focus on the US, not international, every country has its own monetary policy to manage, FED is the US not world CB. Purge the EM now or next month it doesnt matter, china is its own issue, it probably has to devalue 20% now to make much difference and its let the cat out of the bag it intends too. They really should have asked the squid what to do.....


A mate said "Markets hate uncertainty... " the fed has make a call as once they go they will say thats all for now, another 30 days of this crap will make things worse not better. He is credit side.

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Anonymous
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September 11, 2015 at 11:00 AM ×

you have to watch stuff like this though, prices to go "further higher"

lots of money trying to out of China as soon as possible.. sorry url its about Chinese buying Vancouver RE

https://video-lax3-1.xx.fbcdn.net/hvideo-xpa1/v/t42.1790-2/11353431_10153095019112686_548834792_n.mp4?efg=eyJybHIiOjQzOSwicmxhIjo1MjF9&rl=439&vabr=244&oh=4d6d515df550561fae09699c98a20123&oe=55F2BE39

I think this is just the beginning as the money of millions of Chinese ants tries to get out asap, massive outflows coming, eventually devaluation and capital controls....

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CV
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September 11, 2015 at 11:04 AM ×

Largely agree with this MM. I think this is the inverse of 2008. Global central banks are programmed to overreact to deflation panics. In 2007/08 the oil price surge meant CBs were hiking well into recessions, with Mr. Trichet's final squeeze in in July 2008 the real treat! Now, we have the opposite situation. Oil prices are cratering (and, admittedly kicking manufacturing in the nether regions), but anyone with eyes can see that consumers are slowly building up to a consumption binge (at least in the U.S. and the U.K.) ... and what will we get, well arguably the most dovish global CB constellation EVER!

I cannot force myself to get really scared over a deflation panic. I will be scared by an inflation/taper panic though, very scared, and reserve the right to change my view immediately to uber bearish if yields start to go haywire. But my base case (complacently) remains that we will all get a chance to laugh at the bears, once again, in Q1.

The astute investor will also realize that if we can engineer a world where the developed world recovers amid (partly because of?) carnage and capacity destruction in EMs, it stands to reason that this situation can reverse engineer itself. Can you imagine the S&P doing NOTHING for two years, while EMs outperform. No? ... well, too bad.

The market, in the end, will tell me whether I am wrong, and here I need to concede that equities, just to name one, aren't exactly trading nicely. I am not stupid you know ;), but worry about a deflation panic ... nope, can't do it, sorry!

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marcusbalbus
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September 11, 2015 at 12:33 PM ×

at end i think you mean get "on" with it.

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abee crombie
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September 11, 2015 at 6:04 PM ×

I see the market very much like it was in 2007 or early 2008, with EM the culprit instead of the banks. Not saying the same outcome has to occur ( I'm not betting it will) but EM is kind of a slow moving train wreck that now everyone sorta knows about.

Malaysia, Brazil S Africa and a few others have political problems that are compounding the macro story. But clearly those arent an unknown anymore. What is shocking the market, which MM touched on is the Chinese, which clearly are better at allocating resources to building stuff then they are at managing financial markets. The big sell off in EM was really exacerbated by the Chinese devaluation and markets would like some clarity on what is the policy goal. For now we are all left guessing which necessarily adds a risk premium.

So while the Fed has its head in the sand, much like 2008, a crisis is brewing. Whether it threatens to take the whole financial system down with it, I doubt but it is a higher possibility now than 6months ago.

I think raising rates by the Fed will be a good thing but if FX starts to get disorderly again, the Fed needs to immediately step up the swap lines and China needs to come out and tell us what thier plan is. Hopefully that doesnt happen, and we get a slow sell off in equity markets into the fall which sets up a nice year end buying opportunity...

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Anonymous
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September 12, 2015 at 1:21 PM ×

When did NZ get relegated to EM status? It used to be considered "developed".

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Booger
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September 12, 2015 at 1:40 PM ×

MM - the Chinese defending their currency appears to be a good thing now, but I reckon it is unlikely to appear so in 6 months time. In fact, the main thing that is different from 1997 that makes the EM's less vulnerable now is that most now have a floating currency. The main thing that saves Brazil and Russia this time appears to me to be their exchange rate adjustment.

The maximum pain trade and where things appear to be headed in the short term is rally in EM currencies next week, significant dollar correction, oil rebound and then when everyone thinks the coast is clear, resumption of business as usual in terms of China falling apart.

The proxy I like to watch in terms of China is the Australian economy. That is closing in on the post-war record for most number of years of uninterrupted economic growth. Australia is now at over 24 years, which is second only to Norway at 26 years. The Norwegians growth cycle was fueled by the discovery and exploitation of North Sea Oil, but even that could not prevent the economic cycle reasserting itself. The Australians have had China. And as Australia is nowhere near recession yet, I think there is a lot further to run in the Chinese slowdown. In fact I think there is a good chance the Chinese have misjudged the value of their exchange rate by perhaps 20% currently. Using forex reserves at this point in time seems like a waste of resources. The rapid slowdown in their economy indicates they need a much lower exchange rate.

Despite their forex reserves and current account, I think China with their managed exchange rate and exploding debt levels since 2009, is actually the most vulnerable in the system. As Michael Pettis points out (his latest article is great reading), their inverted balance sheet has created institutional bias towards risk-taking and pro-fragility. A very long, uninterrupted period of growth creates that anyway, but tied with a semi-command economy, with astrononomical growth rates, the leaders get idealized during the growth period, they can do no wrong and then they are the biggest morons when things wind the other way (see Japan). The day of reckoning must come and I think we are still a good way from a long term bottom in China and commodities.

Humans have a major problem with recency bias and the main thing slowdowns do is clean out the excess. China with uninterrupted growth for that many years and by proxy Australia, the risk taking that happens when people extrapolate that growth into the future is I imagine likely to be crazy.

I think EM crisis continues but unlike 1997, this time China will blow up with the others being affected less. I doubt the Fed will hike with the markets not pricing in that as a majority probability (only 30% chance or less currently). And if that is the case the dollar index may correct significantly this month. Which would be where I will be waiting to pick up commodity bloc currencies to short again. Aud.usd around 0.75 would be nice.

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Macro Man
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September 12, 2015 at 2:01 PM ×

Anon- NZD is developed, albeit with EM liquidity. I put it in there as a frame of reference.


Booger-

The issue with China's FX rate is that it has two equilibria: the current account equilibrium is at a stronger RMB level (as recent trade data demonstrate), whereas the capital account equilibrium is at a much weaker RMB level.

The whole point of accruing massive, massive FX reserves when the RMB equilibrium was stronger on both measures (say 2002- 2013)was to enable China to smooth things when the equilibria diverged. This is different from the examples you cite, where for most of this move the equilibrium exchange rates were weaker on both a current and capital account basis.

Now, it is absolutely the case the resources were misallocated in China (though in this they are hardly alone), and I will concur that the FX regime is a major culprit for this (it was very difficult to sterilize the mahoosive RMB selling intervention over the course of more than a decade, which allowed domestic monetary conditions to remain too loose.)

However, I would re-iterate, China's FX reserve pile is still very very very sizeable, even in relation to the capital account equilibrium, and it is my belief that they can and will spend a sizeable portion of it to maintain a basically stable exchange rate somewhere between the two equilibria. The RRR gives them plenty of room to do this in very substantial size without thoroughly freezing the domestic money markets. Chinese FX stability is a net positive for the world- if you think EM is blowing up now, what will happen if USD/RMB goes to 7.50! (Moreover, if that happens you can bet the US Congress will be breaking out the Smoot-Hawley history books.)

Now, if we are discussing this in a year's time and Chinese reserves are down to 2 bio and capital flight is accelerating, well then one can extrapolate a year or two forward and say that something will have to give. But we are a long way aways from that, and at this juncture such an extrapolation is likely to cost, rather than reward, the extrapolator IMHO.

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washedup
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September 12, 2015 at 3:28 PM ×

"The maximum pain trade and where things appear to be headed in the short term is rally in EM currencies next week, significant dollar correction, oil rebound and then when everyone thinks the coast is clear, resumption of business as usual in terms of China falling apart. "

Boog - I don't about literally next week, but I agree with the premise - where I disagree with you is that you imply that this is a drama with just two acts - I think it will be slow march to oblivion over many years given the sheer size of their reserves, and in that sense MM has a point. Even the financial crisis in the most 'transparent' DM mkt in the world took about 2 years to unfold, and only the last 6 months felt like a crash - you are right that Australia getting into an actual recession could turn out to be a great indicator.

I wish I could muster have Mr T's level of conviction that the fed's removal of uncertainty about rates presages an equity melt up into spring - it feels right, but I have a hard time getting into actual trades where I can't even imagine the catalyst other than an abundance of greater fools! Of course, I was also short in late 99 so am quite the wrong person to judge. So stay out of equities I will - hopefully they send brazilian equities to zero I think its a pretty good risk reward from there.

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KR
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September 12, 2015 at 7:14 PM ×

Now, what happens next?

https://research.stlouisfed.org/fred2/graph/?g=1OWO

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Anonymous
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September 12, 2015 at 8:54 PM ×

washedup -

"Even the financial crisis in the most 'transparent' DM mkt in the world took about 2 years to unfold, and only the last 6 months felt like a crash - you are right that Australia getting into an actual recession could turn out to be a great indicator. "

just a thought but wouldn't a less transparent EM mkt like china fuel more market uncertainty and in turn accelerate EM dump?

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washedup
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September 12, 2015 at 10:58 PM ×

I'm not sure anon - tough to argue for anything major within China - at some point people need earnings misses, credit events, and accounting scandals to validate bear theses and initiate runs - in a country that still has ample reserves, doesn't have any impediments to absorbing local, provincial, and even corporate problems under a state umbrella, and doesn't think twice about shaming financial journalists on TV and jailing short sellers, I think those catalysts will be hard to come by at a fast enough pace to create a true meltdown - you can forget about the 10% crash due to a failed TARP vote in congress on Sep 30, 2008 type scenario, to state a too specific example.

As far as the impact on other EM's, the conduit through which bad news would travel would be via their chronic low demand leading to selloffs in base metals and oil and financial issues in Brazil and Russia which do have some semblance of traded markets - thats already happening but probably closer to the end than the beginning, so yes maybe capitulation soon, but then what?

Like I mentioned before, my base case for China is a slow but sure rot and an underperforming contribution to global GDP growth for many years a la 90's Japan. I think the impact on DM equities is a much tougher call and leads us to whats happening in silicon valley, not anywhere in China.

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Leftback
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September 13, 2015 at 1:27 AM ×

LB is in Spain. Hard to see a global economic slowdown from here, perhaps one of the places where one might expect it to be easiest to find. Just sayin'... we are still partially in hammock mode, but also long European equities and from this local vantage point that still looks like a decent place to be invested. I follow the logic of the dollar/commodities/EM reversal call above and am in general sympathy with the argument that the Fed should just get on with it. Anticipating a little more turmoil in the days immediately ahead of us, but a monster short squeeze is possible at some point when markets realize the next rate hike boogeyman isn't going to appear for quite a long time.

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Hotairmail
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September 13, 2015 at 2:14 PM ×

Yes, I've always favoured the idea that the dollar would "counter intuitively" weaken and stocks rise on confirmation of a rate rise. However, too many are now of this opinion. And I have a new, separate worry....that the Fed will both raise near term rates and lower future expectations thereby flattening the yield curve and affecting bank profitability and credit creation.

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Anonymous
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September 13, 2015 at 4:38 PM ×

Hypocrisy of religion exposed. But few will ask questions!

#Welcoming_Syria's_refugees_is_a_Gulf_duty

Why aren't the rich Arab countries like Saudi Arabia,Qatar,and Kuwait welcoming refugees from Syria since solidarity and brotherhood is emphahsized in their religion.
And Hajj is just around the corner...

""I swear to the Almighty God, it's the Arabs who are the infidels."

http://www.bbc.com/news/world-middle-east-34132308



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Nico G
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September 13, 2015 at 6:58 PM ×

Polemic you spoke the simplest conviction that is my mantra

the world has too much stuff

three billions of Chinese and Indian were supposed to save the day and consume Western goods like crazy but hey nope, they'd rather focused on their domestic markets

i believe in 'degrowth' or décroissance in french, a time to chill, recycle, barter/exchange, fix what already exists. This is profoundly deflationist and could give planet earth a break

back to my opium

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Nico G
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September 13, 2015 at 7:32 PM ×

on a more technical note

you will not talk me out of thinking that 'coincidentally' scheduling FOMC, ECB decisions, or the paramount Greek votes of 2011 the day before big expiries will certainly benefit a very informed few - by punting 1-day options on the next out of the money strike up or down accordingly

do you remember Gaddafi 'cease fire' announcement 15mn before US cash expiry in March 2011? his family office probably made monster money that way on the sick rip that followed. just saying'

good luck everyone it's gonna be a funky expiry week

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Anonymous
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September 13, 2015 at 10:17 PM ×

Agreed Nico G - my post wouldn't go through earlier but, even if they were to hike by a token 0.15 and talk really dovish, you've got triple witching the next day. Could be a monster up move.

http://www.bloomberg.com/news/articles/2015-09-08/market-volatility-has-changed-immensely

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Mr. T
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September 14, 2015 at 2:24 AM ×

Everyone's looking for the next shoe to drop based on ideas that seem increasingly far fetched. If you need the worlds #1/#2 economy to blow up for your idea to work - it sounds like a low probability event. There is just too much of a middle ground between "blowing up" and "crushing it". If China does 3% over the next 10 years thats still a lot of growth. The simplest (albeit maybe not correct) analysis I see is "summer is illiquid". Maybe that's it - a bunch of quants fell over each other in a temporary feedback loop until the humans were able to step in.

This fed meeting looks like another setup with very little downside. I'd put "raise and emphasize gradual via dot plots" at 50%, and "conditions not perfect yet, no need to hurry" at 50%. That leaves not a lot of opportunity for hawkishness. I don't buy into the idea that a flattening of the curve is something to get worked up over. There is plenty of spread out there if you (or lenders) want some more risk. Isn't that pretty much the epitome of a functional market?

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Anonymous
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September 14, 2015 at 6:35 PM ×

on a slightly different topic- i have moved from a 17 year career in an Ib to now trading for my own.Given bbg too expensive , any suggestions for different market data platforms people are using here?( more for market data than execution)
thx

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Macro Man
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September 14, 2015 at 7:29 PM ×

@ Anon, I just started a trial of money.net. Haven't done a tutorial yet but looks like it could be promising, and retails at $95/mo.

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washedup
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September 14, 2015 at 7:41 PM ×

@anon - ycharts is supposedly good worth a look.

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