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Population Dynamics in Investing

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December 28, 2008 – Comments (30)

I have remained bearish, although not to the extreme that I was bearish for much of my posting over the past year.

The level of debt and deleveraging is not over, imho.  The commercial real estate and alt-A mortgage resets will continue to challenge the economy.  The grossly increasing unemployment is going to result in new challenges where problems were not expected.  Take a family living within it means and able to save that loses a high paying job.  Well, if they can find a new job it is likely to be far less pay, 60% of the old pay is not unlikely.  Can they make ends meet now?

I still see a negative cycle happening and this is going to leave little cash for the markets.  The aging population mostly like is not going to commit new money to the markets.

The birth rate has to decline, people simply can't afford kids and people will put off starting families.  Canada had a serious debt problem in the mid 80s and I know so many people that put off having kids until they just ended up never having kids.  I am one of them.  I have an older friend who had 4 kids in my age range and has had 1 grandchild and now all of his kids are past the age that people start families.  There is one child between me and my sister and my brother. 

Canada's decline in birth rate was a function of the lack of opportunity for child rearing aged adults, and this will repeat in the US, only it will be a bigger problem because of the difference in demographics.  When this happened in Canada the top age for baby boomers was in their 40s and it was the bottom end boomers who stopped having children.  Now in the US the top age boomers are retiring.

Those that are forward thinking about events will see the link of 500 years of uncontrolled population growth completely linked to the belief that the stock market historically goes up forever over the cost of living over the long term and I really think the exploitation of population growth is over and in a macro perspective the world markets are entering the declining side of the business cycle curve and it will be unlike any of the past as increasing population can no longer carry the markets to new highs like it has historically.

That's my belief and I'm sticking to it.

30 Comments – Post Your Own

#1) On December 28, 2008 at 3:37 PM, jmt587 (99.89) wrote:

I'm reading a book called Collapse by Jared Diamond, which isn't as hypey as its title might lead you to believe.  It's a very well researched and thoughtful look at past societies that have come to the brink of collapse for various reasons, and either gone on to collapse, or to be flexible and make necessary changes and adapt to the realities facing them.  I'm only into the fourth or fifth chapter, but it is very interesting, and you might find it relevant to what you've posted above.  Give it a look if you're interested (I first heard of the author when I read that Charlie Munger recommended another of his books, Guns, Germs, and Steel, or something like that, which was a fascinating read, and this one is turning out even better).

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#2) On December 28, 2008 at 5:56 PM, DarkToast (48.92) wrote:

  jmt587

"I'm reading a book called Collapse by Jared Diamond"

Great book. Much more about environmental degradation than financial armageddon.

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#3) On December 28, 2008 at 8:02 PM, Ewok82 (29.18) wrote:

I doubt that the ability to afford children alters birth rates, otherwise Africa, China and India would have very low birth rates.

Second, the planned retirement of the babyboomers has been put on hold for many in my generation due to the recent financial problems.  This may create employment problems for younger generations, since the boomers won't be moving out of the way.

Real estate to live in is a good idea, since the recent fall in home values and relatively low mortgage costs makes this a more realistic option.  Speculating in real estate is gambling that the greater fool theory is still alive.

 If you plan to work until you die, then investing is not as critical as maintaining stable employment.  I would like to continue to work because I enjoy my work, not because I need to eat.  To give me this option, I need to invest and save.  I believe that if the world remains a going concern, there will be continued investments in various markets, risks and rewards for those willing to play the game.

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#4) On December 28, 2008 at 8:17 PM, uclayoda87 (29.17) wrote:

I agree with Ewok82, the world is bigger than it was in the 1960's not just in people but in our interconnection.  Microclimates in population dynamics may be present in Canada or areas in the US, but the world appears quicker in responding to preceived needs and opportunities.  Watching the decreased immigration flow from Mexico to the US in the last year should have been a clue to the coming problems.

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#5) On December 29, 2008 at 12:04 AM, monksnake (38.08) wrote:

dwot, I agree with everything except the birth rate declining.  I think  you are assuming most births are planned out by adults that are responsible people.

Watch the beginning of the movie "Idiocracy" and you will see what I believe about the birth rate.  That movie is not just a movie, it's a prophecy. 

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#6) On December 29, 2008 at 12:38 AM, BigFatBEAR (29.17) wrote:

Ewok and monksnake,

In the developed world, birth rates drop dramatically -- and appear much more sensitive to economic shocks -- than in the developing world. In poor countries, there's often an incentive to have babies even if you "can't afford them" because they can work and contribute to household labor...  whereas in developed countries babies are seen as expensive and non-economically productive for the first ~18 years of life (a big disincentive to reproduce).

While I agree that perhaps the "lower class" in the USA is still having babies at young-ish age (say, average is early 20s), most all of my friends who are in their mid-20s (myself included) are years and years away from planning to have a baby. I'm guessing I'll be 30-35 before my first born, if I am so lucky.

I'm with dwot - the average age of a child-bearing couple will continue to steadily increase in the US, and the number of babies per couple will also likely decline. What effect this has on the market - I have no idea. I'd like to think that foreign investors may step up and fill in the investment gap created by the aging population. Personally, I see a recovery and more bubbles on the way within a few years, because human nature does not change.

-BFB

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#7) On December 29, 2008 at 10:14 AM, Entrepreneur58 (37.07) wrote:

"I still see a negative cycle happening and this is going to leave little cash for the markets.  The aging population mostly like is not going to commit new money to the markets."

The market doesn't need new money to make it go up.  That is not how the market works.  To buy a stock, someone else has to sell it to you.  The buyer and seller have to agree on the price or the transaction will not happen.  No net money goes into or out of the market when these transactions take place.   The S&P 500 could go up by 1000 points in one day and there will be the same amount of cash available to invest at the end of the day as there was the day before.  The owners will change, but not the amount.

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#8) On December 29, 2008 at 10:52 AM, BigFatBEAR (29.17) wrote:

Entrepreneur,

What if long-term there are more net sellers than buyers?

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#9) On December 29, 2008 at 11:42 AM, Tak3natheFlood (34.10) wrote:

You should check out my blog that relates to this and one of the lead theories on the subject by Harry Dent. http://caps.fool.com/Blogs/ViewPost.aspx?bpid=116479&t=01008255228265744535

A similar generational situation happened in Japan in the 90s. One of the only real macro upsides to this phenomenon over time is that technology will improve helping to boost GDP. It is clear though that consumption will significantly decrease as the boomers leave the workforce though. Immigration could play a very important role in this debate as well.  

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#10) On December 29, 2008 at 11:46 AM, ByrneShill (77.57) wrote:

@BFB: By definition, a transaction happens between a seller and a buyer, so there is by definition the same amount of shares sold and bought. The only variable is the price at which sellers are willing to sell and buyers are willing to buy.

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#11) On December 29, 2008 at 12:17 PM, russiangambit (29.21) wrote:

I love Jared Dimond works. Guns, germs and steel is my favoirte.

I disagree, though, on population decline in the US. I have a lot of friends in Canada, and it seems it is much easier to raise kids in Canada than in the US due to various social programs. Still, middle class people in the US have 3-4 kids with full knowledge that they are unlikely to be able to provide for college for them. The kids will have to take on debt. Mom stays at home with the kids so that they don't have to pay for daycare, school is free. How 5-6 people live on 80K in the US  and live well is beyond me (actually, I am starting to get an idea, - they live on credit). This is very wide spread. If there is ever  going to be decline in population, both Canada and the US can simply get more immigrants. The US doesn't have anything to worry about in that respect for the next 30 years, at least. Providing jobs and education to all this people, though, is a different matter entirely.

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#12) On December 29, 2008 at 12:18 PM, TeaBeri (75.29) wrote:

This reminds me a lot about Malcolm Gladwell's article on population: http://malcolmgladwell.com/2006/2006_08_28_a_risk.html

Gladwell basically claims that one of the best indicators of economic growth for a country is the ratio of workers to those not working, and ties this to the rate of population growth. 

I have to agree that population issues make me rather skeptical of the USA's economic future.

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#13) On December 29, 2008 at 12:29 PM, dexion10 (27.56) wrote:

thanks for sharing your thoughts again dwot. A rec for you.

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#14) On December 29, 2008 at 12:49 PM, BGriffinFlorida (27.00) wrote:

DWOT,

I am a big fan of your blogs and your insight.

I disagree that population growth is linked to ideas about stock market growth. The people most cognizant of the market end up having far fewer offsping than those for which the market is a distant concept or relatively unknown.  

Substancial stock market holdings is certainly a far bettter predictor of low birth rate; considering individuals, socio-economic groups, or countries. Increased (real or perceived) wealth and the accompanying access to additional education and exposure to ideas like women's rights, leads awa7y from high birthrates, if only from the right to use and ability to obtain contraception.

 ...

Anyone who hasn't had a chance to read Guns, Germs and Steel, should take the time now....

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#15) On December 29, 2008 at 1:16 PM, socialconscious wrote:

I agree the Alt-a's and other similar mortgages coupled with commercial real estate will unfortunatley be round 2 of this disaster in the least!

Respectfully and with mixed emotions Dwot the population of the US will not decline because poor people continue to have babies because of poor health education initiatives on the prevention side. I am in favor of most immigration with many reforms- Although they do the jobs most would not do in NYC we have too many people already! It also adds to the population. Find excerpt from CIA site and link below. 

Birth rate:14.18 births/1,000 population (2008 est.)            Death rate:8.27 deaths/1,000 population (2008 est.)              Net migration rate 2.92 migrant(s)/1,000 population (2008 est.)

https://www.cia.gov/library/publications/the-world-factbook/print/us.html 

The point being we are growing America and become more diverse. Employers do not want pension obligation and more likely will offer matching 401k's in leiu of pensions. Thusly we will see the average joe move out of the market with his 401k being conservative, presently. In 10 years however the market will be most peoples' pension. All IMHO Social C

 

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#16) On December 29, 2008 at 2:00 PM, blade5adj (< 20) wrote:

While population growth is part of the equation, you forget to include technological growth.  If it weren't for that, we would have all starved a long time ago.

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#17) On December 29, 2008 at 3:31 PM, SnoopyDancing (< 20) wrote:

dwot, thank you for the amazing blogs. This webite didn't allow me to email you to ask for a new one, but my question kinda fits with this existing thread:

Did the change in the securities industry that came with mutual funds in the 80s directly cause the changes in corporate governance and executive pay? Rewards are often no longer tied to longer term performance.

I know from formerly being in that industry that portfolio managers routinely vote with management and that at the big proxy clearinghouse for all those votes, one person may be able to swing the whole vote by being able to lobby bigger investment and mutual fund company managers--not the people who own the underlying funds. (Unless the rules have changed in the past few years.) Since investors gained the ability to diversify by using mutual funds, it seems like they have lost the right to vote for quality company management that sees the long-term implications of each decision.  As the population grows, this mismatch of control over corporations will accelerate as larger proportions of the population's savings are invested in mutual funds over which they have little control.

Is the solution is to contact each legislator and ask that the rules change so that we can vote our shares, regardless of where they reside or how small a position we hold? Call each fund company and ask for such a right if it does not already exist? Move toward self-directed accounts? Or, am I completely off base??  Ideas would be welcome...and thanks again for the diverse topics!

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#18) On December 29, 2008 at 3:36 PM, Entrepreneur58 (37.07) wrote:

BFB,

"What if long-term there are more net sellers than buyers? "

No impact.  Suppose, for example, there are more people who want to sell a money market mutual fund on a given day than there are buyers.  Does the value of the fund fall?  Obviously not, despite the net selling.

Stock values are determined by only 2 things.  The market's estimate of what the stock is worth, and the market's estimate of what other competitive investments are worth.  Demographics can only impact stock values by lowering what people think the stock is worth or by lowering what people think other things like bonds are worth.

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#19) On December 29, 2008 at 4:12 PM, bammerone (30.31) wrote:

I have to agree with Enrepreneur58 and a couple others. It doesn't matter how many people or free cash is available in the economy, a stock's value should be a fairly valued discounted net cash flow of a companies future cash flow.

Although a lot of us are DOWN on the "market" now, it is always cyclical. If you believe that economy, population (worldwide), productivitiy and demand will grow over the long term, that is a great reason to be in the (Equities / stock)market.

 If you truly have no confidence that the economy will ever recover, get out and stash your cash under the matress, or buy gold. I'll take the shares at this overly discounted value.

Seriously, there is SO much cash sloshing around (regardless of the population growth in a few economies like Canada, EU, Japan, and US) in government issues paying next to nothing and less if adjusted for inflation and transaction costs.

Once people tire of being so pessimistic, they will be coming off the sidelines and looking for places to put that cash. More demand for a finite (and decreased due to stock buybacks) supply of equities is going to drive up overall demand and prices of equities.

Human nature is optimistic, not pessimistic over the long run. DWOT, me and a lot of others here are short term pessimistic, but if you don't believe in growth, this is the wrong marketplace to be in OVER THE LONG-RUN.

Stepping down off the "its a bright new year" soap-box.

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#20) On December 29, 2008 at 4:14 PM, bammerone (30.31) wrote:

I have to agree with Enrepreneur58 and a couple others. It doesn't matter how many people or free cash is available in the economy, a stock's value should be a fairly valued discounted net cash flow of a companies future cash flow.

Although a lot of us are DOWN on the "market" now, it is always cyclical. If you believe that economy, population (worldwide), productivitiy and demand will grow over the long term, that is a great reason to be in the (Equities / stock)market.

 If you truly have no confidence that the economy will ever recover, get out and stash your cash under the matress, or buy gold. I'll take the shares at this overly discounted value.

Seriously, there is SO much cash sloshing around (regardless of the population growth in a few economies like Canada, EU, Japan, and US) in government issues paying next to nothing and less if adjusted for inflation and transaction costs.

Once people tire of being so pessimistic, they will be coming off the sidelines and looking for places to put that cash. More demand for a finite (and decreased due to stock buybacks) supply of equities is going to drive up overall demand and prices of equities.

Human nature is optimistic, not pessimistic over the long run. DWOT, me and a lot of others here are short term pessimistic, but if you don't believe in growth, this is the wrong marketplace to be in OVER THE LONG-RUN.

Stepping down off the "its a bright new year" soap-box.

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#21) On December 30, 2008 at 12:19 PM, DemonDoug (82.19) wrote:

Entrepreneur:

No impact.  Suppose, for example, there are more people who want to sell a money market mutual fund on a given day than there are buyers.  Does the value of the fund fall?  Obviously not, despite the net selling.

Ever seen a supply and demand curve?  I'm guessing not, but then again that would require a basic understanding of economics.

Your statement is beyond any hope of teaching you how things work.  Yes, the value of the fund would fall, because of the net selling.  It might not fall today, but eventually it would "break the buck," as one fund recently did.  Why wouldn't it fall in the short term?  Because banks will prop up their funds, and other banks funds, and, when all else fails, The Fed steps in and buys up assets in that fund at 100% value to maintain the value of the fund.  That's a large part of what all these bailouts are for.  Your statement about how it's "obvious" means that you are showing yourself to be "oblivious" to basic fundamentals.

Russian:

How 5-6 people live on 80K in the US  and live well is beyond me (actually, I am starting to get an idea, - they live on credit).

Exactly.  And with the credit bubble now ending, this will not be possible going forward.

Bammer:

It doesn't matter how many people or free cash is available in the economy, a stock's value should be a fairly valued discounted net cash flow of a companies future cash flow.

"Should be" are the operative words.  The first question would be at what multiple would you feel is fair?  And what if a company has NO possibility of a future cash flow?  If your statement were reality, then there would be hundreds if not thousands of stocks that are currently traded that would be at zero.  And your statement about free cash available in the market is also completely moronic, if a market has 1B to invest versus 1T to invest in the same amount of stocks, the supply of dollars will be more compared to the supply of stocks, it is likely that with 1000x the amount of cash available to invest that stocks would be higher.  (I say likely, because there could be a scenario where people wouldn't invest a dime at 1T where they were 100% invested at 1B, and this would be another factor in stock price, which would be emotion/sentiment - so the "should be" again rings hollow.)

Ewok and Monk:

If economic conditions had no impact on birth rates, then why did they drop precipitously in the 1930s and the 1970s during times of severe economic downturns?  Oh, that's right, they dropped because you are completely 100% absolutely wrong in your opinions, and they in fact did indeed drop during those times because of economic malaise.  And, shocker of all shockers, after the economic woes faded, people had lots of kids, kind of like a "pent up demand" for kids that had been pushed to the future.

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#22) On December 30, 2008 at 4:21 PM, BigFatBEAR (29.17) wrote:

Demon,

Haha, the baby boomer generation is a direct result of "pent up demand" from returning soldiers and lonley Rosie the Riviters, is it not? :)

While I agree with your points and your take on the facts, I must say that you were perhaps a bit needlessly harsh on our fellow CAPS members in your reply. I have had the benefit of studying econ for the last 4.5 years in college, but I recognize that most people have been working / studying / doing other things. Anyway, let's enrich/educate/amuse, not judge/disparage!  

-BFB

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#23) On December 30, 2008 at 8:01 PM, DemonDoug (82.19) wrote:

BFB, I'm in a really salty mood these days.  I have no patience for people who make completely erroneous statements.  Anyone who thinks prices have nothing to do with money supply has zero understanding of money, and therefore has no validity in terms of arguing their economic point.  You can argue that that money isn't going anywhere - if you have 1000x cash in the market, but the velocity is zero, then yes, that would be a case where more money = less prices, but that is not explained or even implied.  Anyone who thinks that more sellers means the price of something stays the same, also has no place in an economic argument.  And like I said, I'm a bit salty these days, and I'm fed up and tired with stupidity.  It is people like this that are running our government into the ground.  I wonder how many people in Congress think that money supply has nothing to do with prices?  Then again how many people in Congress even have the first clue at what money supply is?  I'm sick and tired of it, it's voodoo economic theory like those statements that have gotten us into this mess, and I will be harsh on anyone who espouses them.  Their opinions are no better than Bernanke, Paulson, Bush, Christopher Dodd, Nancy Pelosi, et al.  It is not a stretch to say that I absolutely loathe the lot of them.

And yes, regarding the baby boom, but it wasn't just pent up demand from the war, if you look at the birth chart on Deej's recent post, you'll notice that throughout the 1930s the birth rate was lower.  So it was pent up demand not just from the war, but from the Depression also.

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#24) On December 31, 2008 at 4:19 AM, dwot (72.18) wrote:

On birth rate, it was high because economic condtions were good.  Certainly a family with 5 kids had to do more to make ends meet then a smaller family, but there were lots that did so with single bread winners.  Heck, I remember a family of 5 not only making ends meet with a single wage earner, they also managed to go on a month long vacation to England.  Sure it took them 2 years to save for it, but there were lots of lifestyle choices, even with large families.

Canada's birth rate fell significantly below replacement levels yet the population increased due to immigration.

Immigration brings further downward pressure on wages.

SnoopyDancing, I haven't looked into what you ask about. 

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#25) On December 31, 2008 at 6:05 PM, MikeMark (29.58) wrote:

Well put.

Mish has said it in a different way. He has brought up the idea of Peak Credit. At first glance, they may seem unrelated, but on deeper thought the total amount of credit that should exist has a relationship to the number of people to whom credit is extended.

Either way, it spells a major difference for investing of all kinds and especially in markets for public company stocks.

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#26) On January 04, 2009 at 1:50 PM, SnoopyDancing (< 20) wrote:

dwot,

I found a bit of news about that corporate governance issue above (cause of exorbitant executive pay and the result is increasing harm to investors as the population grows simultaneously with the 'bubble' building in executive pay.....) http://www.calculatedriskblog.com/ has a story in Economists View with a comment by robertdfeinman that beautifully explains some of the problems. Still doesn't link mutual fund investors' loss of voting rights to the whole mess, but it's pretty close and is also right on the mark about a few other topics: http://economistsview.typepad.com/economistsview/2009/01/should-executiv.html

"One solution, for those that like to leave things to the market, is to change the regulations concerning the selection and responsibilities of boards of directors. Right now boards are generally picked by the CEO they are supposed to be overseeing. Furthermore the days of interlocking directorates have returned, anti-trust precedents notwithstanding."

To the other Fools on this thread, please pardon the interruption.

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#27) On January 05, 2009 at 10:50 AM, LawfordCap (99.85) wrote:

In the case of falling birth rates do the economic problems arise from a fall in the number of consumers or a fall in the number of workers or something else? Can immigration or the labor saving ability of new technology solve the problem?

 

 

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#28) On January 09, 2009 at 2:44 AM, JonBarleycorn (70.03) wrote:

Entrepreneur:

"What if long-term there are more net sellers than buyers?"

"No impact.  Suppose, for example, there are more people who want to sell a money market mutual fund on a given day than there are buyers.  Does the value of the fund fall? Obviously not, despite the net selling."

Your position may hold on any given day, but, any substantial outflow from a fund will result in a reduction in net assets as the fund sells stock to meet redemptions. If a lot of funds are seeing net outflows, the market will have to absorb the excess, thus driving prices down.

JB

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#29) On January 09, 2009 at 2:47 AM, JonBarleycorn (70.03) wrote:

dwot

 

“…the belief that the stock market historically goes up forever over the cost of living … (is linked to the long term) … exploitation of population growth … (and)  … increasing population can no longer carry the markets to new highs like it has historically.”

 

I think you may be painting with a pretty broad brush here. Per capita creation of wealth depends on many things besides population growth. My short list would include at minimum infrastructure, education, and the belief that individual effort will be rewarded.

 

I love your posts.

 

JB

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#30) On March 23, 2009 at 4:56 PM, huddaman (98.23) wrote:

dwot,

 

great post. however you are missing one key important point. and frankly, i am surprised because you are in canada.

 immigration - thats what can bridge the demographic hole. hasn't it done for canada.

 despite the fact that developing or 3rd world is 3rd world, the population growth in those countries is enormous. there are millions of young and qualified individuals who wish to become legal residents of canada and usa today. 

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