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This is the Bloomberg Surveillance Podcast. I'm Tom Keene, along with Jonathan Farrow and Lisa Abramowitz. Join us each day for insight from the best and economics, geopolitics, finance and investment. Subscribe to Bloomberg Surveillance on demand on Apple, Spotify and anywhere you get your podcasts and always on Bloomberg dot Com, the Bloomberg Terminal and the Bloomberg Business App.
Lurri Cavsine joined us.
Now.
How do us secuity strategy at RBC Capital Markets?
Laurie?
What if I have you with us on the program to kick off this trade and week. There's a line in your recent note we aren't convinced this is the end of the current period of equity market weakness.
Lorie. Why is that?
Well, I think that basically what we did with the government shutdown is we took one of a number of different issues that have been weighing on market short term off the table, and we only took it off the table for you know, maybe a month and a half or so. We'll see how long it lasts. But I think, you know, we always look at these kind of episodes and markets and say where was sentiment? And I don't think sentiment got bad enough last week to serve as
any kind of big springboard. So we were looking at some of the commentary that was coming out over the weekend saying you know, it's time to buy, We're in the clear, and said, well, this thing has just been kicked down the road. There's still a lot of other stuff we're going through, and sediment just never got that bad. We just really we saw concern comeback last week. We
didn't see fear. And if you look at the AAII survey, net bulls got down to about minus thirteen percent on the weekly data point, but the four week data point, the four week average was about flat. You contrast that with back around the SBB period, we were at minus twenty percent or worse for four weeks in a row. So we're just not anywhere near the same kind of point where we can say, Okay, it's so bad, we got to go higher from here.
Laurie, Once again, small caps disappoint. I have a chart a keep of a NASTAQ one hundred, granted seven or eight super stocks. Maybe they're Dow stocks, but we don't want to admit it. And the Russell two thousand, and it's a chart of failure. What should these companies do if they can't get value from the market. Should they go private? Should they merge? Should the zombies go away?
Well, I think there's always going to be, you know, sort of that zombie element, and the Russell two thousand, I don't think they're going to you know, disappear anytime soon. I do think that we have to keep an eye out to see whether or not there's more m and a activity that comes up, particularly in an area, say like the industrial space, where we often hear from small cap portfolio managers that quality of management and quality of
businesses is quite high. So I think that's one thing that we can look at I think, frankly, small caps just have a problem at this point in time after that last FED meeting, because while I do think twenty twenty four cuts are still on the horizon, that's still the call of our rate strategy team. I think there's starting to be some doubts about how many cuts, about when, and that was really the catalyst. I think that small caps needed to really get going, and it seems like
it's been damaged. I think we're also just in an air pocket of economic uncertainty right now, and small caps I think also needed to see incremental enthusiasm about the twenty twenty four economy emerged, and instead we've gotten the return of uncertainty in here.
Laurie, a couple of months ago, you came on and you expressed caution but said you were not bearish, that you did see equities muddling through. Am I hearing that you are more bearished now after seeing where bond markets are, how high yields are, the fact that yield cuts, that cuts are not being priced into the market maybe shouldn't be pricedge to the market for next year.
Now, I think you know, our head is still really where it was at the beginning of August that we've got some short term issues that we've got to work through. We've had a tremendous run in the market this year. I would say, though, you know, there's definitely a camp of strategists out there right who are you know, very much in the doom and gloom camp for next year. And I wouldn't put me in that camp by any stretch.
I do, you know, sort of subscribe to what you guys were living to us the neil do to you earlier, kind of the resiliency of the consumer. I just think we're not going to get a lot of information about that in the here and now. Companies seem to have planned up and they're frankly not saying anything that's all that useful, whether you're looking at conferences or the last
round of earnings reports. And I think that's a problem when you've had the year like we've had, Doubts are starting to create about the economy again, and we're not getting a lot of stars to navigate by at this point in time.
I think the interesting point about this moment, Laurie is that unlight through the most rest of this year, consumer discretion rey is starting to crack. The equity market is starting to show some real weakness that the story of the year is being consumer discretionary has really performed to
perform quite strongly. What do you take away from the weakness we're seeing in the equity market for discretionary recently, Laurie, whether you see that as a buying opportunity if we discounted enough gun into Q four.
I think it.
Depends on what part of consumer discretionary you're talking about. You know, we talked a little bit about small cap earlier. Small cap consumer discretionary stocks which do tend to you know, sort of migrain order to lower end. They're more domestically focused. They priced in a recession last year. The big cap s and P five hundred consumer discretionary stocks did not.
And while valuations don't look terrible right now, they haven't been looking cheap at any point in our model over the last year year and a half, So we think the risk reward there is not fantastic. And then, you know,
we talked a little bit about higher bond yields. That's really, I think probably one of the biggest problems we're dealing with, and the problem is that it Traditionally, if you look at a post GFC world, the sectors that do most poorly when bond yields arising aren't things like consumer discretionary, communication services, kind of those growthier parts of the market. So you've got a sector that it never get cheap enough.
Economic angst is rising, and you've got this bond yield negative catalyst hitting all of you know, kind of hitting them precisely the wrong time.
Laurie James Diamond is going to get all the press today. He's going to do chit chat with Emily Chang and London. Great. It's all going to be, you know, the usual big bank stuff. The BKX chart is a train wreck. Are the banks some mother of all value traps here?
You know, it's interesting financial should be outperforming in a higher bond yield environment. They're not doing that right now, not to the extent that they should be anyway, And we're seeing, you know, energy has really kind of sucked, you know, some of the benefit that the other parts of the value trade would see. I think it depends on your time horizon, you know. I do like financials. In the S and P we're overweight. We have said
we like energy better. You are seeing a nice revisions recovery if you look at the bank space in particular, but we haven't quite crossed over into positive revision territory.
Things have just been.
Getting less negative. I do often find that when you see Earning's revisions turning, but they're not quite in positive territory yet, you still have a lot of doubters in the trade, and that's often a good opportunity to come in. I think there's money to be made here long term, but I do think you have to have a stronger stomach, and there, frankly may be other parts of the value trade that just don't have as much.
Hair on them.
Hey, Luri, thank you, good luck for the rest of this Waight Lo Cavasity, the of RBC Capital Markets.
Joining us on Jordan Rochester g Ten, FX strategist at Nomura. What I see Jordan this morning that is absolutely distinct is finally Swiss Frank gives way to stronger Swiss Frank. It's ever so slight, but that's a distinctive tea leave link euro trajectory with the symbolism of a stronger Swiss Frank to come.
Indeed, some I think last week's weakness in Swiss Frank was a lot to do in month fender as well. A lot of moves last week cool her to do that month end flow because of the equity sell off that we had. But when it comes to the sort of view on the Swiss and Stocky and all those sort of local Euro Area currencies, Swiss is one of those currencies where in a global slowdown it tends to strengthen.
It's still got a banking repatriation flow as well. So if you think the Euro Area is going into a recession, which we do, that is usually to Swiss Frank's benefit, You've still got a central bank that is also intervening in the FX market as well, eleven billion euros per per month of in FX intervention to strengthen their currency.
So even though we think the SMB is.
Done with rate hikes, because of the impending global slowdown and potential for recession risks pretty much in Europe and the US, it's very hard to be selling the Swiss franc.
Okay, sell Swiss Frank, I'll go with that. But then they got the euro. What is the appropriate pair to play weaker euro?
Well, we're looking at it this morning. I mean, the view for US is euro dollar and EUROCAD. I think euro dollar towards one o two doors parity is very possible as long as oil prices don't find.
A way to collapse.
In the previous guest you had on Kit Jukes, he was talking about US yields rising higher.
Well, US rates suggest that euro dollar should.
Be at one oh one to one oh three already, and if oil gets to one hundred dollars a barrel to one hundred and ten dollars a barrel, it's very easy for the Euro Area to see their currency weaker because they are an energy importer. The problem for all of US this year and euro as a chart shows you, it's been a zigzag up down, up, down, up down, and this looks to be finally an exit of that rangebound price action.
This looks to me more like a trend now. It's a bit of deja vu to last year.
Last year euro broke through parity thanks to vadamir Putin natural gas supplies being squeezed. This year, it's more thanks to what's going on in the Middle East with the lack of oil supply, and that's going to help.
The euro get towards those sort of figures.
The main risk is if the US data starts to come in soft and US yields stop climbing. But I think we've had a bit of good luck in that respect. For this week, at least, US government shutdown has been avoided, which means that we're going to get non farm payrolls, we're going to get the jolts data, and crucially, we're not going to get all those government workers laid off. It was going to be really difficult for the market to buy the dollar with initial claims jobbers claims spiking
higher on Thursday. Well, that shouldn't happen now thanks to that government shutdown being avoided.
Jordan, we've got a natural bias here to ask questions about the US dollar. US rates better reserve the US economy. You touched on the international story. Can you have us understand how important that is, not just what's happening with the Middle Eastern crude, but also what's happened or hasn't happened over in China.
Absolutely well, the situation in China has been that for the first half this year, most economists were quite disappointed with the growth data. We've had a more bear sho outlook on China than most when.
It comes to our GDP forecast.
But what's happened over the summer is that China has done little bits of policy here and there, and it's kind of built up to a much more mixed view in the market on China, which is is China slowing down or is it bouncing back? And the property measures such as cutting mortgage rates for first time buyers is a significant one because most of the Chinese property market is first time buyers. Well, that's going to lead to some of the Chinese data looking healthier over the short term.
But for us, the long term is that China's trade balanced China's current account those flows are looking pretty weak, especially with the tourism outflows which are going to continue to pick up. So from a flow perspective, we're not seeing the inflows into China bonds like we saw from
foreign investors either. All together, weaker outlook for China a bit messy in the short term for data surprises because of all of these sort of measures that were announced, But the big picture is a slowdown and a weaker Remember for us, does.
That make it more difficult to make a call for next year, that goes beyond one ten.
Well, the difficulty with the euro dollar view is that when the FED cuts rates, when you get liquidity, it
leads to dollar weakness. Now we have the view that the FED could even cut rates as soon as March because of a recession call that the US economics team at number have that starts in Q four, by the way, but if they're wrong, if we get an actual off landing for the next few months, because soft landings can last a few months before it turns into a hard landing, if we have all the data in the US pretty healthy in Q four, it pushes those FED cuts out, so that one ten call is based on that a
Q one story next year, really where the market quickly shifts to saying yep, FED cuts are coming in the next few meetings. At the moment, we're in the higher for longer phase. That's why the dollar's not selling off here Jordan.
One reason why I love your research is because you always put the sort of conviction level that you have on each trade. Can you talk about how difficult it is to have conviction at a moment where you're dealing with so many variables. We're tracking the weather. Again, we're tracking you know, different congestion pricing and congestion emissions over in China. To understand the recovery, I mean, how do you have conviction in a market like this.
You have to look at the local stories.
I think, so you have the broad dollar view, which we've got a pretty high conviction on, you know, three to four out of five, I would say for the long dollar vie, then the local story. And what helps me,
Lisa is positioning. So just a few weeks ago, maybe let's go about four weeks ago, you would have had guests on here saying the Bank of England could raise rates maybe to seven percent, And because of one week services CPI and one Bank of England meeting and a week labor report as well, it's quickly shifted to the Bank of England's done. And because of that shifting narrative, you've got a lot of stale positioning out there. So I think in Sterling there's still long Sterling position amongst
some investors that needs to be unwound. We've gone through a lot of that already, but I think there's more to go. So that helps me have a four out of five on short cable for example. Or then you have to look at the other factors in Asia and elsewhere and think where is there less positioning? I think that's where you have lower conviction. So if there's less positioning, lesser positioning squeeze, there's not much of a.
Trade to do. But short cable short ur.
I think there's still some stale lungs out there that need to be unwound.
Joan.
This is a pretty toxic recipe for the Bank of England and for the European Central Bank.
Right with inflation, well, inflation's coming down. The main thing is does it not fall to two percent? And that's what the center banks are really worried about.
I personally look at all these charts that help us forecast inflation, and it looks like it's going even below two percent on some of them. So PPI, which is the manufacturing inflation in the UK.
And Europe, it's pretty awful.
I think in Norway it's minus thirty five percent year on year, So you get these extremes in manufacturing that will push the headline down eventually. So I think, look, we could be looking at CPI falling much closer to two percent than center banks think, and then Lisa, we'll be looking at global recession risks in the early part of next year, and a lot of these center banks that worried about inflation today will be very worried about
growth and employment tomorrow. We've already got signs in the UK labor data, the Swedish labor data, there's layoffs happening, and when we get to the year end, I think a lot of center banks we're changing their focus on inflation was high today and focusing more on the fact that it was going to be quite low tomorrow. The main risk to that, of course, is oil and the supply side. So in the US, these UAW strikes and boosting car prices and as we know, the oil markets
moving headline inflation higher as well. If we have another rise in oil to one ten per barrel, then inflations will be the center banks will be in a stagflationary mode and the markets won't like it. FX will be selling those sort of currencies like the pound, like Swedish krona, because that's what the sort of mix we had in twenty twenty two. So we could be going back to a twenty twenty two style FX market reaction, which was massive dollar strength.
But twenty seconds for you, Jordan, you can have it. When was the last time Villa scored six goals? I can't remember.
That's a good stat But it's bloody good, isn't em.
It's bloody good to to hear that Jordan's words.
I practice for a week in proper.
Jordan Rochester any more? Jordnah, thank you?
Proper Never with a crok in his mouth is Michael Darta, chief economist, macro strategist, dog keeper for Roth MKM. Just back from Japan, which is always a good and wonderful thing, Michael data in your political economics, What did you learn in Tokyo and Kyoto?
Well, Tom, we were there on pleasure, not business. You know, incredibly beautiful cities, majestic if you're talking about Kyoto, and for people that have never experienced it, I mean in Tokyo, imagine a city three times the size of New York City with essentially no litter, no crime, and almost no one even disobeying traffic lights. I mean, it's quite a trip. You have to experience it firsthand really to believe it.
Frankly, they are imputing inflation into their system. Some would say they're inventing an inflation. Do you see any historical analog that any country can manage inflation higher successfully?
Well, sure, Tom, if you believe in the power of the central bank. And that's essentially what's happening the discussion earlier, Lisa really hit it on the head. The problem for the boj is that they can't hit two targets with
one arrow. So if you're going to effectively peg an interest rate, you can't at the same time peg the currency or even you know, control the price level, you know, perfectly, So you know, what's happening is they've got to adjust the you know, the rate pegs based on macroeconomic conditions. It's different in the sense that typically central banks, you know, will target the you know, the short policy rate. In Japan because of the zero lower bound situation, they're targeting
a long term interest rate. But the same basic concept applies, Mike.
If we do get some sort of abandonment of yieldcraft control or the Bank of Japan losing the plot, losing control, losing the narrative when it comes to controlling bond yields and controlling the depreciation of the end, how much does that accelerate the move up in US yields that we've seen as we see just yields globally rise and maybe some of those buyers from over in Japan step away from the US market.
Yeah, it's an interesting situation. I mean, if you look at what's happened in the US bond market, we've had a huge real rate shock, so this isn't really an inflation expectations story. So you do have movement in global yields on the back of central banks trying to persist in a tighter policy regime, but it's really driven by real interest rates. Inflation expectations in the US have really barely budged, so crude oil prices are spiking higher, coppers
rolling over and FED rate hiking expectations. Or if you look at let's say the thirty six month FED fund's futures yield, it's moved up one hundred and fifty basis points since the spring of this year, So that really accounts for the entirety more than the entirety of the
rise in the ten year yield. So it's a higher for longer trade based on the back of perceived economic resilience in the States and the fact that you know, the Fed's reaction function is to make sure that growth slows below trend, So you know, if it looks like that's not happening, then they're going to persist for a longer period of time.
Mike, there are a lot of questions over the weekend about why something hasn't broken, given how quickly rates have rised, given how quickly benchmarking yields have rised. Do you see any evidence either any economy or in the markets that you track that shows that something is breaking.
Well, you know, I think the reason something hasn't broken yet is the strength of the cyclical upswing that we've had coming out of the COVID shock has been much more robust in what we've seen historically, especially relative to the last cycle. So with that, you're going to have a higher neutral interest rate, and with a higher neutral interest rate, it'll simply take longer before things start breaking, so you can have more central bank tightening before things
fall apart. There also may have been some temporary factors that have held things up this year. There's been a very strange explosion in the fiscal deficit at a time of full employment. You know, that is probably also feeding into the higher for longer strategy on the part of the FED. So those you know, those factors matter, But the critical element here is, you know, nominal growth is slowing, Nominal GDP growth is slowing on the back of tighter
FED policy. Gross domestic income in nominal terms, even if you adjust for FED losses, has essentially decelerated to trend or below trend growth. Here you have the FED, you know, with policy rates up at five and a quarter to five and a half, and they may move up further. So I think in terms of something breaking that could still be in front of us. There's a perception that
we've successfully soft landed. But those kinds of discussions are pretty common prior to business cycle peaks and recessions, so we're not quite out of the work just yet.
Michael, first day of Q four Primmer, what is the signal of disinversion? If two ten spread is one hundred prems or basis points, and we reverse and we start to disinvert towards normal, what is the signal of that?
Well, you don't get meaningful and sustained disinversions without the front end of the year yield curve coming down, you know, which would happen in a slower growth recession scenario with the FED cutting interest rates. You know, it certainly would be possible, at least theoretically, for the long end to just keep rising in the curve to disinvert. But that's
actually pretty unusual historically. The last time we saw anything even close to that was actually two thousand and seven, and within a few months we were actually in one of the longest deepest recessions in history. So, you know, this inverted yield curve structure backdrop that we have, I think is a real warning sign in terms of the sustainability of the business cycle. And you know, I think a bit of cold water in terms of getting too excited about any kind of sustained growth acceleration.
Mike, some real confusion for me, at least at the moment. I hear lots of confidence to why yields can go lower, but I feel that I hear little conviction as to why they're higher.
Mike.
I don't know how you can make the coal for the former without an understanding of the latter. Mike, Why I yields up so much at the long end? How much of this is just about budget deficits in Washington.
Yeah, I think a combination of for US is John. Obviously, the economy has been more resilient than anticipated this year, and you do have this strange fiscal policy and environment where the fiscal deficits exploded to levels really never seen outside of wartime when you're at full employment. And so the Fed's higher for longer strategy has been self actualized
by the bond market. You know, we can see them move up in real yields is going basically step for step with that thirty six month Fed fund futures implied yield. So that's the higher for longer trade, but that can also be unwound. You know, this has happened over the course of this year, over the last six months really, and with softer data going forward that you know that trade can be unwound. So I think we know why
it's happening. The question is you know what is the forecast going forward and will that forecast be accurate?
Mike, thanks for the inside buddy, As always my town of rough mcm on this bum market.
Let us dive in right now to what you and I witnessed this weekend. He witnessed it as well. The congressman from Arkansas, french Hill, he's been such a good friend of the show and trying to give us perspective on the history we're witnessing. French Shill, I really take issue with people that say this has never happened before. It's an outrage, beloney. My reading a history back to Alien Sedition Act is this is frequent, like Joe Cannon
nineteen ten. Is an absolute parallel here from those analogs of the past Alien s Edition Joe Cannon nineteen ten. What is the outcome for the Speaker of the House? You support?
Well, Tom, It's great to be with you, always good to be on the program. Look, I think Kevin McCarthy should Congressman Matt Gates bring a motion to vacate the chair to the House floor, There'll be a motion made to table that motion, and I think Kevin McCarthy survives. Look, Kevin McCarthy has over two hundred solid supporters in the Republican Party. You witness that in in January when it took fifteen rounds for him to be elected Speaker of
the House. And on your historic point, that hadn't happened that many times since nineteen twenty three, exactly one hundred years before, and I think it was nine rounds then. So these items have historic precedent. As you point out, Kevin McCarthy has the support of his conference. He's doing a good job as Speaker of the House, bringing to
the House floor important measures. He negotiated single handedly virtually a good debt sealing deal that lowers spending twenty twenty four over twenty twenty three and has some other important economic reforms. And so that's why I think his colleagues will sustain him as Speaker of the House.
You're entrenched in Arkansas. Fine, there are Republicans up north who are not entrenched, and they're outrage this weekend seem to be tangible. Are those Republicans in the north at risk because of the foolishness of the weekend.
It's such an important point. We have our majority tom our very narrow majority where we can only lose four or five votes on the House floor because we have one districts in which President Biden was so in New York and in California particularly, we have House Republicans that won successfully with outstanding campaigns in twenty twenty two, but they might be in a Biden district plus three or a Biden district plus thirteen, and so they are really
hurt in their districts if it looks like we're not governing and not honoring our commitments on spending and regulatory policy. In other words, they're conservatives and they're advocating at home for solid conservative Republican values, but they want to deliver it in a way that makes sense, and this kind of back and forth does, I think put them at risk.
Congressman, does help them if you combine the Ukraine aid effort with the aid effort for the Southern Border.
Jonathan, I think you'll find that we will move a Ukraine bill in the coming days, and that we're building a consensus around what that should look like, including oversight of the administration's strategy in Ukraine to win and win promptly. But look overwhelmingly, you've seen it in vote after a vote, there's a majority of members of Congress that support Ukraine funding. They want to make sure that other countries are doing
their part. They want to make sure that that money is transparent, and they want to make sure that the Biden administration is encouraging a strategy in Ukraine that can win and win promptly, there's definitely fatigue after the stalemate of this summer along the front lines of Ukraine.
Why is it importance combine that with a border security issue, which essentially is what Speak mcconfe communicated over the weekend.
Well, this is an important political point domestically, Jonathan. People are stunned by the incompetence of the Biden administration to secure the border. Over six million people across the border, over one hundred and fifty one people on the tear watch list across the border, hundreds of pounds of fentomyl that can kill the Americans many times over, and two hundred thousand people a month they're coming across the border, setting a record up twenty five percent from last year.
So I believe, and I hear this from my constituents. The Governor of New York has even called out the National Guard on this issue. So every state's a border state. We think the most pressing domestic problem, besides getting spending under control from the pandemic, is the border and border security. And that's why I think Speaker McCarthy set that out. Let's find a compromise and do something about border security. Honor a commitment. We've passed that bill across the House
floor only with Republican votes. We call it HR two, and we'd like to see if we can get Democrats and support in the Senate for border security. There is a strong majority to support Ukraine under the terms that I just outlined. So let's do both. Let's have two wins by working together.
Whether it's the border, whether it's Ukraine, whether it's the budget, whether it's getting Kevin McCarthy to remain a speaker Congressman, are you finding sort of a greater ally in centrist Democrats right now than the far right of the Republican Party.
Well, inside the Republican Party, we have some goals. We want to secure the border. We want spending below the pre pandemic levels to the best that we can considering the wins that we locked in in the debt sealing deal between President Biden and Speaker McCarthy, those are shared priorities. Inside the Republican Conference, we're still educating, in my view, our members on what is the best course forward for Ukraine. I admit there's a party split there and I'm disappointed
about it. I'm a strong supporter of kicking Putin out of Russia. It's an outrage that he's there. And there are many reasons why Putin was greenlighted to invade Ukraine that date back to the Obama administration. But where we are is where we are, and we're doing that work I think to find consensus on how to move forward on Ukraine.
Congressman, I guess what I'm trying to say is, if Speaker McCarthy remains speaker, there's going to be some Democrats that basically give a pass to it. Is there increasingly a centrist coalition that's going to have a greater influence going forward.
I think it could be, Lisa, you saw that in the run up on trying to find a solution in this most recent conflict on the end of year spending, where you had centrist Democrats work with Republicans to try to find a way forward for a continuing resolution. So you may see that continuing. If so, that may be in the best interest of the American people if centrist Democrats come to the Republican side and work with us on things to cut spending, secure the border, and properly fund assistance to UKRAI.
The Congressman, I've known you long enough to know that these issues frustrate you. Shut down debates, debt ceiling issues. Do you think your colleagues in Washington understand that they're losing the privilege to act recklessly based on what's developing in the treasury market.
Jonathan, You are so right. I have made that point repeatedly over the last month. Looking at that tenure this morning at over four to six, gets my attention. Moody's comments get my attention. And one thing that we had and you'll all appreciate this, in the Republican continuing resolution that failed on Saturday, all the Democrats voted against it and thirty one Republicans voted against it. Very disappointing, very disappointing. You would have secured the border cut spending by eight
percent for four weeks. Was a debt commission, Jonathan. And that's exactly what we need, is a bipartisan Alan Greenspan type approach dating back to nineteen eighty three where we solved US Social Security solvency at the time and produced a forty year positive outcome for that very very important program for our seniors. That's the kind of approach we need to take on finding a bipartisan solution to long term fiscal concern on that two thirds of spending that the US con does not debate.
We got to talk more about it. We can do it. Maybe in Alabama, raise a Backspama October fourteenth, Congressman, Thank you, Congressman. French Show Avonkasoul.
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