Between Keynes and Von Hayek

Fri, 2014/11/14 - 1:36pm | Your editor

Try Abba Lerner's ideas! John Llewellyn and Russell Jones, two establishment economists, have come up with an unorthodox economic policy to get the world back on the growth track. On its own, “structural reform is ill-equipped to combat a chronic shortage of expenditure and dormant animal spirits.” Perhaps the solution is “less conventional macroeconomic policy, perhaps adoption of so-called ‘functional finance’”.

Functional Finance

They write about functional finance:

“This term was coined by Abba Lerner, a Russian-born British economist who in the 1930s worked alongside both Friedrich von Hayek and John Maynard Keynes, and then emigrated to the US, where he taught at universities.

“A maverick, albeit a brilliant one, Lerner’s macroeconomics ca[me] down to the idea that so strong [is] the economic, social and moral case for achieving high employment and relative price stability, policymakers should not be fussy about how they went about it. Policies should be judged on their ability to achieve these goals, and not whether they were considered ‘sound’ or comply with the dogmas of traditional economics. It was maintaining an adequate flow of expenditure that mattered.

“Lerner’s view would be that if direct financing of budget deficits by the central bank is the only option to boost aggregate demand and keep output in line with potential, then it should be employed.

“Modern-day policymakers may come to the same conclusion. Direct debt monetisation would break the policy logjam produced by a requirement for simultaneous deleveraging in both the private and public sectors. Because it makes no call on private sector savings, it should also prove more expansionary than QE or orthodox fiscal expansion on a unit-by-unit basis. Furthermore, by acting to rebuild shattered confidence, it could ’crowd in‘ additional private expenditure. Finally, as long as programs of direct debt monetisation were confined to closing large output gaps, the inflationary impact should be limited.

“Arguments against direct debt monetisation fall into two categories: the moral hazard it encourages, and its inflationary potential. The disruption of the connection between government decisions on the budget deficit and the willingness of the private sector to fund that deficit at reasonable interest rates destroys at a stroke one of the most important disciplines the market imposes on politicians. And with that discipline swept away, the door is open to irresponsible and ultimately inflationary policies. This, it would be argued, would at the very least encourage a significant increase in inflation expectations and risk premia.

Latin Juntas and Zimbabwe?

“Despite the logic of Lerner’s philosophy, taboos about outright ‘monetary financing’ cannot easily be cast off. In Latin American dictatorships and Robert Mugabe's Zimbabwe, debt monetisation is the route to hyperinflationary purgatory. But these taboos are ‘man-made‘ rather than ’God-given‘. Monetary financing need not always be bad and lead inevitably to a catastrophic loss of price stability. There can be circumstances where it is appropriate. Key considerations are: whether it has been subject to a rigorous cost-benefit analysis, how it is operat[ed], and whether it can be ‘turned off’ once it filled its objectives.

For the public and markets not to fear the worst, robust checks and balances need to be in place before direct debt monetisation: an explicit inflation, price level, or nominal GDP target framework, and all the transparency that goes with it.

“It would also make sense that any final decision [on debt monetisation be given to] an independent central bank’s policy-making committee, rather than a government. Direct monetary financing [sh]ould be [for] a specific amount over a specific period – say 3% of GDP over 3 years. It must be finite.

Rather than financing tax cuts [and thus] government popularity, it would be better funding a specified number of public infrastructure projects, [to] add to an economy’s productive potential and subsequently be partially sold back to the private sector. In the euro area, financing could be provided to the European Investment Bank rather than individual governments, thereby ring-fencing public sector balance sheets from associat[ion] with Weimar Germany,

“As a symbol of authorities’ good faith, it make[s] sense to combine the stimulus with structural reforms applied over [several] years.” The economists work for Llewellyn Consulting in London, I know the principal of the firm since he was deputy chief economist at the very orthodox multilateral Organisation for Economic Cooperation & Development in Paris.


China ended most but not all of the ambiguity over the link between the Shanghai and Hong Kong stock exchanges by announcing that it will waive capital gains taxes on foreign investors licensed to invest in China by extending their tax exemption to linked trades on the Hong Kong exchange. How long this waiver will last is still not defined but it is enough to get business going. The link of exchanges starts up Nov. 17. A former China correspondent of this newsletter is involved.

More for paid subscribers follows from Singapore, China, and Hong Kong, and other places like Mexico, Britain, The Netherlands, S. Africa, Canada, Portugal, Spain, Brazil, and Finland.

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Dear Numpty

Thu, 2014/11/13 - 3:10pm | Your editor

Dear fellow Numpty:

What is astonishing about the way banks cheated their clients by colluding to fix exchange rates to extract higher sums is not only that they did this to what they called “Numpty's”, but when they did this.

The FX faux fix went on until early this year, according to the $4.5 bn settlement made with regulators in Europe yesterday. And the settlement will exceed $4.5 bn. There are still other fixes for which further fines are payable covering US exchange rate manipulation and at least one banking major, Barclays, refused to join the settlement.

Anyone who ever bought a foreign share using a US discount brokerage foreign exchange facility; anyone who ever paid for foreign travel or hotels using a credit card in a different currency; anyone who ever imported or exported anything was cheated by the banks.

We learned about early on. About a decade ago, I bought a French stock called Stellergènes . I sold it 3 years ago from my account with Fidelity when its compliance officer called me to say I could not accept a takeover bid from a Swiss buyer. Actually he was wrong but I listen to lawyers and doctors.

The trade was mistakenly booked in US dollars although French stocks are priced in euros. I was left short by ~25% at the then-exchange rate. Some readers proceded to legally get the Swiss takeover payments, so the whole compliance routine was unnecessary. I had found the stock by my own research work, without help from readers or Fidelity (Fido).

After long hemming and hawing, Fido converted my proceeds into dollars at a weird exchange corresponding to nothing public. They refused to adjust the rate to what was shown for the trading day.

A certified grouse, I then sought arbitration with Fido to try to get this adjusted. Instead of displaying zeal for customer satisfaction, Fido then simply banned me from having a Fido account. That is how E-trade won my fidelity, such as it is. The Swiss buyer relisted the share in 2009 and it even trades now on the Euronext part of the NYSE and as an ADR again.

Now I am thinking maybe the Fido global trading desk was treated as a Numpty and not just me. The fine is trivial considering the pattern of deceit.

A new Van Eck China Bond ETF is offering yield-hungry investors a chance to buy RMB bonds under the planned Hong Kong-Shanghai link. The CBON yield is expected to be ~4%. The amount of taxation is unclear as Shanghai interest is taxed while Hong Kong's is not.

China is looking poorly today apart from the worry about one of our shares discussed for subscribers below. Chinese industrial output failed to meet expectations, rising only 7.7% in Oct vs estimates of 8%, continuing the Q3 pattern of slow growth. This may require govt stimulus, which however, risks boosting retail sales, which are growing exponentially based on the 11/11 frenzy at Alibaba. More on this below.

Our newly returned India reporter offers better ideas. India is gaining from yield hunger. Its debt markets have drawn in $23 bn ytd, while equities inflows were only $15 bn, according to Barron's Blog. So we are aiming Abhimanyu Sisodia's attention to stocks. He writes today on 2 key deals reached with India by the supposedly lame duck Obama administration:

India won okay from the USA allowing to publicly stockpile food, which paves the way for a global World Trade Organization accord that could add $1 bn and 21 mn jobs to the global economy (according to Reuters). India now has US support before the WTO General Council, The deal will allow large state food purchases to continue, despite other countries saying the food buying and stockpiling amounts a subsidy leading to surpluses and dumping on world markets. Just some food for thought. [Ed: Pun intended.]

Obama seems quite charmed by Modi, no surprise, as India is wisely considering opening its defense industry to foreign direct investment. Non-Indian companies will be allowed to assemble weapons.

More from China, Japan, Israel, Canada, Ireland, Switzerland, Spain, Holland, France, Portugal, Singapore, Senegal, South Africa, Ghana, Botswana, Tanzania, Mozambique, Zambia, and Zimbabwe.

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Liberty, Fraternity, Inequality

Wed, 2014/11/12 - 2:27pm | Your editor

Thomas Piketty's Capital in the 21st Century won the 2014 Financial Times Book of the Year Award. The FT reviewer found many data problems but economists and businessmen agree with the French economist that inequality today is close to that of the era of Robber Barons. The top 3%, or 1%, or 0.1% or even 0.001% of the population in most capitalist countries owns more assets than the rest. And its share has risen sharply higher. One key reason is that the owners of assets, the rich, gained more from measures to prevent a recession in the wake of the global financial crisis since 2008.

But Piketty dates the rise of inequality earlier. He says that 60% of the rise in US national income since 1977 has gone to the top 1% of US earnings. The only segment of the population which beat the 1% was the 0.01%, and the 0.001% have done best of all. He links the rise in inequality not to wealth but to income.

One comment, from Warren Buffett, is “the lucky sperm club”. But that may not hold.

The Lucky Sperm Club?

Larry Summers noted that in fact the wealth of the very richest heirs wound up falling rather than rising. He dissed the Piketty formula for redistribution (which everyone agrees is unrealistic). Summers wrote that anyone who was among the Forbes list of the top 400 richest Americans in 1982 (near the start of Piketty's 30 years) would still be among the richest if they invested for a mere 4% annual return. But the 2012 top 400 only included 10% of the earlier ones. They weren't top 400 because they consumed too much. Summers also argues that the recent rise of the profit share of national income is not only the result of the Piketty factors but also of globalization and new technology.

But as I wrote yesterday quoting from stock analysts and GMO's Jeremy Grantham, it is still weird when the US rate of return on capital exceeds the rate of growth. Summers says the solution is that over time the lucky sperm club members will spend more than they reinvest and blow their edge. He may be right; he may be wrong.

Business Week, now that it is in the Bloomberg stable (and ran a cover showing not the usual CEO of a major company but Lord Keynes, once a bete noire) in its current 2015 special forecast issue includes several cogent comments from firm free-market capitalists on Piketty's insights.

Rabobank's international senior forex strategist Jane Foley says “rock-bottom” interest rate policies “probably increased the income inequality spread.” She adds: “At the end of the day, who benefits when the central bank buys assets? They tend to be the ultrarich, while at the same time it becomes more difficult to promote economic growth by monetary policy tools.”

Abby Joseph Cohen, the Goldman Sachs investment strategist, attributes the 30-year long concentration of wealth to “educational levels”. “Many good paying jobs [need] people who have better skills.”

The Inequality Trifecta

The best summary is by Mohammed El-Erian, a Bloomberg writer and the chief economic advisor for Allianz (but since early this year no longer advising its Pimco sub). Asked if wealth and income inequality are holding back economic growth, he said:
“It's a trifecta: inequality of income, wealth, and opportunity. We haven't had that combination for a long time. There's a growing recognition that inquality has gone from being pro-incentive—you need a bit to encourage entrepreneurship—to being antigrowth. That has to do with the fact that only the top 3% have experienced income growth, and the marginal propensity to consumer is much lower for the botom 97%.

“The inability to bounce back from the global financial crisis, long-term unemployment, youth unemployment, the extent to which we haven't been able to invest in the educational system, lack of labor mobility and social mobility—all that speaks to inequality of opportunity, a major concern, not just for this generation but for the next. That's new for the US. The US always prided itself on being one of the most equal societies in terms of opportunity.”


My reason for running this commentary is to highlight the degree to which inequality has negative effects for the global economy. Unlike currency trends or even politics, the seemingly inexorable inequality trend is not self-correcting. The tide doesn't go out again and excess is not pulled down by reversion to the mean.

More follows for paid subscribers including a pair of quarterly reports, some hot M&A news, and biotech and pharma updates.

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Reversing Tides II

Tue, 2014/11/11 - 2:03pm | Your editor

Today is Veteran's Day here, Armistice Day in many other countries, and Singles Day in China. The latter is the top shopping equivalent of Black Friday in the USA, reportedly recently invented by e-commerce giant Alibaba, and targeted on the un-wed (those 4 ones all in a row.)

Joe Shaefer, USAF-Ret., with whom we trade newsletters, for years has sent a letter to his readers and friends for Veteran's Day. Today his views on “Those Who Stand and Wait” was published on the op-ed page of The Wall Street Journal. Joe puts out a newsletter and runs money as Stanford WealthAdvisors.


My note yesterday about tides reversing has opened another question. Are US Dow-Jones Biggies or S&P 500 middie firms going to revert to the mean? Or can they continue to grow faster than US GNP growth, as they have done for the last 3 years?

I am firmly on the side of Jeremy Grantham (of GMO) on this. He told Barron's:

“Profit margins are probably the most mean-reverting series in finance. If profit margins do not mean-revert, then something has gone badly wrong with capitalism. If high profits do not attract competition, something [is] wrong with the system and it is not functioning properly.”

So how can a company grow profits faster than the country?

The answer is via structural changes. Firstly, big US firms are ever heavier exporters. So they are not linked to US GNP alone. But this assumes that they can continue to boost their exports. A strong dollar makes this much harder.

Moreover, top US stock firms are switching from selling stuff to selling services, on which margins are normally higher. US national accounts service data (and that of other countries) is not as good as on goods. But the service feed into profitability doesn't repeat forever. It is a one-off which sets a higher level profits have to meet the following year.

Another way up ahead of the USA is through technology-generated productivity gains. But again this is a one-off. You can only upgrade your systems every decade or so. At some point productivity will run into a shortage of labor, a factor so far missing from the US equation. When that triggers wage increase demands, the game is up and productivity stops rising.

How soon will the US market lose its edge? Reuters thinks surprisingly soon. It reported that calculated estimates for Q4 earnings growth at the end of October were 7.6%. But a mere month earlier the Q4 growth estimate was 11.1%.

For Q1 2015 the estimate now is 8.8% vs the one Oct. 1 of 11.5%.

Making this more ominous, according to Nick Raich, CEO of The Earnings Scout of Cleveland, the drop in 2015 Q1 is likely to be greater at the end of the month.

The other indicator of troubled waters ahead is the guidance given by US companies, something only a minority do. Mr. Raich says that negative outlooks outnumber positive ones for Q4 so far by about 3.9 to 1. For Q3 the ratio was 3.3:1. “That's a worsening trend”, he told Reuters. “The outlooks have gotten a bit worse this quarter.”

Outlook numbers are massaged by corporations to keep down negative earnings surprises, which hit stocks hard. And as Mr. Raich notes, most of the estimates came in before the recent rocketing up of the dollar.

I make these comments not in order to hurt my US stock portfolio, but to remind readers that the current trend against global investing, which is what we preach and practice, will not continue forever. It never has failed over multi-year periods in the past.


Presubscribers who want to pick up a cheap subscription are invited to hit and aim to buy to help Lilith Magazine fund-raiser. Five days and about 8 hours remain for bidding which is currently stuck at $175 for a full year. I and one of my daughters-in-law support this mag. You can also see goods and services from other charities on the site.


Today we have a bunch of company reports and some sells for our current paid subscribers with news form Britain, Kenya, Ireland, Portugal, Mexico, Brazil, Canada, Russia, Japan, and Finland.

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The Tide Always Reverses

Mon, 2014/11/10 - 1:17pm | Your editor

Knowledge is power. And lack of knowledge is terrifying. This rather banal insight helps our readers by motivating our buys and sells.

Today we have seen a bit of recoil from the mad global fund rush into the USA and the dollar which dominated last week's investment flows. The panic has not ended but it has become a bit more sensible.

You don't have to be a deep thinker to recall whenever a tidal wave move occurs in markets the fate of Ozymandias King of Kings. The tide always reverses.

All of Europe is not under imminent threat of Russian invasion, however busily Russia has been in testing borders in far-away areas of Europe (like Portugal) as well as nearby Nordic and Baltic countries. So the panic has been replaced by calculation of risk. Spain, Switzerland, and Ireland are up, Poland and Russia down, a sign of market discrimination.

The US dollar rush ultimately cannot continue because the money seeking a bolthole is limited. And because like all irrational excess, it contains the seeds of its own reversal.

An ever higher greenback would hurt the very large US stocks the fearsome are targeting. Most household name stocks are global players and multinational in ambition. Even AT&T, long a by-word for home-bias investing, is plotting to get into telecoms in Mexico by acquiring Iusacell.

So Wall Street cannot rise without selling stuff to foreigners, be it Boeings or Starbucks, castrated hogs or wheat, autos or Apples. If the dollar is too strong the foreigners cannot afford US goods or services.


I also think the wave of Republican Party support and money talking in Washington may reverse too. The combination of Tea Party antiestablishmentarianism and liberal revival is inevitable and may come as soon as 2016 if the supposedly mainstream GOP controlling both Houses of Congress comes short of good legislation.

If they toady to their nutty fringe and drink the Kool-Aid, the GOP will get into fighting immigration, abortion, gays, deficit spending, and the Fed, and become unelectable. If they behave sensibly and work on trade, tax, or budget reform with the White House and Democrats across the aisle the sensible Republicans may be attacked by the raving zealots in their own ranks. Enough zeal either way and the GOP can split. So this too will end. Look upon my works, ye mighty and despair, as Shelley wrote.


GOP Congress Stocks

Anyone wanting to play the Republican congress can buy makers of medical devices like Covidien or Zimmer or Medtronics. All 3 are now outside our bailliwick as they are USA firms or becoming them. The med device tax is slated for repeal.

You can also buy oilsands stocks or Transcanada on the argument that Keystone XL will be built. But remember that besides being filthy their extraction also is expensive, and the big job boost will temporary and Nebraskans may vote for the Democrat ticket the next time round.


More follows for paid subscribers from around the globe starting with a some proof that knowledge is power on occasion. We have news from Colombia, and Lusitanophone countries Angola, Portugal, Mozambique, and Brazil, China, Hong Kong, Israel, Japan, Mongolia, and Ireland.

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Model Portfolios Updated

Sun, 2014/11/09 - 1:08pm | Your editor

As is my habit on Sunday when most markets outside the Middle East are closed, I have updated the tables. Paid subscribers may view all three. Pre-subscribers only get to see the closed positions. Note that clicking the printer-friendly button makes it easier to view spread sheets even if you are not going to print them.

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War Fears

Fri, 2014/11/07 - 2:48pm | Your editor

Little red diaper babies like my late roommate Linda used to sing:
“Fly higher, and higher, and higher

On each silver wing a red star.

And every propeller is shouting 'Red Front!'

On the planes of the USSR.”

She taught me this song to show how she had been raised, with irony. Her mom, born in Hungary, stayed loyally red after 1956.

As the border battles in Ukraine pick up I keep thinking of the Red Army Chorus to which Linda belonged. But even they would not be singing now.

Russian tanks, planes, and troops are reportedly crossing the border with eastern Ukraine after the referendum there which violated the terms of the truce between Ukraine and Russia.

As is customary on these occasions, Euroland stocks are mostly down for fear of Krieg, Guerre, War. And gold is up.


The NZZ interviewed the most obscure central banker in the world, Thomas Jordan, head of the Swiss National Bank, about the pending Nov. 30 vote on central bank gold holdings. Herr Jordan said:

“This initiative is against the interests of Switzerland because it aims to fundamentally change our monetary policy.” He added that it would have fatal consequences by limiting the ability of the CB to react to upheavals to restore currency stability.

Switzerland allows petitioners to require a vote on matters which governments would rather not consider, like gold policy or emigration. If enough people sign the petition, it comes to a vote, even if it is not politically correct.

The current populist referendum would require that Swiss reserves hold 20% in physical gold and sets limits on when the CB is allowed to sell the yellow metal. Referendums are not necessarily more democratic than parliaments. In fact they often ways to pander to the right and localism, particularly in the lonesome valleys of the Alps.

Now for the news with 5 companies reporting tops and flops, and lots of bits and pieces.

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Smart or Lucky?

Thu, 2014/11/06 - 2:53pm | Your editor

Festivities for the 25th anniversary of “Die Wallfall”, the fall of the Berlin Wall between the old Communist East Germany and the rest of the world were rather subdued because the now free Grman railroad workers went on strike. Strikes were illegal in the old German “Workers' Paradise”.


All our NRI and other India fans should cheer the return of Abhimanyu Sisodia as a contributor after family crises kept him away from the 'Net. We missed his coverage of India and Asia while he dealt with a family illness and a complicated inheritance. Interestingly enough, a complex inheritance also cut off a Pakistani journalist friend from London who doesn't write for us. He also went upcountry after his grandfather died, out of contact for months.

Common traditions survive on both sides of the 1947 border, including cricket and food. The abritrary borders of the former Raj are perhaps why the Taliban murderously attacked fellow-Pakistanis watching the ceremony near Karachi to close the barrier between the two countries as night fell. Goose-stepping soldiers in gorgeous turbans strut smartly at each other without actually landing a kick. And the similarity of their choreography and kit is strikingly obvious.


To quote another contributor, Amb. Harry Geisel: “Sometimes it's better to be lucky than smart.” More on this in today's blog where we again have results to report and news from Israel, Egypt, Spain, Switzerland, Brazil, Britain, Canada, and Mongolia.

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Trading update

Wed, 2014/11/05 - 3:45pm | Your editor

Trading updates are only for paid subscribers. Join them to gain with us.

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The New Congress

Wed, 2014/11/05 - 1:42pm | Your editor

Now that they have swept to controlling both Houses of Congress, our modestly middle-of-the-road Republicans will have a chance to show what they can do. The key reason for the victory dance is that the GOP managed to eliminate Tea Party contenders from major races, mainly by use of vast sums of money.

I expect that moderate GOP immigration and energy policy can perhaps produce some good results for the country, if reasonable people will be able to work with those across the aisle. More renewable energy and fracking and less coal. A permit for Keystone XL with a safer route. Helping Dreamer kids who were raised in this country but who have progblems with the Migra because they entered the country as children.

I am not so sure about a desperately needed start on tax reform or retirement programs. This is too much same old, same old, too contentious. And the Republicans are hampered by movie stars making use of poor data. Paul Ryan, who wants to take over as Chairman of the House Ways & Means Committee, is a famous producer of slippery numbers.

Naturally I dread any move on social policies like abortion to homosexuality although in fact most politicians now know that they cannot win elections on banning either. So the plots to turn back the clock will probably die in committee.

I fear some useful government programs like the Ex-Im Bank may fall by the wayside if the GOP feels it needs to throw some red meat to its radical fringe but probably business will back its continuation.


One key plank in the Tea Party's misguided platform was attacks on the Federal Reserve for its alleged “money-printing”, expected to result in deficit-spending, inflation, and depreciation of the dollar. This drumbeat of criticism is economically unsound, and also contradicted by the facts on the ground. In fact the Federal deficit is shrinking fast. While the US trade deficit is rising because a strong dollar hurts exports, the same is not true of the budget gap, as Bloomberg reported:
“Robust economic growth has helped push the U.S. budget deficit down to the lowest level since 2008, marking the sharpest turnaround in the government’s fiscal position in at least 46 years.
“The shortfall of $483.4 bn in the 12 months ended Sept. 30 was 2.8 % of the nation’s gross domestic product of $17.2 trillion over the same period, according to data compiled by Bloomberg using Commerce Department figures. The figure peaked at 10.1% of GDP in December 2009. “


Another area of contention is foreign policy, notably the Obama administration handling of Syria, Ukraine and Russia, Iran, and Israel.

Today Gazprom, a friend of Putin, announced that it was offering Eurodollar bonds, denominated in the greenback but sold abroad. It is offerign up to 5% for 1-year money, but the amount it can raise is unclear. OGZPY has been frozen out of normal markets since the Ukraine invasions began, but it owes about $8 bn to Bank of America-Merrill Lynch from a pre-sanctions deal. Gazprom raised a mere 15 bn rubles, about $340 mn, with a local currency issue in Russia last week. It is hurting.


If you want to buy local currency debt from the BRIC countries and other emerging markets, you now can do so with an ETF, issued today on Nasdaq to let US retail investors buy this paper. It is called First Trust Emerging Markets Currency Bond ETF. This is not a recommendation of course. And it will not be able to buy ruble bonds as a US entity. Another new ETF from the same shop is called First Trust International IPO Fund. I am not sure if that would include international companies which raise money in the US, as Alibaba did.


More for paid subscribers follows from Britain, Ireland, Israel, Germany, Canada, Colombia, The Netherlands and a few other miscellaneous countries. But nothing about Russia, Ukraine, China, Hong Kong or Norway today.

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