I'm worried about stagflation and am selling all my bonds tomorrow.

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StinkyToes
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I'm worried about stagflation and am selling all my bonds tomorrow.

Post by StinkyToes » Tue Apr 28, 2020 9:56 pm

I have a strong hunch that the next few weeks will be really bad for bonds.

Start with the March CPI report:
https://www.bls.gov/news.release/cpi.nr0.htm

Overall, prices were down 0.4% from the preceding month and up 1.5% year over year. On the surface it seems like inflation is well under control, especially since unemployment is very high.

Of course the March CPI report was driven by a big decline in energy prices, which in turn was driven mainly by big time deflation in gasoline and fuel oil. Clothing and transportation services (airline) prices were also down.

The price of food consumed at home, however, was up 0.5% from February. That was on top of a 0.5% increase the prior month. The report states: "The index for dairy and related products increased 3.7 percent over the last year. The index for meats, poultry, fish, and eggs rose 2.3 percent, with the beef index increasing 3.8 percent." Those are big increases.

That's through March.

But we know that food prices have been accelerating in April. According to this article -- https://www.wtkr.com/money/consumer/don ... 9-pandemic -- egg prices are currently up 50% this year; orange juice prices are up 20%; rice prices are up 20%; wheat prices are up 15%.

In addition, I have personally observed substantial increases in the price of fish, poultry, and meat. Reportedly, these prices will rise even further in the coming days due to shortages caused by meat processing plant closures. It is conceivable home-consumed food price inflation could increase to 1% or more in April, equivalent to an annual inflation rate of 12.7% or more.

Home-consumed food is not the only category with rising prices. Food consumed away from home was up 3.0% year over year. But nobody is eating out, so we can ignore that.

Medical care services prices were up 0.5% in March from February. Up 5.5% year over year.

Shelter prices were flat month over month but were up 3.0% year over year. I do not see any decline in housing prices in my neighborhood as yet.

One might argue that rising prices of food, medical care services, and shelter are being offset by the decline in the price of gas, fuel, clothing, and airline prices. However, people aren't driving much these days. Nor are they shopping for clothes. Nor are they flying. Nor are they heating their homes. (It's almost May.) But they are eating; they need a place to live; and if they get sick they will seek medical care. Basically, the price increases are for necessities whereas the price decreases are for items which most people are forgoing. Thus, CPI may not reflect actual inflation experienced by actual people.

Actual inflation -- the inflation that most people will experience in their actual pocketbooks for the goods they are actually buying -- between now and one year from now could easily be 5% or more. If so, it will be a bloodbath for long-term treasuries (current yield: 1.20%).

* * *

A combination of inflation and recession, called stagflation, is considered very pernicious because it is so difficult for policymakers to fight. The usual method of fighting inflation -- raising interest rates -- isn't an option when tens of millions of people are out of work. Even if it were an option, it would likely be ineffective. Food prices are rising not because of loose monetary policy, but because supply chains are screwed up. All the monetary stimulus in the world won't make meat magically appear on shelves.

* * *

The next PPI report will be released May 9 and the next CPI report will be released May 10. I think from a risk-reward perspective, it is best to move my bond money into cash for the next few weeks. Right or wrong, I will buy bonds back on June 1. Wish me luck!
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by Dieter » Tue Apr 28, 2020 11:02 pm

I've been thinking of shortening duration, but not completely getting out.

At some point, "rates can only go up" will come true. For at least a little while.

Interesting times we live in.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by Vil » Wed Apr 29, 2020 2:03 am

Dieter wrote:
Tue Apr 28, 2020 11:02 pm
I've been thinking of shortening duration, but not completely getting out.
Do you consider moving to ITTs ? What WA duration are you thinking of ? It might be move worth to be done, given future perspectives. Though for the time being there might be not that many indicators for such necessity, and still if stocks take a plunge, bonds may serve as diversifier, too. But that's my over simplified point of view :)
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by mathjak107 » Wed Apr 29, 2020 5:41 am

at this stage until we get some clarity i would not leave equities hanging out to dry without good fighter cover.... the bigger the portfolio in dollars the more important that fighter cover is if you are older .

heck if i was still in my accumulation stage i would only be 100% equities ... but being retired now and with sizable assets and full fuel tanks as i call it , the damage in dollars that can be done without good fighter cover can be years of withdrawals .
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by ochotona » Wed Apr 29, 2020 8:19 am

Personally, I think big precipitous portfolio moves with LTTs are a huge mistake. The LTT market is volatile, fickle, and wants to give everyone a good drubbing.

Why not...

Convert TLT to a real Treasury, and over time just don't roll it. The duration will magically shrink over time. Even better if you can find a bond which will slightly outlive your retirement planning horizon... then you never have to think about it again.

Got your full complement of I-Bonds? If not, go to TreasuryDirect now.

Convert TLT to 1/2 TLT and 1/2 IEF and rebalance when they drift significantly away from half and half.

Got gold?

I'm keeping an eye on commodities... own 1 share of BCI just to keep my interest up... a broad commodity basket, with pretty low expense ratio and no K-1 tax form. After we survive supercontango on the crude oil contracts (!) you could use bond interest to buy a little position in commodities. It has gold, silver, industrial metals, agricultural products, oil, natural gas... everything that people hate. Everything that is being shut-in now (wells shut in, milk thrown away, pigs destroyed, industrial metals not being used... yes, that will come back to haunt us).
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Wed Apr 29, 2020 9:11 am

Am I the only one that gets more tempted to *BUY* bonds the more I hear people on forums hating on them??? Usually, the contrarian indicator goes that whatever is the most hated asset on Internet forums at the moment is the one most likely to go up.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by InsuranceGuy » Wed Apr 29, 2020 9:38 am

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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Wed Apr 29, 2020 9:47 am

InsuranceGuy wrote:
Wed Apr 29, 2020 9:38 am
pmward wrote:
Wed Apr 29, 2020 9:11 am
Am I the only one that gets more tempted to *BUY* bonds the more I hear people on forums hating on them??? Usually, the contrarian indicator goes that whatever is the most hated asset on Internet forums at the moment is the one most likely to go up.
I have been thinking of posting the same thing. I believe my model is about to put me in long bonds actually until things settle down in equities.
It's just so funny how when any other asset goes up people love it. But whenever bonds go up everyone jumps on the hate train. Bonds are the strongest performing asset over the last 12 months. They have a lot of momentum behind them. Could they top here and go down? Sure they could, anything is possible. But, usually what is winning today will usually continue to win tomorrow. Would it make sense if a sports team cut their star player because he was winning too much and they were afraid he was going to suddenly start losing? No. They would let him play until he stopped winning.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by StinkyToes » Wed Apr 29, 2020 9:54 am

pmward wrote:
Wed Apr 29, 2020 9:11 am
Am I the only one that gets more tempted to *BUY* bonds the more I hear people on forums hating on them??? Usually, the contrarian indicator goes that whatever is the most hated asset on Internet forums at the moment is the one most likely to go up.
I normally am the same way. I frickin love my LTTs. They have performed beautifully. But the risk-reward for the next few weeks is not attractive at all.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by InsuranceGuy » Wed Apr 29, 2020 9:55 am

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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Wed Apr 29, 2020 10:08 am

StinkyToes wrote:
Wed Apr 29, 2020 9:54 am
pmward wrote:
Wed Apr 29, 2020 9:11 am
Am I the only one that gets more tempted to *BUY* bonds the more I hear people on forums hating on them??? Usually, the contrarian indicator goes that whatever is the most hated asset on Internet forums at the moment is the one most likely to go up.
I normally am the same way. I frickin love my LTTs. They have performed beautifully. But the risk-reward for the next few weeks is not attractive at all.
In a world where the Fed is buying massive amounts of long dated treasuries, and is even mulling over yield curve control... where is this outsized risk? I think the risks in bonds are exaggerated. This is more like the 40's than the 80's. The Fed is going to keep yields contained for many years to come, so they can slowly inflate away the debt. At the moment, LTT's are the best hedge for the stock market. I do not see the volatility in the stock market going away anytime soon. I think the dynamic we've been in since Q1 2018 with hard to predict volatile surges up and down will continue. And as long as that continues, LTT's will be your best friend.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by AdamA » Wed Apr 29, 2020 1:46 pm

pmward wrote:
Wed Apr 29, 2020 9:11 am
Am I the only one that gets more tempted to *BUY* bonds the more I hear people on forums hating on them???
No.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by AdamA » Wed Apr 29, 2020 1:51 pm

StinkyToes wrote:
Tue Apr 28, 2020 9:56 pm



The price of food consumed at home, however, was up 0.5% from February. That was on top of a 0.5% increase the prior month. The report states: "The index for dairy and related products increased 3.7 percent over the last year. The index for meats, poultry, fish, and eggs rose 2.3 percent, with the beef index increasing 3.8 percent." Those are big increases.

That's through March.

But we know that food prices have been accelerating in April. According to this article -- https://www.wtkr.com/money/consumer/don ... 9-pandemic -- egg prices are currently up 50% this year; orange juice prices are up 20%; rice prices are up 20%; wheat prices are up 15%.

In addition, I have personally observed substantial increases in the price of fish, poultry, and meat. Reportedly, these prices will rise even further in the coming days due to shortages caused by meat processing plant closures. It is conceivable home-consumed food price inflation could increase to 1% or more in April, equivalent to an annual inflation rate of 12.7% or more.
My understanding is that the price increase in food is that it's related to issues the pandemic has caused with the food supply.

https://www.nytimes.com/2020/04/13/busi ... upply.html

Hard to have inflation with such a high unemployment rate, I think.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by StinkyToes » Wed Apr 29, 2020 4:37 pm

AdamA wrote:
Wed Apr 29, 2020 1:51 pm
Hard to have inflation with such a high unemployment rate, I think.
Well that is what many people believe. But I am pretty sure they are wrong. We already have had a big inflation in food prices. Yes it is due to coronavirus and it's probably going to get worse. Medical prices are going up (month over month and year over year). And shelter prices in March were 3% higher than a year ago. But airline fares are down! Hooray, except nobody is flying.

Some of us are old enough to remember the 1970s when we had the horrible combination of high unemployment and inflation. That is stagflation, and it was a disaster for bondholders.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by buddtholomew » Wed Apr 29, 2020 5:03 pm

LTT’s flight to quality during an equity decline is sufficient reason for me to hold them in the portfolio. I consider them even more valuable now that I have 40% allocated to stocks (changed from 35% following recent decline).

There are certainly aspects of LTT’s that I don’t like when looked at in isolation, but allocating 25% to Cash lowers duration and Savings Accounts are paying 1 to 1-1/2% to pickup “some yield”.

Gold and/or stocks plus higher cash yields should mitigate losses in bonds in the event we experience the environment you fear the most.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by Dieter » Wed Apr 29, 2020 5:42 pm

Vil wrote:
Wed Apr 29, 2020 2:03 am
Dieter wrote:
Tue Apr 28, 2020 11:02 pm
I've been thinking of shortening duration, but not completely getting out.
Do you consider moving to ITTs ? What WA duration are you thinking of ? It might be move worth to be done, given future perspectives. Though for the time being there might be not that many indicators for such necessity, and still if stocks take a plunge, bonds may serve as diversifier, too. But that's my over simplified point of view :)
Yeah, that is likely what I would do if I went this route -- VG ITT fund for part of LTT allocation (yeah, using funds)

Note I'm not in a true PP -- 50% stocks, 20% LTTs. 15% each Gold / Cash (retirement accounts)

For the person who commented that LTTs were the best performing asset the last 12 months -- that's one reason I'm considering it. Sell high. (Well, that's a thought , anyways).

But yeah, also worried that who knows what is going to happen, and LTT could be best performer over next 12 months.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by AdamA » Wed Apr 29, 2020 7:09 pm

StinkyToes wrote:
Wed Apr 29, 2020 4:37 pm
AdamA wrote:
Wed Apr 29, 2020 1:51 pm
Hard to have inflation with such a high unemployment rate, I think.
Well that is what many people believe. But I am pretty sure they are wrong. We already have had a big inflation in food prices.
But prices going up due to issues of supply and demand is different than prices going up due to inflation.

Mass unemployment is deflationary. I would be very careful about selling those long term treasuries.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by Tortoise » Wed Apr 29, 2020 7:16 pm

Given how large the national debt has ballooned in recent decades (~$500B in 1975 to ~$24T in 2020), does the Fed still actually have an incentive to "fight inflation" like it did back in the 1970s?

The government has zero incentive to fight inflation, except maybe to prevent it from getting so high that the public revolts. The Fed is supposedly "independent" of the government, but we all know that's not true at all.

If the Fed's incentive to fight inflation no longer exists, why would they ever let Treasury rates rise significantly? There would be no benefit to the government.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by AdamA » Wed Apr 29, 2020 7:35 pm

Tortoise wrote:
Wed Apr 29, 2020 7:16 pm

If the Fed's incentive to fight inflation no longer exists, why would they ever let Treasury rates rise significantly? There would be no benefit to the government.
But they really only have any control over the short end of the curve.

I agree that at some point there may be less demand, but I'm not sure when that will be.

Where will people who sell their LTTs put the money?
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Wed Apr 29, 2020 8:08 pm

Dieter wrote:
Wed Apr 29, 2020 5:42 pm
Vil wrote:
Wed Apr 29, 2020 2:03 am
Dieter wrote:
Tue Apr 28, 2020 11:02 pm
I've been thinking of shortening duration, but not completely getting out.
Do you consider moving to ITTs ? What WA duration are you thinking of ? It might be move worth to be done, given future perspectives. Though for the time being there might be not that many indicators for such necessity, and still if stocks take a plunge, bonds may serve as diversifier, too. But that's my over simplified point of view :)
Yeah, that is likely what I would do if I went this route -- VG ITT fund for part of LTT allocation (yeah, using funds)

Note I'm not in a true PP -- 50% stocks, 20% LTTs. 15% each Gold / Cash (retirement accounts)

For the person who commented that LTTs were the best performing asset the last 12 months -- that's one reason I'm considering it. Sell high. (Well, that's a thought , anyways).

But yeah, also worried that who knows what is going to happen, and LTT could be best performer over next 12 months.
Is it selling high or is it selling low? That can only be known in retrospect. In my PP I will continue to hold long bonds. In my VP I can play around.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by Tortoise » Wed Apr 29, 2020 8:43 pm

AdamA wrote:
Wed Apr 29, 2020 7:35 pm
But they [the Fed] really only have any control over the short end of the curve.
Didn’t the Fed start purchasing longer-term Treasuries (among other types of securities) in March?

If they can purchase Treasuries of any duration, that means they can influence all parts of the yield curve, doesn’t it?
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Wed Apr 29, 2020 9:20 pm

Tortoise wrote:
Wed Apr 29, 2020 8:43 pm
AdamA wrote:
Wed Apr 29, 2020 7:35 pm
But they [the Fed] really only have any control over the short end of the curve.
Didn’t the Fed start purchasing longer-term Treasuries (among other types of securities) in March?

If they can purchase Treasuries of any duration, that means they can influence all parts of the yield curve, doesn’t it?
They also can implement yield curve control in the future, which was basically what they did in the 1940s... and I seriously think the coming years are going to be much more like the 1940s than the 1970-80s as their interest is in slowly inflating away the debt.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by AdamA » Thu Apr 30, 2020 9:43 am

pmward wrote:
Wed Apr 29, 2020 9:20 pm
Tortoise wrote:
Wed Apr 29, 2020 8:43 pm
AdamA wrote:
Wed Apr 29, 2020 7:35 pm
But they [the Fed] really only have any control over the short end of the curve.
Didn’t the Fed start purchasing longer-term Treasuries (among other types of securities) in March?

If they can purchase Treasuries of any duration, that means they can influence all parts of the yield curve, doesn’t it?
They also can implement yield curve control in the future, which was basically what they did in the 1940s... and I seriously think the coming years are going to be much more like the 1940s than the 1970-80s as their interest is in slowly inflating away the debt.
To be honest, the details of how this works are way over my head, and I could definitely be wrong.

The impression I get from having read about this from time to time on this forum is that the Fed has some ability to influence rates, but it cannot control them completely.

There are other deflationary forces like demographics (aging population) and unemployment that are potentially much more powerful than anything the Fed can do.

Again, just my gestalt - put out there more for discussion than as a strong opinion.
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by shekels » Thu Apr 30, 2020 10:04 am

AdamA wrote:
Thu Apr 30, 2020 9:43 am


To be honest, the details of how this works are way over my head, and I could definitely be wrong.

The impression I get from having read about this from time to time on this forum is that the Fed has some ability to influence rates, but it cannot control them completely.

There are other deflationary forces like demographics (aging population) and unemployment that are potentially much more powerful than anything the Fed can do.

Again, just my gestalt - put out there more for discussion than as a strong opinion.
Yes, the changing environment forces the Fed to buy more or less depending on the financial climate.
It can work for a long time until it doesn't,
The Fed can control the rate they desire by buying up the surplus.
Right now they do not have to purchase many as long term rates are coming down.

Side Note: I have seen somewhere that they have not purchased any Junk Bonds yet.
Just saying they would buy them has influenced the market.


from the link below.
https://www.brookings.edu/blog/up-front ... e-control/
What is yield curve control, and why does it matter?

In normal times, the Fed steers the economy by raising or lowering very short-term interest rates, such as the rate that banks earn on their overnight deposits. Under yield curve control (YCC), the Fed would target some longer-term rate and stand ready to buy long-term bonds to keep the rate from rising above its target. This would be one way for the Fed to stimulate the economy if bringing short-term rates to zero isn’t enough. Current Fed Governors Richard Clarida and Lael Brainard have both said the Fed ought to consider adopting YCC, as have former Fed chairs Ben Bernanke and Janet Yellen.

Yield curve control is different in one major respect from QE, the trillions of dollars in bond-buying that the Fed pursued during the Great Recession. QE deals in quantities of bonds; YCC focuses on prices of bonds. Under QE, a central bank might announce that it plans to purchase, for instance, $1 trillion in Treasury securities. Because bond prices are inversely related to their yields, buying bonds and pushing up their price leads to lower longer-term rates.

Under YCC, the central bank commits to buy whatever amount of bonds the market wants to supply at its target price. Once bond markets internalize the central bank’s commitment, the target price becomes the market price—who would be willing to sell the bond to a private investor for less than they could get by selling to the Fed?

The Bank of Japan (BOJ) committed in 2016 to peg yields on 10-year Japanese Government Bonds (JGBs) around zero percent, in a fight to boost persistently low inflation. To hit that yield target, the BOJ has a standing offer to purchase any outstanding bond at a price consistent with the target yield. On days when private investors for any reason are less willing to pay that price, the BOJ ends up purchasing more bonds in order to keep yields inside the target price range.
¯\_(ツ)_/¯
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Re: I'm worried about stagflation and am selling all my bonds tomorrow.

Post by pmward » Thu Apr 30, 2020 10:20 am

AdamA wrote:
Thu Apr 30, 2020 9:43 am
pmward wrote:
Wed Apr 29, 2020 9:20 pm
Tortoise wrote:
Wed Apr 29, 2020 8:43 pm
AdamA wrote:
Wed Apr 29, 2020 7:35 pm
But they [the Fed] really only have any control over the short end of the curve.
Didn’t the Fed start purchasing longer-term Treasuries (among other types of securities) in March?

If they can purchase Treasuries of any duration, that means they can influence all parts of the yield curve, doesn’t it?
They also can implement yield curve control in the future, which was basically what they did in the 1940s... and I seriously think the coming years are going to be much more like the 1940s than the 1970-80s as their interest is in slowly inflating away the debt.
To be honest, the details of how this works are way over my head, and I could definitely be wrong.

The impression I get from having read about this from time to time on this forum is that the Fed has some ability to influence rates, but it cannot control them completely.

There are other deflationary forces like demographics (aging population) and unemployment that are potentially much more powerful than anything the Fed can do.

Again, just my gestalt - put out there more for discussion than as a strong opinion.
Right now markets set all rates other than the overnight rate. The Fed can be a participant in the market, but they are not controlling it. In Japan (and to a lesser degree the EU) they actually implement yield curve control. This is similar to what the U.S. did in the 1940s where they effectively capped the rate of all treasuries and bought everything and anything that went above their target rate. In yield curve control, the Fed would effectively set the rates for the entire curve... and literally buy or sell treasuries anytime they went above or below their target window. They don't do this now, but I wouldn't be surprised to see it at some point in the future. It's a silly and dumb thing to do... so maybe they'll try to dodge it just like they are trying their damndest to dodge negative rates. We will have to wait and see. Either way, I see rates across the curve staying below inflation for a long time to come.
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