* WHAT TO DO NOW: Learn the three ways political corruption can ruin your purchasing power. Currencies ultimately rise and fall because of a nation’s real production versus the amount of currency printed by its government. When governments print too much money, it affects your purchasing power in three ways. Learn all three below.
* EZ CURRENCY DIVERSIFICATION: Get equities in many currencies. Learn why and how on page eight.
* EZ PROFIT: Buy on fundamentals. I used this simple philosophy to buy a London house and added $54,400 to my profits just through the currency moves. See how on page ten.
The forest in the valley below awakens and shimmers in its new growth of green. Brisk winds ply sweet fragrances of apple blossom and plum over fields that burst with explosions of May flowers in bloom. A robin sings. His song, sweet in my ears, is of his long journey home and of his good cheer and happiness to be here in spring.
Forwood, Glouchestershire, near a tiny village in the Cotswold hills of England. Early spring. I sit on my flagstone patio and view the fields which lay just below and think how lucky I am to have survived financially so I can live in such a beautiful place.
In earlier case studies, you learned how currency changes played a part in nearly destroying my business. In the case study this lesson, you will learn how at about the same time another currency change saved my standard of living and gave me the capital to rebuild my business and maintain my family’s standard of living. However, before we review the case study, let’s look at more fundamentals of currencies and how these fundamentals affect standards of living through purchasing power.
We learned last lesson that real money can only be produced by work that creates some product or service. We also learned that the money we use on a day to day basis, as a form of exchange, is a social agreement and as such is vulnerable to corruption by the society in which we live (normally allowed through poor leadership).
The political corruption of money can have a dramatic impact on our standard of living in three ways. First, the corruption of money can reduce our purchasing power in the country where we live, second, it can reduce our purchasing power abroad and third, it can reduce our purchasing power in the future.
The chart next page shows the purchasing power of the dollar from 1964 to 1994. Just a glimpse at the falling curve shows how the dollar’s purchasing power has fallen over the years. This is due to both internal inflation (the mechanics of which will be shown in detail in this report) and the external effect of the falling value of the dollar compared to other major currencies.
The chart shows that the dollar’s purchasing power was six times as great in 1964 as it was in 1994.
This means that those who hold U.S. dollars must now have more dollars to just maintain their standard of living. This also shows that the deterioration of the dollar, currently the reserve currency of the world, has been steady, year after year. This fall is causing global currency deterioration and means that all investors must protect against currency moves.
Within the internal economic system of every country, the value of money is based on the efficiency of the country’s labor force and the country’s natural resources.
The success of any economy is measured (in one sense) by how much workers are paid. If workers earn more real money, this is a sign that the workers are producing more goods of real value. Remember: Real money can only be created by work that produces something of value that can only be produced by work and can be available for exchange.
A Mexican worker, for instance, is paid in pesos. An American worker in dollars. Local purchasing power in either country can be reduced through inflation.
Inflation is caused when a government creates more money then there are goods and services. When this happens, there is too much money competing for too few goods. Money being abundant loses its value in relationship to goods and services. The purchasing power of the currency falls.
Normally in times of inflation some members of the country suffer more than others. For example, workers’ pay is normally protected within an economic system when there is inflation. Inflation might increase the price of goods within a country, but workers’ wages almost always ultimately change to reflect at least part of the increase. Inflation usually destroys those with fixed incomes that are produced from money or pensions rather than those incomes from work.
The reason workers are normally protected during times of inflation is because real work produces real money. If, during inflation, workers are not compensated more, they will stop working. Then there will be no goods ar services and hence no money at all!
However our investments, and our pensions, etc. are social contracts. Society has agreed to pay us for our money or our pension. It is easier for society to alter its promise to those who do not create real goods rather then those who do!
This impact only takes place at the local level first. Take for example, the U.S., Mexican example above. Assume that three Mexican pesos buys a loaf a bread in January. Then assume because of inflation that by June, it takes six pesos to buy a loaf of bread. The local purchasing power of the peso has dropped in half.
Also assume that one U.S. dollar also buys a loaf of bread and during the same period does not lose purchasing power. That means that in June it still takes one dollar to buy a loaf of bread.
How Global Purchasing Power Is Affected by Inflation
Now we can see how local drops in purchasing power affect foreign exchange values of various currencies.
If during the January to June period mentioned above, one U.S. dollar was worth three pesos, imagine what happened in that six months to someone who held U.S. dollars and wanted to buy bread in Mexico. In January that bread buyer needed one U.S. dollar to buy three pesos to buy one loaf of bread. But if in June that bread buyer took one U.S. dollar and bought three pesos to buy a loaf of bread in Mexico, he would find that he was still three pesos short! A loaf of bread in Mexico now costs six pesos. The bread buyer would have to spend two dollars to get six pesos to buy one loaf of bread in Mexico.
What would happen? The bread buyer can still buy a loaf of bread for one U.S. dollar in the U.S., so it is not likely that he will spend two U.S. dollars to buy the six pesos required to buy a Mexican loaf of bread.
So when someone from Mexico wanted to buy a loaf of bread, he could buy a loaf from the U.S. for half the price as what they must pay in Mexico. This is the reverse of the beggar-thy-neighbor approach that we learned in Lesson Three. However, this normally does not happen because as a currency’s local purchasing power falls, so does its value against other currencies which are not losing their purchasing power.
Money as a social contract is supposed to represent work. If our invested money is real money, it should be tradable for real goods and services. However, today since most governments interfere and dilute most currencies, few currencies are real money. This means that as we invest money and its value in numerical units grow, the purchasing power per unit falls. It is possible and often probable that the purchasing power falls faster then the investment grows.
The real return on our invested money is the return after adding numerical growth of our investment and subtracting the loss of purchasing power of the currencies we hold.
Important lesson. We as investors always have to look at the real return on our investments in both local and global terms.
More Currency History
We will look more at how to determine and make currency predictions based on real returns in future lessons, but here let’s look at more currency history to see how inflation has affected money and society in recent years.
Our first historical review is through two charts that show inflation rates for the G7 from 1890 to 1989. The first chart shows inflation rates for the United States, Great Britain, Germany and Canada.
In this chart we can see deflation in the United States and the rest of the world during the 1920s. Deflation is the opposite of inflation. This particular deflation was the cause of the great world depression of that period. This depression had such an impact on world leaders and the public that it led to a new era of government intervention in money. The currency turmoil that we see today is a result of that impact and the changes that were made then.
The second chart shows France, Italy and Japan.
On the graphs last page, you can also see that prior to WWI in the classical gold standard period there were low rates of inflation (with very little change during the twenty-year period) and a high degree of inflation convergence between the nations. Inflation rates bounced up and down sharply from the period of WWI through the end of WWII. Then inflation fell dramatically during the late ’40s after the Bretton Woods Agreement in 1944, and was calmer thereafter until after 1971, when the Bretton Woods Agreement dissolved.
The Bretton Woods Agreement arranged for the United States to be the only country to peg its currency against gold. All other countries fixed their currencies in terms of dollars, and by the Bretton Woods Agreement had to maintain their exchange rates within 1% of parity with the dollar. In effect, the United States became the world’s banker-buying, selling and holding gold.
The International Monetary Fund (IMF) was established at Bretton Woods to provide international reserves which maintained equilibrium between currencies. In other words, the IMF lent funds to countries to assist them in meeting the balance of payments deficits without resorting to devaluation of their currency. Also established was the World Bank, with an aim to help finance reconstruction of countries damaged during the war (mostly in eastern Europe), and to increase productivity in underdeveloped areas of the world.
At the end of WWII the U.S. held two-thirds of the world’s monetary gold supply. This came partly as a result of the flight of capital from Europe during the war. Central bankers from countries outside the U.S. could bring dollars to New York and exchange them for gold (at the fixed price of $35 per ounce). American citizens, however, could not own gold. Nor could they exchange dollars for gold.
For that time, the dollar was the rock of stability. Pegging any currency to gold helps restrict the printing of paper money because there is only a finite amount of the precious metal. The world came to have tremendous confidence in the dollar. All the world’s currencies were convertible into each other, and all were pegged to the dollar. For a time, the dollar was more desirable than gold. The dollar was completely convertible, and it offered the benefits of earning interest. Gold offers no interest when stored (it actually costs money to store), so for nearly fifteen years after Bretton Woods, the dollar dominated world trade.
Now it was the American Navy (instead of the British) sailing the world, American companies and private investors buying railroads in Malaysia, rubber plants in Brazil, and oil fields in Iran. Until 1958 or so, the world economy grew like a well-planned garden, with the dollar as the fertilizer and American business as the gardener.
The Economic Co-Operation Act of 1948, which created the Marshall Plan, provided relief to war-ravaged European countries by distributing massive U.S. aid in the forms of grants and loans. The U.S. donated money for the world to rebuild. This, in its own right, helped the U.S. gain dominance in almost every sector of world trade, because much of the lending activity was carefully orchestrated to promote U.S. interests.
Nonetheless, by the mid-1950s, the U.S. produced half the world’s oil, half the world’s cars, and nearly half the world’s total industrial output. The chart below shows the changes in the world gold supply from 1945 to 1970.
The heavy dotted line shows the U.S. monetary gold supply, which falls steadily from about 1957 onward. The two solid lines show all external dollar liabilities, which steadily increase from 1958 onward. Starting about 1969, external dollar liabilities began increasing exponentially.
Gold and Dollar Holdings 1945-1971
Underlying all of this was the United State’s dual purpose throughout this period. On one hand, the U.S. was anxious to develop its own internal prosperity. U.S. citizens were hungry for stability and growth, and any government party that bucked this tide would quickly be voted out of office. Government parties don’t want to be voted out, of course, so public financing flowed to the building of roads, expanding the welfare system, and financing private industry.
At the same time, the U.S. maintained its focus on arms production. After WWII, the U.S. halted arms production only temporarily before diving in once again to match the Soviet Union’s perceived emphasis on world domination through military superiority. In addition, the U.S. was financing military protection for Eastern Europe and Japan.
Never before in the history of the world had a country put forth such a full-scale effort to dramatically increase both its own internal growth and its external military strength. Throughout history, whenever a country went to war, it tightened its belt. The U.S. itself followed this course during WWI and WWII, but U.S. citizens would not hear of belt-tightening in the ’50s and ’60s.
This dual expenditure came to a head during the late 1960s in the form of the Vietnam War. Tremendous military expenditure was put forth to produce items that literally went up in smoke (bombs, bullets, etc.), along with an increased emphasis on the development of what Lyndon Johnson called “The Great Society.” The result? Dollars were printed and sent out of the country. Then more dollars were printed and they, too, were sent out of the country.
With this inflation the quantity of Eurodollars increased dramatically. As dollars piled up overseas, more and more central bankers began worrying about their ability to cash in dollars and receive gold. As with any bank, the great fear was that all depositors would arrive at the same time wanting their money. Confidence in the dollar eroded. In March of 1967, a run on the dollar forced the U.S. to suspend the convertibility of the dollar into gold for all except central banks.
The dollar began inflating around the world, and since all currencies were pegged to the dollar, they, too, began feeling the pressure of inflation. France had to devalue the franc in 1969. Germany devalued the mark the same year, and Canada released its dollar from the gold peg and began floating in 1970. In May of 1971, the German and Dutch currencies floated. The German central bank, the Bundesbank, stopped taking in dollars and exchanging them for marks. The dam burst on August 15, 1971, when President Richard Nixon announced that the U.S. was “temporarily” suspending the convertibility of dollars in gold.
Nixon’s announcement had numerous causes. There were too many Eurodollars, with their inevitable claim on U.S. gold. Inflationary pressure was too great and had to be released. And, too, unemployment in the U.S. was becoming a political issue. Nixon faced an election in November of the following year, and political expediency demanded a stronger U.S. job market. That meant he had to send dollars out into the economy. Without dollars, industrial growth (and employment) would stagnate. But Nixon couldn’t send out dollars if each had to be backed by gold.
So the dollar was freed from gold, and the world’s key currency no longer had the backing of a precious metal. The G7 (the leading industrial countries — United States, Great Britain, Canada, France, Germany, Italy, Japan) met in Washington to try for another Bretton Woods. They tried to devalue the dollar and peg it to gold at a lower price and to peg currencies to new fixed rates. But this plan didn’t work. Inflation shifted into higher gear. The Reuters Commodity Index of food, minerals, etc., rose 65% from the end of 1971 to early in 1973 alone. The chart below shows long-term interest rates for the G7 nations from 1880-1989. Notice how sharply the rates increased after 1971.
Long-Term Interest Rates G7 Nations 1880-1989
By the end of 1973 every major currency floated, meaning that on any given day it was worth — in terms of any other world currency — only what someone would pay for it. The world had entered a new era, one which exists to this day. In effect, the world economy started from scratch after the WWII with the Bretton Woods Agreement in 1944. It then started from scratch again in 1971 when convertibility was removed.
From 1971 to the present, complex and varied forces drive the currency markets. Currency values rise and fall daily. The forces that cause these rises and falls are discussed beginning with the next lesson.
How to Hold other Currencies
In Lesson One we looked at using money market mutual funds to hold other currencies. Lesson Two, we reviewed managed currency funds and Lesson Three short bond funds in other currencies. A fourth approach to obtaining a global currency portfolio is to invest part of your portfolio outside your own currency in overseas stocks. Using overseas equity mutual funds is one easy approach.
The benefits of using equity funds is that over long periods of time equities have always proven to outperform short term deposits and bonds. The downside is that equities have also normally proven to be more volatile and are considered having a higher degree of risk.
Another benefit of equities is that they are often seen as an inflation hedge. Remember how in this lesson we learned that the pay of workers is normally adjusted upwards to compensate for inflation. The same is true of business. The essence of business is to provide real work and real services. Thus business must be paid real money. In short, business will always raise its prices to compensate for inflation. This means that stock markets normally rise, in the long term, faster than inflation.
As a recent example, let’s consider the Brazilian Stock Market in 1994. 1994 was a terrible year for inflation in Brazil. Inflation rose so fast that the Brazilian currency fell 1,136% versus the U.S. dollar. The dollar also fell versus other currencies. However the Brazilian market rose 1,213%! This meant that the Brazilian Stock Market index enjoyed a 77% increase even after the fall of the currency.
A more recent example is that of the Turkey Stock Market. The Turkish currency fell versus the U.S. dollar (the dollar was also falling dramatically) in the past nine months by 48%. However, the Istanbul Stock Market rose by 93%. The Istanbul Stock Index increased by 48% in nine months in U.S. dollar terms.
There are many kinds of mutual funds that invest in equities. Some funds invest just in one country. Others invest in just a region, while others invest all over the world.
One of the simplest ways to implement this type of system is through the use of umbrella funds. Umbrellas are mutual funds that are attached to a family of subfunds. This family of sub funds normally includes equity, bond and cash funds that cover the world. A good umbrella fund will have Asian, European and North American equity sub funds, plus bond and cash funds for each region as well. They will also often have many country sub funds and currency funds too.
With one umbrella fund, you can invest in equities, bonds and CDS in Asia, Europe and North America, plus invest in emerging markets as well. It is possible to make all investments through just one or two umbrella funds plus switch from one country to another whenever you choose.
Wide range and flexibility are valuable features in umbrellas. Another benefit of the umbrella is that normally once an investor has invested in the fund, he or she can switch from one fund to another on a very low or no cost basis. Most umbrellas, though managed from many countries, are incorporated in Luxembourg. There are many umbrellas offered by huge, well established management firms.
Listed below are the names and address of mutual fund managers that offer umbrella or global equity funds.
ABN AMRO International Growth Fund, PO Box 283, 1000EA Amsterdam, The Netherlands. Tel: 011-31-20-628-2823. Fax: 011-31-20-629-5088.
Aetna Umbrella, PO Box 275, 47 Boulevard Royal, L-2012, Luxembourg. Tel: 011-352-443252.
AGF, PO Box 50, Toronto Dominion Centre, Toronto, Ontario M5K 1E9. Tel: 1-416-367-1900. Fax: 1-416-368-5244.
Barclays Fund Mangers, Rue des Mielles, St. Helier, Jersey, Channel Islands, Britain. Tel: 011-44-1534-67888. Fax: 011-44-1534-21882.
CMI Managed Portfolio Fund, Clerical Medical House, Victoria Road, Douglas, Isle of Man. Tel: 011-44-1624-625599. Fax: 011-44-1624-625900.
Fidelity Funds, 3/F Kansallis House, Place de L’Etoile, L-1021, Luxembourg. Tel: 011-352-250-4041. Fax: 011-352-250-340.
Fleming Flagship Fund, 25 Copthall Ave., London EC2 7DR, England. Tel: 01-44-171-638-5858. Fax: 011-44-171-256-9205.
Gartmore Fund Mangers, PO Box 278, 45 la Motte Street, St. Helier, Jersey JE4 8TF, Britain. Tel: 011-44-1534-27301. Fax: 011-44-1534-32848.
Govett & Co. Shackleton House, 4 Battle Bridge Lane, London SE1 2HR, England. Tel: 011-44-171-378-7979. Fax: 011-44-171-638-3468.
Hambros Fund Mangers, PO Box 225, Barfield House, St. Julians Avenue, St. Peter Port, Guernsey, Channel Islands, Britain. Tel: 011-44-148-17-15454.
Julius Baer Multifund, PO Box 36, Bahnhofstrasse 36, CH-8010 Zurich, Switzerland. Tel: 011-41-1-228-5111. Fax: 011-41-1211-2560.
Parvest Fund, Banque Paribas, 10a Blvd Royal, L-2093 Luxembourg. Tel: 011-352-46461. Fax: 011-352-464-64141.
Robeco Group, Herr Bokelweg, Postbus 973, 3032. AD Rotterdam, The Netherlands. Tel: 011-31-10-465-0711. Fax: 011-31-10-465-1544.
State Street Global Advantage Funds, 47 Boulevard Royal, L-2449, Luxembourg. which in regions and single countries. Look at the one, three, five and ten year performance of as many funds as possible. Look for similar funds offered by different managers. Compare performance of the similar funds you find. Remember the notation in Lesson Three that not all funds will answer to countries where they are not registered.
In 1970 I lived in London, England for a year, then moved to Hong Kong. During that time I also maintained a home outside of San Francisco, California.
This was a time of great inflation. My homes in California and in Hong Kong appreciated greatly. In 1976, when I moved from Hong Kong back to London, I noticed that London real estate was priced about the same as it had been in 1970. This puzzled me. Why had London property prices remained flat despite inflation?
On investigation, I learned that there had been a huge real estate crash in 1970 which continued to dampen real estate prices six years later despite the rampant global inflation. Then at the same time, the British pound collapsed suddenly over 35% versus the U.S. dollar from 2.4 dollars per pound to a new all time low of 1.52 dollars per pound. To my way of thinking London houses, which I thought were already very cheap by world standards, just became 35% cheaper.
I could not resist, started property shopping and eventually bought an old five bedroom house in Bedford Park in west London. I converted $15,200 to make a 10,000 pound down payment and took a 25,000 pound loan to meet the 35,000 pound asking price I had negotiated (about US$53,250).
A couple of years later, the pound rose and as mentioned in Case Study One, so did my business losses. I had to shut down my business and move. This meant selling my London house. Here I discovered that I made some great profits.
First, I had been right. London property had been underpriced. I was able to sell the house for 115,000 Pounds. I made a profit of 80,000 pounds. But the currency change helped enormously too. The pound had risen from 1.52 U.S. dollars per pound back to over 2.2 dollars per pound. My 80,000 pound profit was not worth US$121,600 (value at the 1.52 rate) but was worth $176,000. I earned $54,400 extra profit because of currency moves!
There is much we can learn from this case study both about real money, international purchasing power and how they affect currencies. This study is a classic example of how real money moves versus currencies that have been adulterated by governments.
In this case, property was the real money. Residential property is a classic hedge in times of inflation and currency destruction because it always offers a real service of value, i.e. a home for one to live.
In the study, this real money was first lowered by a local real estate crash. Most British real estate buyers were not aware how inflation had pushed real estate prices up in other countries. They were inadvertently beggaring their neighbors. British businesses could operate cheaper then elsewhere because it cost less to house their employees. This gave Britain an unfair advantage. Their low real estate prices were not caused because there was a greater supply of British land nor were British builders more efficient nor were British building materials more abundant. British homes were cheaper only because investors elsewhere had not yet seen the discrepancy.
Then prices really became cheaper when the pound crashed. I was lucky to buy when Britain was beggaring their neighbors the most. This did not last long. Overseas buyers (like myself) caught on to the cheap prices and Americans, Japanese and Arabs began buying London homes. Prices soared. So much money flowed into Britain that the pound rose.
As is usually the case the pound had been oversold at its bottom, so that it rose dramatically. The effect was shattering on my business (remember that at work I had pound expense, but U.S. income), but in my house sale, the results were wonderful.
Much of the profit I enjoyed from the sale of this house came from the very forces we have reviewed in these first four lessons. Certainly this period of dramatic inflation and currency turmoil was caused by the historical factors we have learned so far in this course. I was sitting at just the right place at the right time and so currency moves ruined my business, but also saved my overall finances enough that I could afford to buy a nice home in the English countryside and rebuild my business from a more modest base.
In the next case study, we will see why I did even better than the figures we reviewed here show, because I then turned all my profits back into the U.S. dollar which became very strong in the early 1980s. We’ll see why in Lesson Five.
Beggar-Thy-Neighbor. When a country purposefully devalues its currency, or encourages its currency’s depreciation on foreign exchange markets in order to make products produced in the country cheaper in foreign countries — thereby increasing sales.
Example: Say that two countries, Singapore and Malaysia, have currencies that exchange at the rate of 1:1. Both countries produce raw rubber and trade back and forth, with a balance of payments equaling zero. But say that, hypothetically, Singapore allows its currency (the Singapore dollar) to inflate, until it’s worth only 50% of Malaysia’s currency (the ringgit). That means 1 Malaysian ringgit exchanges for 2 Singapore dollars, whereas before it exchanged for 1 Singapore dollar.
Before the devaluation, a ton of Singapore rubber sold in Malaysia for 200 ringgits. But after devaluation, the same ton of Singapore rubber sells in Malaysia for 100 ringgits. This is great for Singapore, because Malaysian rubber will still sell in Malaysia for 200 ringgits per ton. And in Singapore, Malaysian rubber will sell for 400 Singapore dollars. All other things being equal (quality of rubber, lack of trade restrictions or tariffs) this will obviously stimulate sales of Singapore rubber — both in Malaysia and Singapore.
Countries have undertaken beggar-thy-neighbor strategies since exchange rates were first used. Recently the United States expressly allowed its currency to weaken, in order to stimulate sales of U.S. products with Japan. U.S. officials hoped that the weakening dollar would encourage Japan to lower trade restrictions. The strategy did not work, but it was a classic example of beggar-thy-neighbor in the 1990’s.
Bad Money Drives Out Good. This oft-heard quote means that whenever a person has a choice between using a currency that has stable, underlying value (such as one backed by gold) and a currency that has no underlying value (such as a fiat currency), the person will always hoard the valuable currency and spend the worthless currency first. The truth of this epigram has been borne out whenever a country has had two systems of currency or coinage, one more stable than the other. The less stable currency is always spent first, because people realize that it will be of less value in the future. Imagine an international bank in today’s economy, holding, say, dollars and yen. When payment needs to be made for something, which currency would the bank tend to use, and which would it tend to hold? Considering that the dollar has fallen to less than one- quarter of its value against the yen over the last 25 years, the bank would most certainly want to spend dollars first and hold on to the yen for the long term. Short-term considerations often arise, but inevitably people and organizations will pay for goods and services in a currency they consider to be ultimately worth less than a currency they consider to be worth more.
British Pound. GBP. Called Pound Sterling or just Sterling. The currency of Great Britain, hence the code GBP. Great Britain is a nation that encompasses four states — England, Scotland, Wales and Northern Ireland. Thus Scottish and English pounds are one and the same. They are interchangeable and are legal tender throughout Great Britain. Other pound currencies such as the Manx Pound (issued on the Isle of Man) keep a one-to-one parity with the English and Scottish pounds but are not legal tender except on their own island. The Irish pound (which is called the Irish punt) used to maintain parity, but no longer does so.
Hyperinflation. Extreme inflation in which prices rise uncontrollably, threatening to completely wipe out a currency’s purchasing power. The U.S. has never undergone hyperinflation, but many major currencies of the world have. Purchasing power of the German mark was wiped out by hyper- inflation prior to WWII. Brazil, Argentina, Mexico and many other developing countries have experienced hyperinflation during the last twenty years. Today, many of the countries of the former Soviet Union are undergoing hyperinflation, with consumer price indexes rising 2,000% or more yearly.
Stagflation. A combination of economic inflation and industrial recession, during which consumer prices rise but business output falls. This is often accompanied by rising unemployment as businesses cut back. A recent example of stagflation was in the U.S. during the 1970s, when rapidly-rising oil prices pushed consumer prices up sharply but caused businesses to cut back production.