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Fear & Greed, Fear and Greed

This is Fear and Greed – The Week Ahead, where Sean Aylmer and Stephen Koukoulas discuss the major events, reports and releases that provide insight into the economy this week (with a look back at the events of last week too).

Find out more: https://fearandgreed.com.au

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Sean Aylmer: Welcome to Fear and Greed, The Week Ahead. I’m Sean Aylmer, and as

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Sean Aylmer: always at this time on a Monday morning, I’m joined

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Sean Aylmer: by economist Stephen Koukoulas. You’ll find him at thekouk. com, T- H- E- K- O- U-

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Sean Aylmer: K, thekouk. com, and on X using the handle TheKouk.

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Sean Aylmer: Stephen, good morning.

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Stephen Koukoulas: And good morning after a busy week last week, wasn’t it?

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Sean Aylmer: It sure was. How did you think Michele Bullock went

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Sean Aylmer: at her first, or in fact, the first ever press

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Sean Aylmer: conference for a governor after a board meeting and obviously

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Sean Aylmer: the first one for Michele Bullock?

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Stephen Koukoulas: She did really well, and I think even she said a

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Stephen Koukoulas: bit of plain- speaking came through, and that was really

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Stephen Koukoulas: refreshing that, first of all, the decision to keep rates

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Stephen Koukoulas: steady, absolutely non- controversial. I don’t think anybody was expecting

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Stephen Koukoulas: a move. But there was a debate about, well, is

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Stephen Koukoulas: the next move up or down? When will it occur?

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Stephen Koukoulas: Did they make a mistake in November with the rate

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Stephen Koukoulas: hike, which sort of came out of left field in

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Stephen Koukoulas: a sense? But she handled it well.
The questions, as

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Stephen Koukoulas: always in these things, they’re of mixed quality, but they

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Stephen Koukoulas: generally got to the key points. And the governor did

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Stephen Koukoulas: a really good job just even with a tiny dose

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Stephen Koukoulas: of humor attached to how she was answering these questions,

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Stephen Koukoulas: because they’re important decisions. We know the economy’s slowing down,

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Stephen Koukoulas: we know that the inflation rates falling, and that’s where

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Stephen Koukoulas: the updated forecast came through, and she just simply articulated,

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Stephen Koukoulas: well, like all mere mortals looking at the data as

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Stephen Koukoulas: it comes out, do we need to hike or probably

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Stephen Koukoulas: not. Do we need to cut? Well, not yet because

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Stephen Koukoulas: we just want to be sure that that inflation momentum

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Stephen Koukoulas: has been extended into 2024. So she did a good

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Stephen Koukoulas: job. Very good job.

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Sean Aylmer: What about the forecast, Reserve Bank forecast? They certainly have

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Sean Aylmer: changed their view on inflation. They’re much more sanguine about it.

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Stephen Koukoulas: Oh, yes, that was the killer point, and that’s why,

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Stephen Koukoulas: as we sit here on Monday morning, the markets are

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Stephen Koukoulas: still pricing in interest rate cuts. Not yet, but they’ve

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Stephen Koukoulas: still got, if you look at the yield curve going

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Stephen Koukoulas: out to the next 12 to 18 to 24 months, there

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Stephen Koukoulas: are rate cuts in there. And the fundamental reason, of

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Stephen Koukoulas: course, is that inflation is falling.
One of the simple,

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Stephen Koukoulas: simple rules of thumbs in economics that I’ve learned over

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Stephen Koukoulas: all those decades is that if you want to know

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Stephen Koukoulas: where interest rates are going, look at the momentum in inflation. If inflation is

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Stephen Koukoulas: going up, interest rates are probably going up; inflation is

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Stephen Koukoulas: coming down, interest rates will probably come down. And if

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Stephen Koukoulas: inflation is sort of broadly in the middle of the target, they’re going to be on hold.

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Stephen Koukoulas: And we’ve got this clear deceleration in inflation.
And the

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Stephen Koukoulas: RBA’s own forecast, as you were touching on, given we

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Stephen Koukoulas: had the downside surprise, I suppose we call it for

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Stephen Koukoulas: the December quarter numbers, a week or two back, forced

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Stephen Koukoulas: them to revise down their profile for inflation. So they’ve

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Stephen Koukoulas: got inflation returning to the top end of the target

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Stephen Koukoulas: in about 12 months, and then gradually drifting a little

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Stephen Koukoulas: bit lower after that.

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Sean Aylmer: Okay, so the other side of the equation with the Reserve

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Sean Aylmer: Bank, they’ve got price stability and full employment are their

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Sean Aylmer: goals under their charter. So employment is the thing that

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Sean Aylmer: Michele Bullock spoke a bit about last week. It’s also

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Sean Aylmer: an important figure out this week as we’re getting the

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Sean Aylmer: unemployment numbers for January, is that right?

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Stephen Koukoulas: Yes, for January, yes. Yeah, and they’re the critical issue.

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Stephen Koukoulas: If we’d have… I like to bore things down in

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Stephen Koukoulas: economics to try to keep it simple. Inflation we’ve just

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Stephen Koukoulas: discussed, absolutely vital to the interest rate outlook. But as

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Stephen Koukoulas: you said, the new mandate of the new RBA is to

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Stephen Koukoulas: put a greater emphasis on the labor market.
On Thursday,

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Stephen Koukoulas: we’ve seeing the January labor force numbers, and as the

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Stephen Koukoulas: Bureau of Statistics have said, I don’t want to get too

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Stephen Koukoulas: technical and funny here, but the seasonal adjustment between December

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Stephen Koukoulas: and January and even November with the bring forward of

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Stephen Koukoulas: the Black Friday sales impacting retail employment and all those

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Stephen Koukoulas: other things has really made it a choppy number. And

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Stephen Koukoulas: you might recall last month in December, we saw employment

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Stephen Koukoulas: falling 65 thousand. So that’s probably partly the trend, but

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Stephen Koukoulas: also partly just statistical noise.
So I think we’re looking

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Stephen Koukoulas: for a bit of a rebound, and I think when

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Stephen Koukoulas: we try to analyze and the Reserve Bank analyze what’s happening to

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Stephen Koukoulas: those numbers, they’ll put some sort of trend through there,

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Stephen Koukoulas: probably still detect that the labor market’s slowing down. The

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Stephen Koukoulas: big question also will be, will we see the unemployment

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Stephen Koukoulas: rate with a four handle on it for, well, best

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Stephen Koukoulas: part of 18 months now, it’s been three point something.

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Stephen Koukoulas: Last month was 3. 9, so obviously we’re really close

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Stephen Koukoulas: to 4%. That’ll be a really important signal to just confirm

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Stephen Koukoulas: interest rates are not going up, and that speculation about

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Stephen Koukoulas: when they come down will continue.

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Sean Aylmer: Something that Stephen Halmarick, the chief economist at Commonwealth Bank

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Sean Aylmer: last week, I was listening to him and he made

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Sean Aylmer: a really interesting point. You can get a higher unemployment

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Sean Aylmer: rate without anyone in the economy losing a job; it’s

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Sean Aylmer: just that more people enter the workforce and we sort

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Sean Aylmer: of forget that. A couple of things here I want

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Sean Aylmer: to say is, so it’s just that idea that people

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Sean Aylmer: don’t have to lose jobs for the unemployment rate to

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Sean Aylmer: rise, but also even at 4.1, 4. 2, 4. 3, historically,

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Sean Aylmer: that ain’t a bad result.

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Stephen Koukoulas: Oh, that’s a terrific result. And in fact, pre- pandemic

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Stephen Koukoulas: even, when we were sort of analyzing the economy and

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Stephen Koukoulas: the unemployment rate was hovering around 5%, you might recall

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Stephen Koukoulas: in 2018, 2019, well, that’s not bad. If we get it

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Stephen Koukoulas: to four and three- quarters, we’ll be doing really well.

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Stephen Koukoulas: Now, here we’re saying, ” Well, if it goes up to four and

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Stephen Koukoulas: a half, we’ve got a real problem.” But I think that

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Stephen Koukoulas: that point of a bigger economy is a really important

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Stephen Koukoulas: one. That immigration inflow that we’ve often spoken about in

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Stephen Koukoulas: terms of housing and these sorts of issues, yes, it

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Stephen Koukoulas: does help the labor market issues as well. In addition

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Stephen Koukoulas: to demand in the economy, as all these people come

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Stephen Koukoulas: in and buy houses and rent houses and all this

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Stephen Koukoulas: sort of stuff, they actually supply their labor. They want

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Stephen Koukoulas: to work, they need to work to get an income.

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Stephen Koukoulas: So you actually get the employment edging higher in a

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Stephen Koukoulas: reasonably growing economy, but the unemployment rate can edge up. But

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Stephen Koukoulas: the unemployment rate’s a percentage of the workforce. So if you’ve got

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Stephen Koukoulas: a bigger workforce, you get unemployment going up at a

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Stephen Koukoulas: time when you’ve got even okay levels of job creation.

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Stephen Koukoulas: So yeah, it’ll be interesting sort of thing, but I

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Stephen Koukoulas: think the critical point will be the unemployment rate, what

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Stephen Koukoulas: proportion of the labor force is unemployed, and even the

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Stephen Koukoulas: underemployment rate is important to people who have a job but who want to work more hours because they

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Stephen Koukoulas: need more hours to earn more money to pay the bills.

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Sean Aylmer: One final thing, Stephen, just quickly, we’ve got National Australia

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Sean Aylmer: Bank business conditions and confidence. We’ve got Westpac consumer sentiment

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Sean Aylmer: this week. What do you expect? Any changes from them?

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Stephen Koukoulas: Consumers are feeling a little less gloomy. I’m wondering whether

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Stephen Koukoulas: the talk of rates on hold and possibility of rate

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Stephen Koukoulas: cuts, the fact that wages growth has been lifting a

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Stephen Koukoulas: little bit and inflation is coming down, so helping cost

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Stephen Koukoulas: of living pressures, we’ll see the consumer for the first

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Stephen Koukoulas: time in a long time being just a smidge more

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Stephen Koukoulas: optimistic.
Businesses have been more resilient through this whole slowdown

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Stephen Koukoulas: that we saw in 2023, but alas, it’s catching up

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Stephen Koukoulas: on them. So we’ve seen a trend weakening in business

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Stephen Koukoulas: conditions. Again, it’s still way more optimistic than consumers. So

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Stephen Koukoulas: we’ll be watching that lab survey for clues on how

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Stephen Koukoulas: business is going. And importantly, from the subcomponents of the

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Stephen Koukoulas: survey, what’s happening to employment intentions, profitability, there’s all these

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Stephen Koukoulas: questions that get asked as well, which actually add a

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Stephen Koukoulas: lot of flesh to how the business sector is going.

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Stephen Koukoulas: So yep, labor force is the big one, but we’ll

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Stephen Koukoulas: be watching the consumer and the business sentiment numbers really

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Stephen Koukoulas: closely as well.

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Sean Aylmer: Enjoy your week, Stephen.

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Stephen Koukoulas: Thank you, Sean.

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Sean Aylmer: That was economist Stephen Koukoulas, better known as The Kouk.

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Sean Aylmer: You can find him at thekouk. com and then follow

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Sean Aylmer: him on X using the handle TheKouk.
I’m Sean Aylmer

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Sean Aylmer: and this is Fear and Greed, The Week Ahead.