December 12-18, 1921
This week, Germany formally announces her intention to default on war reparations.
Quick Stats:
DJIA: 80.95 (Today: 35,971)
Shiller PE Ratio: 6.1 (Today: 39.4)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $4.16 (Today: $1.33)
Price of The Wall Street Journal: $0.07 (Today: $4.00)
Market-Moving Themes:
Sentiment slowly turning positive as business activity improves and financial conditions ease (equity, debt markets)
Commodity prices normalizing after working through post-war adjustments (commodity markets)
British and French interest payments and German reparations are causing a strong dollar as gold flows to the United States (currency markets)
Executive Summary:
The Dow moves up 1% over the week in a gentle Santa Claus rally. Opinions of the trend from the summer bottom have been met with shoulder shrugs. The Wall Street Journal editors nailed the low, but the Financial Times remains on the fence about how the economy may unfold in 1922.
Bethlehem Steel CEO Charles Schwab (no relation to the brokerage) lays out why high income taxes are harming America’s industrial growth: they cause gross misallocations of capital. He hopes President Harding lowers income taxes once again when he reviews criticisms of last month’s Revenue Act.
Historical Fact: President Ronald Reagan described a similar disdain for high taxes; he would work half the year and “loaf” around the other half as an actor in the 1950s. Channeling his inner Calvin Coolidge, Reagan lowered the top marginal rate dramatically in the 1980s.
The pound sterling storms higher on confirmation of the Anglo-Irish Treaty. Investors see stability returning to the British Isles after a rocky period following WWI. On Thursday, the FT discusses how a corresponding drop in the US dollar once accompanied a drop in the value of American securities but since achieving reserve status this correlation has ceased.
Germany intends to default on the January reparations payment. The mark drops 15% against the dollar, hitting its lowest level since the Great War. Prominent individuals such as John Maynard Keynes have voiced such concerns in the press for several months. The Reparations Commission will discuss further options in January.
Historical Fact: Over the past year, investors (Otto Kahn, JP Morgan Jr.) have purchased German equities on hopes of a rebound. This is very similar to the parade of investors (Prem Watsa, Wilbur Ross, David Einhorn, Marc Mezvinsky) buying Greek equities around 2015. In both cases, it ended in tears.
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