December 5-11, 1921
This week, stocks continue climbing a wall of worry. President Harding delivers his first State of the Union address.
Quick Stats:
DJIA: 79.60 (Today: 34,580)
Shiller PE Ratio: 6.0 (Today: 38.3)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $4.10 (Today: $1.32)
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:
Global investors rejoice at the comprehensive alliance that now binds France, the Empire of Japan, the British Empire, and the US under the Four-Power Treaty. The Dow rises 2% during the week. Japan’s approval of the Pacific status quo eases nerves around companies with Southeast Asian assets. Oil and rubber shares, such as Burmah Oil (today known as BP) and Royal Dutch Shell, are the top gainers.
On Monday, the front page of the WSJ’s ‘Review & Outlook’ section discusses how experienced Wall Street investors often suffer from an intellectual complex that can be described as a mix of cynicism and stubbornness. Meanwhile, recessions pass and human progress advances. Almost no speculation exists in the markets after being squeezed out during most of 1920-1921.
Although markets have rallied 25% off the summer low, a bevy of letters to the editors continue to rattle off unoriginal lists of bearish topics. The paper reminds readers that the broad market is a discounting mechanism, capturing all past, present, and potential future events. The Dow’s current price level forecasts a brighter 1922 than the bears envision.
President Warren Harding delivers his first State of the Union address. Of the dozen items to tackle in 1922, investors are focused on two: resolving dissatisfaction from the recent income tax bill and alleviating European exchange rate weakness. He acknowledges that America’s status in the world has been elevated since the World War.
C.W. Barron, of his eponymous magazine, writes a lengthy article on Tuesday describing Germany’s “financial holocaust.” Following the Franco-Prussian war in 1870, Germany debuted the Reichsbank and had a credit collection and monetary system that stood as a model for the world. It has now gone from upstanding citizen to pariah. Some type of international receivership should occur, and America must “referee” such negotiations.
Historical Fact: Germany will limp along over the next couple years until the reparations question finds resolution in 1924 under the Dawes Plan. And, about that Reichsbank: its core mechanisms set a blueprint for both the Federal Reserve and Bank of Japan.
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