January 2-8, 1922
This week, the new year brings fresh optimism to stocks and rumors of an interest rate cut. Memories of the Great War and the 1920 recession start fading.
Quick Stats:
DJIA: 78.96 (Today: 36,338)
Shiller PE Ratio: 6.3 (Today: 40.0)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $4.20 (Today: $1.35)
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)
The US dollar has emerged from World War I as a reserve currency, alongside the pound sterling (currency markets)
Executive Summary:
It’s interesting how new years shape human emotions. All of a sudden, sanguine articles populate the papers. FT editors come back from holiday to summarize 1921: investors witnessed bashful bullishness near the last half of the year, which very few thought possible. They aren’t sure how long this rally will last, or if it’s even a durable rally at all.
A column graces the cover of the WSJ on Tuesday discussing the current interest rate, 4.5%. The author, a Boston cotton merchant, frets this rate may be too easy, potentially kicking off a speculative craze similar to 1917-1919. He’d prefer a mature adult in Ben Strong’s office if rumors are true of yet another rate cut.
Historical Fact: John Maynard Keynes outlined two necessary ingredients for a bull market: cheap money and human optimism. Allow me to go one step further since Keynes wrote that back in 1936: heroic bull markets (1929, 2008) occur when the Federal Reserve is no longer viewed as a system of productive liquid credits but rather a life preserver for speculators.
On Friday, the WSJ takes the temperature of bankers from coast to coast. Many of the abuses and illegitimate practices of 1919 have been eradicated. One banker said: “Everyone knows that political and financial readjustments are required abroad. As far as American banks are concerned, the worst has been seen thanks to the Federal Reserve System.”
Clarence W. Barron provides his “Outlook for 1922,” and all 800 words of passion are palpable. My goodness. Before he prognosticates, he provides readers a history lesson. Americans find themselves at a unique moment in their country’s history. Barron believes the risk/return profile favors US equities in this brand new Washington-led world.
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