January 9-15, 1922
This week, frozen credit from the 1920-1921 recession shows signs of thawing, and Germany succumbs to the laws of finance.
Quick Stats:
DJIA: 80.82 (Today: 36,232)
Shiller PE Ratio: 6.3 (Today: 39.2)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $4.23 (Today: $1.36)
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 have normalized following the 1920-1921 recession (commodity markets)
The US dollar has gained reserve currency status alongside the pound sterling (currency markets)
Executive Summary:
The Wall Street Journal opens Tuesday’s paper with a remarkable piece about lower borrowing rates. In many investment circles, it has been met with suspicion. The concern centers around the health of economy. The editors at the WSJ brush this off as nonsense. At some point, they declare, the cheap price of money will be used for economic growth as well as investment speculation.
Historical Fact: After the fallout of 2008, low rates were also met with hesitation. Near the end of both 2010 and 2011, ructions hit markets as Wall Street panicked over future prospects (the eurozone crisis also created severe distress). Over the years, the view on low rates has evolved and provided a positive source of energy for markets.
Frozen credit is thawing all over the country. Some bond dealers have been offering loans as low as 3.75% as rumors of a 4% discount rate take shape. Bankers agree that the frozen credit situation in certain Fed districts is far from satisfactory; however, the reduction in rates alleviates the burden of borrowers who have been handicapped by liquidating loans.
Historical Fact: The 1920-1921 contraction is sometimes called the Forgotten Depression, but severe deflation did not result in a 1929 or 2008 event because the 1917-1919 boom wasn’t debt-driven. The Federal Reserve first let markets naturally expunge excesses before relieving credit stresses. A more modern example is the dot-com bubble and the ensuing 2001 recession.
France rips Germany in Cannes. How could the Prussian machine miss their reparations payments? The Allied powers agree to delay payments, but only a few more times. France is deadly serious: they will invade portions of Germany, such as the Ruhr valley, to obtain resources in-kind. This is the boldest declaration of conflict since the Great War ended.
Historical Fact: Resource wars are typically concealed by other means. In 2003, the United States, the United Kingdom, and Poland divided Iraq into three divisions to ostensibly seize “weapons of mass destruction.” In 2010, the then Polish finance minister admitted that securing oil was the main intention for invading.
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