July 18-24, 1921

This week, the Dow Jones Industrial Average nears bottom, setting the stage for the Roaring 20s. Germany continues resisting appropriate WWI reparations.

Quick Stats:

  • DJIA: 68.11 (Today: 34,688)

  • Shiller PE Ratio: 5.2 (Today: 37.9)

  • Federal Reserve Bank of NY Discount Rate: 6.0% (Today: 0.25%)

  • GBP/USD: $3.58 (Today: $1.38)

  • Price of The Wall Street Journal: $0.07 (Today: $4.00)

Market-Moving Themes:

  • Potential end of the 1920-1921 recession (equity, debt, commodity markets)

  • German WWI reparations causing incredible US dollar strength (currency markets)

Executive Summary:

  • The severe deflationary effects from the June 1920 Federal Reserve discount rate hikes all the way up to 7% (known as the discount rate today) litter both newspapers in the early part of the week.

    • Historical Fact: 7% was the highest Fed discount rate until the 1980s.

  • The Federal Reserve lowers the discount rate to 5.5% from 6% on July 20, 1921 and over the next couple days the broad market improves by a few percent; commodity markets (oil, rubber) remain subdued. The Bank of England cuts rates one day later to match New York.

  • Policy tools from the Federal Reserve are brand new; a few articles discuss how the discount rate, open market rate, and potential new “money markets” should operate. The Federal Reserve System formed 7.5 years ago.

  • Several companies, such as Chevrolet and Rolls-Royce, mention price cuts on products and wage reductions.

  • Highlights in the newspapers this week reflect the growing unease of “forced liquidations” and terrible equity market trading conditions in New York, London, and Amsterdam.

  • German reparations are the single biggest factor moving the foreign exchange markets. Observers say for “several years”, the forex markets will express unnatural exchange rates. Under the Reparation Commission, Germany owes (in 2021 figures) billions of dollars to the UK and France. Prior reluctant and intermittent payments destroyed any concept of good faith. Whenever Germany sends partial payments to the Allied countries, these countries quickly convert German marks to US dollars in order to extinguish US dollar denominated WWI debt (the US emerged as the leading creditor nation after WWI). The currency table below shows incredible US dollar strength (the par value of the British pound sterling is $4.86, but spot is $3.58).

  • In marked contrast to the broad economy, the farming industry exceeds 100% capacity; a few articles mention an unusually favorable climate so far this summer. One column notes how the value of farmland and real estate doubled from 1910 to 1920. Over the same period, the Dow Jones Industrial Average was flat.

  • Interesting article about Poland’s recent creation as a sovereign state and how the country raised debt as a way to supply itself in its fight against the Bolsheviks/Soviet Union (today known as the Polish-Soviet War). A US government official recently mocked Poland schlepping around its devalued currency in New York, and so this article functions as both a rebuttal and explanation of Poland’s intentions.

  • There is a gossip column about an unusually large purchase of The Coca-Cola Company’s shares originating from a brokerage account in Asheville, NC. Purchases were recently made in early July right after Q2 ended, and word is that the company will deliver strong earnings in a few weeks. Based on the amounts listed, the company has a trailing PE ratio of 4 in 1921 (my own calculations).

    • Historical Fact: SEC insider trading rules don’t exist until the 1930s.

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