July 25-31, 1921
This week, expectations run strong that the recent Fed rate cut to 5.5% will end the current recession.
Quick Stats:
DJIA: 69.80 (Today: 35,062)
Shiller PE Ratio: 5.2 (Today: 38.2)
Federal Reserve Bank of NY Discount Rate: 5.5% (Today: 0.25%)
GBPUSD: $3.56 (Today: $1.37)
Price of The Wall Street Journal: $0.07 (Today: $4.00)
Market-Moving Themes:
Potential end of the 1920-1921 recession; business sentiment consolidates and the recent rate cut helps stabilize liquidity (equity, debt, commodity markets)
Status of German WWI reparations as set forth by the Treaty of Versailles and overseen by the Reparation Commission (currency markets)
Executive Summary:
A daily opinion piece, known as ‘Round the Markets’, profiles Black Wednesday July 1914. An investor writes about his experience. Seven years ago, the London Stock Exchange closed during the early innings of WWI. Nathaniel Mayer Rothschild, The Lord Rothschild, urged the closure of the London Stock Exchange at once. The operating committee agreed rather than risk government closure. Instead of reopening in one week, the exchange reopened five months later. Investors thought they were ruined, but gradually trading conditions improved. He laments the awful sentiment around stocks, and reminds readers that investors have faced far worse than the current recession; financial markets in the developed world are strong enough to handle severe calamities.
The front page of the WSJ on July 27, 1921 published information regarding the new income tax established in 1913. High tax rates set during the mid-1910s to pay for WWI affected the number of tax returns. In 1916, about 200 households had income above $1m, but by 1919 this number had shrunk to 50. The article attributes the drop to business owners deciding that closing up shop and buying risk-free, tax-exempt Liberty Bonds (and other various Treasury issues) at 4% yields were superior choices than toiling away for improbable returns on investment necessary to make business ownership worthwhile.
Historical Fact: President Coolidge will be elected in a few years and lower income tax rates to historical lows in 1924 (marginal rates will swing from 75% to 25%). These income tax rates will help fuel the Roaring 20s.
US government data shows the economic recession of 1920-1921 affected California the least and the American South the most. There is acknowledgement in the business community that the Federal Reserve’s rate hike in mid-1920 started the recession.
South African Breweries (known today as SABMiller) takes out half a page in the Financial Times where it discusses the weak results of 1920 and how revenue has slightly improved in the first half of 1921. The company also reports how half of the directors visited South Africa and toured facilities. Nicely detailed descriptions of South Africa’s beauty are present.
The Financial Times has a 5-page “Banking Supplement” on July 29, 1921 discussing how countries are dealing with the current recession. The writers conclude America’s new Federal Reserve System was put to the test and passed incredibly well. The editors go on to presciently conclude that the Federal Reserve is the “most perfect monetary system” and one that will need few tweaks.
Historical Fact: Part of America’s success during the 1920-1921 period rests on emerging as the greatest creditor in the world after WWI and running gigantic trade surpluses. The Federal Reserve has gone through multiple modifications and enhancements since 1921.
An advertisement appears frequently in The Wall Street Journal, and it’s from Roger Babson’s outfit (also founder of Babson College). He published one of the first popular investment newsletters - Babson’s Reports - from the 1910s through the 1930s.
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