November 28-December 4, 1921
This week, stocks await the outcome of the Washington Naval Conference, and the WSJ explores recent British pound strength.
Quick Stats:
DJIA: 78.12 (Today: 34,899)
Shiller PE Ratio: 5.9 (Today: 38.8)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $4.05 (Today: $1.33)
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)
European post-war debt payments are causing a strong dollar as gold flows to the United States (currency markets)
Executive Summary:
No drastic changes in the general business situation have occurred in November, but investors always crave some pressing matter to worry about. All eyes are on the results from the Washington Naval Conference, which focuses on naval disarmament. Every now and then, geopolitics veers into the financial markets and this is one such moment. Stocks trade sideways right up to the end of the week, when negotiations produce a landmark agreement capping tonnage of the leading naval powers of 1921: the US, the UK, and Japan.
The British pound sterling trades at its highest price since April 1920 on Wednesday. Sentiment in connection with the proposed debt moratorium to Germany has caused strength in exchanges, JP Morgan & Co. stated, but there is also the talk of exchange rate stabilization closer to pre-war levels. In either case, analysts at the firm aren’t sure there’s clear conviction and ponder something else moving the unconscious mind of the market.
Historical Fact: Just as today, nobody truly knows how risk assets, such as currencies, will perform in the short run. In 2013, Axel Merk famously declared that the Yen would approach infinity against the US dollar on the back of Abenomics and, in 2020, economist Stephen Roach stated that the US dollar would collapse against the euro from surging covid-related deficits. Neither event happened, despite garnering media attention.
Japanese markets surge on news that Hirohito has been named Prince Regent of Japan. The Tokyo Stock Exchange witnesses one of its highest volume days in furious trading. Much of the optimism has to do with Hirohito’s resemblance to his grandfather, Mutsuhito (Emperor Meiji). In a speech, Hirohito promises continued modernization of financial markets and national welfare, and reinforces his friendships with the West. He’s officially an emperor-in-waiting.
Historical Fact: Japan has not been mentioned in this newsletter yet, but it is building an equally important financial system alongside America and Europe. Today, these countries are known as the G7, and they set the tempo in political, cultural, and economic matters.
A fitting political cartoon of the ongoing disarmament conference adorns the Journal’s second page, which is all the rage this week.
Historical Fact: The Washington Naval Conference produced three core agreements. All of them held until the dawn of World War II in 1937. Supposed world peace boosted investor sentiment in the 1920s.
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