October 24-30, 1921
This week, the economy begins healing from the wreckage of the 1920-1921 recession and the papers peer into the mind of legendary trader Jesse Livermore.
Quick Stats:
DJIA: 73.80 (Today: 35,677)
Shiller PE Ratio: 5.7 (Today: 38.7)
Federal Reserve Bank of NY Discount Rate: 5.0% (Today: 0.25%)
GBPUSD: $3.91 (Today: $1.38)
Price of The Wall Street Journal: $0.07 (Today: $4.00)
Market-Moving Themes:
High taxes, soft business conditions, and elevated interest rates are negatively impacting investor sentiment (equity, debt markets)
Wartime raw material shortages are easing, paving way for price stability (commodity markets)
European post-war debt payments are causing a strong dollar as gold flows to the United States (currency markets)
Executive Summary:
Stocks rallied 4% this week following a volatile trading session. Slowly but surely, participants are coming back into the market. The WSJ notes improved economic conditions in the Lehigh Valley and increased rail freight traffic in the Mississippi Delta during October. None of that matters as much to traders as two pieces circulating on Friday morning: Coca-Cola reinstated its dividend and SS Kresge (today known as Kmart) pre-announced better than expected September sales. There is growing consensus that the crushing deflation from 1920 could be ending.
Famed stock market speculator Jesse Livermore graces this week’s papers. Barron’s recently profiled his life a few weeks ago. On Tuesday he cuts to the chase, discussing rumors surrounding Mexican petroleum and how to think about profiting. The source of such intrigue isn’t important to him. First, price moves before fundamentals. And, second, volatile moments leave little time to crunch numbers so come prepared to trading sessions. He claims to have made $15 million shorting oil off the back of last week’s Royal Dutch rumors ($200 million in today’s dollars).
Anticipation that the Federal Reserve will cut rates further drives corporate bond yields to 4%. Treasury Secretary Mellon is expected to sound out the market next week. Bankers suggest that the November meeting might result in a discount rate of 4.5%. According to sources, Mellon views the current level of price deflation satisfactory and finds no more pockets of speculation.
Historical Fact: Unlike today, there isn’t a clear division between the Federal Reserve and the Treasury in 1921. Andrew Mellon remains one of the most powerful Cabinet members in history. A common joke of the era, “three presidents served under him,” will be memorialized in the 1930s by US senator George Norris.
A short piece from Wright Aeronautical (today known as Curtiss-Wright) expresses concern about government involvement in the aircraft industry. They want Congress out of the way. Even though technological limitations hold back the industry right now, removing man-made barriers would spur faster domestic innovation.
Historical Fact: The government eventually recognizes the importance of passenger air travel, beginning with the Air Mail Act of 1925. By 1926, several airlines launch, including Delta and United. Replace private air travel with private space travel today, and we get very similar feelings between SpaceX and the FAA.
A special feature in the FT about commodity price deflation is sprinkled with several ads stating there’s been “reduction in prices.” Now with raw material prices dropping 40-60% from a few years ago and credit easing, companies are making it known that they are still in business. This seems to be helping. On an adjacent page, Rolls-Royce mentions improving business conditions.
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