October 3-9, 1921
This week, Treasury Secretary Andrew Mellon testifies to Congress and bankers convene in Los Angeles.
Quick Stats:
DJIA: 70.95 (Today: 34,326)
Shiller PE Ratio: 5.5 (Today: 37.6)
Federal Reserve Bank of NY Discount Rate: 5.0% (Today: 0.25%)
GBPUSD: $3.73 (Today: $1.35)
Price of The Wall Street Journal: $0.07 (Today: $4.00)
Market-Moving Themes:
Sentiment remains lukewarm towards stocks despite improving business conditions and monetary easing (equity, debt markets)
As wartime raw material shortages ease, price stability reigns (commodity markets)
German war reparations and European post-war debt payments causing strong dollar as gold flows to the United States (currency markets)
Executive Summary:
The Dow trades sideways this week, but articles begin to paint a rosier picture of industry. A combination of consumer price cuts and cheaper money over the past quarter is leading to increases in railroad activity and oil production. Business activity in September is the highest so far this year. An economist states that the trough in activity was likely in Q1 1921. WSJ writers point out that while bonds are trading at highs last seen in 1920, the index is down about 15% year over year. The main culprit as they see it? Income tax rates.
American International Corporation, one of the hottest stocks in the market, nearly hit bankruptcy last year when bets in Latin America soured. The company had paused its dividend and warned about business conditions. Fast forward to today, and results have improved. Management now sees daylight ahead.
Historical Fact: Founded by the head of Citigroup, AIC was technically a publicly traded closed-end fund. The fund invested in the popular emerging market space during the 1910s. Sadly, none of the investments panned out and it liquidated in the late 1920s. Every bull market has its “hot” fund, from the Jacob Internet Fund (90s) to the Fairholme Fund (00s) to the ARK Innovation ETF (today).
Andrew Mellon speaks to Congress about his plans since becoming Treasury Secretary earlier this year. He makes his intention clear: to create a taxation system for a modern industrial society. Mellon wants to solve two core issues. The first is to extend maturities on European war bonds, thereby providing breathing room. And, the second is to make a case for lower income taxes. In his view, taxes lead to improper allocation of capital and slower economic growth.
Historical Fact: Andrew Mellon will structure much of the 1920s economy. It’s going to take him a few years to get a handle on how government works, but, by 1924, the media will brand the government as Coolidge-Mellon.
On Thursday, British investors aren’t swayed by Vladimir Lenin’s appeal for help to alleviate a severe famine ravaging the country. A few years ago, millions of pounds went poof when Russia’s sole stock exchange in St. Petersburg closed. Lenin counters the British business community by calling the famine a humanitarian crisis; old debts can be settled later. He believes his Bolsheviks will be victorious in the current Russian Civil War and promises to repay any and all goodwill soon.
Historical Fact: America ultimately answers Russia’s plea for relief while Britain provides very little. Lenin’s posse will soon emerge victorious and establish the Soviet Union in 1922. Russia won’t have another stock exchange until 1991.
American bankers gather in Los Angeles on Monday to discuss the moment's most pressing matters. Networking events round out the evening. One popular presentation analyzes London's prominence over the past 200 years and concludes gold inflows were matched by balanced credit outflows, backed by Britain's world order. If New York is to mature and dominate international finance, bankers should extend more credit to Europe. After heavy topics like this, the schedule moves to some after hours mingling. The main event is at William Wrigley Jr.'s request: a visit to his Catalina Island. The chewing gum magnate recently acquired the island and hosts a mixer at his oceanfront resort.
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