October 31-November 6, 1921
This week, the Fed lowers rates to 4.5% and the Dow consolidates around 75.
Quick Stats:
DJIA: 73.98 (Today: 35,820)
Shiller PE Ratio: 5.8 (Today: 39.2)
Federal Reserve Bank of NY Discount Rate: 4.5% (Today: 0.25%)
GBPUSD: $3.94 (Today: $1.37)
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; high taxes still an issue (equity, debt markets)
Wartime raw material shortages are ending, 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:
Editors of the FT reminisce how they haven’t seen this much swagger from Wall Street in months. Both cheaper money and improving business conditions are creating enthusiasm in the market. Stocks close flat for the week after rallying 2% on the rate cut, due in no small part to professional shorts engineering drives against various issues. The Dow consolidates around 75.
In Round the Markets, the FT writes that a prominent broker rushed into the London trading floor, beaming with pride. He jumped onto a stool and proclaimed news of the recent rate cut. Cheers were heard a mile away, and alerted more people of the news. Before markets closed, retail dividend favorites like Rolls-Royce and Royal Dutch Shell were bid up, all sporting dividends near 7%.
The guarantee committee of the Reparation Commission just returned from a visit to Berlin. This committee acknowledges that further payment in gold marks will be impossible, and believes Germany has failed to provide any proof of serious effort to meet future obligations. As a result, raw materials as payment-in-kind will be the path forward.
Historical Fact: A comparable saga, albeit smaller, was the trio of Greek debt restructurings in the 2010s (2011, 2012, 2015). This culminated with the radical, anti-austerity political party Syriza coming to power. Critics derided Greece’s final bailout as a new Treaty of Versailles. Fortunately, the bailout programs concluded peacefully in 2018.
The Federal Reserve Bank of New York further cuts rates to 4.5% from 5% on Thursday. The WSJ notes that there has been a strong feeling in the country that the policy of credit restriction was applied with unnecessary vigor in the early part of 1920. It applauds Benjamin Strong’s decision to ease.
A letter to the editor comments on the recent rate cut. Unnaturally low interest rates of 1917-1919 gave way to frenetic speculation and economic activity the likes of which America had never seen. Nevertheless, the psychological factors that produced an atmosphere of optimism produced an atmosphere of pessimism for far too long. The Fed needs to learn how to counter balance these urges.
Historical Fact: Recessions leave scars. While fiscal and monetary accommodation was established for a fresh bull market by the end of 1921, people weren’t emotionally ready. Nowhere is time a greater healer than investing. After the Financial Crisis of 2008, it took one decade for the percentage of stock-owning households to return to 2007 levels. (according to the Federal Reserve Board Survey of Consumer Finances).
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