September 12-18, 1921
This week, the Dow punches through 70 (a level not seen since May) yet negativity still plagues the papers.
Quick Stats:
DJIA: 70.76 (Today: 34,607)
Shiller PE Ratio: 5.4 (Today: 38.7)
Federal Reserve Bank of NY Discount Rate: 5.5% (Today: 0.25%)
GBPUSD: $3.71 (Today: $1.38)
Price of The Wall Street Journal: $0.07 (Today: $4.00)
Market-Moving Themes:
Sentiment remains lukewarm towards stocks despite the perfect setup (equity, debt markets)
Raw material prices continue easing as wartime shortages abate (commodity markets)
German war reparations causing strong dollar (currency markets)
Executive Summary:
Several columns this week rattle out reasons why stocks should plunge further. The Dow’s summer slump might be temporarily over, but according to one view the upcoming winter “could see” averages head toward 50. Among the top reasons listed: income taxes, deflation, moderating post-war economic growth, company share issuance and poor central bank policies. Not a single positive tone can be found.
Historical Note: After pouring through paper after paper during the 1919 wonder year, it’s fascinating to read the bullish sentiment. We’re talking extreme bullishness: calls for Dow 200 (the peak was 120) and feelings that the post-war boom won’t end for years. Feelings flip by mid-1921. Neither panic selling nor forced liquidations mark a bottom, just apathy and quietness.
On Sunday, a former war veteran in London writes a fiery op-ed about conditions in the stock market. He returned to trading stocks in 1918, and says the continued downward momentum is the result of incredible taxes from Westminster. He writes how he could easily find 200-250 profitable trades per year in the decade before 1914. Over the past year, it’s been impossible to make a living and he’s ready to hang up the cleats. High taxes have led to poor volume, and he sees no reprieve.
The professional writers at The Wall Street Journal rail against America’s foolish tax policy on Friday. Of all the things keeping the market down, these journalists believe risk develops countries and propels growth. If money is being given safe passage in an uncertain world, then it will not come out of hiding. President Wilson’s policies after the war have impacted capital markets. Collectively, the editors are calling for lower taxes and further rate cuts.
Germany made the first reparations payment at the end of August. John Maynard Keynes one month ago mentioned that Germany will miss a future payment by 1923. Blatant disregard for compromise has put the nation into a mad scramble. German banks offer to mortgage their industrial property in solidarity with the nation state.
Historical Note: Over the next several years, we’re going to see this situation go from bad to worse. It might seem incredible that WWI reparations are still a topic three yeas later, but geopolitics and markets work in long waves. Iraq is still paying Kuwait reparations from the Gulf War in 1991, and the 2008 financial crisis regularly gets mentioned on Bloomberg TV and CNBC in 2021.
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