September 5-11, 1921
This week, stocks meander back and forth, and Germany completes its first war reparations payment.
Quick Stats:
DJIA: 66.78 (Today: 35,369)
Shiller PE Ratio: 5.4 (Today: 39.2)
Federal Reserve Bank of NY Discount Rate: 5.5% (Today: 0.25%)
GBPUSD: $3.69 (Today: $1.39)
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:
Unchanged and directionless describe equities this week. The Dow stayed range-bound between 65-70 after making a fresh 7-year low a few weeks ago. On Tuesday, September 7, Ford Motor Company announced strong sales through the summer, delivered upbeat guidance, and pointed to Q2 1921 as the trough in the current business slowdown. Stocks slid 2% on the news.
While business conditions are improving, equities are not following in sympathy. Sentiment in September 1921 is so poor that one columnist in the FT wonders why he should even care anymore.
The German mark slides 15% against the dollar on Wednesday after reports leak that the Reischbanks has sold 5% of its gold reserves and printed 10% of its currency from a week ago. “This expansion of paper currency should have a depressing effect on mark exchange for some time to come,” the WSJ writes. Britain and France are keen on recouping war damages from Germany even though reparations make no mathematical sense. Emotions run heavy.
Historical Fact: Purposely printing one’s way to prosperity is a fool’s errand. The lessons from today’s quantitative easing experiments have not yet been written, but because the major productive economies of the world (G7) are all engaged in it, hyperinflation will not be the outcome.
Dividend yields on equities underscore the fear on Wall Street. High quality equities from the likes of Loft (PepsiCo), Philip Morris, Sherwin-Williams, and Standard Oil of New Jersey (ExxonMobil) declare payouts between 6-8%. This is not front page news. Rather, the WSJ editors spend this week debating various topics ranging from train fare hikes to the twentieth amendment of the US Constitution to Henry Ford’s ingenuity.
John Maynard Keynes decries the lack of central bank strategy. In his latest column to the Sunday Times (which the FT analyzes), Keynes refuses to believe that central banks guide markets as they claim. If he had the controls, he would have hiked rates faster in mid-1919, but not as extreme as 7%. This delayed rate hike crushed the economy because it forced the Fed and BoE to act late in the business cycle.
Historical Fact: Keynes's illustration of central banks of 1921 contrasts markedly with central banks today. He would be proud. Having long embraced Keynesian economic models many decades ago, central banks lead markets in 2021. Today, you only have to follow central bank asset purchases to understand the future direction of the market.
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