bart
08-03-08, 10:43 AM
"History doesn't repeat itself, but it does rhyme."
-- Mark Twain
"FLOWN DOLLARS"
"Dollars sank last week to the lowest level since the U.S. quit the gold standard, 63 cents. Because President Roosevelt had not yet seen fit to devalue the dollar, the price is determined by supply and demand in international exchange. And because the U.S. has a favorable trade balance, demand is normally greater than supply.
Whence the dollar flood has eaten away 35 cents of every 100 cents in each U.S. dollar since last April. Continental money-changers, canniest of whom are reputed to be ‘the Greeks,’ delight in selling dollars short, but bankers know that accounted for only a fraction of the drop. Last week from the British Commonwealth Relations Conference in Toronto came confirmation of what Wall Street has long suspected; that U.S. citizens have exported their dollars by the hundreds of millions.
"‘One of our problems,’ droned Viscount Cecil of Chelwood, chairman of Britain’s delegation, ‘is the flood of unwanted money that is pouring into our banks. These funds, deposited in the main by U.S. investors, are subject to withdrawal at 24- hour notice and are of little or no value, though it has not yet been discovered how to get rid of them.’
"Standard Statistics Co., Inc., world’s largest figure factory, estimated that $1,000,000,000 had flown the Atlantic, the bulk of it to London. France, whose tie to gold is none too secure, has received little, but Holland and Switzerland have been drowned in dollars. Unlike exports of gold which is strictly banned (for private citizens) the flight from the dollar has been quietly encouraged by Washington; it pushed down the price without requiring devaluation by Presidential decree."
-- Time magazine, September 25, 1933 edition
"U.S. STRIKES AT DOLLAR SHORTS"
"For the past two weeks there have been growing indications that the federal government is tightening its grip on the foreign exchange control or official intervention such as is practiced by the British Exchange Equalization Fund but the market is convinced, nevertheless, that hitherto uncontrolled fluctuations in dollars exchange.
"Thus far it has taken the form of a tightening of the control with regard to ‘swaps’ in the futures market. This is a blow aimed directly at the foreign speculator who has been maintaining an open short account in dollars in the belief that the American unit is headed for still lower levels in the world’s markets.
"Up until present, the foreign speculator, operating abroad has maintained his short position by ‘swapping’ contracts which are falling due for other contracts, say 90 days away. For example, if dollars had been sold for October 15 delivery, at the approach of that date October 15 would be bought and January 15 dollars sold against them. This produces a temporary demand for spot dollar exchange but the continued pressure on the forward market is depressing influences on the rate. The ‘swap’ really amounts to borrowing of dollars for speculative purposes.
"Permission is being granted to execute ‘swaps’ when it is shown that they are based on legitimate commercial needs. For example, if a shipment of goods has been delayed in delivery, it may be necessary to extend the exchange position until the goods are delivered and the exchange contract settled. No difficulty is experienced in obtaining permission for this type of transaction.
"The Continental exchange speculator, however, has no such basis for his transactions, which are financial rather than commercial, and permission for financial swaps is being refused. The effect of this procedure, it is believed in the foreign exchange market, will be to produce a growing outright demand for dollars as the short contracts mature, and which will not be offset by sales of futures. Commercial supply of dollar exchange is said to be very small."
-- Wall Street Journal, October 11, 1933
Here we find another example of what would today be unthinkable. The foreign exchange futures which are being referred to here are cash forwards. If you sell a January position you could find yourself with no means to legally buy back your position. So strange as it might sound, they drove speculators out of the short positions. Government just didn’t want any short bets against them in any market. They sought to have their cake along with a full belly and free rent all at the same time. If it couldn’t be achieved by a free market system, then they would make up their own rules and limit the freedoms of the market to their liking.
The last four months of 1933 were marked by numerous shocking issues. Many of the steps taken to force the markets to yield to the will of government are steps which will one day soon be reimplemented. Today we are all aware of the G-5 group of central banks and the political consensus around the world that promotes the manipulation of foreign exchange to achieve economic stability. The methods of the present are no different from those attempted by the central banks first in 1925, again in 1927 and finally by Roosevelt in 1933. In the September 25, 1933 edition of Time magazine, we find an interesting comment as to how the stock market was viewed to be a hedge against the currency inflation policies of Roosevelt. This is very important because I seriously doubt that anyone would view the stock market today as a hedge against inflation. Nevertheless, this issue was the primary factor which led the stock market into its rally which eventually peaked during 1937. Time magazine reported upon this aspect as follows:
"Methods of hedging against inflation within U.S. frontiers have become a favorite coffee-&-cognac topic. Purchase of industrial stocks is, of course, the most popular hedge, but commodities and land have been creeping up fast since the NRA threatened profits with higher labor costs. Some shrewd businessmen with little capital at stake argue that the best thing is to go as deep into debt as the banks (or friends) will allow; eventually they will pay off with cheaper dollars. Carl Snyder, economist for the Federal Reserve Board, was asked lately by a wealthy friend how he could hedge against all possible contingencies including deflation or stabilization so that he would die as rich as he was at that moment. ‘One way,’ snapped Economist Snyder, ‘is to shoot yourself.’"
The comment of economist Snyder in a very realistic sense was quite true. The only guarantee that one would die with essentially his current assets in this situation was to commit suicide for you never know what tomorrow would bring.
There is no doubt that during the year 1933, the stock market gained significantly on the prohibition issue which anticipated that the country would turn "wet" as of January 1, 1934. But the entire issue of Roosevelt’s currency inflation had a large impact upon the performance of the market as well.
The market began to rally finally from the summer of 1933 lows on the perception of a hedge against inflation. After a rally into January 1934, the market fell back and consolidated into a July low during 1934 once again. From there, commodity prices began to rally after the convertibility of gold for U.S. citizens had been officially abandoned in January 1934 and the effects of inflation began to spread throughout the world. Eventually, the inflation scenario continued to drive the markets higher into 1937.
From March 1933 into 1937, stocks rose largely upon the belief that inflation would raise the price levels of commodities and therefore earnings would rise as well. Stocks were also viewed as a hedge against inflation as we read in the September 25, 1933 edition of Time magazine. Therefore, we find some continuity in the analysis which took the position that stocks would rise in the shadow of commodities. This was largely created by the fact that much of the economy was heavily commodity oriented.
High techs were not exactly the rage of the times. Keep in mind that the automobile was viewed to be a large consumer of commodities. So we do find that there is some logic to the commodity relationship prior to World War II. But as the economy developed over the next several decades, the U.S. industrials and service oriented business sectors began to play a much more dominant role in the GNP of the United States. Thus, the concept of commodity relationships with the stock market has been divided and almost forgotten for the broad market as a whole.
After inflation spending continued yet commodities and stocks declined from the 1937 high, that scenario of currency inflation disappeared and Roosevelt’s theories appeared to be a total failure.
-- 1933, from "The Greatest Bull Market In History", Martin Armstrong
-- Mark Twain
"FLOWN DOLLARS"
"Dollars sank last week to the lowest level since the U.S. quit the gold standard, 63 cents. Because President Roosevelt had not yet seen fit to devalue the dollar, the price is determined by supply and demand in international exchange. And because the U.S. has a favorable trade balance, demand is normally greater than supply.
Whence the dollar flood has eaten away 35 cents of every 100 cents in each U.S. dollar since last April. Continental money-changers, canniest of whom are reputed to be ‘the Greeks,’ delight in selling dollars short, but bankers know that accounted for only a fraction of the drop. Last week from the British Commonwealth Relations Conference in Toronto came confirmation of what Wall Street has long suspected; that U.S. citizens have exported their dollars by the hundreds of millions.
"‘One of our problems,’ droned Viscount Cecil of Chelwood, chairman of Britain’s delegation, ‘is the flood of unwanted money that is pouring into our banks. These funds, deposited in the main by U.S. investors, are subject to withdrawal at 24- hour notice and are of little or no value, though it has not yet been discovered how to get rid of them.’
"Standard Statistics Co., Inc., world’s largest figure factory, estimated that $1,000,000,000 had flown the Atlantic, the bulk of it to London. France, whose tie to gold is none too secure, has received little, but Holland and Switzerland have been drowned in dollars. Unlike exports of gold which is strictly banned (for private citizens) the flight from the dollar has been quietly encouraged by Washington; it pushed down the price without requiring devaluation by Presidential decree."
-- Time magazine, September 25, 1933 edition
"U.S. STRIKES AT DOLLAR SHORTS"
"For the past two weeks there have been growing indications that the federal government is tightening its grip on the foreign exchange control or official intervention such as is practiced by the British Exchange Equalization Fund but the market is convinced, nevertheless, that hitherto uncontrolled fluctuations in dollars exchange.
"Thus far it has taken the form of a tightening of the control with regard to ‘swaps’ in the futures market. This is a blow aimed directly at the foreign speculator who has been maintaining an open short account in dollars in the belief that the American unit is headed for still lower levels in the world’s markets.
"Up until present, the foreign speculator, operating abroad has maintained his short position by ‘swapping’ contracts which are falling due for other contracts, say 90 days away. For example, if dollars had been sold for October 15 delivery, at the approach of that date October 15 would be bought and January 15 dollars sold against them. This produces a temporary demand for spot dollar exchange but the continued pressure on the forward market is depressing influences on the rate. The ‘swap’ really amounts to borrowing of dollars for speculative purposes.
"Permission is being granted to execute ‘swaps’ when it is shown that they are based on legitimate commercial needs. For example, if a shipment of goods has been delayed in delivery, it may be necessary to extend the exchange position until the goods are delivered and the exchange contract settled. No difficulty is experienced in obtaining permission for this type of transaction.
"The Continental exchange speculator, however, has no such basis for his transactions, which are financial rather than commercial, and permission for financial swaps is being refused. The effect of this procedure, it is believed in the foreign exchange market, will be to produce a growing outright demand for dollars as the short contracts mature, and which will not be offset by sales of futures. Commercial supply of dollar exchange is said to be very small."
-- Wall Street Journal, October 11, 1933
Here we find another example of what would today be unthinkable. The foreign exchange futures which are being referred to here are cash forwards. If you sell a January position you could find yourself with no means to legally buy back your position. So strange as it might sound, they drove speculators out of the short positions. Government just didn’t want any short bets against them in any market. They sought to have their cake along with a full belly and free rent all at the same time. If it couldn’t be achieved by a free market system, then they would make up their own rules and limit the freedoms of the market to their liking.
The last four months of 1933 were marked by numerous shocking issues. Many of the steps taken to force the markets to yield to the will of government are steps which will one day soon be reimplemented. Today we are all aware of the G-5 group of central banks and the political consensus around the world that promotes the manipulation of foreign exchange to achieve economic stability. The methods of the present are no different from those attempted by the central banks first in 1925, again in 1927 and finally by Roosevelt in 1933. In the September 25, 1933 edition of Time magazine, we find an interesting comment as to how the stock market was viewed to be a hedge against the currency inflation policies of Roosevelt. This is very important because I seriously doubt that anyone would view the stock market today as a hedge against inflation. Nevertheless, this issue was the primary factor which led the stock market into its rally which eventually peaked during 1937. Time magazine reported upon this aspect as follows:
"Methods of hedging against inflation within U.S. frontiers have become a favorite coffee-&-cognac topic. Purchase of industrial stocks is, of course, the most popular hedge, but commodities and land have been creeping up fast since the NRA threatened profits with higher labor costs. Some shrewd businessmen with little capital at stake argue that the best thing is to go as deep into debt as the banks (or friends) will allow; eventually they will pay off with cheaper dollars. Carl Snyder, economist for the Federal Reserve Board, was asked lately by a wealthy friend how he could hedge against all possible contingencies including deflation or stabilization so that he would die as rich as he was at that moment. ‘One way,’ snapped Economist Snyder, ‘is to shoot yourself.’"
The comment of economist Snyder in a very realistic sense was quite true. The only guarantee that one would die with essentially his current assets in this situation was to commit suicide for you never know what tomorrow would bring.
There is no doubt that during the year 1933, the stock market gained significantly on the prohibition issue which anticipated that the country would turn "wet" as of January 1, 1934. But the entire issue of Roosevelt’s currency inflation had a large impact upon the performance of the market as well.
The market began to rally finally from the summer of 1933 lows on the perception of a hedge against inflation. After a rally into January 1934, the market fell back and consolidated into a July low during 1934 once again. From there, commodity prices began to rally after the convertibility of gold for U.S. citizens had been officially abandoned in January 1934 and the effects of inflation began to spread throughout the world. Eventually, the inflation scenario continued to drive the markets higher into 1937.
From March 1933 into 1937, stocks rose largely upon the belief that inflation would raise the price levels of commodities and therefore earnings would rise as well. Stocks were also viewed as a hedge against inflation as we read in the September 25, 1933 edition of Time magazine. Therefore, we find some continuity in the analysis which took the position that stocks would rise in the shadow of commodities. This was largely created by the fact that much of the economy was heavily commodity oriented.
High techs were not exactly the rage of the times. Keep in mind that the automobile was viewed to be a large consumer of commodities. So we do find that there is some logic to the commodity relationship prior to World War II. But as the economy developed over the next several decades, the U.S. industrials and service oriented business sectors began to play a much more dominant role in the GNP of the United States. Thus, the concept of commodity relationships with the stock market has been divided and almost forgotten for the broad market as a whole.
After inflation spending continued yet commodities and stocks declined from the 1937 high, that scenario of currency inflation disappeared and Roosevelt’s theories appeared to be a total failure.
-- 1933, from "The Greatest Bull Market In History", Martin Armstrong