The Financial Situation

Whither Are We Going in 1920?

MERRYLE STANLEY RUKEYSER

THE tragedy about newspaper reports of the waltzing of security prices in the stock market is that they are always too late. They narrate what has happened in the session that has closed, instead of what will occur in the one that is about to open.

And so the speculator who reads is never wholly satisfied. Through the ages, the press account of the market pursues the actuality, but is never able to catch up with it; surely not to get ahead of it.

Of course, the business of being a broker would not be nearly so profitable if the atmosphere of mystery which pervades the great temples of speculation was dissipated. It is the uncertainty which fascinates the tens of thousands who inwardly feel that some time through a happy intrusion of luck the wealth of Croesus will be theirs.

IN the nature of things, it is impossible accurately to predict precisely what security prices will do in any given period. Many guess, and upon the accuracy of their guess their fortune hangs. Sometimes in special cases, however, men are in possession of information which renders their judgment comparatively error-proof. But for the great masses who insist on exercising their inalienable right as free men to play the market loaded dice are not within reach.

At this time, the man who has contributed funds and passionate interest to the stock market is infinitely more concerned with what is coming in 1920 than in a review of what has taken place in 1919. And if this article contained an infallible forecast of the exact price every active stock will sell at a year hence, it would deserve on its merits as news to be spread under eight-column streamer headlines on the first page of every newspaper in the country. . . .

And yet the market, unless manipulated, is responsive to broad movements in the outer world. Price movements are effects, and events outside are causes.

In 1920, that delicate piece of mechanism— the security market—will be influenced and swayed by countless currents which we do not yet foresee. However, as the new year, the first year of formal peace in nearly six years, opens, one can see ahead some of the dominant economic issues which will press hard for expression in the dancing to and fro of stock quotations.

Five great groups of questions stand out among all the rest. They have many phases and the exact justice in each is hard to know. But that they will react upon security prices seems beyond doubt.

FIRST, there is the question of labor unrest. A distinguished Britisher was asked recently by a group of Chicago reporters how long he believed the "labor trouble" would last.

"If I were very pessimistic," he replied with the zest of complacency, "I would say one year; if I were optimistic, I should say that it is about over now."

If this statement embodied the whole truth, security prices might well hesitate before declining. But labor unrest is hardly likely

completely to disappear as long as human folk toil. Many socially conscious persons conceive intelligent unrest as a spur to progress. Louis Untermeyer, the poet, expressed the thought thus, "From sleek contentment keep me free."

The speculator and the investor may as well know that the labor problem has not been settled, and still looms up as the great issue. If the contest of labor to attain a greater share in industrial control is directed intelligently and met sensibly by those whose immediate interests are affected, it need cause no crash in security values. Indeed, provided adequate labor-saving machinery is progressively installed and efficient methods of production introduced, the workingmen can get a larger share of the product without jeopardizing unduly the interest of other parties.

From the strictly market viewpoint, the thing to be deprecated is industrial warfare, involving the cessation of production and the adjustment of conflicts of interest by trial of battle alone. If Congress can devise any instrumentalities which will make for the settlement of industrial disputes with a minimum of matching of force against force and a maximum of conference, the foundation of security prices will tremendously be strengthened.

If the next election is going to decide issues and not merely popularity contests, the labor question must be one of the great matters on which the competing parties will divide.

THE election will be the second great market influence.

In the early months of the year, it will lie in the background, and manifest itself, if at all, only in the undertone in the surf of stock prices. But toward June, when the conventions assemble, the country will once more be fully engrossed in politics—its favorite sport. In its daily swings, the stock market will reflect the estimate of the speculative community of the candidacy of Mr. So and So, who seems strong enough to capture the nomination in one of the two great parties. And so, after various vacillations, the market will stand ready to absorb the news of the election itself. If a law and order candidate is elected, the effect on the market should be conspicuously favorable. The event may be discounted in advance, if the result is not in great doubt. An extremely powerful Socialist vote, on the other hand, would tend to stay the activities of advocates of higher stock prices and would aid those who would like to see quotations drop.

Intimately connected with the next election is the railroad problem, whi-ch may be considered the third great market influence of 1920. No matter what Congress does in the way of legislation before the roads are turned back to their private owners, the real test will come in 1920.

The head of one of the largest commission brokerage houses in the country, when asked about the outlook for the coming year, remarked :

"I would like to make the broad answer that there is only one factor in the United States which, to my mind, should prove controlling now, or in 1920, and that is, the treatment meted out to the railroad securities of the

country, almost entirely in the hands of confiding institutions and investors. Any bull enthusiasm not based on progressive, favorable and carefully safeguarded treatment of the railroads of the country is without true basis; and while I admit that sentiment in Washington is favorable to an improvement in the treatment which this important interest has received up to date, I cannot as yet see that it has crystallized to a point upon which one can base any very optimistic views for the future."

IN the great rise in the market value of securities in 1919, the rails played virtually no part. None of the expectation of high earnings over a long period, which affected industrial securities, has up to the time of this writing been written into railroad security values.

The rail stocks have in fact been tending to discount unfavorable developments. If the solution of the railroad problem should prove to be extremely favorable to private capital invested in them, then the prevailing scale at which the rails are sold in the open market is vastly too low. The stock speculator will watch the actual conditions of the roads in 1920 with extreme care to determine whether they are better off than anticipated, or worse, and the tendency of quotations will be to adjust prices to developments. If conditions are wholly favorable to the private owners, the swing of the rail stocks upward ought to be greater perhaps than that of any other class of security.

Incidentally, unless the railroads are permittetd physically to deteriorate, there is likely to be a tremendous period of buying of supplies during the forthcoming months. Under the government administration, many of the needs for betterments and repairs have been deferred, particularly during the incumbency of Mr. Walker D. Hines. This policy was due in part to high prices, but more particularly to the uncertainty as to what would be done with the roads.

As soon as their final disposition is determined, large orders will probably be placed. Great quantities of rails are needed, and, if bought, will greatly stimulate the steel industry-

Locomotives and cars of every character are also needed, and, when the purchasing of them is arranged the activity of the large makers of equipment will be significantly heightened. In 1919, the decision of the Railroad Administration not to buy on a large scale revolutionized the character of all those industries whose chief work is to equip the railroads. The president of the Baldwin Locomotive Works at Philadelphia recently said that 70 per cent of the production of that company was devoted to foreign orders.

And the tendency of European currencies to shrink progressively in value to a great extent has curtailed foreign purchases. This suggests the fourth great question which will influence the stock market in 1920.

The American dollar is at a tremendous premium of the currencies of the former belligerent nations of Europe, which normally are the best customers of the United States. The discount of the lira, for example, is so great as to cause the price of a ton of American coal delivered in Italy to reach $60. In practice, this high position of the dollar makes America the dearest country in the world to buy in, and automatically causes foreign trade to tend to disappear.

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IF this were only a question of the pocketbook, sentiment would be out of place, but the demoralization of the foreign exchange rates is keeping from Europe many of the made-in-America products needed to rehabilitate economic life. To inform the people of the United States of the practical meaning of the situation, delegates from Great Britain, France, Belgium, and Italy recently came to this country, and appealed for aid in a tour through Industrial America. Leading bankers pledged themselves to seek to work-out a comprehensive plan to finance the Old World.

The tendency was to look back to the general principles embodied in the plan of Mr. Henry P. Davison and in the Edge bill. When it was evident four or five months ago that the country was not yet prepared to accept the bankers' programme for helping Europe, leading financiers indicated that the people needed a few hard bumps before they would realize the situation. Several "bumps" have already been felt. The export business of many concerns has dwindled as a result of the exchange situation, and precipitate declines in the stock market in November, due largely to money conditions, indicated that all was not well. This movement has better prepared the public to understand the case of Europe in the role of our greatest debtor seeking fresh credit.

Domestic commerce was so large in the year just closing that to some the foreign situation seemed academic. The drift away from war economy brought extremely free spending, which challenged the productive capacity of the nation's giant industries. Many wants which during the war were deferred were satisfied during the last year.

MEN of commerce feel that the time will come when permanent foreign trade will be needed to care for the surplus output of the country's mills, which was tremendously enlarged during the war. Interior cities like Chicago, which in the period before 1914," had no more interest in international trade than a stone blind man has in the movies, are now searching eagerly for foreign markets.

The price of stocks in 1920 may well depend on the sale of bonds^-foreign bonds.

Unless the debentures of Europe are bought by American corporations and individuals, the Old World will have to stop buying goods over here, because of the lack of the wherewithal with which to pay for things.

Even if the $500,000,000 interest which Europe owes the government of the United States each year is postponed during the period of reconstruction, France, Italy, and Belgium alone will need at least $1,500,000,000 of credit in 1920 to finance their purchases here. Financial leaders agree that the only feasible way to create this great reservoir of credit is to call on the plain American to purchase European securities or securities of American corporations especially created to buy European stocks and bonds.

When the bankers of Wall Street were asking in vain for nationwide action to meet Europe's needs, the stock exchange ignored the delay and security prices crept up aazzingly. In 1920, the market will have to reckon with the foreign situation, and the movement of quotations will be based in part on whether America is to have a large international trade.

For the greater part of 1919, industrial stocks in their price movement defied the law of gravitation. They shot up with the speed of the skyrocket and for a long time stayed up. The upward march was so striking that the dispassionate student after the event might well wonder why every one with funds available and the will to speculate did not share munificently in the accumulation of easy money.

OF course, the "bull" market of 1919 did greatly enlarge the obligations of many citizens under the income tax law. Millions were made on paper, and a reasonably large proportion was conserved through transferring stock holdings into bonds.

But the reason why every middle class person did not become a millionaire can be grasped by dissociating the great "bull" period into component days. On no given day after the rise had started did the average man know positively whether the crest of the wave of rising prices had been reached. As early as May, many folk felt that the peak had been attained, and they continued in that view even though actual developments with the exception of the backsliding in June and August disproved their theory until the November break.

A very brilliant analyst of the stock market received the information early in the year that Crucible Steel, then selling under 75, was going to have a sharp rise in value. The stock had sold as low as 58 ⅛ early in the year, and while the man deliberated the stock jumped up two points. He passed on the information that he had received to a friend, but added:

"I am not going in on Crucible, because I feel that it is too late. The stock has already advanced two points."

Before the reaction set in toward the close of the year, Crucible soldas high as 264.

The inflation of security values in 1919 went on faster than the inflation of currency and credit, and toward the end of the year a money shortage developed.

While the average price of industrial stocks was each month working up to a new record for all time, the stock market was calling insatiably on the banks and the Federal Reserve system for money, which is the stuff on which it feeds. A few weeks ago the pumping reached the limit of endurance, and the banks began to contract their loans, making less money available for stock exchange purposes. Inevitably, lower prices for securities came, because it takes less money to finance the holding of a stock selling at 80 than at 100.

In 1920 the stock market observers will have to keep an especially vigilant eye on the money situation, which will be the fifth great market influence.

The stock market in bidding for money will have to compete with productive domestic industry, with the railroads which will seek to build themselves up, and with the Old World in quest of further gigantic credit operations.

When call money rates reached the highest point since the panic of 1907 in November, approximately $1,500,000,000 was tied up in stock exchange loans. That sum, it is believed, will be almost enough to set the wheels of industry in Italy, Belgium and France in motion.