Looking Ahead

By Alvan T. Simonds, President Simonds Saw & Steel Company

For thre_e years, from Janua ry, I9l9 to January 1922, commercial paper rates, \"y York, were high. Th6y fluctuated between 5/o and 8/o, These rates were not favorable to industry which during nearly all of. 1920 and for eight months of 1921 declined, bringing the hardest times of the generation.

For four years, from January t924 to January 1928, commercial paper rates cyclical low, because of President Hoover's efforts and for other reasons for which we do not have space here, may go but little below the low point already reached at the beginning of the year. paper rates have declined from 6fu/o to 3/+%. At the end of the six months there is little oi no evidence that the low p_oint for 1930 in industrial production has been reached. Cy.cles of industrial produ-tion usually make their low poin_ts at one of the seasonal low pointsl i. e., mid-summer or November-December. There ii no exceplion since the war and it is not likely thdt 1930 will prove io be one. This were low. They fluctuated between 3/s and 4%%. These rates were favorable to industry and to speculation. Accordingly from the peak in the spring of 1925 to the peak in the first half of 1929, industry in the United States was at a high level. Notice that this allows the usual lag of about fifteen months between the money rates and the industrial production. It does not overlook the

Previous issues of "Looking Ahead" have pointed out that major movements in industrial production are preceded by corresponding movements in money rates reversed. The chart in this issue of comparatively slight recession of. 1927. From the spring of 1924 to the fall of. 1929, there was a strong and almost-unbroken upward movement in stock prices, The chart shows the sharp brief declines in 1925-1926 and in the first half of 1929. Easy m-onel influenced speculation more quickly and more strikingly than it did industrial production.

Money ra-tes as shoz,n on the chart are commercial paper rates, Nezu york city. Stoch prices. ay frgrn the Annali,st. Industnial prodiction is'froi the Federil Reserve Bulletin. only.rnajor m9teffients are charted,. made by ciinectiii ertreme high and low points by straight lines, -

During 1928 and, ten months ol 1929, commercial paper rates increased from 4Vo to 6%%. These rates, whili not so unfavorable as those of l92O and 1921, were mu,ch less favorable to industry than were the rates of. 1924 to t928. Accordingly_i1du9!ri1! production declined very sharply from the middle of.1929 to the first of 1930. In thi first four months of 1930, the seasonal spring increase has been less than normal. In the six months to May, 1930, commercial

"T,ooking Ahead" shows that.major movements in stock prices are similarly preceded by major movements in money rates reversed. The money rates shown in this chart are ,commercial paper rates, New york City; but in studying major movements only, Federal Reseive rediscount rates_, acceptance rates or time mongy rates will answer equally well.

Close and'careful study of the chart will prove profitable. Taking first any given movement in money ratei, find the corresponding' movement in stock prices ind the corresponding movement in industrial production. If the chosen movement of money rates is dournward, then find the following downward movement in stock prices and the following downward movement in industrial production. For any upward movement of money rates find the following upward movements in stock prices and in industrial production.

From the low cyclical points-in every case except in 1921, stock prices turned up before industrial production.

From the cyclical peaks-in every case except 1929, stock prices turned down before industrial production. It is interesting to note that in the spring of. 1929 there was a sharp falling off in stock prices. This preceded the cyclical turn down in industrial production in June. Similarly in 192I, a few months before the cyclical turn up in industrial production, there was a decided rally in stock prices. Ilere were two notices that, in response to economic influences only, the ,cyclical turning points had arrived. Psychological influences delayed the actual turning points till later.

After the stock crash in October 1929, stock prices fell very abruptly and to a very low point. From this point they turned upward after money rates had begun to fall off. Industrial production turned up a little later, but this is doubtless only a minor movement, a seasonable movement, A study of the chart shows that the increase in stock prices that has occurred since November 1929 is the usual occurren'ce at this period of the cycle and as we have stated ordinarily it pre,cedes the major turnup in industrial production. In 1920 stock prices and industrial production turned up at the same time. In 1924 stock prices began to increase three months before industrial production. In 1926, stock prices began increasing in the spring. Industrial production turned up in the fall of L927. }Jerc was an unusually long lag. It illustrates the fact that stock prices were less influenced than was industrial production by the increase in money rates from 3% in the summer of. 1924 to 4rl/o in the fall of. 1926. In view of the facts we have just stated, it will not be surprising for stock prices in 1930 to keep on increasing (but not without minor reactions) for six to twelve months before industrial production makes its cyclical turn up.

This study is made to reassure those who are discouraged because industrial production and "business" have not yet turned up and are fearful because stock prices and speculation have been so rapidly increasing. Increasing stock pri,ces when money rates are falling is an evidence of the reasonable conviction of the majority of buyers and advisers basgd on past experience and economic law that improving business is not far off. On the other hand, increasing stock prices when money rates are abnormally high and are still rising is evidence of imbecility or temporary insanity on the part of the majority of buyers and advisers. Intentional misleading on the part of advisers is the only altern-ative explanation of the stock debacle of. 1929 and this seems inconceivable,