Stock Market Bottom-Fishing: Great Depression Edition28 September, 2011, 13:10. Posted by Zarathustra
Tags: Germany, Markets, Reparation, Treaty of Versailles, World War I
As I mentioned earlier, the process of getting from the top to the bottom in a financial crisis kind of event often took at least a year or two (I can add that it has taken Japan 20+ years, and they still have not hit the bottom). So are we at the bottom yet? I am not convinced.
The Great Depression began arguably with a market crash in 1929. Despite some strong rallies over the years after the initial crash, the market did not truly hit the bottom in 1932.
1929 The Great Depression, Dow Jones Industrial Average
The market got to the bottom on 8 July 1932, Friday, when Dow closed at 41.22. Over the weekend, something happened:
The Lausanne Conference was a 1932 meeting of representatives from Great Britain, Germany, and France that resulted in an agreement to suspend World War I reparations payments imposed on the defeated countries by the Treaty of Versailles. Held from June 16 to July 9, 1932, it was named for its location in Lausanne, Switzerland.
A moratorium had been placed on the war reparations payments in 1931 and a year later the delegates to the Lausanne Conference realized that the deepening world financial crisis in the Great Depression made it nearly impossible for Germany to resume its payments. However, Britain and France and other Allies had borrowed heavily to fight the war and in particular, France and Belgium were struggling after having had their infrastructure severely damaged by the fighting and by the deliberate destruction and plundering from retreating German forces as the war drew to a close. Therefore, the delegates came to an informal understanding that the permanent elimination of Germany’s debt and war reparations would be subject to reaching an agreement with the United States with respect to their outstanding war debts.
Further from Wikipedia:
However, the Lausanne agreement was contingent upon the United States agreeing to also defer payment of the war debt owed them by the Western European governments. The plan ultimately failed not because of the U.S. Congress refusal to go along but because it became irrelevant upon Hitler’s rise to power and his refusal to pay any reparations.
So basically, as the market hit the bottom, Germany defaulted on its World War I Reparation, and defaulted big.
Russell Napier wrote in his book Anatomy of the Bearand reflected on the event in Lausanne:
When the news of an apparent breakthrough on reparations was announced, the impact was particularly positive on commodity markets. Investors believed the international financial log jam had been broken and that consumption from Germany and the debtors nations was likely to rise. – p.150
By the time Germany defaulted, Germany has only paid about one eighth of the reparation as demanded under the Treaty of Versailles. But the good news is: the market finally got to the Great Depression Bottom.