“Remember that the industrial and railroad stocks used in the averages are essentially speculative. Only to a limited extent are they held for fixed income by people to whom safety of the principal should be the main consideration, and their holders are constantly changing. If they were not speculative they would be useless for a stock market barometer. The reason why railroad stocks during 1919 did not share the bull market in the industrials was that, through government ownership and government guaranty, they had in a real sense ceased, for the time at least, to be speculative. They could not advance in any market, bull or bear, more than enough to discount the estimated value of that guaranty.”
-William Peter Hamilton, 4th Editor of the Wall Street Journal (The Stock Market Barometer. Harper. 1922. page 186.)
Government’s Impact on Risk
According to Hamilton:
“It is plain, then, that with a government guaranty of a minimum return, based upon the average earnings of three years ended June 30, 1917, the railroads entered the fixed income class (page 189.).”
-William Peter Hamilton, 4th Editor of the Wall Street Journal (The Stock Market Barometer. Harper. 1922. page 189.)
Many are arguing that the government purchase of assets along the widest spectrum of risk is the cause of a more speculative investing environment. The work of Hamilton, with the citation of rail stocks after nationalization, point to the opposite outcome, suggests that if the government is so influential then markets should become more sedated rather than increasingly restive.
Fannie Mae: The Evidence
The proof of the strength in the claims made by William Peter Hamilton can be found in the share price of the Fannie Mae and the 30-Year Treasury from 1977 to 2020.
As soon as Fannie Mae lost the implicit guarantee and achieved the actual guarantee of government support the share price has gravitated to tracking the 30-Year Treasury. The chart below shows Fannie Mae from 2013 to 2020 being unable to track beyond the 30-Year Treasury.
For now, Fannie Mae has become a bond even though it is possible to vacillate between $0.50 to $6.00 (+11,000% or -91.67%).
William Peter Hamilton
Often cited by Dow Theorists Robert Rhea and Richard Russell, Hamilton was an intense follower of the writings of Charles H. Dow, co-founder of the Wall Street Journal.
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