The Evergreen Portfolio: Timeless Strategies to Survive and Prosper from Investing Pros

Chapter 4. How Fed Policy Fuels Market Cycles

Gary Alexander

Since 1913, we've seen five 17-year market cycles. We've just seen a decade-long bear market. What's next?

The Federal Reserve Board is nearing the end of its first century. Its track record consists of a rollercoaster ride of artificial booms, mega-busts, and a collapsing currency. More often than not, Fed policies extended the periods of market decline from a brief but painful natural cleansing process to a 15-to-20-year downward arc. The U.S. dollar is another casualty. Except for the Civil War, the dollar's value was stable for the 125 years before the Fed was created. Since 1913, however, the dollar has fallen by 98 percent.

The Birth of the Modern Federal Financial System

On March 31, 1913, J.P. Morgan, Sr., died at age 76. He had been a one-man Federal Reserve Board over the previous generation, single-handedly rescuing the nation from the panics of 1894 and 1907.

Morgan's death ironically came in the same month that Woodrow Wilson was inaugurated as only the second Democratic President since 1860. In the same fiscal quarter, the 16th Amendment authorized federal income taxes. Later in 1913, the Federal Reserve Act was signed into law. So, 1913 was the birth of the modern financial order—and the start of a series of six long-term bull and bear markets in stocks.

World War I soon intervened and global stock markets were closed for most of the second half of 1914. During that timeout, the Federal Reserve was officially ...