Thursday, June 18, 2009

Jebediah, Cletus, and The Federal Reserve

This past Memorial Day weekend, I had the pleasure to join some friends on an adventurous father-son weekend to the Buffalo River in Arkansas. Two days of canoeing the rapids and camping amongst the stars was tremendous. Being that we were in the "back-country", my son and I decided to adopt new names for the weekend, Jebidiah and Cletus.

We quickly realized that balance would be crucial to surviving the river. Jebidiah claimed that I (Cletus) was causing the canoe to be "back heavy", but we had no problem keeping up with our brethren. With a canoe full of cargo, tipping over was not the desired outcome. Balance became our focus.

Financial markets, like canoes, appear to always be seeking balance or equilibrium. One night on our canoe trip, we had a discussion on the role of the Federal Reserve Bank. I was the loner in stating that the Fed has caused major fluctations in the market and we would be better off without it.

The chart below presents some interesting conclusions. The Dow Jones Industrial Average - Gold Ratio is presented from 1800 to 2005. The creation year for the Federal Reserve Bank is noted (1913). Note the "wild canoe ride" that occurs after the creation of the Fed. Before creation, there was steady growth with some corrections. Afterwards, it's major swings in both directions. Like someone paddling a canoe, the Fed "shifts its weight" too rapidly in the other direction causing a volatile swing to the other side.

For a more detailed analysis of the last century:

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