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In my February 2011 article "How to Play Expected Inflation from the TIPS Spread" I wrote I was long SPY, as one way to benefit from expected inflation.

"I also believe it is a good time to own equities including SPY, the exchange traded fund for the S&P500, for both inflation protection and income."

As long as the US government spends more than it takes in and the Federal Reserve continues with its policy of buying the debt from the government at very low rates, I believe this relationship will hold true. Yesterday (12/12/12), Fed chairman Ben Bernanke said,

"Against a macroeconomic backdrop that includes both high unemployment and subdued inflation, the FOMC will maintain its highly accommodative policy. Today the Committee took several steps. First, it decided to continue its purchases of agency mortgage-backed securities (MBS), initiated at the September meeting, at a pace of $40 billion per month. Second, the Committee decided to purchase longer-term Treasury securities, initially at a pace of $45 billion per month, after its current program to extend the average maturity of its holdings is completed at the end of the year. In continuing its asset purchases, the Committee seeks to maintain downward pressure on longer-term interest rates and to keep financial conditions accommodative, thereby promoting hiring and economic growth while ensuring that inflation over time is close to our 2 percent objective."

Like it or not, savers in "safe" investments like CDs and US treasuries are financing the economic recovery. During the Q&A session, Bernanke admitted the goal was to force investors in safe investments into more risky assets for return to help the economy continue to grow. I believe the best investment, in terms of risk-reward, is to get a globally diverse basket of equity index funds like I recommend in my core portfolio with the top holding of the basket in the S&P500 or SPY.

On Wednesday, December 12, 2012, the US Treasury Department reported that the U.S. Government had a budget deficit of $172 billion for the month of November, an increase of 74.8% over the monthly budget deficit for the prior year. With total outlays of $334B, this means the government had to borrow 51.6 cents for every dollar it spent.

Year-over-year, receipts grew by 6.1% but spending rose even faster at 15.2% so the deficit is up 75%.

The data for this table is from the above Treasury report in Table 1 "SUMMARY OF RECEIPTS, OUTLAYS AND THE DEFICIT/SURPLUS BY MONTH."

This shows the information graphically. (click to enlarge)

Note: October 2012 was the start of fiscal 2013.

This table calculates that the US Government in fiscal 2013 has borrowed about 45.8¢ of every dollar it spent so far in fiscal 2013.

Don't Fight the Fed

All this borrowing by the government is supported by the Federal Reserve (Fed) holding interest rates extraordinary low. Add in the Fed's programs of quantitative easing to buy US debt and expand the Fed's balance sheet gave the Fed its intended effect of "reflating the economy" by pushing asset prices higher. The exchange traded fund for Gold (GLD) is up about 8.4% over the past year while stocks in the S&P500, counting dividends reinvested with this chart of , are up over 20.4%.

(click to enlarge)

(click to enlarge)

(SPY is the exchange traded fund for the S&P500)

At least for the past year, the old adage "don't fight the Fed" has held true for SPY and for gold as they have both significantly outperformed cash.

Notes

  1. SPY is the exchange traded fund for the S&P 500 Index.
  2. VTI is Vanguard's "Total Stock Market" exchange traded fund.
  3. VOO is Vanguard's new exchange traded fund that tracks the S&P 500 Index. It is a lower cost alternative to SPY. I own and write about SPY, as I have many years of data for it, but VOO could do slightly better than SPY over time because it has a lower expense ratio.
  4. Raw date in Table 1 below is from http://www.fms.treas.gov/mts/mts1112.pdf

(click to enlarge)

Source: SPY Soars As U.S. Borrowed 51.6¢ Of Every Dollar Spent In November 2012