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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&P 500, 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.

Like it or not, savers in "safe" investments like CDs and US treasuries are financing the economic recovery with a hidden tax levied with artificially low interest rates.

On Friday, January 11, 2013, the US Treasury Department reported that the U.S. Government had a budget deficit of only $259 million for the month of December, a decrease of 99.7% over the monthly budget deficit for the prior year. With total outlays of $269.5B, this means the government only had to borrow 0.1 cents for every dollar it spent. This is a huge improvement over last month when the government had to borrow 51.6 cents for every dollar it spent.

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

Year-over-year, receipts grew by 12.3% while spending by 17.2% so December showed a deficit of only $259 million. This is a great trend if it continues but it is possible some were prepaying taxes in 2012 for capital gains they took to avoid much higher taxes in 2013.

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 32.2 cents 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 1.5% over the past year while stocks in the S&P 500, counting dividends reinvested with this chart of SPY, are up over 15.8%.

(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 which has significantly outperformed cash while gold hasn't done much better than a 10-year treasury.

Disclosure: I am long SPY and own the traditional index fund versions of VTI and VOO bought long ago in various taxable and tax deferred accounts.

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 data in Table 1 below is from here.

(click to enlarge)

Source: SPY Soars As U.S. Borrows 32.2 Cents Of Every Dollar Spent In Fiscal 2013