If the Fed is successful in reflating the economy, then SPY should continue to do well. Gold may also do well if investors want to hedge for too much inflation. If the Fed errs by raising rates too soon or too quickly to drive the United States back into another near depression, then SPY and Gold will suffer while US Treasuries will soar.
One way to judge a family's financial health is to look at their monthly balance sheet. During good times, they should take in more than they spend to save for retirement and build cash reserves for bad times such losing a job or a medical emergency. Governments should be judged by the same metric. That is when the economy is healthy, deficits as a percentage of GDP should fall.
Yesterday, Monday, April 13, 2015, the US Treasury Department reported that the U.S. government had a budget deficit of $52.9 billion for March 2015. They also reported the total deficit now stands at $439 billion for the full fiscal 2015 year.
This shows the monthly information, including sources for receipts and outlays, graphically.
This shows the cumulative YTD information for fiscal 2015, including sources for receipts and outlays, graphically.
According to the "Monthly Statement of the Public Debt" for March 2015", the total US public debt outstanding is $ 18,152,056 million or roughly $18.2 trillion.
According to the most recent estimate of GDP dated March 27, 2015, total "Current Dollar GDP" stands at $ 17,418.9 billion and increased 2.4% over the prior year.
- Current-dollar GDP increased 3.9 percent, or $650.8 billion, in 2014 to a level of $17,418.9 billion, compared with an increase of 3.7 percent, or $604.9 billion, in 2013.
- During 2014 (that is, measured from the fourth quarter of 2013 to the fourth quarter of 2014), real GDP increased 2.4 percent, compared with an increase of 3.1 percent during 2013. The price index for gross domestic purchases increased 1.1 percent during 2014, compared with an increase of 1.3 percent during 2013.
Taken together, this means the US Debt is 104.2% of GDP.
Deficit as a Percentage of GDP is Growing!
Sadly, not only is the total debt higher, but the total debt as a percentage of GDP is also higher than the last time I wrote about the deficit on Seeking Alpha. [See U.S. Debt At 102% Of GDP Hits Another Record... Is It Time To Buy Gold?]
This table calculates that the US Government has borrowed about 23.6¢ of every dollar it spent so far in fiscal 2014.
In my February 13, 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."
Since my 2011 article, the old adage "don't fight the Fed" has held true for SPY, which has significantly outperformed cash and gold.
S&P500 vs Gold (NYSEARCA:GLD) (
As long as the US government spends more than it takes in and the Federal Reserve continues with its policy of holding rates at historically low levels, 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. This "wealth transfer" from a "hidden tax on savers" via lower rates has allowed the government to reflate the economy without causing high inflation, so far.
Despite claims that the US economy is recovering, and it is certainly much better than at the depth of the financial crisis, the US deficit continues to grow even as the Federal Reserve continues to keep interest rates artificially low. If the Fed raises rates, borrowing costs for the government, at least for short-term borrowing, will certainly go higher. If the Fed doesn't walk the perfect tightrope to raise rates but not too quickly to head off high inflation, gold and other physical assets could soar. Some think it could already be too late and another bubble is inevitable.
I believe that the Fed will probably raise rates this year, but at a very slow rate, probably no more than 1% per year or about 0.25% per quarter.
If the Fed makes the same mistake it made in the past, keeping rates too low for too long and we get massive inflation where they have to raise rates to double digits again to crash the economy and contain inflation, then gold should soar.
Is it time to buy gold or its ETF GLD?
ECRI's Future Inflation Gauge: On April 3, 2015 ECRI said its US Future Inflation Gauge (USFIG) fell, indicating lower inflation pressure. ECRI Chief Operations Officer Lakshman Achuthan said in a release, "The USFIG has now fallen further below earlier highs. Thus, underlying inflation pressures are increasingly subdued." This lower pressure should allow the Fed to keep rates near zero and if they raise rates, do it very slowly.
Technical Analysis: Finally, the chart above shows the price of gold finally made a higher low. This is the first step in reversing the bearish trend in gold prices since 2011
Conclusion: For now, I believe the Fed will be successful and global forces will contain wage pressures to help contain inflation so I have the majority of my investments in equities such as SPY, but I also initiated a personal and newsletter trade in GLD as a further hedge. I also believe the Fed will allow inflation to rise above its 2.0% target for a while to make sure the US economy doesn't fall back into a recession. Thus, gold could do well even without high inflation.
Additional 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. I also own GLD for a trade with a stop loss.
- SPY is the exchange traded fund for the S&P 500 Index.
- VTI is Vanguard's "Total Stock Market" exchange traded fund.
- 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.
- GLD is the exchange traded fund for Gold. With a current expense ratio of 0.40%, it may be a more convenient and less costly way to buy gold compared to buying the physical metal after commissions and storage costs.
Disclosure: The author is long SPY, GLD.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.