The Fed’s Balance Sheet, Inflation and S&P 102 Week Returns
Call it monetizing the debt or whatever you want, the Fed has expanded their balance sheet almost 4 3/4 times since July, 2008. It would be logical to assume that some of that liquidity has "trickled down" to the equity and commodity markets.
This is the structure of the various maturities of U.S. Treasury Securities held by the Fed. Treasuries were sold during 2008 as the Fed was making other types of loans to provide the market place with liquidity.
How about this for a "GEE WHIZ" observation: About five times the dollar amount of securities held by All Federal Reserve Banks seems to equate to the dollar value of the S&P 500 Market Capitalization since late 2009.
U.S. Treasury Securities have been held by the Fed since shortly after its inception. They have been purchased and sold for conducting both temporary and permanent open market operations (POMO). After spending hours gathering this data, we were surprised to find that the Fed held as high as 17% of Gross Federal Debt in 1974/75.
We are now going to turn our attention to inflation. First up, import price inflation.
All Imports: All Imports: Import prices advanced 1.5% in January, and for the first time since July 2008 the index advanced at least 1.0% for four consecutive months. Import prices increased 5.3% over the past year, the largest 12-month advance for the index since an 8.5% rise between May 2009 and May 2010.
All Imports Excluding Fuel: The index for nonfuel imports increased 0.8% in January, with higher prices for nonfuel industrial supplies and materials, finished goods, and foods, feeds, and beverages all contributing to the overall advance. The January increase matched a similar 0.8% rise in November, the largest one-month advances for the index since a 1.1% increase in April 2008. Nonfuel import prices rose 3.4% for the year ended in January, led by a 13.0% advance in nonfuel industrial supplies and materials prices and a 14.8% increase in foods, feeds, and beverages prices (chart 6 below).
Foods, feeds, and beverages prices advanced 2.6% in January following a 1.4% increase in December. Higher prices for food oils, fish, coffee, meat, and fruit all contributed to the January rise.
The Producer Price Index for Finished Goods rose 0.76% in January, seasonally adjusted, the U.S. Bureau of Labor Statistics reported on Wednesday, February 16. This increase followed a 0.88% advance December and a 0.66% advance in November. At the earlier stages of processing, prices received by manufacturers of intermediate goods climbed 1.11% in January, and the crude goods index moved up 3.30%.
Prices for finished goods other than foods and energy moved up 0.52% in January, the third straight increase. The index for intermediate goods less foods and energy climbed 1.03% in January, the largest increase since a 1.06% jump in April 2010. The index for crude nonfood materials less energy moved up 4.01% in January. For the 3 months ended in January, crude core prices climbed 11.1%, subsequent to a 10.6% rise from July to October. Over eighty percent of January's over-the-month increase was driven by a 13.6% jump in the index for iron and steel scrap. Those of us in the inflation hawk camp continue to be worried about the “core rate” for intermediate goods and crude materials making their way into finished goods.
This chart has all the major sub-indexes of the Consumer Price Index listed.
The PPI and CPI do track together, especially directionally speaking. Both have turned up and we would expect the gap to narrow. An annual rate, approaching at least 4% for the CPI in our opinion, is coming before the end of 2011.
The S&P bottomed 102 weeks ago at 666.79. At the high of 1,344.07 on Friday, February 18, the S&P was up 101.57% from the bottom. We have only seen a "double" in 102 weeks on two other occasions, 1934 and 1937 (see Table 1 below).
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