From February seventeenth, two thousand twenty-five to February twenty-first, two thousand twenty-five

I. Foundation 

resistance to change and hence greater dependability for the results shown in the past.

How much spending can Musk’s DOGE actually cut?

In U.S. government spending for the current fiscal year, approximately 25% is discretionary spending, while the remaining 75% is mandatory spending, including Medicare, Social Security, and interest payments on fiscal debt.

In other words,The “Doge” team can truly control only the discretionary spending of 25%.

If they are to fulfill Trump’s promise not to cut any spending related to Social Security, that means only a portion of 25% can be adjusted.

Additionally, 12% of discretionary spending goes to defense spending (Defense Spending). Against the backdrop of escalating current geopolitical tensions, the United States is unlikely to cut the defense budget and may even increase it further. In other words, The only spending that can actually be cut is about 1 trillion dollars of non-defense discretionary spending (Non-Defense Discretionary Spending).

This also means that Elon Musk’s initial pledge to cut 1 trillion dollars in spending is, in practice, impossible to fulfill. If they really leave mandatory spending untouched, there is nothing left to cut.

Bloomberg’s own model currently estimates that the final result will be cuts of around 4000 billion dollars per year.

Bessent once mentioned the Grace Commission, an investigative body established by Ronald Reagan in 1982 to study how to improve government efficiency and cut fiscal spending. The commission’s final report (the Grace Report), in today’s dollars, recommended cutting 1.3 trillion dollars in fiscal spending over three years, or about 4000 billion dollars per year.

If Bessent can achieve this, it would actually count as a major success (his pledge was to cut “1 trillion dollars,” but he never explicitly said “1 trillion per year.”

A cut of 4000 billion dollars is equivalent to 40% of nondefense discretionary spending and would lower the federal debt-to-GDP ratio (Debt-to-GDP Ratio) from the current baseline projection of 130% to about 100%. In other words, compared with the baseline projection, the debt-to-GDP ratio would decline by 30 percentage points.

2025.02.17

A better indicator for capturing changes in China’s macroeconomy

Compared with export and import data, high-frequency measurement of domestic economic activity is more difficult，particularly since quarterly expenditure-side real GDP estimates have not yet been released and there are information gaps in the related consumption and investment data. For example, retail data cover only part of consumer spending, while fixed-asset investment data are reported in nominal terms and defined differently from investment in the national accounts, among other issues.

These information gaps have led investors in the market to be skeptical of the growth figures reported officially.

To address this issue, GS developed a monthly GDP proxy indicator based on the import mix. The indicator is constructed as follows:Using China’s input-output tables, it matches different categories of import data with consumption, investment, and export demand to infer the level of domestic economic activity.

Trade data are used because they are generally more reliable and transparent than official macroeconomic data such as GDP, since trade data are compiled not only by China Customs but can also be cross-checked against export data from trading partners.Cross-checking also makes data deviations easier to detect.

At the same time, because Export data are updated frequently (they are published every month), making it possible to create a monthly real GDP proxy indicator that is more frequent and timely than quarterly GDP.。The resulting monthly indicator captures cyclical fluctuations fairly well and reflects short-term economic swings better than quarterly GDP, particularly at turning points in the economic cycle.

This tracking indicator shows that Domestic consumption and investment are much more volatile than official data indicate, while the periods of relative strength and weakness are broadly consistent with other alternative indicators constructed in the past。GS also validated this method. First, similar import-based trackers of domestic demand were constructed for other emerging-market economies, such as Brazil, Mexico, and India. The results showed that these indicators reflect historical consumption and investment growth cycles fairly well, further validating the method’s effectiveness. In addition, China’s monthly proxy for domestic demand growth is closely related to listed companies’ total revenue growth, further supporting the method’s soundness.

Chart: Investment in China is much more volatile than consumption

However, the tracking indicator constructed using this method also has certain limitations:

1/ The correlation between imports and domestic demand is imperfect:Some industries have low import content, which limits the information value of inferred domestic demand. Some imports, such as commodities, may reflect marginal demand more than average demand, making the estimates more volatile.reflect marginal demand rather than average demand, making the estimates more volatile。

Chart: The ultimate sources of demand for imports vary significantly across sectors

2/ Excessive reliance on goods data leaves services undermeasured: This method’s heavy reliance on goods-sector data does mean that it performs relatively well at tracking demand in emerging markets(goods make up a large share of domestic demand) and is fairly accurate for investment and consumption (investment is more goods-intensive than consumption).

But because there is less services-sector data, this method is less able to capture services consumption, for example it performs poorly during periods of domestic-demand fluctuations led by services demand (such as reopening after pandemic lockdowns)and may underestimate domestic-demand growth when the structure of import demand changes (for example, China’s reduced reliance on imported intermediate goods in 2007-2017).

3/ Unable to distinguish final demand from inventory accumulation: Imports may be used for final demand or may enter inventory，so the method cannot accurately distinguish between the two. This limitation is particularly evident in light of China’s strategic stockpiling in recent years.

See the supplementary reading for details on how the indicator is constructed:

Through the Looking Glass- Inferring China's Growth from its Import Mix

We’ve also posted it on the Planet for everyone to access.

2025.02.17

II. Insights 

Our Viewpoints and ideas on market.

A not-so-optimistic 3-3-3 plan

At present, the United States is already at full employment (Full Employment), so GDP growth is mainly determined by two factors: labor force growth (Labor Force Growth) + productivity growth (Productivity Growth).

The United States is deporting workers on a large scale, which is effectively lowering the labor force growth rate. Two structural factors also mean that the U.S. labor market will not see growth in the coming years:

1/ Large-scale deportation of immigrants 2/ Acceleration of the Baby Boomer retirement wave

This means that to achieve the planned 3% GDP growth, all growth must come from productivity..

But even if productivity growth is strong, it may only reach 1.5% - 2%, meaning that 3% economic growth is unattainable under the current policy framework.

Second, the fiscal deficit (Deficit) outlook is also not encouraging.

On the one hand, slower GDP growth will reduce tax revenues; on the other, Baby Boomer retirements will automatically drive up benefit spending such as Social Security and Medicare. See 250217 How much spending can Musk’s DOGE actually cut?

The Trump administration has explicitly said it will not cut Social Security or Medicare spending + low-interest debt issued over the past few years is about to be repriced, causing the associated interest costs to rise sharply.At least for now, the “3-3-3” plan is still just a clever slogan, and the chances of actually implementing it are rather slim.

They will have to come up with another move.

2025.02.17

Micro-level drivers will persist

Pair this note with 250218 excess HF vs. 60/40 Read them together.

In 2024, the annual return dispersion of the S&P 500 index widened to 70 percentage points, the highest level in a non-recession period since 2007.And Higher return dispersion generally means a more favorable stock-picking environment。In 2024, 6 of 11 sectors had return dispersion above the historical average. The increase in return dispersion was driven by lower correlations among individual stocks and higher individual-stock volatility.

Over the past 6 months, the average realized correlation among S&P 500 constituents was only 0.2, at the 6th percentile of the past 20 years of data. Options-implied volatility and correlation indicators both show that This market environment of high return dispersion may persist.

Since the beginning of 2023, the market has displayed a markedly stronger-than-historical-average micro-driven profile.Over the past 6 months, among the returns of S&P 500 constituents, 74% came from company fundamentals rather than macro factors; by comparison, the average over the past 20 years was 58%.

The micro-driven market environment is likely to continue in 2025, mainly for three reasons: first, the economic growth environment remains resilient this year; second, the continued development and adoption of artificial intelligence will increase differentiation across individual stocks; third, policy uncertainty remains high，discussions concerning trade, taxes, fiscal policy, and other policies may act as catalysts for return dispersion.

Further reading:

250205 Revisiting political noise and the ultimate performance of assets

241031 In the U.S. stock market, micro-level earnings matter more than macro-level politics

2025.02.19

Rebuilding Ukraine

This article expands on the Ukraine reconstruction theme as a trade:

The European building materials sector has outperformed the STOXX600 index by approximately 7% year to date in 2024, mainly on expectations of a peace agreement and Ukraine’s reconstruction. Overall, the outlook is that 1/ demand in the Ukrainian domestic market may grow by 40%, benefiting both local companies and imported materials; 2/ this incremental demand will have a limited impact on the EU construction industry as a whole, with construction spending potentially increasing by 0.5-1.0%; 3/ compared with other building materials, cement will be the main beneficiary, although EU cement output is constrained by the reduction in CO₂ emissions allowances.

On the earnings impact, Lower energy prices in the EU may be a key variable.

Energy costs currently account for 40% of EBIT in Europe’s building materials industry.However, companies’ ability to pass cost changes on to customers depends on local supply and demand conditions. Since the EU energy crisis, most companies have maintained historically high price-cost spreads through price adjustments.At the individual-stock level, HEI and ROCK are the two companies with the highest energy consumption and the greatest exposure to Eastern European markets.

How much could Ukraine’s reconstruction boost demand for building materials?

Foreign investors currently estimate that Ukraine will invest 100-200 billion U.S. dollars annually in reconstruction, implying an increase of approximately 42% in domestic investment. For comparison, this increment represents approximately 0.5-1.0% of current EU construction spending (EU-18, data for 2024). Compared with the World Bank’s estimate of 4860 billion U.S. dollars in reconstruction needs, this estimate is relatively conservative, based mainly on Some damaged areas of Ukraine remain occupied, and some industries affected by the war may struggle to recover in the future.

In terms of demand for building materials, the U.S. Agency for International Development (USAID) estimates that Ukraine’s reconstruction will require approximately 620 billion U.S. dollars’ worth of building materials. If spread over 10 years, this Demand is equivalent to an increase of 40% over Ukraine’s prewar average annual demand for building materials (160 hundred million dollars). However,, Supply chain bottlenecks (the availability of materials, equipment, and labor) could become a constraint.

Which building materials will benefit the most? Cement will play a key role in Ukraine’s reconstruction because Cement is a core material for repairing buildings and infrastructure. As of 2024 1, damage to housing and infrastructure accounted for 37% and 23% of total losses, respectively.

Public data indicate that Ukraine’s cement demand could rise to 1400-1500 ten-thousand tonnes per year during reconstruction, compared with current annual demand of about 900 ten-thousand tonnes, an increase of 40%. The estimate by USAID is based on data from 2022 11; as war damage accumulates (the Kyiv School of Economics reports that losses increased by 16% from 2022 11 to 2024 1), forecasts for future cement demand may be revised further upward.

Which companies are most affected?

Building materials are generally produced and consumed locally, and listed building-materials companies have roughly 5%-20% of their market exposure in Eastern Europe. According to USAID data, as of 2022 11, Ukrainian domestic producers can supply 90% of the building materials needed for reconstruction, The government estimates their total value at 628 hundred million dollars.

As for cement, Ukraine’s current cement capacity is 1800 ten thousand tonnes per year (of which approximately 50% is operated by CRH). This should theoretically be sufficient to meet growing demand, but imports may still fill part of the gap. Notably, plants covered by the EU Emissions Trading System (EU ETS) may be less willing to export because of higher CO₂ costs.

From a supply-chain perspective, Turkey is well positioned to export cement to Ukraine: it has ample capacity (1.53 hundred million tonnes), domestic consumption of 6900 ten-thousand tonnes, export capacity of 3100 ten-thousand tonnes per year (2021), and relatively low production costs. In 2020, Ukraine had already imported about 100 ten-thousand tonnes of cement from Turkey, accounting for 97%.If Ukraine increases cement imports from Turkey, U.S. cement prices may benefit, because Turkey is the largest source of U.S. cement imports.

The impact of lower EU energy prices?

If a peace agreement is reached in Ukraine, the building materials sector may benefit from lower EU energy prices. Building materials manufacturing is energy-intensive, with energy costs averaging 11% of sales (2023 year), and having a greater impact on EBIT (approximately 40%).

It is worth emphasizing that, from fiscal year 2023 through the first half of 2024, Despite the decline in energy prices, the producer price indices (PPI) for most building materials (except EU flat glass) remained stable or increased.For cement, the market previously sustained high prices with support from carbon costs, but cement margins are currently at historic highs. If CO₂ cost pressures ease, smaller producers or foreign importers may re-enter price competition.

In addition, the moderate economic growth resulting from a ceasefire in Ukraine (eurozone GDP growth of 0.2-0.5%) would benefit cyclical building-materials stocks。

2025.02.20

III. Market Pulse 

Our latest Comments on the economic and market environment

Outperformance: HF vs. 60/40

The high interest rates and greater market volatility in the post-COVID era differ significantly from previous cycles, and this situation is likely to persist for a long time..

The period from 2015 to 2019 marked the second half of the “secular stagnation/new normal” era (the federal funds rate averaged about 1% over those five years).During this period, a basic stock-and-bond portfolio of 60/40 delivered an average annualized return of +6.1%.

During the same period, hedge funds returned +4.8% annualized.

Next, let’s look at the five years from 2020 to 2024:

The average return on the 60/40 portfolio fell to +5.5%.

By contrast, hedge funds’ average return rose to +9.3%.

The return on the 60/40 portfolio fell from 6.1% to 5.5%, while hedge fund returns rose from 4.8% to 9.3%.

Further reading: The Current State of the Hedge Fund Industry and the Outlook for 2025

The materials are all in the Planet group; help yourselves.

2025.02.18

Federal Reserve January meeting minutes

The Federal Reserve’s 1 meeting minutes show that most participants favored a “cautious approach” to “further adjustments to the stance of monetary policy” amid considerable uncertainty about the economic outlook, the neutral rate, and the economic effects of potential changes in government policy. The minutes also noted that“An overwhelming majority” of participants thought the federal funds rate remained in restrictive territory, although participants said they did not want to adjust the monetary policy stance until there was further progress on inflation.

Participants have begun reviewing the 2025 monetary policy framework and said some elements of the previous review should be reconsidered, including the focus on the effective lower bound, the focus on shortfalls from maximum employment, and the setting of the average inflation target.

Some participants said, Before the debt ceiling is lifted, it may be necessary to consider “pausing or slowing” balance-sheet runoff.For this section, you can read it alongside last year’s 241211 Fed focused on liquidity Read this piece alongside it; balance-sheet runoff will most likely end in the third quarter of this year.

Several key points from the minutes:

1) Support for a “cautious approach” to monetary policy adjustments 2) Near-term inflation risks are tilted to the upside 3) Complex economic outlook 4) Balance-sheet runoff adjustments, expected to end by the close of the third quarter

FOMC advocates a “cautious” strategy, and will consider adjusting monetary policy only after inflation shows clearer improvement. This is despite the federal funds rate remains at a restrictive level, but the current economic outlook, the real neutral rate, and the potential effects of government policy remain highly uncertain, so there is no clear timetable for rate cuts.Markets now expect rate cuts of 25bp in 2025 6 and 12, respectively, followed by one more cut in 2026.

FOMC’s dual-mandate risks are broadly balanced, but near-term inflation risks tilt to the upside, mainly because of potential changes in tariff and immigration policies, while longer-term expectations remain anchored.The Fed’s economic projections are similar to those at the 12 meeting, with inflation forecasts largely unchanged, with inflation in 2025 expected to be similar to 2024, although uncertainty over trade, fiscal, and regulatory policies makes economic forecasting more difficult.

Further reading: 250129How did the Federal Reserve view tariffs during the previous trade war?

The Committee’s review of the 25 monetary policy framework focuses on revisiting the policy elements introduced in the 2019–2020 review, including the effects of the effective lower bound (ELB) on policy, the risk of shortfalls from maximum employment, and the applicability of average inflation targeting (AIT).

The Fed’s balance-sheet runoff involves several adjustments, including appropriately adjusting its purchase strategy so that the maturity structure of its SOMA portfolio more closely matches the maturity structure of outstanding Treasury securities, as well as pausing or slowing the balance-sheet runoff until the debt-ceiling issue is resolved. Compared with the previous expectation that the slowdown in balance-sheet runoff would be announced in 6, it may now be brought forward to 5, with runoff expected to end in 2025 Q3.

2025.02.21

S&P Global Flash US PMI

The S&P Global US Composite PMI Output Index, released just minutes ago, fell to its lowest level in 17 months.

Chris Williamson, chief economist at S&P Global Market Intelligence, said:

“U.S. businesses’ optimism at the start of the year has evaporated, replaced by a grim picture of uncertainty, stagnant business activity and rising prices.”

“Optimism about the year ahead has plunged from near a three-year high at the start of the year to one of the most pessimistic levels since the pandemic.Companies are broadly concerned about the effects of federal government policies, from spending cuts to tariffs and geopolitical developments. Uncertainty has reportedly hurt sales, and changes in the political landscape have amplified it; prices are also rising as suppliers raise prices in response to higher tariffs.”

According to the Flash PMI® survey, U.S. business activity growth in 2 was close to stagnation, as a renewed decline in services output offset the acceleration in manufacturing growth.Growth in new orders slowed markedly, and companies’ expectations for the year ahead plunged as concerns about federal government policy and uncertainty increased.Part of the increase in manufacturing output is related to front-loading ahead of tariffs, suggesting that it may be only a temporary boost.

We made this point earlier this year when the PMI high reading was reported,“The PMI, lifted by forward-looking orders and input prices, reflects production being brought forward amid uncertainty over the trade environment; it does not signal a long-term inflation trend or a fundamental improvement in U.S. domestic industry.”Once uncertainty rises and becomes dominant, the reversal can also happen quickly.

Further reading: Weekly Wrap 250105

Global manufacturing has been going through an upturn that has lasted for some time, while services are beginning to show signs of weakness. The U.S. services Flash PMI data for 2 has just fallen below the euro area level, which will most likely be seen in retrospect as the first sign that American exceptionalism is fading…

The original report is also in the Planet group; help yourselves.

2025.02.21

Note: All content in this article is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for decisions.