From February seventeenth, two thousand twenty-five to February nineteenth, 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 the current U.S. fiscal year, about 25% of federal government spending is discretionary spending, while the remaining 75% is mandatory spending, including Medicare, Social Security, and interest payments on the fiscal debt.

In other words,What the “Doge” team can actually control is 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 part of this 25% can be adjusted.

In addition, 12% of discretionary spending goes to defense spending (Defense Spending). Given the current escalation in geopolitical tensions, the United States is unlikely to cut its 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 original promise to cut 1 trillion dollars in spending is, in practice, impossible to fulfill. If they truly leave mandatory spending untouched, there is very little left to cut.

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

Bessent once mentioned the Grace Commission, an investigative panel established by Ronald Reagan in 1982 to examine how to improve government efficiency and reduce fiscal spending. The commission's final report (the Grace Report), expressed in today's dollars, It recommended that 1.3 trillion dollars in fiscal spending could be cut over three years, or around 4000 hundred million dollars per year.

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

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

2025.02.17

A better indicator for capturing China's macroeconomic changes

Compared with export and import data, High-frequency measurement of domestic economic activity is challenging, especially now that the quarterly estimate of real expenditure-side GDP has not yet been published, and the related consumption and investment data have information gaps—for example, retail data cover only part of consumption expenditure, fixed-asset investment data are presented in nominal terms and use a definition different from investment in the national accounts, and so on.

These information gaps have led market investors to view the growth data reported officially with skepticism.

To address this issue, GS constructed a monthly GDP proxy indicator based on the composition of imports. The indicator is constructed as follows:Using China’s input-output tables, different categories of import data are matched 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 macroeconomic data such as official GDP, since trade data are compiled not only by China’s customs authorities but can also be cross-checked against export data from trading partners.Cross-checking also makes data discrepancies 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 the quarterly GDP。The monthly indicator constructed captures cyclical fluctuations relatively well and reflects short-term economic fluctuations better than the quarterly GDP, particularly because it is more sensitive at turning points in the economic cycle.

This tracking indicator shows that Domestic consumption and investment are far more volatile than official data suggest, while the periods of relative strength and weakness are broadly consistent with other proxy indicators constructed in the past. GS also validated this method, first by constructing similar import-based domestic demand tracking indicators for other emerging market economies, such as Brazil, Mexico, and India. The results showed that these indicators captured historical consumption and investment growth cycles relatively well, further validating the method. In addition, China’s monthly proxy for domestic demand growth is closely correlated with the total revenue growth of listed companies, further supporting the method’s validity.

Chart: Investment in China is far 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 the inferred domestic demand. Some imports, such as commodities, may reflect marginal demand more than average demand 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 help it track emerging-market demand well, since goods make up a large share of domestic demand, and makes it relatively accurate for investment and consumption, as investment is more goods-intensive than consumption.performs relatively well in tracking emerging-market demand(goods make up a large share of domestic demand), and is also relatively accurate for investment and consumption (investment is more goods-intensive than consumption).

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

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

For details on the construction of the indicator, see the supplementary reading:

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

It’s been posted on Planet; help yourselves.

2025.02.17

II. Insights 

Our Viewpoints and ideas on market.

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

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

The United States is carrying out large-scale deportations of workers, which is effectively lowering labor force growth. Two structural factors also mean that the U.S. labor market will not grow in the next few 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..

However, even if productivity growth is strong, it may only reach 1.5% - 2%, which means that 3% economic growth cannot be achieved under the current policy framework.

Second, the fiscal deficit (Deficit) outlook is also unfavorable.

On the one hand, as GDP growth slows, tax revenues will decline; on the other, the retirement of the baby-boom generation will automatically increase benefit spending, such as Social Security and Medicare. For details, see How much spending can 250217 Musk’s DOGE cut, exactly?

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

They will have to come up with another approach.

2025.02.17

Micro-driven factors will persist

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

In 2024, the annual return dispersion of the S&P 500 Index widened to 70 percentage points, the highest level outside a recession since 2007.while Higher return dispersion usually signals a more favorable environment for stock-picking.. In 2024, 6 of the 11 sectors had return dispersion above their historical averages. The increase in return dispersion was driven by lower stock correlations and higher individual-stock volatility.

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

Since the beginning of 2023, the market has been significantly more micro-driven than its historical average.Over the past 6 months, of the returns of S&P 500 constituents, 74% came from company fundamentals rather than macro factors, compared with an average of 58% over the past 20 years.

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

Further reading:

250205 Revisiting political noise and the ultimate performance of assets

241031 Micro performance outweighs macro politics in the U.S. equity market

2025.02.19

III. Market Pulse 

Our latest Comments on the economic and market environment

Excess returns: HF vs. 60/40

The higher interest rates and greater market volatility of the post-COVID era differ markedly 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%.

Over the same period, hedge funds returned +4.8% on an annualized basis.

Next, consider the five years from 2020 to 2024:

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

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

The return of 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 have all been posted on Planet; help yourselves.

2025.02.18

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