From February seventeenth, two thousand twenty-five, to February eighteenth, 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 fiscal year, about 25% of U.S. government spending 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 part of this 25% can be adjusted.

Moreover, 12% of discretionary spending is 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 approximately 1 trillion dollars of non-defense discretionary spending (Non-Defense Discretionary Spending).

This also means that Elon Musk’s initial promise to cut 1 trillion dollars in spending is actually impossible to fulfill. If they truly leave mandatory spending untouched, there will be 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 group established by Ronald Reagan in 1982 to study 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 approximately 4000 hundred million dollars per year.

If Bessent can accomplish this, it would actually count as 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. It could reduce the federal debt-to-GDP ratio (Debt-to-GDP Ratio) from the current baseline forecast of 130% to approximately 100%. In other words, compared with the baseline forecast, the debt-to-GDP ratio would fall by 30 percentage points.

2025.02.17

II. Insights 

Our Viewpoints and ideas on market.

The not-so-optimistic 3-3-3 plan

The United States is currently 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 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 grow 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..

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

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

On the one hand, GDP growth is slowing, so tax revenues will decline; on the other hand, the retirement of the baby boom generation will drive automatic growth in spending on benefits such as Social Security and Medicare; for details, see 250217How much spending can Musk’s DOGE actually cut?

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

They will have to come up with another approach.

2025.02.17

Micro drivers will continue

Read this note alongside 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.And Higher return dispersion usually indicates a more favorable environment for stock-picking.. In 2024, 6 of the 11 sectors had return dispersion above the historical average. The increase in return dispersion was driven by declining correlations among individual stocks and rising individual-stock volatility.

Over the past 6 months, the average realized correlation among S&P 500 constituents was just 0.2, at the 6th percentile of data from the past 20 years. 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 been significantly more micro-driven than its historical average.Over the past 6 months, among the returns of S&P 500 constituents, 74% came from corporate fundamentals rather than macro factors, compared with an average of 58% over the past 20 years.

The micro-driven market environment is likely to persist in 2025, mainly for three reasons: first, the economic growth environment remains solid this year; second, the continued development and adoption of artificial intelligence will increase differentiation among individual stocks; third, Policy uncertainty remains high, and discussions involving trade, taxes, fiscal policy, and other policies may 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. stock market

2025.02.19

III. Market Pulse 

Our latest Comments on the economic and market environment

Excess return: HF vs. 60/40

Higher interest rates and greater market volatility in the post-COVID era are very different from those of 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 had an annualized return of +4.8%.

Next, let’s look at 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 the return of hedge funds 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 in the community; help yourselves.

2025.02.18

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