DOGE Deficit Reductions

The newly formed Department of Government Efficiency (DOGE), headed up by Elon Musk, is tasked with reducing government waste and increasing efficiency and productivity. The big question bond investors are keying on is how effectively DOGE can reduce the deficit. Tracking DOGE savings is now easy. As we share below, the US Debt Clock shows a running total of cumulative DOGE savings. Thus far, in less than a month, DOGE has saved $56 billion, as shown below (box in the upper left of graphic).Musk’s goal from the onset was to save the government $1 billion per day. However, he is on pace for $2 billion or more daily. Let’s extrapolate his recent success to put the data into proper context. If DOGE can save $2 billion per day, the government can save about $700 billion annually. Accordingly, the fiscal year 2024 deficit of $1.8 trillion would be reduced to a much more manageable $1.1 trillion. To appreciate such savings, the Department of Defense spends roughly $800 billion a year. Equally important, if DOGE makes serious inroads toward deficit reduction, bond yields will likely decline, further cutting government deficits.Savings become more challenging over time. Accordingly, we suspect that $1 billion a day is more realistic. While half of the current run rate, a billion a day would create measurable savings, which should, on the margin, reduce interest rates.

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Market Trading Update
Yesterday, we discussed the “Tariff Turmoil”
 that rocked the markets. Many headlines suggest that Trump’s tariffs will cause the next major market crash. Maybe that is the case. However, we can look back at his first term in office to see how the markets reacted as the China “trade war” developed. I will write a longer article at some point, but here are the initial observations.Following the passage of the “Tax Cuts “Tax Cuts  the market surged to all-time highs. Valuations were elevated, and the Fed was beginning a rate-hiking campaign. At the same time, Trump launched the first escalation of the trade war with China. Over the next 18 months, the market traded in a very wide trading range but remained in a steady liner growth trend higher.As we noted in “Curb Your Enthusiasm,” this year may be very similar to what we saw during the first trade war with bouts of volatility. As shown, as different facets of the trade war developed, volatility would spike as investors tried to digest the actions and their potential ramifications on the market.Despite the barrage of negative headlines, concerns about inflationary impacts, and economic outcomes, the market ultimately wound up weathering the trade war. As shown, spikes in volatility due to trade war announcements provided repeated buying opportunities for investors to pick up stocks at lower prices.We don’t have much history regarding tariffs and the stock market. However, as we noted on Monday, it is likely best to avoid media-driven narratives and focus on managing your portfolio as we concluded in yesterday’s post:

“That does not mean that things won’t change in the future. However, using media headlines to make portfolio decisions has repeatedly turned out poorly. If the recent market volatility is weighing on you, and you “feel” you must “do something,” take very small steps.”

“As we saw on Monday, taking small steps to reduce portfolio risk now can help you weather sharp market events. Remembering that portfolio management is not an “all or none” process is crucial. It is about positioning yourself to minimize emotional decisions so you can find the “opportunity that exists in crisis.”

 

Rotation Tools For Return or Risk Management
The technology sector is performing relatively differently than the other sectors. To help you appreciate this recent market dynamic, we share the SimpleVisor table below. It calculates each sector’s excess return versus the S&P 500 and then computes the correlation of that sector’s excess returns to each other sector’s excess returns. For example, in the top right corner, the correlation of the excess returns of transports (XTN) and materials (XLB) is positive at .37. In other words, both sectors will tend to beat or underperform the market simultaneously. This is vital information for those interested in using sector rotations to bolster returns or better manage risk.We have highlighted the correlations of technology (XLK) and staples (XLP) versus the other sectors to point out a recent anomaly in the market. The technology sector has a negative correlation with every other sector. On days when technology beats the market, odds are most other sectors will underperform. Conversely, when technology underperforms, most other sectors will outperform the market. On the other hand, staples positively correlate with almost all other sectors which is more normal.

Tariffs Roil Markets
The announcement of tariffs set the market on its heels yesterday morning as media writers quickly pushed narratives about the potential impacts. However, as suggested on the “Real Investment Show” before the market opened on Monday, the best thing to do would be “nothing.” There were a couple of reasons for this suggestion.READ MORE…

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“Tariff Turmoil”

Can Musk Be The Bond Whisperer