Markets Price in a DOGE-Induced Recession
Andrew Packer / March 7, 2025
“Government should enforce the rule of law. It should enforce contracts, it should protect people bodily from being attacked by criminals. When the government does those things, it facilitates liberty. When it goes beyond those things, it becomes destructive to both human happiness and human liberty.”
– Grover Norquist
March 7, 2025— It’s been a hectic couple of days for the market amid a flurry of new data and rising uncertainty. Overall, markets are looking at a 3-4% drop for the week, but there have been plenty of intra-day swings higher too.
As I mentioned to Grey Swan subscribers in a special video update on Tuesday, a lot of that movement reflects the fact that markets need to digest a lot of rising uncertainty.
Let’s just cut through some of this noise, see where we’re at and determine the proper investment strategy for this jittery market.
Let’s begin with the biggest data point out there: gross domestic product (GDP). Lower revisions in GDP helped kickstart the market selloff on Monday. Here’s the specific data released by the Atlanta branch of the Federal Reserve:
In the span of a few weeks, U.S. growth estimates have gone from positive to a negative 2.8% drop for the first quarter of 2025. Talk about falling off a cliff!
So what’s going on? A few things are happening.
First, GDP measures items like government spending. The Department of Government Efficiency (DOGE) knows that we’re looking to make some aggressive cuts in government spending.
Elon Musk says he wants to cut about $4 billion a day. He’s trying to hit that goal so that by fiscal year 2026, the government can see a trillion dollars in annual savings.
That’s actually good news for the economy because we’re currently running over $2 trillion a year in deficits, which is increasing our debt. Plus, that debt has to be financed at today’s interest rates, which are still pretty high, north of 4%.
However, in the short term, lowering government spending will lower GDP. It’s going to sound scary, and that’s certainly not the kind of headline that market traders and algorithms like to hear.
Another reason for GDP contracting is soaring imports.
This week’s January data showed a 34% jump in imports, resulting in the largest trade deficit ever. Remember, in the GDP equation model, you have your exports minus your imports, so a rising deficit is a drag on GDP.
However, the U.S. imports more than it exports because physical goods measure import/export data. GDP doesn’t fully capture the value of all the intellectual property that we create and export, and America creates a lot of knowledge.
We create media that the rest of the world consumes. We create computer chip designs that might be manufactured elsewhere. We create more efficient processes, whether in manufacturing or software, that the rest of the world quickly adapts to.
None of that is fully measurable in the GDP equation as it currently stands, just like how government spending doesn’t account for the fact that the more the government has to spend, the less resources remain available for the private sector.
And some of our recent import surge has come from billions of dollars of gold bullion flowing back to the United States. Yes, that’s part of that data too. But what does that have to do with the private sector’s production of goods and services? Not much.
So GDP is a flawed model, but looking at the trend in GDP, it’s clear that the Trump administration is looking to undertake some short-term pain in order for longer-term better results.
If we can shrink the size of our deficit substantially, and if higher tariff rates and improved private sector growth can kick in, we could potentially eliminate the entire deficit. In the long term, that’s phenomenal news.
It takes us off that unsustainable path that puts us on that high debt-to-GDP ratio that Addison’s always talking about. Remember, an empire’s collapse often comes from spending too much money. The United States really has a narrow window with our debt-to-GDP ratio of over 120% to fix that and get on the right path.
So, right now, the headline numbers are scary.
Of course, tariffs were the big headlines all week, but the end result was more of an on-again/off-again news cycle that really only drove uncertainty. One estimate for the impact of tariffs came to 0.2% of GDP. Hardly worth the panic that tariff headlines bring.
In the meantime, where does this leave markets? Well, if we go to the S&P 500, our preferred tracking measure for the economy as a whole, we have pulled back to the 200-day moving average. We’re now slightly below where we started the year.
We’ve now had a flat market after the first two months of the year. Statistically, if you’re looking at the calendar, the second half of February is usually pretty weak going into March.
March usually looks better, especially in the second week. So we should see some improvement there.
Currently, we’re getting into oversold levels on several technical indicators, and usually, you get a pretty good bounce from there, although we may have a few more rough days to shake out first.
I’m reminded of the wisdom of the late Charlie Munger, who said that you can substantially outperform the stock market if you only buy it when it hits the 200-day moving average.
Today is a buying opportunity for investors.
In the meantime, what should we be doing?
Gold has sold off in the past few days from its recent highs along with everything else, but it’s still holding in there. It’s just over $2,900 per ounce right now. However, over the past six months, gold is up over 14%. In the past 12 months, it’s up 35%, compared to just a 16% return for the S&P 500.
In other words, gold is still doing a fantastic job, which is why gold and gold-related equities are a part of our Grey Swan Model Portfolio and have been the focus of some of our latest research in recent months.
They’re worth a closer look if you’re looking to put some money to work now.
Hopefully, that clears up some of the recent market fears, why they look overblown here, and why there are still some pretty good investment opportunities ahead.
We view Grey Swan events as unlikely, but foreseeable events that can move markets. We’re getting a bit of that right now with the tariff fears, as well as downgrades to GDP as Trump is managing to shrink the government.
But that doesn’t make us pessimists. We’re realists.
In our latest research unveiled this week, we reviewed seven stocks that look attractive now as potential big winners from President Trump’s agenda. And we also issued a “blacklist” of stocks that are valued too high right now, carry too much debt, or are starting to show signs that they’re past their growth phase.
With markets now nearing what’s like the end of a seasonal pullback, but perhaps part of a broader shift sideways amid rising uncertainty, it may be time to reposition yourself in the right stocks for big profits in 2025.
Regards,
Andrew Packer,
Grey Swan
P.S.: If the inbox is any indication, we struck a nerve yesterday.
For instance, DL writes:
It’s all about the money! Much of it is being laundered and returned to the Democrats’ favorite cash cows. And the new administration is cutting it off.
Period.
Somehow talking past the rest of us, 94-year-old reader Stuart writes in part:
He [Trump] is an asset of Putin and Russia.
Trump does not care about America. Just listen to his words; his dream is to be a warlord. I pray that history does not repeat itself.
P.P.S. “How about that?” reader Basil writes again, “All my hippie friends of my youth are frothing warmongers. What a transmogrification!
“Sad!
“Those copious amounts of “recreational” drugs they did back then appear to have caught up to them as their critical thinking skills have decayed–like the rest of their bodies.
“Be very careful trying to engage them, especially in these parts, as they’re frothing. (seriously)”
My response to B?
Can’t really engage the MAGA folks, either.
As I’ve been saying, populism is rot.
Good lord.
Please send your comments to feedback@greyswanfraternity.