In western societies, the concept of government helping the private sector is done infrequently.
Except for perhaps support for original research, governments do not in general support specific firms
or industries outside of wartime. While there have been tax incentives extended for the purchase of
electric vehicles (EVs), this is considered short-term and for the public good. The belief is that EVs are
better for the environment than gasoline-powered cars.

In China, the concept of “public/private cooperation” has an altogether different meaning. The
government encourages not only the production of EVs but also their export. This is done by
subsidizing the cost of production through cost reductions in the raw materials for batteries for
domestic producers. Such materials come mostly from government-owned mines. The environmental
gains from EVs are somewhat offset by the fact that China is one of the few countries that continue to
build coal-fired electric generators. EV’s do not so much eliminate pollution as displace it.

China aspires to be a major player in the supplying of EVs to the world. They dominate the low
end of the price spectrum. The abovementioned subsidies on battery materials make their small cars a
bargain for the price charged. Western companies, who have to pay retail for batteries, cannot compete.

At the current time China builds about half of the world’s EVs. By category, cars are second to
commercial airplanes as a manufacturing export. EVs are not that difficult to build, but few countries
have the materials to make the batteries as does China.

The goal of the Chinese EV strategy is commerce in the short run, and political influence in the
longer term. China recently announced that the importing of Chinese battery materials such as graphite
will require a license. This way the Chinese government will know where and in what amounts the
materials are moving to other lands.

As for what China will do with the information: recently there was talk in Europe of placing
tariffs on cheaper Chinese EVs to protect their domestic auto providers. China has let it be known that
such a tariff would be grounds to reduce the export of battery materials, crippling the European EV
producers in the process. While the discussions are unresolved, it is obvious that China is looking out
for its own interests, both current and future.

This is not a new strategy. China has loaned out billions to other countries to build a rail and
transportation corridor from China to Europe. Called the Belt and Road Initiative, its stated purpose is
to upgrade transportation infrastructure along what was once known as the silk road. The construction
by Chinese companies has been shoddy overall. The countries who accepted Chinese funds are
obligated to China to repay the debts they have racked up with interest. In the meantime, China’s navy
calls on the debtors’ ports and warplanes use their airfields. The countries are in no position to object.

In terms of EVs, the US response has been to encourage prospecting for battery input minerals
in other parts of the world, especially Africa and Latin America. Getting a mine up and running takes
time, especially if transportation is not available to deliver the output to ports. At the same time
Chinese agents try to foment unrest to delay if not scuttle the mineral export competition altogether.
This would be equivalent to the Pentagon and CIA working with the US Chamber of Commerce to
carry out corporate America’s aims.

It is for these and other reasons that the Biden administration has prioritized containing China.
With the war in Ukraine and now Gaza, America’s focus is distracted. It is hoped that China does not
use the distraction to invade Taiwan. That is all the west needs.

Complicating matters further are the mixed signals Congress is sending out regarding the
willingness to fund these embattled countries. With a shutdown looming in November, the House is in
no position to introduce or vote on an aid package. The longer aid is delayed, the more emboldened our
adversaries become to act in a way that is contrary to America’s interest. While some people may tire
of the US being the leader in such times, there is really no one else among democracies that can assume
the role. Be aware that it is in the interest of the US to fight by proxy in Ukraine and the middle east,
rather than on our own shores. Europeans know this from experience. Americans should as well.

The Economy

The economy is showing clear signs of deceleration. Aside from the stimulus funds which have
not been spent (mainly on infrastructure), there does not seem to be a lot of push in the economy.
Indexes of rail freight and trucking are showing small declines. Retailers are looking to the holiday
season with a certain amount of dread.

Higher interest rates are sucking a lot of funds out of the economy and putting them in the
hands of debt holders, many of whom are foreign. Couple this with a labor force that is aging, maxed
out and not growing, and it will be difficult in the short run to grow the economy going forward.


The consensus is that interest rates are peaking, and it is safe to invest in long-term bonds.
Nothing could be further from the truth.

New and redeeming US Treasury issues total almost $1.5 trillion in the current quarter. The
bond market is perhaps reaching the limits of what it can accommodate in terms of issuance and

The idea that there is all this cash on the sidelines ready to get into bonds (or stocks) is a myth
perpetrated by the investment community. To buy an existing bond is to pay someone else for the
bond. To buy a newly issued government bond is to give up cash to the Treasury which uses the cash to
pay the government’s own bills, sending the cash back into circulation. The same holds true for stocks.
Thus, if all cash were committed to bonds or stocks, there would be cash balances enhanced by the
sellers of the same securities. The amount of cash would not change.

What makes stocks and bonds appreciate is when people will pay a higher price for the same
security than was previously the case. However, unless there has been a material overnight change in
the fortunes of the company or economy, investors are getting less for their investment than before.

Over time, stock appreciation can be supported by higher earnings, assets and/or cash returns.
The issue is whether such returns are forthcoming. In the fads of Wall Street, securities are being
under and overpriced all the time. Whether a decline is temporary or something more substantial is
what portfolio management is all about.

The Stock Market

The stock market has been in a correction since August. The so called-magnificent seven stocks
are down about 17 percent on average

The issue is what will these stocks do going forward. With so much domestic and international
political instability it is difficult to ascertain what the overall market will do in either the near or long
term. Some industries such as healthcare would seem to have a clearer path than others. Energy is
interesting because supply is being suppressed relative to demand. Better to buy stocks than the stock

Warren M. Barnett, CFA
November 8, 2023

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