1) In yesterday's e-mail, I discussed new electric vehicles ("EVs") made by Xiaomi and other Chinese manufacturers. And I said, "I have trouble seeing any scenario in which Chinese companies don't dominate their own market and the rest of the world."
This comment was specific to EV makers, but I'd apply it to many industries. I wrote on this topic on October 13 and October 14, linking this article from the Telegraph: Western executives who visit China are coming back terrified.
Further evidence of China's manufacturing dominance was released on Monday and has been featured in multiple articles:
- Financial Times: China's trade surplus tops $1tn for first time
- Wall Street Journal: China's Manufacturing Is Booming Despite Trump's Tariffs
- New York Times: China's Trade Surplus Climbs Past $1 Trillion for First Time
These charts in the FT article show China's astonishing gains over the past quarter century and how the surplus has shifted from the U.S. to the rest of the world in recent years:
The WSJ article notes:
Some of those exports probably found their way to the U.S., either as parts and components in another country's exports or simply by being rebadged as non-Chinese to avoid tariffs, analysts say.
China's surprise export strength has been aided by factories cutting prices and a weak currency, especially in real terms, which adjusts for China's lack of inflation. [For more on this, see this NYT article: China's Weak Currency Is Powering Its Exports and Drawing Criticism.]
As I've said time and time again in my daily e-mails, I don't recommend investing directly in China or Chinese stocks because there's too high a chance of being defrauded.
However, I continue to follow developments there because of the effect on companies and industries around the world. For example, seeing the glowing review of Xiaomi's new EV makes me increasingly wary of the stocks of other EV makers, such as Tesla (TSLA).
2) Yesterday, I also discussed the new management changes at Berkshire Hathaway (BRK-B) and commented:
[Warren] Buffett, by his own admission, has undermanaged the massive conglomerate. For example, BNSF Railway has been the slowest in the industry to adopt "precision railroading," which its competitors have adopted to unlock tremendous value.
My guess is that [Greg] Abel will find a lot of low-hanging fruit to pick that could result in a significant increase in Berkshire's cash flows.
One of my readers, David F., e-mailed me in response:
There's a good reason for BNSF being slow to adopt precision scheduled railroading ("PSR"), Whitney. They're the smartest of the Class I railroads! And they can operate their railroad based on what's best for BNSF, not what Wall Street wants.
PSR is a "strategy" that eats away the company like a cancer from within. It downsizes and disinvests, getting rid of employees and infrastructure and in the process shrinking the business. On the other hand, BNSF is governed by a mandate for growth, and it is growing, year after year, while its PSR peers shrink before the almighty Operating Ratio, which is all Wall Street looks at anymore.
He continued:
BNSF is the best Class I railroad, far and away. You need to visit their campus in Fort Worth and spend some time with their management, as I have. And notice that they have refused to be suckered into merger talks with CSX. They know they have a winning franchise with unlimited potential and are content to maximize it without silly distractions like merger talks and PSR.
Another suggestion... You travel a lot. Book a stay at the former Harvey House hotel trackside in Winslow, Arizona (La Posada). You can get off Amtrak right there and wheel your backpack up the walkway to the hotel. They have lawn furniture right there by the 4-track BNSF mainline where you can watch the intermodal trains pass every few minutes, often on multiple tracks at once. Then tell me BNSF has been slow to adopt anything. Their management knows what they're doing, and Buffett knows they know!
Thank you for sharing your insights, David – and I hope you're right about BNSF.
I've studied PSR closely for more than a decade and am aware of the heated debate about it, which I shared in my October 18, 2024 e-mail (between David and a friend of mine).
I agree with you that some railroads took PSR too far. But there are some elements that BNSF could and should adopt that will result in more streamlined operations and higher profits.
As for your suggestion of visiting Winslow, it rang a bell because of this line from a classic song I love, "Take It Easy" by the Eagles:
Well, I'm a standin' on a corner in Winslow, Arizona
Such a fine sight to see
It's a girl, my Lord, in a flatbed Ford
Slowin' down to take a look at me
I checked Google Maps to see where it is:
Winslow is a three-hour drive from Phoenix and not far from two of the most beautiful places in the world, Sedona and the Grand Canyon. So I've added it to my travel bucket list!
3) Speaking of Warren Buffett, he's right most of the time – but not always...
As Charlie Bilello notes on social platform X, Buffett was completely wrong when he said in 1999 that corporate profit margins as a percentage of GDP were unlikely to exceed 6%. In fact, they have steadily risen and today are nearly double that:
For many years, I believed Buffett was right and was confident that profits would revert to the long-term average. That's one of the reasons why I was too bearish much of the time.
But I've changed my mind. I think the factors driving higher profits are here to stay. These include the rise of structurally higher-margin businesses – like Alphabet (GOOGL) versus General Motors (GM) or Visa (V) versus ExxonMobil (XOM) – and tech-driven efficiencies like AI optimization.
And with the decline of unions (from more than 35% of the private-sector workforce in 1953 to 6% today), labor doesn't have the power to demand its share of growing profits. So instead, these profits accrue to owners and shareholders.
4) This phenomenon helps explain why stocks are near an all-time high, despite the University of Michigan Consumer Sentiment Index being near a 10-year low:
This WSJ article explores the reasons sentiment is souring toward the end of the year:
High prices, a fragile job market and anxiety about President Trump's tariffs have helped drag consumer sentiment, as measured by the University of Michigan, down near historic lows this year. The latest numbers were slightly improved from a previous reading freighted by government shutdown disruptions, but barely.
"People are not feeling confident about the economy," said Joanne Hsu, who directs the University of Michigan Surveys of Consumers. Americans are still looking back to prices they paid before the Covid-19 pandemic and struggling to digest the increases since then.
I'm increasingly skeptical of this index, however. That's because the average American's feelings about the economy are increasingly driven by whether their political party is in power, as you can see in this chart from the article:
Contrary to their "sentiment," consumers are spending at a healthy level, which is why retailers are reporting such strong numbers.
5) Today's strong economy and expectations for the future are two of the five reasons investors are feeling good about stocks again, according to the WSJ:
Anxiety has given way to hope on Wall Street.
Stocks are back near records, recovering from a slump spurred by fears that the excitement about the artificial-intelligence boom has outstripped the potential profits.
Optimism about AI has proved durable. But other important factors are also powering gains. Here's a look at some of the reasons investors expect that the rally could go further from here:
- Stock valuations could be worse
- Economic growth is supporting earnings
- It isn't just about big tech stocks
- Inflation expectations are anchored
- Prospects for longer-run economic growth have improved
I continue to be constructive on the markets. So if you own good stocks and funds, stay the course!
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.