I often wonder why some politicians ever run for office? Are they motivated by personal gains or do they really want to make things better for their countries?
Admittedly it is almost impossible to please everyone. But what if nobody benefits except for a privileged few?
Consider the tariffs that The White House has slapped on Chinese imports? Did it really think that China would stand idly by and do nothing?
Of course China would retaliate.
So, the Chinese retaliatory tariffs on US exports are now hitting American Farmers where it hurts most – in their pockets. So painful are the tariffs on US soybean and pork exporters that the US government has been forced to provide emergency subsidies to cushion the blow. That’s US$12 billion of taxpayers’ money.
Let’s not lose sight of the irony behind The White House’s gesture of goodwill. It amounts to government subsidies that it has been accusing China of using to gain an unfair competitive advantage. Pot calling the kettle black, springs to mind.
Meanwhile, China, which is desperate to prevent its economic engines of growth from stalling, is allowing its banks to provide more liquidity. It has cut their Reserve Requirement Ratios.
China is also accelerating its infrastructure spending programme, even though the country is already groaning under a mountain of debt. And let’s not forget it is also devaluing the yuan, cutting taxes and providing new loans to businesses.
So, what should we make of all this as investors?
We can argue the toss about the rights and wrongs of America’s strategy to protect its industries through import tariffs. To me, though, it makes about as much sense as blow drying hair under a hot shower.
But we are where we are.
Increased public spending, subsidies, tax cuts, competitive devaluation and tariffs could add up to a faster rate of inflation for all of us. That probably means higher interest rates, if not now then later.
This could be bad news for those companies that find it hard to raise prices.
Warren Buffett once said that the single most important decision in evaluating a business is pricing power…..
….. If you’ve got the power to raise prices without losing business to a competitor, you’ve got a very good business.
It is hard to argue with that. I won’t even try because he’s right.
A version of this article first appeared in Stock Advisor Singapore and Stock Advisor Gold.
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