Africa+China=Economics; and the US dollar

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The Chinese Connection
There's no comfort in it for personal freedom apologists like myself, but China's ever-increasing role in Africa is significantly improving the continent's macroeconomic future. True, most of energy-hungry China's investments center around oil, gas, coal, and metals, but something interesting happened in 2007-- China invested heavily in Standard Bank, one of the largest Africa-based financial institutions, to the tune of now owning 20% of Standard Bank. This is an interesting tipping point for the continent. Over the past 50 years, we've seen flirtations with outside investment in Africa's financial services companies (mostly by French and UK firms who had colonial governments to support) but China's play into Standard Bank is different. It's based on merit. It's a good investment. Obviously it will help their other investments, but that's the point; foreign direct investment on the continent is making African financial services companies good investments.

Here's what I like about China's investments: they are heavy on cash and lite on preconditions. They aren't trying to social-engineer the continent to their political whims. It's business. Africa has things China needs and China has cash that Africa needs. This efficiency (and capitalists will tell you that in the end, efficiency wins) is what is changing the macroeconomic picture of Africa, in my opinion. The US attempts this via programs like the Millenium Development Goals, the World Bank, the IMF-- but these programs have preconditions on them. "First do X, Y, Z, and then you get the investment." In comparison, China asks Africa, "What do you need?" and a deal is worked out.

The upside is that Africa is getting much-needed investments--getting roads and hospitals built, getting manufacturing facilities built, and jobs are being created. The downside is China will do deals with good governments and bad governments. Things like political freedom, religious tolerance, transparency, equal justice, are not key determining factors. Don't think the West can claim the moral high ground here having supported some pretty awful regimes in the Cold War. The stark reality is both good things and bad things are part of most economic equations. In some cases, like Darfur, it can be very very bad.

Does China= Warren Buffet?
If you know where to look, investors can surf upon China's economic wavefront and still do good things. China's investments are forward-leaning and a bell-weather of things to come, largely because they are the ones who will be the things to come. The investment in Standard Bank means investors should look at African financial institutions. China is a Warren Buffet of sorts; you want to go where they go. They are value investors and they bring enough capital to bear in their investments to make risky bets worth taking. So start looking at African banks, investment houses, and bonds. Understand that investing in business in Africa isn't as risky as it looks. American businesses should try to be more like Warren Buffet, and find good opportunities that are unappreciated... and one of the sectors worth looking at is African financial services.

Prognostication: The Currency Equation
One of the reasons China moved into Standard Bank, and into Africa, I think is because they need to diversify where they are parking their massive currency reserves. The largest holder of currency in the world is China, and having most of those reserves tied up in domestic financial institutions has now become a liability. China is currency top-heavy, which isn't good when the global economy is slowing down. If the dollar appreciates too much against the yuan, the value of those holdings declines in terms of purchasing and export power (and China lives on export power). China's economy in terms of purchase parity was recently reduced by the world economists, which is further straining the the currency equation.

This is why I'm still bullish on the US greenback despite the US heading into recession. The second tripwire was tripped today when home values fell below 8% (8.9% yy according to Case/Shiller index). Along with the 5% unemployment figures last month, that's two out of three so yes, the US is heading towards a significant recession.

So how can I be bullish on the greenback? Because what's also clear is that inflation is heading up, which means we're heading into stagflation where inflation increases and export growth worsens. This double-whammy means that currency valuation just became the key factor in economic growth (because nothing else will improve the economic picture).

The probability that currency-improving policies will be implemented now outweigh stimulus attempts like cutting rates which devalue the dollar. It also means that a slowdown in the US will be worse for the rest of the world than for the US. China's super-hot economy is already cooling off and cracks in the European economy are opening up. That means it will be more advantageous for holders of US currency than other currencies, and that will drive dollar holdings because there won't be that many safe places for investors to land.

Signs of this are already coming up-- the Euro has weakened a bit, and the South African Rand has lost 20% against the dollar.

I also think stagflation will drive liquidity vehicles. I still remain positive on gold and silver. Platinum seems too hot right now, but if you want to play with fire, platinum is also a liquidity vehicle. My prognostications also mean companies that have benefited from a weak dollar, like IBM, are likely in for harder times ahead. A strengthening dollar makes it that much harder to find growth.

I want to remind my readers that I'm not a license investment adviser or a school-trained economist. I'm just a guy who sees what he sees and is willing to tell you what I think. You must make up your own mind. Also remember that I don't have any personal holdings (at all).

Humor Stuff: two really lame hunting jokes...
Lame Joke 1: A couple of Tennessee hunters are out in the woods when one of them falls to the ground. He doesn't seem to be breathing, his eyes are rolled back in his head. The other guy whips out his cell phone and calls 911. He gasps to the operator, "My friend is dead! What can I do?" The operator, in a calm soothing voice says, "Just take it easy. I can help. First, lets make sure he's dead." There is a silence, then a shot is heard. The guy's voice comes back on the line. He says, "OK, now what?"

Lame Joke 2: Three statisticians go duck hunting. A duck flies by. The first statistician stands up and shoots but misses behind the duck. The second statistician stands up and shoots but misses ahead of the duck. The third statistician stands up and shouts "We got him!"