TUG OF WAR

Purging the rottenness out of the system

In Summary

•If you had said two years ago that the status of global geopolitics and financial markets depended on the world's supply of pigs you would have been laughed out of the room.

Men from various communities compete in a tug-of-war during Laikipia Highland games in Laikipia County
Men from various communities compete in a tug-of-war during Laikipia Highland games in Laikipia County
Image: BOB MURIUKI

Last week I closed by quoting the President of the AfDB, the mercurial and Bow Tie toting Akinwumi A. Adesina who said

The U.S.-China trade war and uncertainty over Brexit pose risks to Africa’s economic prospects that are “increasing by the day”

“You have Brexit, you also have the recent challenges between Pakistan and India that have flared off there, plus you have the trade war between the United States and China. All these things can combine to slow global growth, with implications for African countries.”

“I think the trade war has significantly impacted economic growth prospects in China and therefore import demand from China has fallen significantly and so the demand for products and raw materials from Africa will only fall even further,” he said.

“It will also have another effect with regard to China’s own outward-bound investments on the continent,” he added.

The US-China Trade War continues to intensify notwithstanding the fact that aides have now admitted Trump Made Up "High-Level Phone Calls" With China to boost markets. Such a negotiating strategy is of the ''Cry Wolf'' type and its shelf life infinitesimally short.  It is the increasing intensity of the trade war which has triggered the surge into safe havens. Unprecedented doses of financial repression have created ''scarcity'' in the G7 Sovereign Space, further fuelling the interest rate rally. Central bankers apparently stand ready to increase the dosage. Central bankers are seeking to re-imagine the economic cycle and magic it away. It's not going to happen, it never does. 

Andrew Mellon believed that economic recessions, such as those that had occurred in 1873 and 1907, were a necessary part of the business cycle because they purged the economy. In his memoirs, Hoover wrote that Mellon advised him to “liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down. ... enterprising people will pick up the wrecks from less competent people.”

The overarching macro issue for Africa remains the Trade War and it will remain a source of downside pressure via the China EM Frontier Feedback Loop Phenomenon. This Phenomenon was positive for the last two decades but has now undergone a trend reversal. The Fall-out is being experienced as far away as Germany Inc. The ZAR is the purest proxy for this Phenomenon. African Countries heavily dependent on China being the main taker are also at the bleeding edge of this Phenomenon. This pressure point will not ease soon but will continue to intensify. 

As to Brexit, The Queen approved the government's request to prorogue parliament. The Financial Times editorial Board pronounced "Boris Johnson has detonated a bomb under the constitutional apparatus of the United Kingdom." -  

It is clear to me that Prime Minister Johnson is the triangulator and therefore the United Kingdom is now like the Pound at risk of a precipitous, downside, even asymmetric move before the recovery. 

China whilst fending off Trump and a flare-up on its periphery will mark the 70th anniversary of People’s Republic on Oct. 1. The DF-41 intercontinental ballistic missile will be a centerpiece of that parade. China's miraculous economy is slowing down. 

''If you had said two years ago that the status of global geopolitics and financial markets depended on the world's supply of pigs you would have been laughed out of the room. But you would have been right'' @SantiagoAuFund

Pork inflation in China amid the trade war: "I've never seen anything like this," said Xiao Tong, a vendor who has been selling pork for nearly 20 years in Beijing. "Every day the price rises more."

China has exerted the Power of Pull over vast swathes of the World from Germany to Angola, from the Mekong Delta to Asia and that Power of Pull is now ebbing. 

Now where does that leave Africa?

Well firstly, it places an enormous premium on nimble policy-making and a heavy discount on policymaking that cannot read the signs or as Lao Tzu put it 

“Men are born soft and supple; dead they are stiff and hard. Plants are born tender and pliant; dead, they are brittle and dry. Thus whoever is stiff and inflexible is a disciple of death. Whoever is soft and yielding is a disciple of life.  The hard and stiff will be broken. The soft and supple will prevail.”

Let me tell you by the way who was very nimble, Abiy was. Prime Minister Abiy has already reprofiled his debt to China. 

Of course, the continent is absolutely non-linear something which we are seeking to address with the AfCTA and what is key in that is the free circulation of our most valuable capital of all our human capital.  [As a result, population explosion in Africa has been supercharged compared with earlier adopters of modernity in Europe. If large numbers of people are a good thing, then this is a case of last-mover advantage FT] However, the AfCTA whilst surely a Silver Bullet is some ways off and we have to deal with the NOW. The NOW looks different depending on where you look at it from. Africa Confidential is reporting that the  G7 had planned to arrange a $2.3bn bailout for Zimbabwe, which would settle its arrears with the World Bank, African Development Bank and the European Investment Bank.  They would then immediately release $1bn in a fresh loan (AC Vol 60 No 11, Austerity first). The quid pro quo, insiders say, was for the Mnangagwa government to show goodwill on opening Zimbabwe's democratic space. The bailout was not discussed at Biarritz, we hear, probably because of Harare's failure to follow through on this. Remember Lao Tzu. That was the opportunity. They have blown it. They also blew $1.3b ahead of the election in 2018, money they did not have. South Africa with is smack bang in the middle of Fire when it comes the China EM Frontier Markets Loop Phenomenon, saw its stock market witness its worst August since 1998. The ZAR has been hammered. Nigeria's currency peg is a far better short sale than the Hong Kong Dollar. Zambia's ratings were Lowered To 'CCC+/C'  and it recently sold -2024 local currency debt at of yields 32%. Zambia is the Canary in the SSA coal mine. The U.S. Export-Import Bank said its board intends to vote on a $5 billion direct loan for the development of a liquefied natural gas (LNG) project in Mozambique. 

Now we can all agree that the external Environment has turned much darker but as the inestimable Billy Ocean once sang ''When the going gets tough the tough gets going.''

What is increasingly clear is that there is an ongoing major global supply chain disruption. There is surely an opportunity now to re-position some manufacturing capacity from China into Africa. Soft commodity prices have gone haywire in China. The Pork Apocalypse is front and centre but its a symptom of the disease. Feeding China Inc is a major opportunity especially given the Chinese desire to reduce dependency to the US Farm Economy. 

From a trading perspective, The Euro is as much caught up in the crossfire as is the ZAR. I look for the Euro to reach 1.0600 and the ZAR to vault 15.50. In Africa, President Sisi has proven incredibly finely tuned into the markets, the GDP clock speed continues to accelerate and I expect continued outperformance.