Since 2005 China’s interest in Africa has intensified. In November 2006, Beijing hosted a Sino-African summit at which it promised more than 40 of the continent’s leaders a new era of co-operation.

Beijing has offered more than long-necked symbolism. In 2006 alone, it signed trade deals with African countries worth $60bn. Investments, which often include a resources-for-infrastructure element, have poured in thick and fast. China’s stock of foreign direct investment has shot well past $120bn. In 2006, Angola temporarily overtook Saudi Arabia as China’s main supplier of oil, and Africa now accounts for nearly 30 per cent of China’s oil imports.

In 2007, Industrial and Commercial Bank of China, the biggest bank in the world by deposits, paid $5.6bn for a fifth of South Africa’s Standard Bank. Two years ago Beijing pledged $10bn of new low-cost loans to Africa. It also promised to eliminate tariffs on 60 per cent of exports and to forgive the debt of several countries. Trade between Africa and China has already risen spectacularly: in 2009 it jumped 45 per cent to $107bn, a tenfold increase over 2000.

Beijing’s engagement with Africa has caused much hand-wringing. China is no philanthropist, but its rise may still represent Africa’s best hope of escaping poverty. In the eight years to 2007, before the financial crisis, African countries were growing, on average, by more than 4 per cent a year, far higher than previously. That was thanks partly to better economic management, debt relief and increased capital flows (some from China), but also to the higher commodity prices driven by Chinese demand.

Much of the criticism of China’s influence rings hollow. As Chinese and Japanese officials point out, the west’s track record is less than exemplary. European contact with Africa can best be summed up as decades of naked rapaciousness followed by a spectacularly unsuccessful attempt to make amends. During the cold war western governments supported dictators across the continent, from President Mobutu Sese Seko to Idi Amin.

Finally, China is not alone in seeking opportunities on the continent. As well as the west, India, Brazil and Russia are also looking for business.

This is the time of the year when strategits  make annual forecasts. We have already seen a wide range of forecasted outcomes but we would like to summarize the consensus :

• Muted Recovery but Recovery
• Equity Markets up
• Short Long Term Bonds
• Long Commodities
• Certain Volatility
• Inflation

We do not see the economic events of the last two years as a classic Recession/Recovery phase. So we think that the possible outcomes are very uncertain.

But let´s try to Forecast  (do not forget that we are humans ) :

This recession was unlike any other we have experienced since the Great Depression. Typical recessions are inventory-adjustment recessions, caused by businesses getting too optimistic about sales and then having to adjust. You get temporarily higher levels of unemployment as inventories drop, and then you get the rebound. It is not quite as simple as that, but close enough. This time is more about credit expansion and contraction.We are in a post-credit collapse that is ongoing…

This recession was caused not by too much inventory but by too much credit and leverage in the system. And now, we are in the process of deleveraging. It is a process that is nowhere near complete. While the crisis stage is over (at least for now), there is still a lot of debt to be retired on the consumer side of the equation, and a lot of debt to be written off on the financial-system side. And this is true in US and in Europe as well.

Given the high rate of delinquencies and charge-offs of all sorts of debt in US, it is unlikely that we are going to see growth in loans in 2010. Consumers are working hard to reduce their debt. The New Frugal is part of the New Normal.

Past post-recession expansions have been built on growing credit and leverage. That will not be the case this time. We are going to see reduced lending and borrowing. Even though the federal government is running massive deficits ( US ), the stimulus portion of the debt will be running down in the latter half of 2010. There will be little political will to continue with massive stimulus and deficits. While this is good in the long run, in the short run it will reduce GDP.

Perhaps Inflation is a consensus forecast but Deflation is the present day reality and often lingers for years following an asset and credit bubble and further collapse.

We see the range of outcomes in the financial markets and the economy to be extremely wide at the current time.But a clear strategy is being defensive and minimizing volatility and downside risks and focus on where the secular fundamentals are positive such as equity sectors that lever off the commodity sector.

We are going to take a break for the next two weeks and recharge batteries, but we will be ready to go as 2010 comes around.

We wish you Happy Holidays and a great Year ahead…

THE PIGS ( Portugal, Ireland,Greece & Spain )

As it is well known, the biggest problem economies in the Euro-area are Ireland, Spain and Greece, all of which are mired in debt and economic malaise.

The Irish economy, with a debt-to-GDP ratio forecast to rise from the current 66% to 96% by 2011, is obviously in miserable shape, but at least the government appears willing to take painful and politically risky measures–massive wage cuts and income reductions are being implemented across the spectrum, in tandem with proposed tax increases on income and levies on public sector pensions.

In Spain and Greece, by contrast, the governments still appear resistant to hard choices that might help them tackle their debt, which in Greece’s case is forecast to rise from the current 112% to 130% of GDP by 2011. Within weeks of winning the country’s elections in October, the Greek socialist government raised the budget deficit forecast to 12.7%, twice the previous government’s forecast.

Spain’s debt to GDP ratio at 55% is below the European average, but it is suffering the ongoing effects of a major housing bubble implosion. Yet unit labor costs in Spain rose +0.4%YoY in the third quarter despite an 19.3% unemployment rate. More worrying are the fears that European banks in general and Spanish banks in particular have been slow to write off bad assets (how could Spanish banks have managed to largely avoid Spain’s massive housing bust?).

With these concerns coming, we see another reason to sell the Euro vs the US$, though the coming decline of the Euro from the current very overvalued levels will not provide countries like Ireland and Greece much relief in the near future.

After all, in terms of their real effective exchange rates, these two countries, along with Spain, have appreciated the most in the past decade.

The Black Swan

by James Merrill

Black on flat water past the jonquil lawns
Riding, the black swan draws
A private chaos warbling in its wake,
Assuming, like a fourth dimension, splendor
That calls the child with white ideas of swans
Nearer to that green lake
Where every paradox means wonder.

Though the black swan’s arched neck is like
A question-mark on the lake,
The swan outlaws all possible questioning:
A thing in itself, like love, like submarine
Disaster, or the first sound when we wake;
And the swan-song it sings
Is the huge silence of the swan.

Source: Albert Edwards

Complacency can be the name of the game. It seems that Investors have forgotten everything that had happened since 2007. Since March 2009 we have enjoyed a stock market rally based in the heavy hand of government intervention and stimulus but investors doesn´t care… Today´s  bullishness is dangerous…

2010 can be a disappointing and tumultuous year. The credit collapse and the accompanying deflation and overcapacity are going to drive the economy and financial markets in 2010. This recession is quite different from  the recessions post WWII experience because it is NOT an inventory cycle problem . It is a credit contraction related to households and small businesses  that will take a LONG time to heal…

So we recommend prudence and patience for the year that comes, that BTW is the YEAR of the TIGER ( Chinese horoscope ).

We admit that of late our writings have had a rather dark tone but the World, certainly has  a number of severe long-term problems that we must deal with, and they’re going to serve up a lot of economic pain.

Anyway today we want to look at some changes we are likely to see over the next few decades that can bring a bright future . As John Mauldin comments :

“Some time next year, we are going to see the three-billionth person get access to the telecosm (phones and internet, etc.). By 2015 it will be five billion people. Within ten years, most of the world will be able to access cheap (I mean really cheap) high-speed wireless broadband at connection rates that dwarf what we now have.”

“That is going to unleash a wave of creativity and new business that will be staggering. That heretofore hidden genius in Mumbai or Vladivostok or Kisangani will now have the ability to bring his ideas, talent, and energy to change the world in ways we can hardly imagine.”

And because of the internet, the advances of one person soon become known and built upon in a giant dance of collaboration. It is because of this giant dance, this unplanned group effort, that we will all figure out how to make advances in so many ways. (Of course, that is hugely disruptive to businesses that don’t adapt.)

New jobs will emerge from new Energies, Nanotech, Robotics, Artificial intelligence, Virtual reality, etc…

A pessimist never gets in the game. A wild-eyed optimist will suffer the slings and arrows of boom and inevitable bust. Cautious optimism is the correct and most rewarding path in these changing but amazing new times.

DUBAI is considering a delay in its debt payments, that would be the largest sovereign default since ARGENTINA 2001.It is shaking investor´s confidence across the Persian Gulf.The cost of protecting government notes from Abu Dhabi to Bahrain rose, extending the steepest increase since February as Dubai World, with $59 billion of liabilities, sought a “standstill” agreement from creditors.

Gulf region default swaps jumped, with contracts linked to Bahrain rising 32.5 basis points today to 227, the biggest increase since Feb. 18. Contracts linked to Abu Dhabi added the most since February yesterday, climbing 36 basis points to 136.5 and were another 27 basis point higher at 164 at 10:10 a.m. in London, according to London-based CMA. Qatar default swaps advanced 23 basis points to 115, adding to yesterday’s 11 basis- point increase.

Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a company fail to adhere to its debt agreements. A basis point is 0.01 percentage point and is equivalent to $1,000 a year on a contract protecting $10 million of debt.

What if … As Albert Edwards, Societe Generale’s global strategist, sees the risks running quite the opposite of the consensus, which has a global recovery on track with a steadily falling dollar. Instead, he looks for a double-dip back into recession leading to a surging greenback, with a collapse of “the China economic bubble” resulting in a double whammy for commodity prices.

He points to signs of doubts about the U.S. economic recovery, from the labor market remaining “very sick” with the uptick in unemployment rate over 10% plus the Conference Board’s consumer finding showing jobs getting still harder to get. Meanwhile, the ECRI Leading Indicator, which trumpeted recovery earlier in the year, has fallen for five straight weeks.

What if… China no longer will be accumulating currency reserves at nearly the same pace, leaving less to recycle into U.S. Treasuries. The reduced capital inflow would also slow China’s domestic monetary growth and real output, which track each other. Meanwhile, capital outflows from Japan, another source of global liquidity, could be hampered were there a sharp rise in its government bond yields.

What if… A synchronized end to the Chinese and U.S. economic recoveries could play out in increased protectionist pressures, including competitive devaluations.The sort of deflationary crisis, resulting in competitive devaluations, protectionism and contracting world trade that  recalls what happened in the 1930s more than what happened in the 1970s.

As Stephen Roach explained in his book ” The Next Asia” and Bill Gross declared yesterday in Bloomberg, China is facing a bubble of their own to confront.

Gross : ” “It’s gearing up for export that doesn’t find an end consumer, that’s the real problem in China.”

The “systemic risk” of new asset bubbles in global economies and markets is rising with the Federal Reserve keeping interest rates at record lows…

The Shanghai Composite Index of shares returned 84 percent this year. The index is valued at 35 times reported earnings, more than doubling in a year.

Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.

In an interview with the Financial Times, Miguel Fernández Ordóñez, governor of the Bank of Spain, outlined plans for a series of mergers within months among the “cajas de ahorros”, regional savings and loans institutions.

“I think there are at least 15 institutions that should merge with others,” he said. “I hope  next spring we have restructured all these institutions, that’s my idea. We now have many, many mergers that we are discussing.”

Spain’s listed commercial banks, some of which were involved in previous domestic banking crises, have so far survived the global financial crisis in better shape than many of their international rivals.

But the unlisted “cajas” , many of them politicised, linked to regional governments and with an opaque ownership structure ,seized market share from the banks at the peak of the recent housing boom and now account for about half of outstanding loans in Spain. Several are heavily exposed to bankrupt property developers and homeowners unable to meet mortgage payments.