"Hopeless Continent"?

George Soros maintains that the way to make money is to “look for the trend whose premise is false” and bet against it.

A year ago, the premise undergirding the Nasdaq was that a New Era would send stock prices upward, if not forever, at least for a very long time.

This premise appeared false to us at the time…and has since been proven false (though not yet entirely destroyed in the minds of most investors).

While Wall Street was at its peak, The Economist decided to focus on an issue in another part of the world – one that was so far from Manhattan and the boom of the New Era that it might have been on another planet. “Hopeless Continent” pronounced the cover in May…over an illustration of Africa.

While North America was thought to offer infinite opportunity…Africa was thought to offer none at all. In America’s New Era, all things were possible. Hope was unbounded. But in Africa, nothing was possible; there was no hope at all. The “promethean light,” as George Gilder referred to the illumination provided by the information age, seemed to shine brighter and brighter on the United States…but the lights would be out on the Dark Continent forever.

The question I pose to you, dear reader, in this letter is simple: If the premise of the New Era in North America was false…mightn’t the premise of the Old Era in Africa also be false?

The news from Africa is almost always bad. People are getting shot by teenage soldiers in one country. In another, a tribe of short people is hacking off the legs of their tall neighbors. Silly state-supported development projects in Africa turn out to be no better than the silly state-supported projects in North America and Europe. Millions in aid money disappears into Swiss bank accounts.

But there is another side to Africa. Most places are stable, growing and peaceful. There are 53 countries in Africa. All but a handful of them are at least as peaceful as Baltimore. And many of them have GDP and income growth rates twice as high.

“The investment case for Africa,” wrote Miles Morland of Blakeney Management [which came to me courtesy of Marc Faber], “is a simple one: it’s one of the fastest growing parts of the world in economic terms; it’s the most profitable part of the world in which to do business in terms of margins and returns on investment; it’s the cheapest part of the world in which to buy assets; and nowhere will the introduction and application of management and technology bring a quicker return.”

The premise of the ‘Hopeless’ case for Africa is that the continent is a hellhole, has always been a hellhole and always will be a hellhole. Yet, prior to WWII, Africa was not such a bad place. Colonial governments invested huge amounts of money in infrastructure. Economies were growing rapidly in most places. Cities were safe.

Two of the most dynamic and successful people with whom I work grew up in Africa – Dave Gibson and Karim Rahemtulla. In both cases, their families were driven from the continent by the misguided policies of the post-colonial governments.

“Memories are short,” writes Morland. “When the Gold Coast, as Ghana, became Africa’s first nation to be granted independence in 1957, its per capita GDP was more than three times that of India and significantly higher than Korea or Thailand.”

With the politics of the post-war period came economic decline. By 1980, observes Morland, “only three countries in Africa had real elections and none ran genuine market economies.” Between 1965 and 1989, sub-Saharan Africa averaged annual growth of 0.3%, while growth in East Asia was over 5%. The horror!

But there is nothing to say that a trend that has run for nearly half the 20th century cannot reverse itself in the 21st. The Cold War brought with it a bidding war for African allegiance. The United States and the Soviet Union provided money, arms, food and other aid to corrupt African dictators. Foreign support kept the dictators in power – and caused the ruin of local economies, just as welfare has in inner city Baltimore.

Since the collapse of communism, both Russia and the United States have lost interest in Africa. Without foreign aid to cripple their efforts, Africans have begun to rebuild.

“The result,” says Morland, “is that all but a handful of African counties now have elections, many of them observing higher standards than is apparently the case in the U.S., have moved towards a market economy, and are implementing wide-ranging privatization programs.”

“If one compares annual growth in Africa since 1994…with that of other parts of the world in which people invest,” Morland continues, “Africa emerges as having grown faster than Latin America, Eastern Europe and the Middle East, Asia ex China and India, and the OECD countries.”

Here at the Daily Reckoning, we do not presume to know what will happen next month in Baltimore, let alone in Africa. But we think we see the trend whose premise is false…and an opportunity.

Just as everything was going so well in America that it could scarcely get better…things had been going so badly in Africa for the last four decades that they could scarcely get worse.

“To an economist there is a tantalizing possibility,” wrote Hamish Macrae in the Independent. “Because much of Africa has been so badly governed in recent years, it doesn’t need to be well governed to achieve real progress. There are plenty of enterprising people, lots of commercial zeal and new communications technologies that are well suited to African needs. There is also a yearning desire to learn.”

Ignorant as we are of the future, we take our investment cue from a simpleminded observation: when things are really out of whack, they tend to regress to the whacky mean. Africa doesn’t need good government or free markets to make investors a lot of money. It only needs governments that are less awful than those it has had for the last 40 years…and economies that are somewhat better organized.

More to come…

Bill Bonner Baltimore, Maryland December 31, 2001

*** What a relief! The consumer confidence numbers for January show another decline. Confidence fell for the fourth month in a row – down to a level not seen in four years. They may be borrowing and spending as recklessly as ever – but at least consumers are getting worried about it.

*** Amazon, the river of no return stock, said it would be profitable by the end of the year. But it also said that sales would be significantly lower than forecast.

*** And George Soros, idiot savant of international financiers, announced to a crowd of reporters in Davos, Switzerland, that the U.S. economy is probably already in recession. Soros went on to say that he would not be traveling to Thailand, because he wasn’t feeling all that well and didn’t want to have to deal with protesters. Swiss police arrested 100 rebels-without-a-clue. “We regard Soros as a Dracula,” said a Thai protest organizer. “He sucks blood from the poor.”

*** The trouble with the poor, which the anti-capitalists may not have noticed, is that they don’t have much blood to suck. The capitalists first have to fill them out a little…more on that below…

*** Morgan Stanley’s economists commented helpfully that they expected real GDP growth in the United States during the first half of this year of negative 1.25%.

*** So, there’s no reason for the Fed not to follow through with its rate cut today. The Morgan Stanley team also expressed the prevailing view that rate cuts would turn the economy around in the second half – in which they anticipated real growth of 4%.

*** The Dow rose 179 points – anticipating the rate cut: 201 stocks hit new highs; only four hit new lows.

*** The Nasdaq was unchanged.

*** The big winners yesterday were the gold shares. Gold rose $2.80. The HUI mounted a 3% increase. Newmont and Homestake both rose fractions.

*** “I believe that gold, and gold and other resource stocks, could perform well in the coming deflationary recession,” wrote Marc Faber in December. Faber recommended Newmont, Homestake and ASA as his traditional “Christmas Present” to his readers. “At just $5,” Faber continued, “Homestake Mining is like a long-term option on the price of gold.”

*** George Soros echoed the views of many economists when he noted that the Fed had a lot of room to maneuver. With few signs of inflation, the Fed can lower rates aggressively and thereby head off a severe slump, he said.

*** Of course, there are few signs of inflation precisely because the economy is not merely cooling off but melting down. It is suffering from overcapacity, too much debt and trillions in bad investments. Making debt more accessible is not going to help.

*** What’s more, the Fed actually has no room to maneuver. It is trapped by its own save-the-world agenda. Greenspan & Co. must cut rates – and they must make the cuts more or less as people expect them. If they either fail to cut…or cut too aggressively, it will be a disaster.

*** Everyone believes the second half will be better. What if it’s worse? Oh, why bother to think such a thing…rate cuts always work, don’t they?

*** Well, as I point out with the regularity of St. Merry’s bells, they didn’t work in Japan. The problem in Japan in the late ’80s was the same as the problem in the United States today: debt. The Japanese had borrowed too much – and had run up real estate and stock prices to absurd levels. Except in a few areas, America’s real estate market has been relatively sane…but we more than compensate in the stock market. Last March, Americans owned shares worth 175% of disposable income, according to The Economist. In Japan 10 years earlier, stocks equaled only 90% of incomes. “Just as Japan’s crash led Japanese consumers to raise their savings and cut spending,” opines The Economist, “so the risk is that the same could occur in America.”

*** Rate cuts only work so long as people have the desire and ability to borrow. Sooner or later, people run out of both. While we don’t know when that will occur…this year seems at least as good as any.

*** A Newsweek magazine article, “Drowning in a Sea of Debt,” estimates a rise in personal bankruptcies of 20% this year and shows how easily a typical middle-class family can slip over the edge.

*** “In November of last year, consumer borrowing rose at a 10.2% annual rate,” says Dan Denning. “Americans borrowed an additional $12.9 billion in credit, which brings the total for the year up to $1.523 trillion…It’s bad enough that the savings rate in the country remains negative. What’s scarier still is all this new credit is not finding its way into retail sales or auto sales. Those numbers are going down. It looks like Americans aren’t borrowing to buy more stuff – they’re borrowing just to service the debt on the homes, cars, TVs, and new computers they already have.”