Central Bank Wizards Strike
The Wizard of Oz is a 1939 American musical film produced by Metro-Goldwyn-Mayer. Its the story of a Kansas farm girl Dorothy Gale (Judy Garland), who is told of the mysterious Wizard of Oz in the Emerald City and sets off down the yellow brick road to find him. After a series of adventures and eventual triumph, Dorothy returns from her adventures to the wizard's chamber. Toto opens a curtain, revealing him to be an ordinary man (Frank Morgan) operating a console of wheels and levers while speaking into a microphone.
I watched the Wizard of Oz only when I was an adult but it is a very rare pleasure. There are many lessons in the c20th Hollywood fable but most important of which is the discovery that the wizard was not a real wizard but a pretend one. That was Dorothy's rite of passage into adulthood.
This week, the Central Bank wizards of the world swung into action. The Bank of England injected £50bn of electronic money into the UK and the grand total is now £375b. Mario Draghi of the ECB said euro-bloc economic growth “continues to remain weak with heightened uncertainty” and downside risks had appeared [As far as I am aware those downside risks appeared an eternity ago], whilst cutting its main refinancing rate by a quarter-percentage point to a record low 0.75% and said it will no longer pay interest on overnight deposits. In fact the German Schatz [Which is the German 2 year note] is now yielding negative 0.01%, which is an extraordinary thing. I once had to lend money at -15% in Japan but that's another story. I had to make a presentation to Paul Tucker of the Bank of England about it and in point of fact. The People’s Bank of China cut its key interest rate for the second time in a month, on the same day. And even here, on the frontier, we got a 150 basis points cut.
I believe the FED who are set to issue their next policy statement on Aug. 1 after a two-day meeting, will confirm a 3rd round of Quantitative Easing, QE3. The FED has already printed $2.3 trillion of Magic Money. I think in many places, The policy makers are now running on empty. They are at the limits of their Influence. In some places, it feels like the Titanic. Everyone is dancing, the ship is sinking and thinking if we dance fast enough, we won't sink.
In chaos theory, the butterfly effect is the sensitive dependence on initial conditions, where a small change at one place in a nonlinear system can result in large differences to a later state. The name of the effect, coined by Edward Lorenz, is derived from the theoretical example of a hurricane's formation being contingent on whether or not a distant butterfly had flapped its wings several weeks before. Hurricane winds could blow anytime from anywhere.
If the markets were really efficient, a tsunami of liquidity would be flooding into African sovereign paper. Maybe it will. Across the African continent, You will note that we are conducting an orthodox monetary policy. Here in Kenya, I think the easing cycle will total about 6% [of which we have received 25%] through year end. I think this easier policy will see the Nairobi Securities Exchange NSE 20 Index [which is the world's 3rd best performer in 2012] rally another 400 points. I think the shilling will confound everyone by behaving well and staying in an 83-88 range versus the dollar.
The price of oil remains a wild card. The Euro hit a 2 year low Friday against the dollar and the charts look really grim. I remain concerned about the Euro Shilling cross which closed at 102.98 on Friday. We sell a lot of volume into Europe and its getting very expensive.