What I Learned in 2011

In 2011 I learned
That attention is artfully earned
By enhancing the text
With verses well-sexed,
Where economists' blogs are concerned.

As 2011 draws to a close, I would like to thank all the supporters of Limericks Économiques; those who read the blog, all you e-mail subscribers, Facebook fans and Twitter friends and followers. In particular, I would like to thank Professor Greg Mankiw, whose clarity in writing economic textbooks cannot be matched, though it can evidently be sexed up a little. Prof. Mankiw's Ten Principles of Economics inspired Dr. Goose's most widely read rhymes this year - The Ten Limerick Principles of Economics. To all those who inspired and encouraged these limericking efforts this year - thank you.

Happy New Year to one and all!

Happy Holidays from Internal Auditing

It's required, in bank regulation,
That each trader have two weeks' vacation;
While preventing their burnout,
An audit may turn out
A case of a "rogue" operation.

During the holidays (or the dog days of August), when the thoughts of some bankers turn to carefree vacations, others contemplate... forensic accounting. Bank regulations call for every employee to take two consecutive weeks off each year, to give internal auditors sufficient time to uncover whatever financial fraud they might secretly be working on. This is based on the observation that such frauds usually require the frequent oversight of one or more conspirators, whose forced, temporary removal may cause the scheme to unravel.

Slow Week

Said a stock market man named O'Toole:
"Never trade in the week after Yule;
For liquidity's thin
When the traders aren't in,
Which, for now, is the general rule."

Discussion of stock market trading in the week between Christmas and New Year's invariably touches on the low market volume. For example, Tuesday's New York Stock Exchange volume, at two billion shares, was half the normal daily figure of 4.3 billion shares traded. This is caused not only by the fact that half of the market participants are on vacation, but also by the fact that most of them will have already "cleaned up" their balance sheets for year-end financial and regulatory reporting, and are loath to untidy them again. Interest rates for short-term funding over year-end can be volatile and expensive as well, another encouragement simply to take the week off.

The Fight before Christmas

'Twas the week before Christmas and all through the House
Each rep wished to go home to children and spouse;
When what to their wondering eyes should appear,
But a tax cut expiring at the end of the year.

The Speaker maneuvered to tie its extension
To a pipeline Obama would rather not mention;
But the President managed to win to his side
The bulk of the voters, who fitfully cried:

"On Boehner, Pelosi, McConnell and Reid -
Put cash in the pockets of workers in need!"
And Republicans claimed, 'ere they drove out of sight:
"We had all the votes, but Barack won the fight!"

House Republicans finally caved in the latest high-stakes Washington duel, over a two-month extension of the cut in payroll taxes to 4.2% from 6.2%. The issue provided a means for President Barack Obama to combine middle-class advocacy with tax cutting, a feat of political jiu-jitsu he could use in undermining the GOP House majority. Speaker John Boeher's bid to combine a year-long extension with the controversial Keystone XL oil pipeline failed, as both the press and the public saw his party as the obstacle toward tax relief for the average family. 

* * * 

As the Night Before Christmas approaches, Dr. Goose wishes a Happy Holiday to all those who will celebrate around the world this weekend, and joins you is wishing Peace on Earth and Goodwill to All.

Los Arcos Dorados

Said a friendly investment advisor,
As to where the best stock market buys are:
"Just look to Brazil,
Where, intriguingly, still
The best markets for burgers and fries are."

Investment advisor Josh Brown, whose nom de blog is The Reformed Broker, was among the stock pickers helping Investor Place to select the Ten Best Stocks for 2012. The reformed broker's pick? Arcos Dorados (NYSE: ARCO), the world's largest McDonald’s franchisee, with more than 1,750 locations, largely in Latin America Mr. Brown shines a light on the southern hemisphere's expanding consumer spending, particularly in Brazil (50% of $ARCO revenues), where a thriving middle class of 100 million people gives the company "incredible room for growth." Well done, Mr. Brown, but we can only hope that Brazilians' waistbands are equally expandable.

U-1 = Unemployed / Workforce

When the rate of the jobless declines,
The message is one of two kinds;
Either jobless are fewer
(The positive view) or
They gave up the job-seeking lines.

When reading of the unemployment rate, also known in the US as U-1, one must always be mindful of the fact that both the numerator - the jobless - and the denominator - the workforce - can fluctuate. As a recent Wall Street Journal headline ("Unemployment Eases, Jobs Still Scarce") reminds us, the unemployed can lower the jobless rate by becoming too discouraged to look for work. In this sad state, they no longer count in the denominator of the U-1 equation, and thus lower the unemployment rate.

On a brighter note, let us pause to wish all of our Jewish friends a Happy Hanukkah (regardless of their employment status)!

An Il Wind from North Korea

To the President whispered the Queen,
As the Dictator passed from the scene:
"The foe that we know
Is preferred to the foe
that we don't, If you see what I mean."

The death of North Korea's "Dear Leader" Kim Jong Il incited mass displays of hysterical grieving in that country. Reactions among the global political and military elite tended more toward anxious calculation, as each country tries to figure out what the passing of the torch to Kim Jong Un, the late dictator's youngest son, will mean for them. China, in particular, would like to sustain its neighbor's government, both to avoid a flood of North Korean refugees in the event of that state's collapse, as well as to act as a buffer against South Korea, Japan and the US. The latter three are hoping, first and foremost, that "a 27-year-old running a repressive regime with nuclear weapons" (in the words of a US defense official) does not do anything rash.

France Defends Its Credit Rating

Said the Banque de France Gov'nor Noyer,
On the risk to the French "triple-A":
"But ze debts of ze Brits
Are so deep in ze sh£ts,
For comparison's sake, if I may."

French central bank head Christian Noyer may have sparked a war of words with Britain. Responding to S&P's putting his nation on negative credit watch, with the possible loss of its prestigious AAA rating, Mr. Noyer commented:

"A downgrade doesn't seem justified to me when you look at the economic fundamentals, or else a downgrade should come first for the U.K., which has a greater deficit, as much debt, more inflation, and less growth than us, and collapsing credit."

Trying to keep a stiff upper lip, a spokesman for Prime Minister David Cameron's Conservative government noted the credibility of the UK's deficit reduction plan. In truth, the British have nothing to gain by rising to Mr. Noyer's bait, since their public deficit, at 9.4% of GDP, is far above France's 5.8%.

Overheard at FedEx

"A drop in the pricing of oil
Should sweeten the fruit of our toil,
But since shipping has slowed
In the air and the road,
The fruit of our toil may spoil."

When should shippers not rejoice in the falling cost of fuel? When it indicates a slowing economy, according to the Wall Street Journal's Kelly Evans. Her Ahead of the Tape column points out that lower oil prices have coincided with weakness in the price of $FDX and the S&P 500 generally. Although cheaper fuel is clearly a benefit when looked at in isolation, it may be correlated with global economic activity, as is the shipping business.

Euro Downer

The market's unflinching barbarity
Toward the euro zone's flagging prosperity
Has its rate on a path
From a buck-and-a-half
Toward - eventually - dollar parity.

The euro has reached an 11-month low of $1.30, accelerating a trend that has seen the Old World's currency decline 12% from a high of $1.48 in May. As usual, the reasons are many; they include the belief that Europe is headed for a recession if its leaders do not soon restore confidence. European banks are poorly positioned to ease a credit crunch, as their piles of idle cash result from mandated deleveraging and recapitalization. Even the European Central Bank is contributing to euro weakness, based on the expectation of future rate cuts, which typically devalue a currency.
Chart courtesy of The Wall Street Journal.

US 4th Quarter Growth Forecast

America's merry 4th quarter
Has economists caroling (sorter),
But growth that's depending
On holiday spending's
Reversing again in short order.

The Wall Street Journal reports that a number of economic forecasters have raised their estimates of US 4th quarter growth to a robust 3.5%, compared to average forecast of 2% when the Journal surveyed economists in October. Among other things, consumer sentiment has improved, and shoppers are dipping into savings to make purchases, while companies are replenishing inventories. Of course, using one's savings for consumption is not a sustainable trend, which may be one reason why the forecasts for the 1st quarter of 2012 average only 2.1%.

A Prime Minister Who Can Say No

Said Cameron: "I could have been cannier
In dealing with France and Germania,
But when they're on a roll
About Euro-control,
In my mind I can hear Rule Brittania."

When the 17 euro-zone governments announced a deal to save their common currency on Friday, it was not - as some had hoped - accompanied by a major, supporting treaty change among the 27 EU members. Britain's Prime Minister David Cameron, constrained by his "euro-skeptic" Conservative Party, vetoed changes that would have centralized more fiscal controls with the European Commission, EU executive and European Court of Justice. This left Britain isolated within the EU but bolstered Mr. Cameron's standing at home, where a clear majority desire a "Prime Minister [who] can say 'No,'" in the words of one prominent Conservative.

Corzine's Congressional Testimony

"A billion-point-two, evidently,
Has failed to be found, accidentally;
Though we foundered, it's true,
When our funding withdrew,
Our finances were fine, fundamentally."

Ex-MF Global CEO Jon Corzine told the House Agriculture Committee that he was "devastated by the enormous impact on many people's lives" when the giant futures broker went bankrupt. In his first public appearance since the firm's collapse, Mr. Corzine expressed regret but not remorse. MF Global's failure was, in his view, precipitated not by his misjudgment in holding a $6.3 billion leveraged position in European bonds, but rather the market's sudden lack of confidence in in the firm's balance sheet. Regarding the notoriously missing $1.2 billion in MF Global customers' funds, Mr. Corzine testified: "I simply do not know where the money is."

A Refined American Export

The GDP targets we've missed of late
Makes Americans' fuel use desist of late,
But with fuel usage surging
In markets emerging,
We ship more petroleum distillate.

The Wall Street Journal recently reported that booming US exports of gasoline and other refined petroleum products would soon make America a net fuel exporter for the first time in 62 years. Though still the world's leading importer of crude oil (that's right - we're still dependent on "foreign oil"), the US' huge and growing refining capacity feeds the demand from growth markets such as Mexico, Brazil and Singapore. Even moribund Europe are "PIGS" for Yankee petrol. Of course, there is a dark side to this good news: the net export balance is helped by our slow economy, which has reduced US fuel consumption.
Graphs courtesy of The Wall Street Journal.

Those M*F* Risk Controls

A risk manager, naturally prone
To deny an improvident loan,
Heard the boss say: "We're wishin'
To cut this position;
Not that of the loan, but your own."

The Wall Street Journal reports that the Chief Risk Officer of MF Global found himself out of a job after he questioned that firm's big bet on European bonds, arranged by CEO Jon Corzine (pictured). CRO Michael Roseman had argued that the "repo to maturity" trades - in essence, leveraged long bets on treasury bonds of Italy and other sovereigns - could endanger the firm's capital if markets went strongly against them. Both privately and in front of the MF Global board, Mr. Corzine had responded that Mr. Roseman's dire scenarios were unlikely or even impossible. Eventually, Mr. Corzine is said to have grown annoyed with the CRO's persistence; whatever the reason, Mr. Roseman soon found himself assisting in the transition to his successor. Of course, soon afterward, his impossibly dire scenarios came true and the firm was bankrupt.

Walking out of Econ 10

Said Harvardian students of Mankiw:
"Shall we occupy seats here? No thank you!
We simply despise
Inequality's rise,
Among whose enablers we rank you."

The professor replied in an entry:
"You need learning that's more supplement'ry
Before jousting the rich
With your knowledge base, which,
Like my lectures, is quite element'ry."

One of the recent highlights of the Occupy movement was the walkout last month of some of the Harvard freshmen in Professor Greg Mankiw's Economics 10 introductory class. The students asserted that "the biased nature of Ec10 contributes to and symbolizes the increasing economic inequality in America." Though the story has faded from the front pages, the Professor is continually asked about it, and gave his thoughts in a New York Times op-ed piece on Sunday. While acknowledging that claims of inherent conservative bias in the economics field are not new, Prof. Mankiw prefers to cite Keynes' view that

The theory of economics does not furnish a body of settled conclusions immediately applicable to policy. It is a method rather than a doctrine, an apparatus of the mind, a technique for thinking, which helps the possessor to draw correct conclusions.

Hot and Cold in Brazil

"When Brazil overheated by fractions,
We carried out rate-hiking actions;
When it cooled a bit, then
We sank 'em again,
Plus the tax on financial transactions."

Brazil has surprised the markets with a fiscal stimulus package meant to block the "contagion" of developed countries' financial distress, according to Finance Minister Guido Mantega. Such measures include the lowering of financial transaction taxes on consumer loans, home appliances, homebuilding and foreign purchases of corporate bonds tied to infrastructure projects. All this comes on the heels of the Banco Central's lowering the overnight lending rate to 11% (although the highest among the major economies, this is low for inflation-prone Brazil). What's odd is that, not long ago, the central bank and finance ministry had raised rates and let tax breaks expire, because they feared an overheating economy; though cheered in the short run, some market participants wondered aloud about Brazil's long-run policy consistency.

Liquidity Injection

Said Bernanke: "I'd like to eschew
That the euro would bid us adieu,
So I'll open the taps
To help out those chaps
In the Old World as well as the New."

The Federal Reserve led an internationally coordinated effort among the leading central banks to inject US dollar liquidity into the European banking milieu. With a half-percent cut in the rate on dollar swap lines to the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank and the Swiss National Bank, the Fed hopes that dollars would in turn be made available to those Old World financial institutions for which liquidity has dried up of late. Marketplace's Heidi N. Moore, in her Tumblr, compared the action to siphoning unleaded premium from a Hummer so that a distressed Mercedes tow truck - and the broken Ferrari behind it - can reach the nearest exit and stop endangering the other traffic. Markets reacted ecstatically, which is ironic considering the central banks' implicit acknowledgement of urgency, bordering on panic.