The Guest Blog

Farrell: Defining Leadership

If you look to Congress, or the political class in general, leadership seems to be getting to where the crowd is already going and pretending you led them there.

The President seems to be breaking out of that by plowing ahead with the health care bill that apparently has been rejected by the voters of New Jersey, Virginia, and Massachusetts. But give him credit for sticking to his guns.

Senator Dodd on the other hand is waffling tremendously on the financial reform legislation. Many will be glad he is, but he's turning around as fast as a merry go round. Senator Dodd's initial reform proposal envisaged a super cop for banks that would have taken over the regulatory duties of the Fed and some other agencies. That bold proposal for a single supervisor appears doomed. The "Financial Institutions Regulatory Administration" will probably not be included in the upcoming legislation. Instead, the Fed will likely keep its role as regulator of large banks, and the Comptroller of the Currency will remain. Even the expected consumer watchdog office will be a part of the Treasury and not an independent office. In other words, all smothered in the bureaucracy. Senator Dodd must be looking forward to retirement.

The health care debate will be with us for a bit.

Reconciliation has created a lot of confusion with even Washington insiders apparently fuzzy about details. As I understand it reconciliation can be used to modify an existing law so the House has to pass the Senate version of the health reform . Nancy-Ann DeParle, director of healthcare reform in the White House, was on NBC's Meet the Press on Sunday and said "I believe that we will have the votes to pass this in Congress. I believe that the President will keep fighting and that the American people want to have this kind of health reform " (my italics). I take no sides in the debate but recent election results would argue against the interpretation that Americans want this reform. The Financial Times said the President's party "faces challenges in the House of Representatives where new vacancies and changes to abortion funding language could make it difficult for the Democrats to gather the votes to pass final legislation."

Headlines in the Wall Street Journal on Monday wondered if Japan was going to follow Greece into the international penalty box. Japan's government debt is huge at some 200% of GDP. But the savings rate is so high that debt nets out closer to 100% of GDP so, presumably, domestic funding could come into play if there were to be any rumblings from international bond investors. The more likely candidates for attack would be Spain and the UK.

Spain's GDP is four times that of Greece and the country has an unemployment rate of 19%. The deficit as a percent of GDP was 11.4% last year. The reforms proposed by the Socialist government are "nothing but air" says Luis Garciano, a professor of economics at the London School of Economics. They are "just ideas that for the most part the government cannot put in place by itself." Critics say the economic forecasts are overly optimistic (seems to be true of most government budgets) and the Central Government has control of only a quarter of expenditures.

If not Spain then the next on the chopping block may be the UK.

The pound has been pummeled lately with the currency at a new 10 month low against the dollar ($1.50). The UK's budget deficit is over 12% of GDP and Prime Minister Gordon Brown's government is planning to increase its bond sales to a record 225 million pounds this year. Moody's Investor Services said the country may "test the AAA boundaries." An election has to be called by June and there is no clear favorite which only adds to the level of uncertainty. It's feared the pound could come under further pressure if the government resumes its quantitative easing program. The fear is the government might try to inflate their way out of the problems and debase the currency.

The euro is unattractive versus the dollar, as is the pound.

Yen offer some opportunities but Japan is still on the brink of deflation. The dollar, if by default alone, is still attractive and if you listen to George Soros, John Paulson and other big time hedge fund gurus, there is room to make a lot of money in gold.

Monday's stock market liked the report on US personal spending (and the prospect for a rescue package for Greece along with some M&A deals). The .5% increase in spending for January was greater than expectations. But since income rose .1% the way the arithmetic works resulted in the savings rate falling to 3.3%, which I think is unsustainably low. Disposable personal income (income after taxes) declined -.4% due to one time increase in tax payments. To look at this positively, private sector wages and salaries have increased four months in a row, modestly, but still an increase.

The Institute of Supply Management (ISM) manufacturing index was a strong 56.5. Although down from last months 57.9, this number would still be consistent with 4% GDP growth. The employment sub index of the manufacturing index rose to a four year high of 56.1. Manufacturing is in "V" shaped recovery. The problem is manufacturing accounts for only 13% of GDP. But still, over 75% of the manufacturing indices around the world are in expansion territory.


Vincent Farrell, Jr. is chief investment officer at Soleil Securities Group and a regular contributor to CNBC.