FEBRUARY 16, 2005

Germany reported their GDP dropped in the 4th qtr by .2% and the 3rd qtr was revised lower bringing growth for the year to 1.5%. Don't tell the stock market, it's as high as it has been since 9/2002. The Euro as well finished up on the day by .42 to 1.3012. one of the reasons the Euro is so strong in spite of the poor economic growth is illustrated by a comment by their central banker. Stephen Roach in his latest commentary said that, while in Davos for the economic forum, he asked 'Trichet point blank if he could ever contemplate a situation when European monetary authorities would be willing to provide special support to domestic demand if their externally led growth model were derailed by a further strengthening of the euro. His answer was an unequivocal no." They have a single mandate unlike the Fed. They are charged with maintaining the integrity of the financial system, by fighting inflation to protect the value of their currency, period. It reminds me a lot of the 70's where the strongest currencies were those with the strongest central banks and not the strongest economies.

A lot of Greenspan testimony will revolve around the deficits and social security. I don't expect anything exciting. His view on these are well known. He favors cutting spending to raising taxes. He favors reinstituing pay-go rules to enforce budget discipline. He thinks benefit cuts are part of the social security solution, particularly raising the retirement age. I've heard him so often I almost think I could give his testimony for him.

In Morgan Stanley's Stephen Roach's latest comments he makes the case that nothing much has been accomplished toward resolving the world's current imbalances and everyone is content to let the current games go on and hope that we grow our way out of all our problems. I guess this should not be too surprising. Looking back on history, nothing much gets done until their is a crises. Also, I think its quite clear that Bush has patterned his presidency on Regan's, both strong on defense, tax cutters, supply siders, big budget deficit creators. Both had a weak dollar and large trade deficits. The question is will it end the same way. The reason for doubt is that in each recovery the job growth is weaker and the leverage is higher. Can taxes be cut further? Can interest rates go lower? Can the trade deficit grow wider. Can consumer debt ratios go higher. Most importantly is the economy now self sustaining, becuase if the answers to the previous questions are no, then the question becomes how deep is the recession. Roach's point is, it seems we've but all our eggs in one basket.