Welcome to the Van Liew Trust Company

In this spring issue of As We See It, Wade Walbrun, our equity analyst, sounds a bit like an economist with his pro and con observations pertaining to the weak dollar.

As our associate Sam Hallowell often observes, every eight or nine years the US economy gets itself into a "pickle", however, within twelve to twenty-four months, it is back on track. Thanks to our Fed's monetary policies since the late 80's, with a few minor exceptions, we have returned to relatively slow growth, low inflation after a slowdown or recession. As long as our politicians do not overreact with burdensome higher taxes and regulations, there is no reason why we should not shortly be back to a healthy economic environment.

"The almighty dollar, that great object of universal devotion throughout our land, seems to have no genuine devotees in these peculiar villages ..." - Washington Irving

The above quote taken from a Washington Irving short story published in 1836 appears to ring true today. In fact, the US greenback has been on the decline relative to a basket of foreign currencies since 2002. The seemingly daily fall in the dollar's value has some on Wall Street calling the US dollar the US "peso" in half-hearted jest, harkening back to the "Mexican peso crisis" and the depreciation witnessed there in the mid 1990's. Much of the wailing and gnashing of teeth over US dollar weakness these days surrounds its detrimental affect on commodity prices. With oil prices denominated in US dollars, any subsequent decrease in the value of the US dollar has a way of adding to any price rise. While the price of oil has risen over 30% this year, and over 100% in the last twelve months, year-to-date, the value of US dollar relative to a basket of world currencies has fallen only about 4%. Since the high in February 2002 the value of the US dollar has fallen only around 39%. Hardly the deleterious effect some would have you believe, but a headwind never the less.

Some point the finger of blame at the Fed for dollar weakness, claiming that the Fed funds rate cuts down to 1% (from 5%) during the 2001 to 2003 span were excessive, lasted unnecessarily long and destroyed the value of the dollar (and caused the housing bubble for that matter, 100). Others opine that the greenback slide is appropriate (and likely to continue) as emerging market economies gain strength and stability and grow at more robust rates relative to the US economy. Still others claim that the dollar's value had simply gotten overly inflated in the go-go years of the US economy in the 1990's and the slide in the last five years is simply a natural reversion to the historical mean. Whatever the reason, the recent aggressive cuts by the Fed Chairman Bernanke and friends, in efforts to stave off recession, have provided no solace to those wishing for the good old days of "King Dollar".

(Click image for a larger view)

The effects of a weak dollar are felt not only in commodity prices but also in the reduced buying power of the US consumer and conversely, in the increased buying power of foreigners. At a point in time when energy prices act as a drag on the wallets of consumers, the weak dollar has the added effect of increasing the price of foreign made goods. Literally, a dollar doesn't buy what it used to. Consequently, imports from other countries have fallen. The latest US Dept. of Commerce number shows imports fell $6.1 billion to $206.7 billion in March, the biggest monthly percentage decline since December 2001. Sound daunting? Maybe not. Our weak dollar has spurred growth in US exports. Exports in the first quarter of 2008 rose 17.6% year over year, one of the few bright spots in the US economy. Relative to import growth of 12% over the same time period, the export number is significant in an economy that has consistently racked up higher trade deficits. Some analysts see the trend continuing and even go as far as to claim the US will experience an industrial rebirth due to a weak dollar. They submit increased demand for US goods will spur more manufacturing, and foreign companies will allocate capital to start new manufacturing plants in the US as costs, relative to other countries, have become competitive again. Lower costs combined with traditionally strong productivity gains in US manufacturers is said to make the US fertile ground for manufacturing. We may not be in that camp yet, but welcome the increase in demand for US goods.

For those still fretting over the dollar, the Fed has implied that their program of interest rate cuts is all but finished. An end to rate cuts may provide more stable footing for the US dollar. The greenback has already made up ground on the Euro, rising over 3% from its lows earlier this year. With many parts of Europe now experiencing the lagged effects of slower US growth, and despite inflation fears, it may only be a matter of time before you see foreign central bank rate cuts in order to stimulate their respective economies. This combined with a US economic recovery could put the "mighty" back into the dollar.

(Click image for a larger view)

Please contact Van Liew if there are any changes in your financial situation or investment objectives, or if you wish to impose, add or modify any reasonable restrictions to the management of your account. Our current disclosure statement is set forth on Part II of Form ADV and is available for your review upon request.