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On December 25, The Wall Street Transcript interviewed Hayek Kallen Investment Management LLC's President and Founder, Fred Hayel, and Managing Director, Eric O. Kallen, on their investment outlook for 2007:

TWST: What are your thoughts investing in this environment?

Mr. Kallen: As 2006 draws to a close, we find that it is time to take a step back and evaluate the factors that are driving our economy and financial markets. In essence, we find ourselves at a crossroads, with change happening at a fast and furious pace. For the last couple of years, we have seen the Fed take creditable action against loose monetary policy and inflationary pressure by instituting a gradual program of 25 basis-point rate increases (17 of them, to be exact). With a recent pause, our new Fed Chairman has indicated a willingness to wait for a clear signal as to whether the economy needs additional tightening, or conversely, if just enough steam has been let out to allow for a soft landing. To gain a better understanding of the issues and their impact on the financial markets, it's best to address them one by one.

Mr. Hayek: This benign cyclical crossroads is one without any traffic lights, and it makes me want to slow down a little and look both ways.

TWST: What is the investment climate like for your investment strategy as we approach 2007?

Mr. Kallen: The debate over the health of the US economy is centering on growth. While it is clear that economic growth is slowing, giving rise to less concern about inflation, the data has not presented a clear picture. Clearly, falling energy and commodity prices have lessened inflationary pressure and provided much needed support to over-extended consumers who are even more at risk, given the slowdown in the housing market. But, strong wage growth (the average wage was up 3.9% from a year earlier compared to the average annual growth since 2001 of 2.8%) and a robust labor market (October unemployment dropped to 4.4%) are serving to keep the Fed on inflation watch. The stimulus for future growth remains a large question. With a government that is running huge budget deficits, tax cuts that have already been manifested and a currency that is getting weaker by the day, there is little hope that our government is in a position to stimulate the economy. So if we are to see renewed economic growth, it's going to come from the US consumer - that's nothing new here. Recently, the US consumer has been willing to forgo savings and spend all disposable income with little concern for the future. In fact, given the large amount of equity available through our appreciated real estate, we are able to borrow against those assets and spend even more. It's not a pretty picture in either case.

Mr. Hayek: Globalization is the mega-trend that makes business cycle outcomes so difficult to read these days. The disinflation forces of globalization can't be denied, nor can technological revolutions in communication and software that stimulate productivity. At the same time, the tensions between capital and labor, and consumption and saving, keep tightening. Liquidity-driven markets have gone from bubble to bubble, new highs to new highs, and my sense is that the potential for disruption is growing. Given that we believe we are in the first stage of a real estate down cycle and all that implies, the real conundrum for the Fed could be that renewed talk of deflation takes hold.That said, we always want to be minority owners in core businesses that provide valuable products or services that are needed and have good management teams when they are available at attractive prices.

TWST: Tell us your views on the weakened US dollar and its impact on the markets.

Mr. Kallen: One of the biggest challenges facing the US today centers around the fate of our currency. The dollar's recent tumble has been attributed to growing sentiment that the US economy is overextended and growth is slowing. This has led to speculation that central banks in China and elsewhere will stop accumulating dollars and diversify into other currencies, the euro and yen primarily. With such a large trade deficit, the US relies on this foreign demand for our currency to fund our shortfalls. If the economy shows greater signs of weakness, the demand for dollars could shrink even more, particularly as the gap between our economy and more sound European economies begins to widen. And while a weaker dollar will help our exports and serve to lessen our trade deficit, a rapid devaluation of the dollar could add to inflationary pressures and make it harder for the Fed to cut rates and cushion a struggling housing market and further threaten over-extended consumers.

Mr. Hayek: The fundamentals suggest that a weak dollar is a longer-term trend. The symbiotic trading relationships between "us and them" - they produce, US consumers buy, and then they save in US-denominated securities - is troublesome and gives us little flexibility if things go wrong. I think that is why the Secretary of the Treasury and Fed Chairman were over there recently - to make sure nothing goes wrong.

Source: Hayek Kallen Investment Management's Outlook For 2007