BEST OF LANCE J. LEWISDecember 3, 2003A lot of what we can...

BEST OF LANCE J. LEWIS

December 3, 2003

A lot of what we can expect for the dollar and gold may depend on what indications the Fed gives us at next week’s FOMC. Do they care about the inflationary implications of the dollar’s collapse and the explosion in commodity prices? Obviously, they’re not going to raise rates next week (Uncle Al doesn’t move in such sudden ways), but they do have the ability to hint that they are at least aware of the problem by dropping a few choice words from their statement: "policy accommodation can be maintained for the foreseeable future." If they show us that they don’t care by including that statement again, will the market then panic out of dollars? It’s a little silly that we have to take signals from every nuance that the Fed’s statement has, but this is the game that they have chosen to play. I don’t make up the rules. I just try and figure out what they are.

That appears to be the crossroads that we’re at though. Either the Fed indicates its willingness to potentially defend the dollar by dropping its "foreseeable future" bit, or the market may annihilate the dollar into year-end. And if the Fed drops that portion of their statement, how will stocks react? If this is merely a momentum/liquidity rally and the current economic bounce is unsustainable (as I believe it is), one would expect stocks to begin motoring to the downside, especially with money supply already contracting for several months (incidentally, M3 was flat for the week ended Nov 17th). I think Uncle Al will go down in history as the most reckless and clueless Fed chairman in history, but even he must realize that he can’t allow the market to push the dollar off a cliff here. The dollar's continued inability to rally on positive economic data is saying fairly clearly that the Fed's gamble of trying to inflate our way back to prosperity is not going to work. The only thing that is going to slow the dollar's decline is rising interest rates, and that's precisely what stocks and the economy cannot handle.

Lance Lewis’s excellent and informative daily letter can be found at: www.dailymarketsummary.net

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