The Phoenician US Dollar
Adam Hamilton August 10, 2001 4917 Words
One of the most fascinating empires in ancient history is Phoenicia. Lying directly north of Israel in what is known today as Lebanon, Phoenicia was the name the ancient Greeks applied to the central eastern Mediterranean coast. The actual word “Phoenicia” is very appropriate as it was derived from the classic Greek word for purple phoinikies, which described a famous purple dye extracted from a rare snail that the Phoenicians industriously peddled throughout the ancient world.
A relatively loose confederation of independent city-states, Phoenicia grew into one of the most intriguing trading empires in the ancient world. The Phoenicians had the great fortune of being geographically situated on the very nexus of many of the most important land and sea trade routes of the ancient world linking Europe, Asia, and Africa. In addition to their purple dye that was highly sought after by royalty all over the ancient world, the Phoenicians exported the lumber from the magnificent cedar trees of ancient Lebanon, pine, textile goods, glass, wine, metalworks, and fish.
The Phoenicians grew into one of the most celebrated sea-faring civilizations of all time. They are believed to have been the first group of navigators to use the North Star to maintain their course over the formless seas. Phoenician sailors were the first to circumnavigate the large continent of Africa, and Phoenicians founded trading colonies all over the ancient Mediterranean, including the famous city-state of Carthage on the Tunisian African coast and Tarshish in what is modern Spain.
In order to maintain records of their trading and commerce, the Phoenicians developed a comprehensive alphabet that was later appropriated and modified by the Greeks and passed down through the Romans. It was one of the key ancestors of our current English alphabet today.
In many ways, the mercantile civilization of the Phoenicians that ruled the Mediterranean for over a millennium is among the most fascinating cultures of the ancient world.
One of the most important cities in Phoenicia was Tyre (“Rock” in Phoenician). An island one-half mile off the coast of Lebanon in the Mediterranean, Tyre was considered militarily impregnable. It had massive walls of stone that were two miles in circumference and over 150 feet high on the city’s shoreward side. The powerful Assyrians tried to conquer Tyre in both 701 BC and again 30 years later in 671 BC. Their first siege lasted over four years, their second nine years, and both ended in failure. Tyre stood strong.
The empire that conquered Assyria, the Babylonians, tried to subdue Tyre again in 585 BC, spending thirteen years and vast resources trying to crack the sea fortress. The Babylonians under Nebuchadnezzar also failed to take the city and eventually packed up their war materiel and moved on, leaving the stubborn Tyrians. The proud residents of Tyre continued to consider themselves unconquerable, as they had unrestricted access to the sea, fresh water wells on the island, and an effective half-mile moat between them and land-based armies of marauding kings.
A couple centuries later, Tyre still thrived and business was good on the trade routes of the eastern Mediterranean. Meanwhile, north of modern Greece in Macedonia, a boy named Alexander was born to King Philip of Macedon and Princess Olympias of Epirus in 356 BC. Alexander had an amazing upbringing including studying under the personal tutelage of the legendary thinker Aristotle, meeting with foreign heads of state in his father’s court, and even commanding and leading a cavalry force into battle for his father’s army at 18 years old.
After his father King Philip was slain by an assassin’s sword, Alexander became king of Macedonia at 20 years old, and his life’s story is among the most captivating and exciting in world history.
Lusting after conquest and adventure like his hero Achilles of Homer’s famous Iliad, which he had memorized, young Alexander began his successful bid for world domination at the tender age of 22. Alexander would later be known as “The Great”, and became one of the most extraordinary generals of all time who forever changed world history. Eleven action-packed years later, sitting in Babylon on the Euphrates River after having conquered everything from Macedonia to India, Alexander the Great is said to have sat on his bed and wept, as his heart was broken because there were no worlds left to conquer. He became seriously ill with malaria shortly later and one of the greatest generals in world history died at the age of 33, on June 13, 323 BC.
Of Alexander’s entire brilliant military career, his devastating siege of Tyre stands out as one of his greatest tactical achievements. More than any other event in his early campaigns, it won him a formidable reputation among his potential foes.
In early 332 BC Alexander’s army approached Tyre and he asked the city elders to allow him to sacrifice at their temple, an act that would have proclaimed him ruler over their city. The proud Phoenicians laughed at his request and butchered his messenger. After all, no army in history had ever been able to mortally threaten their city and way of life, so why bow to this young upstart Macedonian? No doubt fully aware of the prior unsuccessful decade-long sieges of Tyre, Alexander set out to conquer the island fortress.
Alexander had his soldiers and combat engineers gather vast quantities of stones from quarries in the Tyrian hills and throw them into the Mediterranean Sea opposite from Tyre. Gradually the stones accumulated into the beginnings of a causeway, a land bridge or “mole” between the Phoenician coast and the island fortress. Alexander’s plan was to build an artificial peninsula out to the island and subdue the hostile city.
The Tyrians could see Alexander’s siege works inexorably approaching and they weren’t happy. Through heavy naval bombardment, special operations types of saboteur tactics, and barrages of lethal arrows from the high city walls, the Tyrian forces did everything they could to harass the construction campaign and stop the relentless advancement of the mole. Yet, young Alexander, at 24 years old, immediately developed effective countermeasures and neutralized Tyrian opposition as it arose. The accounts of the skirmishes during the building of the siege causeway to Tyre are extremely fascinating, and shed further light on Alexander’s legendary genius.
Amazingly, after seven short months, Alexander’s men completed the mole, breached the walls, and stormed the once impregnable city of Tyre. What the mighty Assyrians and Babylonians failed to achieve in a decade, Alexander accomplished in less than a year. On July 29, 332 BC, the Macedonian invaders entered and destroyed the once proud and invincible Phoenician city. Alexander ordered 2,000 Tyrians slaughtered after his victory, bringing the total Phoenician death toll to 8,000. He took 30,000 more Tyrians prisoner and sold them into slavery. Throughout his whole incredible siege, Alexander lost only 400 men.
Alexander the Great’s causeway still exists today and the island that was once proud Tyre is now a peninsula in the Mediterranean off modern Lebanon.
Throughout all aspects of human history, great pivotal events like Alexander’s siege of Tyre have caught most people unaware. We all tend to become seduced and hypnotized by the status quo. We inherently extrapolate the present into the future, relying on linear assumptions in a non-linear world. Because something looks stable today, we usually tend to naturally assume that it will remain the same tomorrow.
This instinctive human tendency led the proud residents of Tyre to believe that their city was absolutely secure and totally impregnable. After all, if two great ancient empires could not conquer and subdue it through repeated heavy sieges, what did they have to fear from some unknown Macedonian general? Yet, this assumption that the past would extend into the future and that they were invincible quite literally proved lethal for the Tyrians.
While the consequences of making false linear assumptions are not life or death issues in the financial world as they were for Tyrians who brazenly rode out the siege instead of fleeing in fast triremes, they are certainly still perilous for scarce and finite investor capital.
Today in the United States and around the world, investors seem to have taken on a Tyrian mentality regarding the mighty US dollar.
The dollar is so incredibly strong, and has been for years, even through the NASDAQ crash and subsequent early deflation of the huge speculative equity bubble, that it is hard to imagine the situation changing. Americans, and even many international investors, have become incredibly complacent. As the dollar has weathered so many spectacular storms in recent years, from the endless parade of serious structural economic problems in the United States to near-meltdowns like the Long-Term Capital Management fiasco of 1998, many assume the dollar will stay strong indefinitely. “Tyre is invincible!”, they shout, “Long live the impregnable Phoenician US dollar!”
In this essay, we take another brief excursion into that surreal hyper-valued world of the US dollar.
As in much financial analysis, a prudent embarkation point is found in perusing a graph of recent US dollar price action. We constructed a graph of monthly US Dollar Index closes from 1994 to July 2001. The dollar index is graphed below as the blue line and slaved to the left axis. The right axis marks the six-month moving average of the annualized monthly rate of change in the dollar index. For instance, if the dollar index had an absolute change in value of 1% over a single month, that rate of change is annualized to 12% to equate to normal annual growth rates. These annualized growth rates are then distilled down into a six-month moving average that is shown in the graph below as the white line. Green shaded areas mark periods of time where that moving average dollar index appreciation rate was positive, and red where it was negative.
Behold the wondrous strength of the Phoenician US dollar!
Since its trough in mid-1995, the dollar index has appreciated a remarkable 46% in six short years. We are not talking about some penny startup biotechnology stock here, this is the most important currency in the world today, the world’s reserve currency! A price move of this magnitude in any major currency over such a short time would be amazing, but it is absolutely mind-boggling in the world’s premier currency. The little white and black arrow marks the launch of the latest steep ascent of the dollar that commenced in late 1999 right before Y2k.
Ominously, the growth trajectory of the US dollar very closely approximates the early ascending stage of a parabolic growth curve, which we discussed in more detail in our “The Elusive Long-Term” and “US Equities: A Strategic Perspective” essays. The dotted yellow curved arrow superimposed over the blue US dollar index data above drives home this point of anomalous appreciation in the price of the US dollar since early 1995. Trends like these are typically seen exclusively in market bubbles, as parabolic growth is inherently unsustainable. This graph is nowhere near as extreme as the NASDAQ bubble, but with the lynchpin of world commerce the US dollar at stake the potential ramifications of a major dollar bubble are vastly more serious than any equity bubble.
Why did the dollar launch on this stratospheric trajectory? Why will the dollar have to fall? And when will the dollar capitulate and head south?
We have written on the origins of the current strong dollar in the past, and generalizing greatly, believe that two interrelated factors contributed to much of the dollar’s supernatural strength. The first factor, foreign capital inflows, is easily probably the most significant single cause for the dollar’s amazing rally. The second factor, a stealthy concerted Western effort to cap the price of gold, while much more difficult to discern, built on the success of the early foreign capital inflows to attach a rocket booster to the already strengthening dollar.
Warping back to the middle 1990s, there was an enormous disconnect that became manifest in the very fabric of the American financial markets. Virtually any important US market one can study, including the US dollar, the Dow Jones Industrial Average, the S&P 500, the NASDAQ, the broad US M3 money supply, etc, seemed to all of a sudden decisively break from old trend channels and launch north around 1995. Looking at all these graphs at the same time, with congruent timespans starting in 1990 and running to the present, it becomes very evident that the US financial markets, dollar, and money supply suddenly broke free from long-term trends and leapt towards the heavens all at the same time. It was an extraordinary event.
Many, including us, have speculated extensively on this discontinuity in recent US financial history. What the heck happened in 1995? We strongly suspect that a significant part of the reason for the odd disconnect in the dollar and US equity markets in the mid-1990s centers around the strong dollar policy of the Clinton Administration.
The mid-1990s were right before the time Alan Greenspan made his famous “irrational exuberance” comment to the US Congress in 1996. The DJIA had just broken through 4,000 in February 1995, and many traditional value-oriented investors looking at cashflows and earnings were in awe of the stock market’s gravity-defying progress. By fundamental measures, the Dow was approaching valuation extremes similar to the late 1960s or even the 1920s, and prudent thinking investors were very concerned about stellar equity valuations.
Meanwhile, various currency crises were erupting around the world in assorted “emerging markets”, countries experimenting with free markets and the hazardous art of trying to manage fragile fiat currencies. Every year or two like clockwork, some far off country would seem to implode as economic problems caused a run on its currency and elite hot money capital deserted it at the speed of light. The 1990s was a decade of continuing financial crises echoing around the globe, putting substantial stress on the world financial system.
In early 1995, Bill Clinton recruited Robert Rubin from Goldman Sachs to become his new Treasury Secretary. Rubin was well known and respected on Wall Street, and he had a passion for the financial markets and a legendary crusader-like zeal to keep the US dollar strong. Rubin knew the strong dollar was necessary to entice fresh foreign capital into the US financial markets, which serves several important purposes.
First, foreign capital inflows bolster US equity market prices, initiating a virtuous circle that entices still more money into the market. The more foreign capital floods into stocks and bids up prices, the more additional capital is attracted to the same markets. Also, as long as foreign capital was rapidly flowing into the States, the chances of the US being seriously damaged by the swarms of regional financial crises of the mid-1990s remained very low. Wall Street, of course, thrives and makes boatloads of profits as the markets rise.
Second, the US was running a huge current account deficit as US consumers spent far more on foreign goods than the US was able to export. Someone had to finance that deficit and maintain balanced capital flows, so foreign investment capital flowing into the US would allow the gargantuan trade deficit to be sustained in the short to medium term.
Third, foreign inflows of capital helped ensure that domestic inflation in the United States remained manageable. As the US Federal Reserve ran its printing presses and computers 24 hours a day creating new inherently worthless fiat paper currency out of thin air, an outlet for that currency was needed so it would not slosh around in the domestic US economy and bid up consumer and producer prices. As long as foreign investors were willing to buy vast amounts of surplus dollars with their own currencies to invest in the US financial markets, a pressure-valve type outlet existed for the Fed to be promiscuous in its relentlessly inflationary tendencies. Foreign demand for dollars bled off potential consumer inflation and pushed the huge gluts of excess money into the inflating equity markets, which made virtually everyone happy.
Finally, and perhaps most importantly to the simple political mind, a rising stock market creates the illusion of prosperity for all, regardless of whether or not this notion is true. A strong dollar seducing foreign capital into the US equity markets was certainly highly valuable politically, especially as Bill Clinton prepared for a second shot at the presidency in 1996.
The stakes for a strong dollar were incredibly high, and the dollar’s strength was highly sought after by the Washington elite as it helped camouflage a variety of structural problems in the US economy, markets, and money supply.
Under Clinton and Rubin, the US government began to make many comments about the strong US dollar and how the official US dollar policy was aggressively for a strong dollar. Amazingly, no one questioned this policy. After all, if the dollar price is determined by free market dynamics, how on earth can there be any dollar “policy”? The words “policy” and “free market” are mutually exclusive. Either the global markets determine the dollar’s value through Adam Smith’s invisible hand, or the US government gets involved in a policy of active management and prodding to goad the dollar into a certain range.
As early foreign capital was enticed into the dollar by Clinton Administration proclamations of a strong dollar policy in the mid-1990s, both the US dollar and US equity markets began to rise. Foreign investors sold their own currencies to buy US dollars, driving the dollar up and other currencies down. Many of these foreigners plowed their purchased dollars right into the US equity markets or debt markets, bidding up prices on key US financial instruments and initiating spectacular rallies.
Some, including ourselves, believe that Rubin’s strong dollar policy went far beyond soundbites, fiery rhetoric, and occasional currency market interventions. A mountain of evidence is accumulating strongly suggesting that part of the US strong dollar policy in the mid- to late-1990s was a concerted US Treasury led effort to place a de facto cap on the price of gold. We have written many past essays and newsletters on the ever-growing and solidifying case pointing to official US government involvement in managing the gold price down, contrary to US law.
Gold is the ultimate currency. For six millennia it has been the king of commerce, the ultimate asset. This is because gold has internationally recognized intrinsic value in and of itself. Gold is valuable because it is gold. It does not represent someone else’s promise to pay like fiat currencies and its value depends on no government to maintain. Gold has been sought after aggressively by virtually every nation and empire in world history, including our seafaring friends the Phoenicians of Tyre.
Gold is the timeless arch-nemesis of fiat currencies like the US dollar. Gold is the barometer by which all fiat currencies in world history have been measured. When a paper currency begins to lose value relative to gold, the gold price in terms of that fiat currency rises. If a government prints too much paper money, the value of each paper monetary unit in circulation begins to decline as relatively more money chases after relatively fewer goods, classical inflation. As this inflation from government printing of money becomes manifest, the gold price in terms of that fiat money begins to rise. Usually a short-time later if the government has attempted to peg its fiat currency to gold it has to abandon that policy, which is known as a “devaluation”, as it declares gold will now be worth more fiat currency units per ounce. In reality, however, the fiat currency is simply worth less as gold’s real value is remarkably constant through millennia of history.
Gold, throughout all financial history, has always been the ultimate judge, jury, and executioner of fiat currencies. If fiat currencies are expanded too aggressively, the gold price rises and ultimately vetoes that fiat currency built on nothing but confidence and promises.
Perhaps the Rubin strong dollar policy was partially or substantially built on the fraudulent premise that aggressive dollar money supply growth could be masked by capping gold. If gold did not rise, global investors would lose their traditional warning sign of impending fiat currency problems. If gold did not signal a weakening US dollar through inflation, perhaps foreign investors would keep buying dollars and keep plowing them back into the US markets, the best of all worlds for the Clinton Administration politically.
Thus, the “strong dollar” policy was born and nurtured. Through incessant political rhetoric, strategic currency interventions, and most probably official gold price suppression, the US dollar launched on a mega rally which has yet to be significantly broken, even with recent weakness in early August.
Unfortunately for the United States, US investors, foreign investors, and countries and companies that do business with the US, the dollar is enormously overvalued and will have to fall. A dollar bear market or possibly even a dollar crash is coming, there is no doubt about it.
Rarely in history has a fiat currency grown stronger when its sponsoring government’s economy was in such bad shape. The US current account deficit remains mammoth, the most speculative portion of the US equity markets, the NASDAQ casino, has crashed, and the Federal Reserve has embarked on its most aggressive easing cycle in its entire 88 year history in a last-ditch desperate attempt to stave off the inevitable.
In economic theory, when a country faces economic problems as great as the United States and official interest rates are slashed, a currency should be sold off. Lower interest rates mean foreign investors owning domestic debt securities will receive lower rates of return and a currency will become much less competitive internationally. Contrary to expectations, however, the US dollar has actually rallied significantly in 2001, growing stronger as interest rates were cut, not weaker as anticipated.
Like the mighty NASDAQ bubble of 2000, today most expect the dollar to remain strong, but the prospects for this wishful notion are virtually zero when viewed in light of the current US economic situation. Sooner or later, the fact that the US Federal Reserve has imprudently grown fiat currency supplies at rates far exceeding US economic growth for years and years will catch up with the dollar. A massive sell-off of the US dollar is inevitable. The challenge is in trying to discern the timing.
When the dollar finally faces fundamental reality, it will be sold off. The critical foreign capital that has bolstered the US dollar by flowing into the dollar and US markets will reverse at some point. Foreign investors, slowly at first and then with increasing speed, will recognize the incredible systemic post-bubble stresses still inherent in the US economy, the terrible US slowdown which will most likely soon be a full-blown recession, and the imploding US equity prices. When these foreign capital inflows, which were approaching record levels early this year, reverse, foreigners will first sell US stocks and bonds, putting heavy downward pressure on Wall Street. Then the dollars earned from selling foreign-held US investments will be sold for the home currency of each foreign investor, driving down the price of the dollar.
The exact timing of any stampede out of the dollar is impossible to predict, but we believe we are nearing the season for a major dollar bear market for several reasons.
Investor faith in markets can be a fragile thing. Right now in the financial markets there is absolutely monumental faith in Alan Greenspan and his Federal Reserve. US and foreign investors alike continue to point to the Fed’s rate cuts and convince themselves that all will be well because the Fed is on the case.
Unfortunately for the perpetually bullish, we have been hearing that same statement for over seven months now, to no avail. Heck, it only took Alexander seven months to capture Tyre! One would think that if interest rates cuts were going to help we would have at least seen initial positive signs by now.
Back in January, a few days after the first emergency rate cut, we hammered out an essay called “The Greenspan Gambit” in which we made the heretical assertion that rate cuts do not matter in a post-bubble environment. Until the speculative excesses of the previous bubble are painfully worked off, we said, rate cuts would probably prove futile. With equity valuations remaining at nosebleed heights, in early January we predicted the markets would sink lower, even with the popular investor fervor over the new Fed rate-cutting regime. We backed up with graphs and further analysis our brazen assertion that rate cuts are meaningless in post-bubble environments in our “Bubbling Interest Rates” essay published the week before the second Fed rate cut of 2001 in late January.
While we have never been among the New Era faithful, many investors around the world have bravely kept their faith in the New Era mythology throughout 2001. Now, with more and more investors gradually coming around to our once heretical conclusion that this post-bubble environment is nothing like anytime of the last 50 years, and that conventional market “wisdom” can prove lethal in this surreal post-bubble era, the probability of a mass foreign exodus from US markets and the US dollar is growing every day. Without international faith in the US dollar and its Federal Reserve custodians, there is no reason for foreigners to stay heavily invested in the dollar. In addition, there is a strong incentive to sell dollars early before the crowd, as if all foreign dollar holders try to exit at once the dollar price would crash. When they reverse their capital flows en masse, the dollar bear will roar to life.
Another reason we believe the dollar pivot point and turn south is rapidly approaching is the growing chords of discontent echoing among the power elite in the United States. More than any time in recent memory, there is a huge disagreement and rift between opinions on the US dollar in the halls of power. President Bush says the free market should determine the dollar’s value, while his new Treasury Secretary Paul O’Neill publicly corrects his boss and contradictorily says that only he speaks for dollar policy and that the US still aggressively advocates a strong dollar. (On a sidenote, it is a revealing commentary on politics and compromising principles that O’Neil was once an outspoken CRITIC of the strong US dollar when he was running Dow 30 companies in the 1980s!) High-ranking poobahs of various elite Wall Street firms are also publicly disagreeing on dollar policy. Some say the dollar is way too strong and strangling the US export economy, while others say the dollar has to stay strong or we face raging inflation and imploding stock markets. We discussed these disagreements in more detail in the current August issue of Zeal Intelligence.
Finally, and most importantly, we believe the dollar is nearing the end of its amazing bull market because we steadfastly cling to market fundamentals and millennia of hard-won market wisdom. To the best of our knowledge, there is not a single important fundamental perspective that does not show the US dollar woefully overvalued by virtually all historical standards. In any market, any country, any era, anywhere, investments that become fundamentally overvalued to extremes ultimately regress to their mean valuations, which are much lower. There has never been an asset or investment in history that has remained overvalued indefinitely. Neither will the dollar. Rock-solid fundamental financial truths time tested in the fire crucible of history will not be shattered by a magical dollar.
The US dollar has been weighed in the balance of fundamentals, and has been found wanting. Its days are numbered.
Bringing us full circle, a diligent study of history, whether of civilizations or finance, inevitably leads to the following conclusion.
NOTHING built by human hands is impregnable, whether it is the magnificent island fortress of Phoenician Tyre or the mighty bastion of currency strength in the current US dollar. Just as the ancient Tyrians believed that because they had not been conquered in the past there was no reason to fear young Alexander and his army, most global investors today think the US dollar will stay strong indefinitely.
Linear assumptions in a non-linear world are highly dangerous. Today the zealous international US dollar faith sits upon a kind of fragile conceptual altar like the widespread Tyrian belief that it could never be subjugated. Like the once mighty city of Tyre, however, the US dollar strength is not immortal. The Phoenician US dollar is poised for a devastating fall. The Tyrians of the international investment world are still partying within the huge stone walls of the “safe and secure” US equity market casino. But somewhere, just over the horizon, a young Alexander rides his mighty war-steed Bucephalus, some yet unforeseen event that will attack the Phoenician US dollar with as much fury as Alexander the Great focused on Tyre.
As the dollar is valued in terms of gold, the primary beneficiaries of a dollar bear market will be physical gold and quality unhedged gold stocks. Before Alexander’s army reaches the US market gates, there is still time to jump on a fast golden trireme and move capital to safety. With every passing day, however, the day of reckoning for the US dollar draws closer and more stones are thrown into the water paving the path to the dollar’s date with fundamental reality and destiny.
It’s only a matter of time.
Adam Hamilton, CPA August 10, 2001 Subscribe at www.zealllc.com/subscribe.htm