A “new normal” for the world economy

After the storm

Oct 1st 2009
From The Economist print edition

The new economic landscape will be grim unless policymakers act to foster growth













Illustration by Jon Berkley

IN THE political dictionary he first published in 1968, William Safire, who died on September 27th, devoted an entry to the word “normalcy”. The term was made popular by Warren Harding, campaigning for America’s presidency in the wake of the first world war. It was inescapable after the terrorist attacks of September 11th 2001. Normalcy is what people call normality when they no longer take it for granted. No surprise, then, that the word reappeared in the communiqué released by the leaders of the G20 group of big economies after their Pittsburgh summit on September 24th-25th. After the wrenching economic crisis of the past year, people crave stability and predictability—in short, normalcy. But how far off is it? And what will a “normal” world economy look like after the biggest financial bust since the Depression?

The new normal

Glance at share prices or short-term growth forecasts and you might feel comforted. Output has stopped shrinking in all the world’s big economies. In its latest forecasts the IMF reckons global GDP will expand by 3.1% next year, 1.2 percentage points faster than it forecast in April. Global stockmarkets have rallied by 64% since their trough. Corporate finance, once frozen, is thawing fast. Bearish analysts are once again having to justify their pessimism.

Yet closer inspection suggests caution. Despite a welcome return to growth, the world economy is far from returning to “normal” activity. Unemployment is still rising and much manufacturing capacity remains idle. Many of the sources of today’s growth are temporary and precarious. The rebuilding of inventories will not boost firms’ output for long. Across the globe spending is being driven by government largesse, not animal spirits. Massive fiscal and monetary stimulus is cushioning the damage to households’ and banks’ balance-sheets, but the underlying problems remain. In America and other former bubble economies, household debts are worryingly high, and banks need to bolster their capital. That suggests consumer spending will be lower and the cost of capital higher than before the crunch. The world economy may see a few quarters of respectable growth, but it will not bounce back to where it would have been had the crisis never happened.

That realisation alone should temper some of the optimism buoying financial markets. But the prospect of a “new normal” (a phrase popularised by Mohamed El-Erian, the boss of Pimco, a fund manager) still spans at least two distinct possibilities. One is that the world economy returns roughly to its pre-crisis rate of growth, without regaining the ground lost. That, the IMF points out, is what happens after most financial crises. The second, more depressing possibility is that growth stays at a permanently lower rate, with investment, employment and productivity growth all feebler than before.

The difference between these outcomes is huge, as our special report on the world economy points out. Persistent damage to economies’ growth potential would result in a darker future of sluggish income gains and diminished expectations. That, above all, is what policymakers must avoid. To do so, they must pull off several tricky manoeuvres: shoring up demand now without wrecking the public finances; containing unemployment without inhibiting the shift of workers from old industries to new ones; and, more than anything else, fostering innovation and trade, the ultimate engines of growth.

Shoring up demand is the most urgent task. It is no secret that global spending must be rebalanced: indebted American consumers must cut back, while thrifty countries should spend more and save less. In China this means a stronger currency, bigger social safety-nets and an overhaul of subsidies to increase the share of national income going to workers. Germany and Japan need structural reforms to boost spending, especially in services. What has long been lacking is the political will—and here the G20 seemed to make progress. The Pittsburgh communiqué promised to subject members’ economic policies to “peer review”. These reviews may prove toothless, but the commitment to them is a step forward.

Private spending in surplus economies will not soar overnight. The world economy will rely more on governments for longer than anyone would like. Premature fiscal repairs could jeopardise the recovery, as America learned in 1937 and Japan rediscovered 60 years later. Governments must eventually fix their balance-sheets, but only when the private sector is strong enough—and it must be done in a way that boosts economies’ growth potential. The bulk of the adjustment should come from spending cuts. Where revenues must rise, taxes on consumption or carbon are better than those on wages or profits.

Out with the old

HEARD ON THE STREET

SEPTEMBER 30, 2009, 12:06 P.M. ET

Sovereign Risk Hasn't Gone Away

By RICHARD BARLEY

It's a sign of the times. The newest credit derivatives index in town covers 15 Western European sovereigns, including France, Germany and the U.K. The start of trading this week of the Markit iTraxx SovX Western Europe underlines that even as markets look ahead to a hoped-for recovery, sovereign risk for developed countries remains clearly on investors' radar.

Sovereign risk remains a live issue as government bond issuance hits stratospheric levels and debate continues over exit strategies from stimulus. That implies continued active trading in credit default swaps on developed countries, even if a default seems a remote risk. Indeed, the Western Europe index has moved to active trading ahead of a sister index that covers countries from central and eastern Europe, the Middle East and Africa that would more usually be regarded as risky.

The new SovX index can be used both as a hedging tool and to express views about sovereign risk versus other types of credit risk. For instance, an investor could sell protection on SovX and buy protection on the iTraxx Senior Financial index to express the view that once Western European banks can stand on their own feet, credit risk will be transferred back to the private sector, Barclays Capital suggests. Or investors who have strong views about the credit deterioration or improvement of a single sovereign but want to avoid exposure to overall market direction could hedge their single name position with the index.

Meanwhile, for those outside the market, the index price will be an indicator of systemic risk perception in the credit market. At Tuesday's level of around 47 basis points, the index remains close to double the theoretical price calculated a week after Lehman Brothers' default, in contrast to some other credit market indicators that have recovered to summer 2008 levels. A sobering thought.

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Volume 5 - Issue 46

September 28, 2009

Into the Fourth Turning

By Neil Howe & David Galland


This week for your Outside the Box reading pleasure I am pleased to offer you the beginning of a very intriguing interview with Neil Howe he did with my friend David Galland at Casey Research. I think Neil is one of the premier forward looking thinkers of our time. His book The Fourth Turning is one of the more important books of the last two decades. 12 years ago, he and the late Richard Strauss basically outlined the psycho-social dynamics of our current time and his predictions have been uncannily accurate.


Basically, he and Strauss demonstrated that the Anglo-Saxon world has a pattern of four repeating generational types. As each generation assumes its period of dominance, the character of the various nations change in a pattern that rhymes throughout 500 years of history. We are in the beginning–middle of what he calls the Fourth Turning. This is a lengthy (17 pages) but fascinating interview but one you definitely should read. It is too long for me to put up in its entirety, but if you want to read more there is a link to the full interview at the end of the article. Just type in your email and the people from Casey will send it to you. They will also add you to their very interesting letter written by members of their research team. And of course you can easily unsubscribe if you like, but you might want to read it for a few weeks to see if you like their angle on things.

Neil Howe is a historian, economist, and demographer who writes and speaks frequently on generational change in American history and on long-term fiscal policy. He is cofounder of LifeCourse Associates, a marketing, HR, and strategic planning consultancy serving corporate, government, and nonprofit clients. He has coauthored six books with William Strauss, including Generations (1991), 13th Gen (1993), The Fourth Turning (1997), and Millennials Rising (2000). His other coauthored books include On Borrowed Time (1988). He is also a senior associate at the Center for Strategic and International Studies, where he helps lead the CSIS "Global Aging Initiative," and a senior advisor to the Concord Coalition. He holds graduate degrees in history and economics from Yale University. He lives in Great Falls, Virginia. His website which has more information is http://www.lifecourse.com/.


John Mauldin, Editor
Outside the Box

Into the Fourth Turning

A Casey Research interview with Neil Howe, co-author of The Fourth Turning

The Fourth Turning is an amazingly prescient book Neil Howe wrote with the late William Strauss in 1997. The work, which describes generational archetypes and the cyclical patterns created by these archetypes, has been an eye-opener to anyone able to entertain the notion that history may repeat itself. At the time the book was published, the Boston Globe stated, "If Howe and Strauss are right, they will take their place among the great American prophets." Read this visionary interview published in The Casey Report, and see for yourself.

DAVID GALLAND: Could you provide us a quick introduction to generational research?

NEIL HOWE: We think that generations move history along and prevent society from suffering too long under the excesses of any particular generation. People often assume that every new generation will be a linear extension of the last one. You know, that after Generation X comes Generation Y. They might further expect Generation Y to be like Gen X on steroids – even more willing to take risk and with even more edginess in the culture. Yet the Millennial Generation that followed Gen X is not like that at all. In fact, no generation is like the generation that immediately precedes it.

Instead, every generation turns the corner and to some extent compensates for the excesses and mistakes of the midlife generation that is in charge when they come of age. This is necessary, because if generations kept on going in the same direction as their predecessors, civilization would have gone off a cliff thousands of years ago.

So this is a necessary process, a process that is particularly important in modern nontraditional societies, where generations are free to transform institutions according to their own styles and proclivities.

In our research we have found that, in modern societies, four basic types of generations tend to recur in the same order.

DAVID: The four generational archetypes. Can you provide a sketch of each for those of our readers unfamiliar with your work?

HOWE: Absolutely.

The first is what we call the Hero archetype. Hero generations are usually protectively raised as kids. They come of age at a time of emergency or Crisis and become known as young adults for helping society resolve the Crisis, hopefully successfully. Once the Crisis is resolved, they become institutionally powerful in midlife and remain focused on outer-world challenges and solutions. In their old age, they are greeted by a spiritual Awakening, a cultural upheaval fired by the young. This is the typical life story of a Hero generation.

One example of the Hero archetype is the G.I. Generation, the soldiers of World War II, who became an institutional powerhouse after the war and then in old age confronted the young hippies and protesters of the 1960s. Going back in American history, we have seen many other Hero archetypes, for example the generation of Thomas Jefferson, and James Madison, and President Monroe. These were the heroes of the American Revolution, who in old age were greeted by the second Great Awakening and a new youth generation of fiery Prophets.

After the Hero archetype comes the Artist archetype. Artist generations have a very different location in history -- they are the children of the Crisis. For Hero generations, child protection rises from first cohort to last. By the time Artists come along, child protection reaches suffocating levels. Artists come of age as young adults during the post-Crisis era, when conformity seems like the best path to success, and they tend to be collectively risk averse. Artists see themselves as providing the expertise and refinement that can both improve and adorn the enormous new institutional innovations that have been forged during the Crisis. They typically experience a cultural Awakening in midlife, and their lives speed up as the culture transforms.

A great example of the Artist archetype is the so-called "Silent" Generation, the post World War II young adults who married early and moved into gleaming new suburbs in the 1950s, went through their midlife crises in the '70s and '80s, and are today the very affluent, active seniors retiring into gated lifestyle communities.

The third archetype is what we call a Prophet archetype. The most recent example of this archetype is the Baby Boom Generation. Prophet generations grow up as children during a period of post-Crisis affluence and come of age during a period of cultural upheaval. They become moralistic and values-obsessed midlife leaders and parents, and as they enter old age, they steer the country into the next great outer-world social or political Crisis. Boomers, for example, grew up during the Postwar American High, came of age during the Consciousness Revolution of the 1960s and '70s, and are now entering old age.

Finally there is what we call a Nomad archetype. Nomads are typically raised as children during Awakenings, the great cultural upheavals of our history. Whereas the Prophet archetype is indulgently raised as children, the Nomad archetype is underprotected and completely exposed as children. They learn early that they can't trust basic institutions to look out for their best interests and come of age as free agents whose watchword is individualism. They are the great realists and pragmatists in our nation's history.

The most recent example of the Nomad archetype is Generation X. This generation grew up during the social turmoil of the 1960s and '70s and are now beginning to enter midlife. They are the ones that know how to get things done on the ground. They are the stay-at-home dads and security moms trying to give their kids more of a childhood than they themselves had. Their burden is that they tend not to trust large institutions and do not have a strong connection to public life. They forge their identity and value system by "going it alone" and staying off the radar screen of government. It could be very interesting to see the rest of the life story of this generation, particularly as they take over leadership positions.

DAVID: Could you tell us the general age ranges of these archetypes now?

HOWE: One Hero generation that is alive today is the G.I. Generation, born between 1901 and 1924. They came of age with the New Deal, World War II, and the Great Depression. They are today in their mid-80s and beyond, and their influence is waning.

Today's other example of a Hero archetype is the Millennial Generation, born from 1982 to about 2003 or 2004. These are today's young people, who are just beginning to be well known to most Americans. They fill K-12 schools, colleges, graduate schools, and have recently begun entering the workplace. We associate them with dramatic improvements in youth behaviors, which are often underreported by the media. Since Millennials have come along, we've seen huge declines in violent crime, teen pregnancy, and the most damaging forms of drug abuse, as well as higher rates of community service and volunteering. This is a generation that reminds us in many respects of the young G.I.s nearly a century ago, back when they were the first boy scouts and girl scouts between 1910 and 1920.

DAVID: Then following the Hero, we have the Artist, right?

HOWE: Yes. As I mentioned earlier, one example of that archetype is the Silent Generation, born between 1925 and 1942. This generation was too young to remember anything about America before the Great Crash of 1929, and too young to be of fighting age during World War II.

That 1925 birth year is filled with people like William F. Buckley and Bobby Kennedy, first-wave Silent who just missed World War II. Many of them were actually in the camps in California waiting for the invasion of Japan when they heard that the war was over. Part of their generational experience is that sense of just barely missing something big. Surveys show that this generation does not like to call themselves "senior citizens." They did not fight in World War II. They did not build the A bomb. They are more like "senior partners." Unlike G.I.s, they are flexible elders, focused on the needs of others. Many of them are highly engaged in the family activities of their children and grandchildren. In politics, they are today's elder advisors, not powerhouse leaders.

There is a new generation of the Artist archetype just now beginning to arrive. They started being born, we think, around 2004 or 2005. We did a contest on our website to choose a name for this new generation, and the winner was Homeland Generation, reflecting the fact that they are being incredibly well protected. So we are tentatively calling them the Homelanders.

This generation will have no memory of anything before the financial meltdown of 2008 and the events that are about to unfold in America. If our research is correct, this generation's childhood will be a time of urgency and rapid historical change. Unlike the Millennials, who will remember childhood during the good times of 1980s and '90s, the Homelanders will recall their childhood as a time of national crisis.

So, those are the two examples today of the Hero archetype, and two examples of the Artist archetype.

DAVID: What about the Prophet and the Nomad generations?

HOWE: There is only one Prophet archetype generation alive today: the Boomer Generation. We define them as being born between 1943 and 1960. Those born in 1943 would have been part of the free-speech movement at Berkeley in 1964, the first fiery class whose peers include Bill Bradley, Newt Gingrich, and Oliver North. The last cohorts of this generation came of age with President Carter in the Iran Hostage Crisis.

For the Nomad archetype, we again have only one example alive today, and that is Generation X. We define Gen Xers as being born between 1961 and 1981. Actually, there may be a few members of the earlier Nomad generation still around – those of the Lost Generation born from 1883 to 1900, but today they would be around 110. This was the generation that grew up during the third Great Awakening, the doughboys who went through World War I. They were the generation that put the "roar" into the "Roaring '20s" – the rum runners, barnstormers, and entrepreneurs of that period. They were big risk-takers.

DAVID: Is the Millennial Generation the next group up in terms of controlling or being a powerful force in society?

HOWE: It depends what you mean by a powerful force in society.

DAVID: Who is going to be in the driver's seat?

HOWE: Let me put it this way. The generation that is about to be in the driver's seat in terms of leadership is Generation X, the group born 1961 to 1981. In fact, we now have our first Gen-X President, Barack Obama, who was born in 1961 and who is in every way a Gen Xer, despite being born at the very early edge of his generation. His fragmented family upbringing, with his father leaving while he was young and his mother moving all over the world, is typical of the Gen X life story. A telling anecdote from his biography is that, when he arrived at Columbia University, he spent his first night in New York sleeping in an alley because no one had arranged to have an apartment open for him.

His life story has a "dazed and confused" aspect. He made his own way against a background of adult neglect and lack of structure. It's interesting that he is the first leader in America to call himself "post-Boomer." As a matter of fact, he talks regularly about how he intends to put an end to everything dysfunctional about Boomer politics: the polarization, the culture wars, the scorched-earth rhetoric, the identity politics, all of that. I understand a lot of people do not believe he can actually do this, but it's interesting that this is the rhetoric he chooses. That rhetoric is one reason why the vast majority of Millennials voted for him.

Obama is the opening wedge of Gen Xers who will assume very high leadership posts. They are not yet the senior generals in control of the military, but they are taking over the reins of government and, of course, the top spots in American businesses.


If you want to know what Neil Howe foresees for the U.S. economy, future investment opportunities, and American society in general, sign up here to read the rest of this 17-page, FREE Special Report - Click Here.

John F. Mauldin
johnmauldin@investorsinsight.com

IMF says world economy is recovering

By Chris Giles in Istanbul

Published: October 1 2009 07:34

A recovery in the world economy is now under way, the International Monetary Fund said on Thursday, but it warned there were many obstacles to sustained rapid growth.

Publishing its twice-yearly World Economic Outlook, the IMF rejected forecasts for either a rapid V-shaped recovery or a double-dip recession, saying the recovery will most likely be “weak by historical standards”.

The IMF is no more optimistic about the medium-term outlook, insisting that growth prospects depend on resolving two difficult challenges: the weaknesses in the global banking system; and the persistent unwillingness of countries with large trade surpluses to boost domestic demand and become motors of world growth.

The economic crisis, which resulted in the deepest global recession since the second world war, has led to a permanent loss of output, the IMF said. Most economies now have a large amount of spare capacity which is likely to keep inflation low, in spite of the extraordinarily expansionary monetary and fiscal policies undertaken by central banks and governments around the world.

But for the first time in more than a year, the IMF’s premier economic declarations have not become more gloomy. It has revised higher its forecasts for world growth, reflecting its view that there was now a much lower risk of the recession turning into something even nastier. “Strong public policies across advanced and many emerging economies have supported demand and all but eliminated fears of a global depression,” the World Economic Outlook said.

The IMF forecast that world economic output would rise by 3.1 per cent in 2010 after contracting by 1.1 per cent in 2009, an upward revision of 0.6 percentage points for 2010 from its most recent forecast in July.

Emerging economies will grow much more quickly than advanced economies, the IMF says, with growth averaging 5.1 per cent in the emerging world, even including the troubled central and eastern European regions, and only 1.3 per cent in rich countries. Central banks of rapidly growing emerging markets might have to raise interest rates soon.

Dominique Strauss-Kahn has become the latest target of the shoe-throwing protest technique pioneered against George W. Bush as he arrived in Istanbul to launch the International Monetary Fund’s annual meetings.

The Fund’s managing director was addressing students on the campus of Bilgi University when a student took aim with a white trainer, chanting “get out of the university, thief IMF.”
Television footage showed security guards shielding Mr Strauss-Kahn and hustling the bearded student, who wore a white t-shirt and sleeveless jacket, out of the room.

Mr Strauss-Kahn later shrugged off the protest. ”It is important for us to have an open debate. I was glad to meet students and hear their views. This is what the IMF needs to do, even if not everyone agrees with us, one thing I learned, Turkish students are polite. They waited until the end to complain”, he told reporters.

In the short-run, the IMF believes the recovery will be sluggish because “the policy forces that are driving the current rebound will gradually lose strength, and the real and financial forces remain weak”.

Unemployment is forecast to keep rising across developed economies, so the recovery will feel “jobless” in most countries. And because companies have clung on to workers during this recession more than in the past, the chances of a rapid pick-up in employment are minimal, the IMF says.

Governments are running out of room due to surging budget deficits, but the IMF warns against any sudden reversal of ultra-low interest rates, tax cuts and public spending increases in rich countries. “Premature exit from accommodative monetary and fiscal policies is a particular concern because the policy-induced rebound might be mistaken for the beginning of a strong recovery,” the report said.

For the medium term, the IMF has taken an aggressive stance on global trade imbalances, warning that the recent reduction in the US trade deficit and associated surpluses in China, Japan, Germany and oil exporters is temporary. It said: “Many economies that have followed export-led growth strategies and have run current account surpluses will need to rely more on domestic demand – notably emerging economies in Asia and elsewhere and Germany and Japan.”

Such language will not be popular in surplus countries, which argue they are not to blame for producing goods others want to buy. Axel Weber, the Bundesbank president, insisted on Tuesday that recommendations for Germany to reduce its surplus have no place in international discussions. “This is not something policy should target or can target. It would mean intervening against optimal structures that have developed in a free market environment,” he told reporters during an economic seminar in Sweden.

Copyright The Financial Times Limited

Fed Promises Easy Money for an Extended Period

by Claus Vogt

Dear Subscriber,

Every few weeks the world's most powerful and influential central bankers — those in charge of the world's number one reserve currency, the U.S. dollar — come together in what's called the Federal Open Market Committee (FOMC).

They discuss the economy, interest rates, financial markets and whatever else they deem important. Then they decide to set the Federal Funds Rate at a level they think is appropriate.
And last week was their week. So today I want to analyze what their decisions mean for the stock market and for you as an investor.

The Fed Statement Reassures A Very Lax Monetary Policy ...

After each FOMC meeting, the Fed releases a statement. And the one for September 23, 2009, is very telling in my opinion. Here's its most important part:

"The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

As you can see, the Fed is promising a continuation of its extremely lax monetary policy "for an extended period." So all the recent media talk about a soon-to-begin exit strategy or a normalization of monetary policy was obviously premature. The Fed is reassuring us that there will be easy money for as far as the eye can see.

Why?

Two reasons come to mind:

First, the Fed is still very concerned about the economy ... the employment situation is dire ... and a double-dip recession is a real possibility.

Second, and more important, is that they know how precarious the banking situation still is. They know that the bad debt problems have not been solved ... that most banks would go bankrupt if they had to implement mark-to-market rules ... and that the banking system is still on life support.

This Is Important News For the Stock Market

Since the Fed is confronted with two major problems — a shaky economy and an unstable banking system — it's not worrying about a possible stock market bubble in the making.
Why is this so important?

Just look at the charts below. The stock market has rallied some 60 percent since the March low. But earnings are still very depressed. Hence the classic version of the P/E ratio — using twelve months trailing GAAP earnings — shot to the stratosphere!

(Click to enlarge)






















Source: www.decisionpoint.com

Twelve-month trailing earnings as of the first quarter 2009 were a mere $6.86 for the S&P 500 making for a P/E ratio of 154. According to Standard and Poor's, these earnings are estimated to rise to $7.51 in the second quarter, and $7.61 in the third quarter. Then they're expected to jump to $39.35 in the fourth quarter and $43.58 in the first quarter 2010. Based on this last figure the P/E ratio will decline to 24.

Historically the normal range for this very P/E ratio — based on 12-month trailing GAAP earnings — has been between 10 (undervalued) and 20 (overvalued). Hence even if the corporate sector will see the estimated jump in earnings, the stock market is still very expensive.

Wednesday, September 30, 2009

UP AND DOWN WALL STREET DAILY

If Hugo Chavez Is Selling Dollars, Maybe You Should Be Buying


By RANDALL W. FORSYTH

Venezuela's bond deal suggests the markets are getting a bit carried away with the dollar-carry trade.

VENEZUELAN PRESIDENT HUGO CHAVEZ may have been overshadowed at last week's United Nations confab by other high-minded diplomats such as Libya's Moammar Gadhafi and Iran's Mahmoud Admadinejad. But he did get to party down with entertainment luminaries after the New York premiere of "South of the Border," Oliver Stone's documentary about him, even though they were past-their-expiration-date types such as Susan Sarandon and Courtney Love.

At least Chavez didn't have to worry about ponying up the bucks to pay for his Big Apple junket. His government was issuing some $3 billion in dollar bonds, split even between a 10-year maturity expected to carry a 7.75% coupon and a 15-year maturity with an expected 8.25% coupon. So, he'll have plenty of greenbacks for his hotel bill, including whatever he got from the minibar.

The bond issue was designed to provide dollars to meet the demand for greenbacks among Venezuelans who, for some reason, would rather have dollar assets than their own bolivars. And the deal was working. Dow Jones Newswires reports from Caracas that the bolivar is up 25% from its August low, at 5.2 to the dollar in the "parallel" market, versus 7 to the buck a month or so ago, when greenbacks were scarce.

Venezuela thus joins the parade of foreign borrowers issuing bonds denominated in dollars. That means they're expecting to pay back those debts in devalued dollars.

As noted in this space previously, borrowing dollars to put to work elsewhere at higher yields is an example of global carry trade. And that effectively is a short sale of dollars, a bet on their decline.

The dollar-carry trade has been gathering steam since it was written about here months ago ("Money for Nothing and Bucks for Free," June 5,.) Earlier this month, Germany confirmed it would borrow in dollars to produce "savings for the federal budget," which would result from the currency gain generated by the dollar's decline.
Germany was followed by a flood of other offshore borrowers, from Abu Dhabi's national energy company to Sweden's Export Credit Corp to Hong Kong's Hutchinson Whampoa, all eager to borrow and repay in ever-depreciating dollars. Now, comes Hugo Chavez and Venezuela jumping on the bandwagon, borrowing and thus shorting the greenback.

"That to me is a sign the short-U.S. dollar trade is ripe for a reversal, when basically the biggest idiot in the house is short," writes Nic Lenoir of ICAP, the major money broker, on ZeroHedge.com.

Lenoir sees signs of a dollar rebound in the charts of various currencies, concurring with Barrons.com Getting Technical columnist Michael Kahn. In his latest column ("Signs of a Short-Term Dollar Bounce," Sept. 29), Kahn notes the U.S. Dollar Index is showing signs of pulling out of its downtrend. In addition, he points to recent technical weakness in the British pound, Canadian dollar, Mexican peso and Swedish krona, all components of the Dollar Index.

Similarly, Woody Dorsey's Market Semiotics advisory told subscribers: "The dollar faltered but had become so well discussed and relatively sober in its behavior that another uptrade seems to be operative." That argues for "a recovery for a few weeks" within a "secular profile" of "dollar debasement," it adds.

Indeed, the dollar's future has been a topic much discussion in the past few weeks. Most recently, World Bank president Robert Zoellick warned the dollar's central role as the world's reserve currency can't be taken for granted.

That's also been a theme here recently ("Take This Monetary System, Please,") But there doesn't seem to be an answer to the existential question about the future role of the dollar -- and by extension, that of America -- in the 21st century. At present, there is no ready alternative to the dollar-centric system ("Steeling for a Currency Deal in Pittsburgh?" Sept. 25.)

For the short term, there are an awful lot of folks playing the currency market, as the Wall Street Journal reported ("Small Investors Make Big Bets on Currencies," Sept. 26,) Plus, there is an array of exchange-traded funds that let anybody with an online brokerage account to be on the Australian dollar (ticker: FXA ), the euro ( FXE ) or even the Chinese yuan ( CYB ) or the South African rand ( SZR .) The bets seem to be on the demise of the dollar.

The markets tend to inflict the maximum pain on the most people in the short term. When most players are betting one way, it means the big money is taking the other side of the wager.

The big money is usually the smart money. If so, in what category does Sr. Chavez fall?

Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved