They are three big bears! And to their credit, they've been telling us for years that our economic policy would lead the Fed to "bail out" the system with massive doses of liquidity and lower interest rates.

Now the issue is whether the Fed will succeed in preventing a deflationary collapse, and whether today's medicine will lead to tomorrow's inflation. The three bears are not optimistic.

Bert Dohmen: Prelude to meltdown

Bert Dohmen has written the Wellington Letter (www.dohmencapital.com) for more than 30 years. He's always been just slightly ahead of the curve, much to the benefit of his subscribers. Bert's new book is "Prelude to Meltdown," and it is available on Amazon.com and at his Website.

When the Dow Jones industrial average made its first close ever above 14,000, in the midst of euphoria, Dohmen sent out a warning that it was a market top.

Today his economic forecast is gloomy: "The world has seen the greatest credit bubble ever seen by man. . . . The enormity of this problem is beyond anything we have ever seen in financial history.

"The size of the leverage and the financial instruments that are outstanding, and now defaulting, are beyond the ability of any central bank, or all of the central banks combined, to bail out. We've never had a situation where the central banks were not big enough to bail out a situation — but we have it now."

He warns about further problems in the banking industry:

"My forecast is that the next big crisis will be the credit default swaps — a $45 trillion dollar, highly leveraged market. These are basically insurance policies that buyers of mortgage securities (CDOs) bought against a mortgage default. Banks and hedge funds "wrote" this insurance, a highly leveraged speculation. Now that the mortgages are defaulting, the sellers are saying they don't have the capital to make good on the insurance.

"The key word over the next year is counter-party risk because these were un-regulated side deals, created outside of the banking system. This is a shadow unregulated banking system much larger than the regulated banking system. The regulators were totally asleep. They let it happen."

Dohmen's not worried that all the liquidity and lower interest rates being created by the Fed will cause inflation. Instead he sees a deflationary collapse, and recommends the relative safety of U.S treasury securities.

A.

Gary Shilling: Deflation

Economist Gary Shilling has been predicting an oncoming deflation for years — even as stock and housing prices continued to rise. His January 2004 newsletter (www.agaryshilling.com) warned: "Sub-prime loans are probably the greatest financial problem facing the nation in the years ahead."

Yes, he was ahead of his time. And what's Shilling saying now? "We are in a very serious global recession, the length and breadth of which will be determined by three factors: First is the depth of the collapse in housing: We're looking for a 25 percent price decline from top to bottom."

The second factor is the extent of the severe consumer retrenchment: "The housing price drop will virtually wipe out the 28 percent of home equity, on average, of all those who have a mortgage. . . . Remember, 30 percent of all homes in the U.S. are owned free and clear, so they're excluded from this statistic."

"The third factor will be the impact [of this slowdown] on other highly leveraged areas such as commercial real estate, emerging market debt and equities, credit card loans, and even commodities."

In the end, says Shilling, look for the recession to run throughout this year and possibly into 2009, as well. His advice: Sell stocks, and buy only longer-term Treasuries — a bet that interest rates will continue to fall, amidst continuing deflation in asset values. As for the Dow: "The 9,000 level is the next stop."

Howard Ruff: How to prosper

Yes, he's back! Howard Ruff, the super-bear of the Seventies, has just revised and re-issued his bestseller of that era, which spent two years at the top of the New York Times bestseller list. It's now called "How to Prosper During the Coming Bad Years in the 21st Century. (www.RuffTimes.com) Ruff has updated his forecasts and prescriptions, some of which I'd argue against, but if you need historical perspective (as well as advice on storing dehydrated foods), you'll find interesting reading.

Most of today's investors don't remember what a long-lasting bear market looks like, or a long-lasting recession. And they don't remember the ravages of inflation. Here's hoping we don't have to re-learn those lessons. And that's The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of the Chicago Mercantile Exchange. She appears weekly on WMAQ-Channel 5's 4:30 p.m. newscast, and can be reached at www.terrysavage.com. Her new book, "The Savage Number: How Much Money Do You Make?" has just been published. To find out more about Terry Savage and read her past columns, visit the Creators Syndicate Web page at www.creators.com.

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