At this stage of the game, there’s no denying that we’re in a recession. The only real question that remains is how deep it will be and how long it will last. Global markets are in a downward plunge, prompting several countries such as Russia and Indonesia to close their exchanges. Oil has dipped below $80 a barrel, hitting a new one-year low, and the prices of a broad range of commodities have been in rapid decline on demand concerns. All three of the major US stock indexes have fallen to levels we haven’t seen since the nation’s last recession earlier in the decade, though this is setting up to be worse.

The Dow Jones Industrial Average sank 18.2 percent for the week; the Nasdaq Composite bled 15.3 percent; and the S&P 500 shed 18.2 percent.

We’re seeing a massive deleveraging of the US economic system, running almost from the top down. Credit conditions remain extremely tight system-wide; the amount of outstanding commercial paper--unsecured debt used by companies to raise short-term cash--fell by another $56.4 billion this week. There were few willing buyers, forcing issuers of traditional bonds to offer higher yields.

Consumers are even being forced to deleverage, with consumer credit plunging 4.3 percent, or $7.9 billion, in August as banks cut off lending and borrowers paid down debt. That’s the largest monthly decline since tracking demand began in 1943 and the largest percent of decline since 1998. That leaves about $2.6 trillion in debt still outstanding. In most cases, consumers are no longer able to borrow against their real estate equity--assuming they have any--and their access to credit cards is likely to be severely curtailed in coming months. In the second quarter, the number of late payments on credit cards rose to 4.54 percent, up slightly from 4.51 percent in the first quarter.

Discover Financial Services, spun if from Morgan Stanley late last year, has seen its market cap fall by more than half, and Visa’s has declined by almost half since its May high. According to the consumer debt numbers, revolving debt such as credit cards fell by $612 billion, while non-revolving such as auto loans dropped by $7.3 billion.

Not only is that bad news for financials, it will leave retailers hard-bitten in coming months. In September, chain store sales increased a rather anemic 1 percent as consumers continued to curtail unnecessary purchases amid tight economic conditions, with discounters and wholesale clubs accounting for much of the increase. Performance expectations going forward are low, given that few are expecting a quick turnaround from the rout of the past few months.

The August wholesaler data also reflects the weakened state of the consumer, with inventories creeping up 0.8 percent as sales declined 1 percent. That pushes the inventories-to-sales ratio up to 1.1 months worth of supply.

The import price index fell in September as the dollar strengthened against a basket of global currencies, with prices down 3 percent compared to August. Prices were still up 14.5 percent from August of last year, but the rate of increase is markedly slowing. The bulk of the decline was due to falling energy prices, with petroleum and natural gas prices down 9 percent and 15.6 percent, respectively. Excluding fuels, the monthly decline would have come in at just 0.5 percent.

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U.S. financial markets are in the midst of the biggest crisis they have ever faced, and stocks on the NYSE, NASDAQ, and S&P are plummeting. There is something you can do to protect your portfolio.

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In one bit of good news, initial unemployment claims declined last week, down by 20,000 new filings to 478,000, as the effects of the Gulf Coast hurricanes are subsiding. Continuing claims continued to rise however, with an additional 56,000 additional workers continuing to claim benefits, putting total continuing claims at 3.659 million.

In an unexpected bit of good news for the housing market, pending home sales--which tracks real estate deals where an offer has been made but hasn’t yet closed--rose 7.4 percent in August.

Mortgage applications also rose 2.2 percent last week, with purchases rising 3.2 percent and refinancing up 0.9 percent. The average interest rate on 30-year fixed-rate mortgages declined to 5.94 percent from 6.1 percent last week, 15-year fixed-rates were down to 5.63 percent from 5.78 percent and one-year adjustable-rate mortgages (ARM) ticked up slightly to 5.15 percent from 5.12 percent.

Citigroup has finally agreed to back away from its fight for Wachovia, leaving the troubled bank to Wells Fargo. Citi is still seeking damages over the slight, with further court hearings expected on Monday, but the battle is over for all intents and purposes.

With the Dow suffering its largest drop since 1987 and years of gains effectively wiped out for the other indexes, little has been immune from the drop. For the time being, the name of the game will be capital protection, calling for holding cash, or preferably gold, if you have near-term liquidity needs. For those staying in the markets, large-cap names that actually produce tangible products such are food and household items are probably your safest bet.

For those who can take a fair amount of speculative risk, I still like the financial names from last week, particularly Bank of America. It took a big hit on the third quarter earnings dive and dividend cut, but I believe they’re staying ahead of the game in airing bad news. I’m particularly encouraged by the fact that the company settled pending litigation and investigation over how Countrywide conducted operations by agreeing to rework the terms of some 400,000 mortgages.

That’s still a speculative--though contrarian--move, which I expect will play out well over the long-term. (I expect it will be one of the few survivors.)

Yiannis Mostrous--editor of The Silk Road Investor and the free e-zine Growth Engines--recently discussed Asia’s prospects in light of the crisis. He also notes of few countries of interest.

This year marks the most critical sequence of events in financial history. We’re witnessing the greatest shock to the system. There’s no way to be sure of the final outcome yet, but the world will certainly be a different place after all is said and done.

Markets have reacted as expected under such circumstances. Investors, driven by extreme fear, have sold off as much as they could as quickly as possible.

Asia and emerging markets in general have paid the heaviest price, initially because they were the only markets posting big gains and eventually because of high-beta characteristics. Investors have ignored still-superior GDP growth and high return on equity these economies and companies offer.

However, emerging markets--led by emerging Asia--currently represent 33 percent of the world nominal GDP and contribute 60 percent to the global nominal GDP growth. This change is structural and will define the global economy for years to come. Consequently, current valuations are very attractive, and sentiment is bearish. Under different circumstances this would be the ultimate time to buy. The obvious problem is the unprecedented tremors rocking the so-called Anglo-Saxon financial system.

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The credit crisis makes assessing the global economic slowdown more difficult, thereby diminishing confidence in analysts’ projections. The US economy is entering a recession--which will be exacerbated by the major financial crisis--so it’s easy to understand why making forecasts is difficult. But there’s still hope that a course leading out of the crisis can be charted fairly quickly, providing the US economy more leeway to combat the recession and rising unemployment, which will become a more urgent problem in 2009.

Looking at Asia, the two main investment themes are the gradual shift to a domestic demand growth model and the growth in infrastructure this effort entails.

China is the epicenter of this change; the government’s plans call for achieving an urbanization ratio of about 65 percent in the next 15 to 20 years. This means that 350 million people will be added to China’s urban population.

According to projections, this will require construction of 700 to 900 gigawatts of new coal-fired power generating capacity, 28,000 kilometers of metro rail, 5 billion cubic meters of road and almost 40 billion cubic meters of floor space, which will require the construction of between 20,000 and 50,000 new skyscrapers.

These are staggering numbers. And if China comes even remotely close to achieving its goals, the profits from the companies involved in the process will unprecedented. For long-term investors, the main reason to continue to invest in asia is that the region as a whole has a high savings rate and lower degree of financial leverage on both the personal and corporate level.

In addition, Asian countries have current account surpluses--India and South Korea are the exceptions--as well as strong foreign exchange reserves. They have enough room to cut rates now as needed because they had raised rates earlier in the year due to higher inflation.

In other words, the region is well equipped to weather the storm, and a repeat of the 1997 Asian Crisis isn’t in the cards. In some instances, governments will also be able to stimulate growth by directly investing, as is the case with China.

Speaking Engagements

Fall is the perfect time to enjoy Washington, DC’s outdoor treasures and catch a glimpse of nature’s splendor. And this year you can enjoy the immediate aftermath of the Presidential election in the seat of the federal government.

Join Neil George, Roger Conrad and Elliott Gue for the DC Money Show, Nov. 6-8, 2008, at The Wardman Park Marriott.

Go to www.moneyshow.com or call 800-970-4355 and refer to priority code 011364 to register as our guest.

We also have a special invitation for our readers. KCI Communications, Inc., is organizing an exciting 11-day investment cruise Dec. 1-12 through the Caribbean and Panama Canal. Participants will have the opportunity to meet and chat with my colleagues Roger Conrad, Gregg Early, Neil George and Elliott Gue.

This will be a unique opportunity to step away from your daily routines, relax in one of the most beautiful parts of the world and share analysts’ knowledge and passion for the markets. During the sail, you’ll not only explore the cerulean splendor of the Caribbean, but you’ll also delve deep into current markets in search of the most profitable opportunities for your portfolios. You’ll also have the rare chance to sail through one of the world’s engineering marvels, the Panama Canal.

It’s always a special treat to meet and talk with subscribers in person, and we couldn’t have picked a better setting than aboard the six-star Crystal Serenity. This is sure to be an especially memorable experience. We hope you’ll join us.

For more information, please click here or call 877-238-1270.