Carter says he expects choppy markets in the months ahead as financial companies announce more write-downs on bad loans. "The market doesn't know how to price these securities and that's why we're seeing such volatility in stocks.   

"I like it when there is turmoil," he says. "That's when you can buy into the market on the cheap."

Tom Connelly manages about $225 million for individuals who meet his $2 million minimum. A chartered financial analyst and CFP with a master's in financial planning, Connelly says that for the first time in his 20-year career as an investment manager, he has positioned client portfolios to an equity allocation below what was specified in their investment policy statements.

"Right now, counterparties in the financial system are worried about whether the other counterparties can handle their commitments and obligations," says Connelly. "They don't trust each other.

"Most of the press and everyone else is saying this is part of the subprime mess and maybe we'll have a recession and then get out, and stocks will go back up like they always have," says Connelly. "But all prognosticators and pundits every step of the way have underestimated the duration and magnitude of the subprime mortgage problem. We went from tens of billions of anticipated write-offs to hundreds of billions, and now Goldman Sachs is saying it will be over a trillion dollars of write-downs."

Connelly is concerned that, in addition to subprime mortgages, the market for complex securitized debt instruments invented in the last decade-credit card, auto and student loans packaged and sold to investors-will come undone along with loans to real estate and private equity funds. "Then there's $45 trillion of credit default swaps, and no one knows who owns them, plus you don't need to keep reserves against them and they were bought on margin and levered immensely," says Connelly. "I'm worried we may be underestimating the effects of this."

Connelly says a 1930s style Depression is unlikely, but he is not sure how the debt crisis will unwind and says that we are only in the third or fourth inning of this dangerous game. "I'm not saying there will be a catastrophe, but I believe we have gone from a 1% to 3% chance of a catastrophic event in our financial system a year ago to a 25% or 30% chance.

"While the Fed has done a fantastic job, it's not clear to me how it can prevent asset values from falling," says Connelly. "It could provide all the liquidity in the world. But if no one wants to borrow, what good is it? If asset prices are dropping, why would you borrow money to buy a home or invest?"

The fall in stock prices through April 10 was not enough to impress Connelly. "We've had a normal pullback," he says. "This looks like it could become worse. I haven't seen anything like this in my career, and I'm not aware of anything looking the same historically.

"It may pass and I could be overreacting, but the mere fact that the problem looks so big and doesn't seem contained yet is enough to make me exercise caution," he says. "Stocks for the long run is still the most likely scenario. But what if it isn't?"