Bengen, who held 35% in stocks 30 months ago, now has allocated just 10% to stocks and they are in mining issues, gold bullion ETFs and some utility mutual funds. His other investments are in short- and intermediate-term U.S. government bond funds. "I'm keeping it very simple so I can get in and out quickly," says Bengen, who was an adept long-term stock picker for much of his career as an advisor.

Like several of the advisors interviewed for this story, Bengen says he's spent a lot of time over the past two and a half years researching macroeconomic issues. "In this environment, macroeconomics trumps everything," he says. "Even if you can pick a great company, a decline in the stock market of 40% is going to trash its value."

Referencing the book This Time Is Different: Eight Centuries of Financial Folly, by Carmen Reinhart and Kenneth Rogoff, Bengen says financial crises have historically been solved by countries with fiscal and monetary policies. But this time the entire Western world is facing the same problems. If all of the nations involved apply the same solutions-stimulus programs, bailouts or austerity-it increases the chances of a currency crisis.

As of early July, Bengen believes the stock market is overvalued by 20% to 30%. One important measure he cites is the ten-year trailing price/earnings ratio on the Standard & Poor's 500. It has hovered recently at about 19 where its long-term historical average is 16. Bengen maintains that, for periods when the economy has wrung excesses out of the system, the ten-year trailing p/e ratio should decline to 8.

"This shows you how far down we can go before the bear market is fully discounted," says Bengen, a CFP licensee who manages a small "lifestyle" money management practice and does not accept new clients. "The stock market has been overvalued since 1993 as a result of the massive debt bubble. So people have forgotten what fair value looks like."

Bengen is avoiding foreign markets as well, believing a further decline in U.S. stocks will drag other markets down with it. However, he says he will consider investing in some emerging markets if their stock prices fall and valuations become more attractive.

Bengen says he believes another stimulus might jolt the economy out of the recession but has little faith in the political leadership to create the right kind of stimulus. "If we have another stimulus, it must be better targeted than the last one, which threw a trillion dollars down the drain," Bengen says. "Building roads, bridges, and strengthening America's infrastructure would be good stimulus spending." He says stimulus was wasted on buying bad debt from banks to strengthen their balance sheets when it should have been used to strengthen the balance sheets of individuals.

Bengen thinks odds are increasing that the economy will fall into recession next year. "And it will be most unpleasant because going into a recession with a 9.5% jobless rate this time is a lot different from entering a recession with a 4% unemployment rate," he says. "Valuations are too high, risks remain elevated and I don't see any reason to risk clients' capital. I may underperform, but this environment makes it impossible to invest intelligently."

Tom Connelly's grim assessment of the economy and markets was what spurred my April 2008 column. At that time, Connelly, who runs Versant Capital Management in Phoenix, said that America had "gone from a 1% to 3% chance of a catastrophic event in our financial system a year ago [in 2007] to a 25% or 30% chance." But Connelly says the events of September 2008 were even worse than he had imagined.

"When history records the story of what happened in the financial crisis, I think we're going to find it was a lot worse than people understood," says Connelly, a CFA who manages about $285 million and also serves as chairman of the investment board of the Arizona state employee pension fund. "The Fed acted decisively, and without its actions we could have experienced something as bad as the Great Depression. The money markets were not functioning and international trade stopped because no one believed in the financing from the biggest banks in the world, and we were probably just hours-maybe even minutes-away from something that could have been much worse."

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