I meant to take yet another Friday away from my writing, but as I am researching for next week's annual prediction issue, there is so much material that begs to be covered that I thought I would put out a short letter with 3 or 4 points as a preface to my prognostications of next week.

This week we look at a very interesting, if not altogether encouraging, piece of research on the length and severity of recessions that come during periods of financial crisis, which can apply to not just the US but all countries that are involved in the current crisis. But being forewarned is better than blindly stumbling through, so we will take some time to peruse it. Then we (briefly) look at the depth of the manufacturing numbers in the US, which leads us into the recent bout of earnings downgrades and some thoughts as to where that might suggest the market is going. That should be enough for this week.

But first, and quickly, my annual Strategic Investor Conference that is co-hosted by my partners Altegris Investments will be April 2-4 this year in La Jolla. We will have information out next week, but save the date in your calendar. Like last year, we expect it to sell out. We have the best line-up of speakers ever: Martin Barnes, Dr. Woody Brock, Dennis Gartman, Louis Gave, and George Friedman are already committed, and we have a few who we expect to announce soon.

And we had a large response to the Richard Russell Tribute Dinner for that Saturday night, April 4. That, too, looks like it could sell out. If you have already responded that you are interested, we will contact you shortly. If you haven't and would like to be part of a dinner honoring Richard Russell for a lifetime of service to investors through writing his Dow Theory Letters, then drop me a response and we will add you to the list of invitees. And now to the letter.

It seems that with each passing month the estimates for losses in the international banking system keep rising. This time last summer the largest estimates (from credible sources), if memory serves me correct, were around $400 billion, give or take a few months. By the end of the year it was in the neighborhood of twice that. Then last quarter we saw estimates approaching $1 trillion. Last week, the number being broached was $1.6 trillion, by Bridgewater Associates, one of the top, and more credible, analytical firms in the world. In this week's letter we look at the implications of that projection, analyze recent lending patterns by banks, briefly touch on the implications of the recent unemployment numbers, and end with a few comments on the bear market. It will make for an interesting letter. Warning: remove sharp objects from your vicinity before reading.

But first, I need your help, and in return I would like to give you a link to a recent speech I gave, where I speak about what I think is the development of an important new asset class, one which will come about precisely because of the problems I am writing abut today. I have not yet written about this topic in public, and the speech has been well-received. I think you will like it. Now, as to how you can help me ...

I get to travel a lot with my daughter and business partner Tiffani (actually she runs the business) and meet new people. Over the years, she has become as fascinated as I have with their individual stories. Everyone has a story to tell or a lesson to teach. We have decided to write a book about those stories, looking at the differences in perspective between old and young, retired and working, those who are wealthy and those who aspire to wealth. What are the differences in attitudes, in work habits, in how you manage money, in how you look at the future, and a score of other items? How do all of these things correlate?

There is so much that is happening each and every day as the Continuing Crisis moves slowly into month 8, so much news to follow, so many details that need to be followed up that it can get a little overwhelming. Where to begin? Maybe with a "minor" change of the rules on how we value assets, then a look at the proposed changes in regulations, some comments to my hedge fund friends, a quick look at the employment and ISM numbers which are clearly showing we are in a recession and then finish up with some thoughts as to what it all means. There is a lot of ground to cover, so we will jump right in without a "but first" today.

Several times in the past few months I have reminded readers of the problem that developed in 1980 when every major American bank was technically bankrupt. They had made massive loans all over Latin America because the loans were so profitable. And everyone knows that governments pay their loans. Where was the risk? This stuff was rated AAA. Except that the borrowers decided they could not afford to make the payments and defaulted on the loans. Argentina, Brazil and all the rest put the US banking system in jeopardy of grinding to a halt. The amount of the loans exceeded the required capitalization of the US banks.

Not all that different from today, expect the problem is defaulting US homeowners. So what did they do then? The Fed allowed the banks to carry the Latin American loans at face value rather than at market value. Over the course of the next six years, the banks increased their capital ratios by a combination of earnings and selling stock. Then when they were adequately capitalized, one by one they wrote off their Latin American loans, beginning with Citibank in 1986.

Today we drop back to take a look at the economy and its long term effect on our portfolio returns. I am in Orlando this week, speaking at the Newport Advisor Conference sponsored by the Newport Group. The attendees are primarily investment advisors focused on larger retirement accounts and pensions. This week's letter is the gist of my speech I gave yesterday, as the entire speech would be way too long for a weekly letter. I want to thank the Newport Group for letting me do this, and thanks for the very kind way they have hosted me. Note: this week's letter will print a little longer as there are a lot of graphs. And next week I will address the housing market, as was my intention this week.

It is increasingly widely agreed that we are now in a recession as I predicted this time last year. The good news is that much of the underlying economy is not in that bad a shape, but it has had two serious body blows administered by the twin collapsing bubbles of the housing market and the credit crisis.

My position is that the recession will be rather long and relatively shallow, and the inevitable recovery will be longer and more drawn out than is typical, resulting in what I call The Muddle Through Economy for a period of several years. I define a Muddle Through Economy as one which grows below normal trend GDP growth of 3% for a period of time, typically in the 2% range.

Just when it felt like it was safe to get back in the water, a second and potentially much meaner version of this summer's credit crisis has reappeared. This week we look at why there are more mortgage write downs coming (in a self-fulfilling prophecy) in the financial sector, how an obscure new accounting rule is shedding light on a lot of risk in the world's banking system, how this is all tied to the consumer and is part of the reason for the fall in the dollar. It's a complex world, and I am going to spend a considerable part of a beautiful Friday evening in Texas trying to make it simple for you, gentle reader. That's my job, and I love it. And since I can't think of my usual "but first" we'll jump right in.

I have written for some time that we are in a credit crisis brought on by a lack confidence which has the real possibility of devolving into a credit crunch which will make loans harder to get and has the potential to slow down the US economy, on top of a weakening consumer. Data released in the past few months, and again this week, have shown that banks and other lenders are tightening their standards for all sorts of loans. And it is not just that they are becoming more like an old-fashioned banker who actually wanted to know that he could get his money back. Their new found conservatism is being forced on them. But let's start at the beginning.

The Financial Accounting Standards Board (FASB) is the referee for accounting practices. They recently issued a new rule which will be implemented November 15. Essentially, Statement 157 requires a financial firm to divide its assets into three categories called simply enough, Level 1, Level 2 and Level 3.

We are awash in debt, assert numerous authorities. And they point to the charts which show debt mounting seemingly to the sky. But not all debt is bad. Some of it is good. We should save more and spend less. But if we do, there are consequences that we may not like. What's good for an individual may be a problem for a global economy. We continue with our series on trade balance and debt, with the thought going through our minds "Be careful what you wish for."

But before we get into that, let's look at something far more important.