"You know what the news is-- in a minute, you're going to hear the rest of the story"- Paul Harvey

Former NY Yankee great Yogi Berra is credited with the simply, yet precise observation; "This is like deja vu all over again."

In the stock market and the economy, events have a way of repeating themselves. If you have been around the markets long enough, you know what I mean.

How well do you remember the real estate bubble of the 1980's? How well do you remember the effects on the banking sector, credit, and the economy from 1980-1990?

While circumstances may not be identical, there are similarities.

Between 1980 and 1994 more than 1,600 banks insured by the Federal Deposit Insurance Corporation (FDIC) were closed. The number of banks closed year to date is just a fraction of those during this 14 year time span, but what happened as a result may not be that different.

In the early 1980s, booming activity in commercial construction was supported by rapidly increased bank and thrift commercial mortgage lending.

The big difference, and this can't be ignored, is the total amount of credit extended to consumers to buy things they didn't need with money that they really didn't have. This extension of credit came by way of second mortgages/ lines of credit, and credit cards. The extraction of equity from perceived appreciation in home values created a vacuum when housing prices began to fall.

In the U.S., the total market value of housing, commercial real estate, and stocks was about $50 trillion at the peak and fell below $30 trillion at the low. The loss of $20-$23 trillion of wealth in the U.S. is still enough to deliver some life altering changes for millions of people in the years ahead. This is why I believe we have entered a period in the financial markets and economy that will be eerily similar to the 1980-1990 time-frame.

So, what does this mean for consumers, the economy, the stock market, and for credit?

1) Now that consumers are waking up to the fact that they are not as rich as they thought, we will enter into a period of less spending. In short, you can't spend if the banks don't extend discretionary credit.

2) Banks will become less likely to extend credit to marginal or even average consumers. As a result, consumers will spending less, live more frugally, saving more, and waste less.

After spending like drunken sailors, consumers will need several years to repair their credit, and payoff debts.

3) This readjustment period (5-10 years) will hurt corporate profits, which for 20 years had benefited from the out of control spending habits of consumers. The stock market, after an initial recovery, sell-off, flat line, and then take several years before making new all-time highs. During the third year of the Presidential Cycle, rallies will be numerous, particularly when massive stimulus programs are applied so the economy can be perceived as stronger prior to the election. The employment rate will magically improve as well.

4) A large rally in the stock market (2010-2011) will prove to be a huge selling opportunity. Shortly following this rally will be a long, drawn out period of substandard returns. Making g big money in stocks will be difficult with the exception of trades on the short side.As a result, investors will shift investments to safer investments (bonds & CD's) that provide steady gains. The game of extreme speculation will be over.

5) After waking up to the fact that profits will be muted for several years, lack of meaningful gains in the stock market will discourage many investors. Inflation will creep up over the next 3 years pushing bond yields higher which will make CD's and bonds an attractive alternative to stocks.

6) While real estate prices have declined, the reduction from peak prices doesn't necessarily make it a bargain. Given the unfriendly nature of the state and local taxing authorities, combined with the higher cost of insurance, many investors will realize that real estate still is not a bargain even at current prices. Like the NASDAQ, real estate will remain in a bear market for 5-10 years.

The last bubble to severely punished investors was the "NASDAQ Bubble". Nine years after the bubble burst, the Over-the Counter (NASDAQ) index is still 50% below it's 2000 peak. This latest bubble in real estate is just as bad, but has even more negatives.

a) Real Estate is not a liquid investment.

b) After so many people have been burned, it may take 5-10 years for wounds to heal, and courage to return.

c) During the waiting period, investors have to cope with a significant capital outlay (taxes, insurance, and upkeep) which could serve as a cash drain for many years.

What investment moves do we make after the big rally in 2010-2011?

1) Reduce predetermined asset allocation to stocks by 50%.

2) Any cash collected by selling stocks should be held in a money-market account or short term CD's until interest rates rise.

3) As rates climb, slowly allocate cash to longer term bonds.