A turn to stocks?

And finally, stocks are attractively priced in a long-term, historical context. If bond prices are hurt over the next few months, as I expect, the valuations of stocks relative to bonds will only improve. Right now, the equity risk premium -- the extra return people are demanding to hold stocks rather than government bonds -- is roughly 6.5%, versus a historical norm of 4%. As stocks move lower, this measure will increase.

The chart below shows this visually. Looking at stocks versus corporate bonds, the earnings yield (earnings per share divided by stock price) is now just above the yield on corporate bonds for the first time since the late 1970s. That's a reflection of the fact that high-yield bonds have outperformed stocks by 57% since mid-2007. If this difference grows, stocks will be in for a boost.

Stocks vs Bonds

There are other positives, such as the fact that corporate balance sheets are in much better shape than governments' balance sheets and that corporations are poised to benefit from the rise of middle-class consumers in China, India and elsewhere. Retail investors are also underinvested in stocks, a positive contrarian indicator.

Also, there is reason to believe that corporate profits, which keep pushing to record highs, will stay elevated for a while -- given that profit margins historically don't start falling until workers start seeing wage increases. Until the job market heals, that isn't going to happen.

How to weather the storm

But while the over-the-horizon picture is encouraging for stocks, there is a lot of muck to get through first. So while you shouldn't stop investing, you should protect yourself. 

I'm recommending that my clients focus on raising cash and their exposure to the dollar while increasing allocations to Treasury bonds via exchange-traded funds such as the PowerShares DB US Dollar Index Bullish (UUP) and the iShares Barclays 20+ Year Treasury Bond (TLT) funds.

The latter might seem crazy, given that 10-Year Treasury yields are at just 1.8%. But as the Japanese experience of the past two decades tells us, rates can go even lower and stay there for longer than many expect. That would boost the price of Treasury bonds, especially as investors panic with the realization that we're in the midst of a real, sustained downturn.

But don't rest easy. Credit Suisse analysts expect that while Treasury bonds will, over time, become less likely to deliver negative returns to investors, bond sell-offs, when they occur, are likely to be severe. (Treasurys will go down when either inflation or economic growth look like it is going to improve.)

The moral of this story: There are no "safe bets" out there. Even Treasury bonds, the global reserve asset of choice, are subject to increasingly violent price volatility. Investors will need to actively manage their holdings to survive. And given the slow extinction of defined-benefit pension plans in favor of self-managed 401k's, they'll have no choice.

The good news is that after we get through the downturn I expect in 2013, there could be some clear skies and easy profits. If you stop investing now, giving up out of frustration and stuffing your savings under your mattress, you'll miss the turnaround.

And after the nightmare experience we've suffered through since the dot-com bubble peaked in 2000, with all the socioeconomic tensions that have followed, we could sure use a turnaround.

At the time of publication, Anthony Mirhaydari did not own or control shares of any fund mentioned in this column in his personal portfolio. He has recommended PowerShares DB US Dollar Index Bullish and iShares Barclays 20+ Year Treasury Bond exchange-traded funds to his money-management clients.

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Be sure to check out Anthony's new money management service, Mirhaydari Capital Management, and his investment newsletter, the Edge. A free, two-week trial subscription to the newsletter has been extended to MSN Money readers. Click here to sign up. Mirhaydari can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.