How do you boil a frog? If you drop it into boiling water it will jump right out. But if you put it into tepid water and raise the heat slowly, it'll stay put and get boiled. Just like many investors. But because today's market frogs have advanced degrees, they plot the temperature trend and if it leads to boiling, they can jump out early.

Therefore the Great Market Panjandrum often gets tricky and lowers the temperature a bit in the middle of a scalding bear market, to mess up their charts. Even more, it sends out a flock of soothing technical analysts to tell the little greenhorns that it's okay. Hold. The worst is over. Here comes a rally. See? And when the suckers plop back in, then the Great Market Panjandrum raises the heat and boils them - which is what's likely to happen soon.

Diversified market frogs are shell shocked with world markets having dropped 8 to 10 per cent last month. Even the Toronto market, one of the only ones to be up for the year, fell. Should diversified frogs jump out? Or is the worst over?

My opinion of the last six months is unchanged: continue to be cautious, because short-term rallies notwithstanding, what's coming is even worse than what came before. Not only should you be cautious in investing, but you should keep more cash on a personal level, because 2009 could be an awful year. Not only markets could plunge, but unemployment could rise as interest rates soar.

Up to now, the U.S. Federal Reserve Board has been cutting rates to help the U.S. economy, without much success - the United States is arguably in a recession, like several other countries, including the Baltic republics, Scandinavia, some in South America - and the Third World is in a depression, with many unable to buy food. And as interest rates rise to fight inflation, it could get worse everywhere.

Here is a partial list of countries that have raised rates already: Australia, Canada, Israel, Chile, Egypt, Nigeria, Indonesia, the Philippines, Brazil, Vietnam, Iceland, Sweden, Denmark Norway, Finland, Poland, South Africa, Hungary, Latvia and Russia. And yes, the European Central Bank has raised rates, as has China, which also raised lending margins.

Which country is missing? The United States - but it won't be able to resist rate hikes for long. Especially since a new president comes along in 2009, and will, inevitably, give the U.S. economy a laxative to get it going in time for re-election. So when the Fed raises rates - when, not if - all market frogs are going to get boiled. How badly? I think there's a good chance that by year-end the U.S. market will be down 15 per cent from here, perhaps more, and the Chinese market, almost double that.

To me the Chinese market today is like Japan of the 1990s, a bubble masquerading as a New Thing. Just imagine: When laid off U.S. consumers stop buying, who will China sell to? Haiti? And when the vicious feedback loop starts, more layoffs would come in the midst of inflation-fighting rate hikes, then more layoffs, just like 1981-82, or even 1973.

Oh yes, 1973 and the first oil shock. We haven't yet mentioned a possible Mideast war. Because surely you understand that one is likely soon? According to Seymour Hersh in The New Yorker magazine, U.S. Special Forces are already inside Iran, marking targets. Iran's reactor in Bushehr goes on line in October and Israel just practised a bombing run with more than 100 planes, so Iran can see what's coming.

Last week, according to Israeli reports, Iran allegedly began to dig more than 250,000 graves around Tehran and Natanz, and Israel told its hospitals to be ready for mass casualties "in case of earthquakes."

The Pentagon, too, says something may be afoot. In July, 2006, the war in Lebanon tanked the market. What could a coming one do? Or will Iran - as North Korea and Libya did - do an about-face? There is no sign of it.

Like frogs in a slowly heating oily soup, the mullahs plow merrily ahead toward their Middle Eastern gotterdammerung. And if their hot soup erupts, the market would too. What are the chances? Here is a small fact: The United States has been buying oil from $100 (U.S.) a barrel and up, to fill its Strategic Petroleum Reserve. The other times it did this were before it went to war.

And yet, too many long frogs have joined the bear camp recently, so any positive whiff can make them rush back in. Like which whiff?

For example, the United States (as agent for the Great Panjandrum) might hint it may sell some of its SPR oil. This could knock oil down $10 in a hurry and make the market jump.

Or anything else equally soothing could convince market frogs to stay put. But after a little updraft (if any), the real plunge should start anew as rates rise, layoffs spiral, and both the economy and the market likely tumble into depths that half the readers have probably never seen.

So I'll repeat my advice: Stay liquid and cautious - more turmoil is ahead.

If you want to stay in stocks, stay mostly in Canadian: Our market is among the safest and our currency among the best, backed as they are by resources.