With global stock markets now down about 20% from their highs last October, it’s time to debate whether we’re in a secular or cyclical bear market.

Is this the 1970s all over again? Are we heading into a protracted period of economic misery driven by rising inflation and skyrocketing commodities prices? If so, aren’t stock prices still vulnerable to further declines?

This is not stagflation – at least not exactly.

Over the last several months I’ve borrowed the term “inverse stagflation” to best describe the current global macroeconomic environment. Since no two economic cycles repeat themselves identically, I can’t label this environment as strictly stagflation; rather, it’s a bizarre and lethal cocktail of skyrocketing commodity prices mixed with deflation in housing and bank credit. This is “inverse stagflation” as coined by commodity hedge fund manager, Rene Haugerud in New York.

In the 1970s, housing values didn’t collapse. Neither did bank credit. What distinguishes the 2000s from the 1970s is the credit crunch combined with a bear market in housing – two formidable forces working to depress economic growth and cool rising inflation.

What most analysts fail to realize is that we can’t be in stagflation. That would imply inflation across all tangible assets, including real estate. But that’s not the case over the last 24 months as housing values suffer their worst percentage decline since the 1930s. Housing values are also declining in Ireland, England and Spain and will probably spread to other European countries before the year is over.

Also, with lending terms much harder to secure for even the most credit-worthy borrowers, the contraction of bank credit is another highly deflationary variable that is pulling the economy into the gutter.

Banks simply don’t have the excess capital they did 12 months ago prior to the credit crisis; the entire American -- and to a lesser extent, European banking systems are still trying to recapitalize devastated balance sheets. This whole process is certainly not coincident of stagflation.

The odds are that investors face a prolonged period of stock market weakness. Inflation is not bullish for earnings unless companies can make higher prices stick. More companies are raising prices, especially the commodity producers. This whole process is now moving up the consumption chain and will result in higher prices for just about everything – mainly, but not exclusively, due to soaring oil. Not every industry will successfully raise prices and that alone implies the broader market will continue to suffer or at best, go nowhere.

Combined with the prospects of Obama winning the elections this fall and higher corporate and individual tax rates in 2009 or 2010, stocks are going to have a very hard time making any serious progress. Rescinding the Bush tax cuts would be devastating for the United States and therefore the global economy because it would be deflationary, draining business investment, consumer spending and depress global demand for goods and services.

If the next government is stupid enough to hike taxes in the midst of a recession, the stock market will suffer incalculable declines. Adding more insult to injury, the Bernanke Fed might be compelled (or forced) to raise lending rates as inflation continues to accelerate threatening commodity inflation.

None of this suggests we’re in a cyclical bear market. Rather, this is a secular bear market or possibly a prolonged period of stagnation. Investors should focus on alternative sectors of the market with low-to-negative correlations to common stocks over the next several years. This includes commodities, mostly gold, foreign currencies in Asia, alternative energy, distressed global blue-chips that pay dividends and hedge funds and managed futures managers that can profit in this mess. Also, structured products that offer a capital guarantee also look interesting in this environment, including one tied to financial services and other distressed areas of the market.

Have a good weekend. See you on Monday.