All assets typically overshoot on the way up amid investor euphoria and greed, and equally plunge in extreme terms when the primary trend reverses as gloom and fear prevail.

This might be the last shoe to drop for world markets ahead of a major bottom sometime in early 2009. But the “last shoe” usually drops the hardest and investors are scrambling to government bonds this week ahead of more pain for equities and commodities. The bad news is that history strongly suggests we’re not even close to the bottom.

Global stock markets are now deep in a bear market since last fall. Though markets are off their lows this morning, benchmarks have already declined another 4% in just a few days of September trading.

From its peak in October 2007, the MSCI World Index of major economies has plunged 23% or its lowest level in more than two years. The index, measured in dollars, has been trashed again this month not only because of plunging equity values but also due to a surging American dollar; a strong buck strips away at local currency gains abroad. About 48% of the World Index is invested in non-U.S. stocks.

The MSCI Emerging Markets Index, all the rage for global investors until earlier this year, has crashed 28% in 2008 and is now over 32% off its all-time high. Emerging market corporate earnings are highly correlated to commodities. And that rally is over. Also, currencies in the sector are also posting declines although not as severe as the European units, especially the pound and the euro.

Since July, investors have gone from an inflation obsession to one of deflation, or an environment of falling prices. With oil and other commodities collapsing since early July, investors are chasing government bonds and dumping everything else. It’s truly ugly.

Finally, in terms of historical bear market declines and duration, we’re still not at the point of maximum pessimism.

According to Ned Davis Research, since 1960 the average bear market has lasted about 14 months and has taken stocks down about 31% before hitting bottom.

The mildest bear market featured a 21% Dow decline in 1990 and the worst during the 1970s oil crisis when equities dropped 45%. Since hitting an all-time high last October, the Dow has plummeted a cumulative 21%. This suggests we can easily decline another 10% from these levels as more bad news filters out from earnings, bank losses and fears of recession.

If you’re looking for a place to hide there’s only T-bills, Treasury bonds, short-term investment-grade corporate bonds and high-quality mortgage-backed debt. Everything else is down hard.

Have a good weekend. See you on Monday.