Financial stocks are getting whacked. With good reason. Merrill Lynch (NYSE:MER), for example, wrote off nearly half its book value in the last half of last year. UBS (NYSE:UBS) wrote down 40%. Morgan Stanley (NYSE:MS) a quarter. And no one knows where it will stop.

"The leading players in the greatest credit expansion of all time were the financial companies," we explained to Elizabeth on our way back from Geneva. "They were the debt mongers. They made their money by leveraging up the entire world - from people living in trailers on the outskirts of a godforsaken town in the middle of nowhere…to the masters of the universe themselves in Manhattan and London. Now that the world is de-leveraging itself, it's only natural that the financial industry takes the biggest hits."

Yesterday morning alone, Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE) - who played a starring role in the leveraging spectacle - saw their own stock marked down. The companies lost some $4.5 billion worth of capitalization before lunch was served.

And you remember Blackstone (NYSE:BX)? The private buyout firm was so much in demand during the boom times that even its founders decided it was time to sell - to the public. You may recall; we were suspicious. The idea of Private Equity was that the hotshots could outsmart the public markets. It was an idea completely at odds with Modern Portfolio Theory, which holds that price movements are random; therefore it isn't possible for a Private Equity firm to beat the public markets for long. If they seemed to do so, it was just, well, a fluke.

MPT was always a fraud, but it more than a little cheeky on the part of Blackstone to pretend that it could beat the public markets while at the same time becoming part of them. If they could really outperform the public markets, we wondered, why would owners ever want to sell? What could they do with the money? And if someone who actually could outsmart the public markets offered to sell you a piece of his business…shouldn't you be a bit suspicious? Unless you've got some pretty racy photos that you're planning to show to his wife, it makes no sense. Obviously, the seller has a better idea of what he's unloading than the buyer does of what he is getting - especially if he's such a great judge of investment value. Wouldn't it be like challenging a world master to a game of chess, in which you were blindfolded? Wouldn't the buyer likely be the loser?

Well, as it turned out, the buyer was a chump. People who bought Blackstone shares when it went public last June have lost 55% of their money.

Of course, it's not just Blackstone that is getting beaten up. The whole capital structure is getting hammered. "Margin calls pummel hedge funds," says one headline. "Peloton [a prominent hedge fund that seems to be going bust] puts its offices up for sale," says another.

Meanwhile, Japanese financial regulators say direct losses from subprime troubles have risen to $215 billion. One estimate says they'll grow to $1 trillion before it is over.

While the geniuses are taking their lumps so are the lumpen. That is, ordinary homeowners are being beaten up too - not only by falling house prices and high debt, but by rising consumer prices.

Yes, dear reader. This is a two front war. In the middle, the middle classes are taking incoming from two directions. The value of their main assets - houses and their own labor - are being deflated, while their cost of living goes up. In terms of oil, gold, Swiss francs, euro or pounds - Americans earn substantially less per hour than they did 5…10…or even 30 years ago. And they own less of their houses too. Americans' percentage of equity in their homes has fallen below 50 percent for the first time on record since 1945, the Federal Reserve said last Thursday.

But while they have less…and earn less…they still have to pay more. Gasoline is up to $3.20 a gallon, we reported yesterday…and oil hit more than $107 a barrel today. The dollar lost more ground too; it appears to be heading for $1.55 to the euro (EUR) this week.

Producer prices are shooting up too. The PPI rose to 6.6% in China. And in Britain it's at a 17-year high.

"Consumer gloom as spending power fails," says the headline item in the TIMES of London today.

The Fed is fighting back, of course. But it's turned its guns only in one direction - against deflation. Inflation can run wild.

Investors have figured out what is going on. They're still buying U.S. Treasury bonds, but now they favor the TIPS - bonds adjusted to inflation. TIPS have been bid up so high that they now produce a negative yield. That's right, yields have fallen below zero…indicating how eager investors have become to protect themselves from defaults and inflation. Nothing is less likely to default than a U.S. Treasury bond…heck, the feds print the money used to redeem them. Ah, there's the catch - they tend to print too many, which results in inflation. As long as the inflation was going into house prices and stocks, no one complained. But now, housing and stocks are going down - while consumer prices rise. These TIPS provide protection from both enemies - inflation and deflation. The feds won't default. And the TIPS adjust to losses in consumer purchasing power - as calculated by, well, the feds themselves. But so great is the demand for this kind of protection that investors are willing to give up all hope of a current yield in order to own them.

*** Gold provides no yield either. All you get is asset protection. But with gold reaching up towards $1,000…and making huge gains every year…you might wonder why investors don't favor gold over treasuries. We wonder too.

But imagine that you have a bill to pay…or a liability of some sort…also denominated in dollars. You don't know how much the dollar will be worth when the bill comes due, but you know you can cover it with dollars. Gold, on the other hand, poses some additional uncertainty. While the price has doubled and doubled again since its bottom in 1999, you never know.

Gold doesn't always go up. Sometimes its goes down. And after it has run up so sharply, it is reasonable to expect a correction. The price could go down 20%…or even 30%…before it resumes its upward march.

If that would worry you…don't buy it. If, on the other hand, you want a way to preserve your wealth over the long term - even if it means giving up current yield and possibly taking a 30% capital loss sometime in the next year or so - gold is the ticket.

The price of the yellow metal will probably go to $2,500 before this bull market is over. If it goes down to $700 or so before - well, we'll just wait it out, happy to be holding gold, rather than say, shares in Blackstone which went down 55% already…or shares in a hedge fund that may disappear altogether…or an extra house with a stopped-up toilet.

Our advice remains unchanged. Sell stocks on rallies. Buy gold on dips.

This is not advice for speculators, however. We offer no guarantees as to what either stocks or gold will do this year or the next. All we know is that we have faith in our fellow human beings. Given an opportunity to make a mess of things, they will. And nothing gives a richer opportunity than a pure paper money monetary system. One day, when the dollar is utterly worthless, gold will still have value.

And even though the price of gold has left our typical buying price in the dust, there is still a way that you can get gold on the cheap - for literally a penny per ounce. Our friends at Outstanding Investments have all the details…

To sweeten the deal for you a bit, for a very limited time, you can get all of our commodities and natural resources services - for life. That's Outstanding Investments, Resource Trader Alert, and Energy & Scarcity Investor. And if you get into the Resource Reserve before midnight on this Thursday, March 13, you can get our brand-new service, Gold & Options Trader - for free.

But only if you sign up before midnight on March 13. After that, the doors of the Resource Reserve are closed. Learn more here…

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.