"It's pretty much all out war," said the chief financial economist at a large Japanese bank.

Yesterday, the battle was hot and heavy. By 8 PM last evening, the financial media was in a panic. An attack of stock market panics was rolling over the world. Japan was down 5%. India was down 4%. In Russia, they stopped trading twice. In Iceland, they stopped trading in financial shares all together.

By the time the battle reached Manhattan, the London press expected the whole island to be pulverized. And for a while, it did look as though U.S. stocks would be hammered to dust. The Dow fell 600 points at one point.

But by the end of the day, stocks were down…but not out. The Dow lost 363 points, to below 10,000. And this morning, there are signs of new life coming from Asia. One investor thought he saw a dove with a green twig in its beak.

What is going on?

The long-awaited sell-off seems to be here… Suppressed, denied, and delayed - Mr. Market is finally having his say. And he's speaking so loudly, even the clowns are listening. This from Jim Cramer:

"Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.

"I don't care where stocks have been, I care where they're going, and I don't want people to get hurt in the market… I'm worried about unemployment, I'm worried about purchases that you may need. I can't have you at risk in the stock market."

"I think what you have to do, if you can withstand it, is just ride it out."

It could be a long ride. By our reckoning, the bear market began in January 2000. Then it was held off by a huge barrage of cash and credit - which sent property prices soaring…and caused stock prices to rally. The Dow surpassed its January 2000 high - but only in nominal terms. Adjusted for inflation, stocks were still going down.

You remember our Trade of the Decade? Sell stocks on rallies; buy gold on dips. The second half of that trade has done very well. Gold rose from under $300 to over $900. Yesterday, it went up $25 - to $858.

But the first half of the trade has never looked very good. We kept our "Crash Alert" flag on the mast and wondered - when will stocks fall?

It looks like they are falling now. Half the stocks on the NYSE hit new lows yesterday. Worldwide, stocks lost $2.2 trillion in value. The Russian stock market lost 22% in the last five days. Here in London, yesterday brought the biggest drop in FTSE history. And if this is the continuation of the major bear market that began in January 2000, it still has a long way to go. Typically, bear markets run for many years. After stocks peaked out in '66, for example, it wasn't until '82 - 16 years later - that they finally hit bottom.

They have a long way to go in terms of price too. At major bottoms, stocks sell for 5-10 times earnings. This implies a Dow of less than half today's level. Dow 5,000 - remember, you heard it here first!

But the war goes on. The forces of inflation (led by field marshals Hank Paulson and Ben Bernanke) are clearly on the defensive - desperately pumping cash and credit into the market to offset Mr. Market's campaign of value destruction. The Treasury is blasting Wall Street's bad debts - at a cost of about $700 billion. And the Fed itself seems to be firing all its ammunition at once. Bernanke told Barney Frank a couple of weeks ago that he had $800 billion to fight the war. And yet, here's today's headline from Bloomberg:

"Fed boosts cash auctions to $900 billion."

The Financial Times adds that the Fed is planning, for the first time, to make unsecured loans. Bloomberg goes on to note that the Fed's balance sheet swelled more in the last week than ever before - to a record $1.498 trillion of 'assets.' What are these 'assets?' They used to be U.S. Treasury bonds. But the Fed is selling that relatively good paper to buy up the kind of paper that caused Bear Stearns and Lehman Bros. to go broke. It is bad enough - from a banking point of view - to be selling Treasuries in order to buy trashy credits and make loans against them. But now the Fed is going even further, making loans with no collateral at all. If the Fed were a publicly traded bank, we would rate it a sell. It isn't public. But its money is. Be wary of it.

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