Did Neanderthal cells cook as the climate warmed?

Neanderthals may have gone extinct because their cells couldn't cope with climate change, according to a new hypothesis presented at a genetics conference this month.

Metabolic adaptations to Ice Age Europe may have proved costly to Neanderthals after the continent's climate started to change, says Patrick Chinnery, a molecular biologist at Newcastle University, UK.

He and colleague Gavin Hudson identified potentially harmful mutations in the newly sequenced Neanderthal mitochondrial genome. In particular, the researchers found genes that are associated with neurodegenerative diseases and deafness. "If they were found in modern humans they would be bad news," Chinnery says.

The extinction of Neanderthals, close relatives of modern humans, some 25,000 years ago remains unexplained.

One theory holds that they were physically outcompeted by modern humans , another that they were economically eclipsed by us.. Yet another theory suggests that Neanderthals couldn't adapt to climate change.

Cooked cells?

The discovery of harmful mutations in the Neanderthal mitochondrial genome supports the climate-change idea, with a twist.

Chinnery and Hudson suggest that mutations in mitochondria helped Neanderthals cope with the cold weather, but that when the climate started fluctuating between warm and cold periods, they were at a disadvantage.

In all cells, from yeast to human, a mitochondrion's main job is to produce the energy that powers cells - this takes the form of a chemical called ATP. Our mitochondria do this quite efficiently under ideal conditions, making 36 ATP molecules with the energy stored in a single molecule of glucose sugar.

Mutations that sap this efficiency would generate heat instead - a potentially useful trick for Neanderthals who are known to have had adaptations to cold weather, Chinnery says. However, a warmer and less climatically stable habitat could have spelled trouble for Neanderthals with such mutations.

Perhaps the Neanderthals' mitochondrial DNA adapted them to the cold, and they couldn't cope when the climate started to change, he says.

Mum's mitochondria

However, with only a single Neanderthal DNA sequence decoded so far, that hypothesis remains provisional.

"This 'n of 1' experiment raises a question which needs to be tested on a large number of cases," Chinnery says.

They might not have to wait long. "We hope to be able to provide [Neanderthal] subjects for doing that kind of analysis really soon," says Edward Green, a researcher at Max Planck Institute for Evolutionary Anthropology in Leipzig, Germany.

Green and colleague Svante Pääbo published the first complete Neanderthal mitochondrial genome earlier this year.

However, Green cautions against reading too much into a Neanderthal's - or a human's - mitochondria.

Unlike DNA in the cell's nucleus, mitochondrial DNA does not reflect a healthy mix of maternal and paternal genes. We inherit all mitochondrial genes from our mothers, so a potentially advantageous gene has no way to spread through a population, without bringing along the rest of the genome.

Most scientists contend that changes to mitochondrial genes instead occur by chance, making them a good marker for human and Neanderthal ancestry.

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Nap without guilt: It boosts sophisticated memory

Reuters – Nursery school children take a nap at Hinagiku nursery in Moriyama, western Japan in this May 27, 2008 …

WASHINGTON – Just in time for the holidays, some medical advice most people will like: Take a nap. Interrupting sleep seriously disrupts memory-making, compelling new research suggests. But on the flip side, taking a nap may boost a sophisticated kind of memory that helps us see the big picture and get creative.

"Not only do we need to remember to sleep, but most certainly we sleep to remember," is how Dr. William Fishbein, a cognitive neuroscientist at the City University of New York, put it at a meeting of the Society for Neuroscience last week.

Good sleep is a casualty of our 24/7 world. Surveys suggest few adults attain the recommended seven to eight hours a night.

Way too little clearly is dangerous: Sleep deprivation causes not just car crashes but all sorts of other accidents. Over time, a chronic lack of sleep can erode the body in ways that leave us more vulnerable to heart disease, diabetes and other illnesses.

But perhaps more common than insomnia is fragmented sleep — the easy awakening that comes with aging, or, worse, the sleep apnea that afflicts millions, who quit breathing for 30 seconds or so over and over throughout the night.

Indeed, scientists increasingly are focusing less on sleep duration and more on the quality of sleep, what's called sleep intensity, in studying how sleep helps the brain process memories so they stick. Particularly important is "slow-wave sleep," a period of very deep sleep that comes earlier than better-known REM sleep, or dreaming time.

Fishbein suspected a more active role for the slow-wave sleep that can emerge even in a power nap. Maybe our brains keep working during that time to solve problems and come up with new ideas. So he and graduate student Hiuyan Lau devised a simple test: documenting relational memory, where the brain puts together separately learned facts in new ways.

First, they taught 20 English-speaking college students lists of Chinese words spelled with two characters — such as sister, mother, maid. Then half the students took a nap, being monitored to be sure they didn't move from slow-wave sleep into the REM stage.

Upon awakening, they took a multiple-choice test of Chinese words they'd never seen before. The nappers did much better at automatically learning that the first of the two-pair characters in the words they'd memorized earlier always meant the same thing — female, for example. So they also were more likely than non-nappers to choose that a new word containing that character meant "princess" and not "ape."

"The nap group has essentially teased out what's going on," Fishbein concludes.

These students took a 90-minute nap, quite a luxury for most adults. But even a 12-minute nap can boost some forms of memory, adds Dr. Robert Stickgold of Harvard Medical School.

Conversely, Wisconsin researchers briefly interrupted nighttime slow-wave sleep by playing a beep — just loudly enough to disturb sleep but not awaken — and found those people couldn't remember a task they'd learned the day before as well as people whose slow-wave sleep wasn't disrupted.

That brings us back to fragmented sleep, whether from aging or apnea. It can suppress the birth of new brain cells in the hippocampus, where memory-making begins — enough to hinder learning weeks after sleep returns to normal, warns Dr. Dennis McGinty of the University of California, Los Angeles.

To prove a lasting effect, McGinty mimicked human sleep apnea in rats. He hooked them to brain monitors and made them sleep on a treadmill. Whenever the monitors detected 30 seconds of sleep, the treadmill briefly switched on. After 12 days of this sleep disturbance, McGinty let the rats sleep peacefully for as long as they wanted for the next two weeks.

The catch-up sleep didn't help: Rested rats used room cues to quickly learn the escape hole in a maze. Those with fragmented sleep two weeks earlier couldn't, only randomly stumbling upon the escape.

None of the new work is enough, yet, to pinpoint the minimum sleep needed for optimal memory. What's needed may vary considerably from person to person.

"A short sleeper may have a very efficient deep sleep even if they sleep only four hours," notes Dr. Chiara Cirellia of the University of Wisconsin, Madison.

But altogether, the findings do suggest some practical advice: Get apnea treated. Avoid what Harvard's Stickgold calls "sleep bulimia," super-late nights followed by sleep-in weekends. And don't feel guilty for napping.

Could Marijuana Substance Help Prevent Or Delay Memory Impairment In The Aging Brain?

ScienceDaily (Nov. 23, 2008) — Ohio State University scientists are finding that specific elements of marijuana can be good for the aging brain by reducing inflammation there and possibly even stimulating the formation of new brain cells.

Their research suggests that the development of a legal drug that contains certain properties similar to those in marijuana might help prevent or delay the onset of Alzheimer’s disease. Though the exact cause of Alzheimer’s remains unknown, chronic inflammation in the brain is believed to contribute to memory impairment.

Any new drug’s properties would resemble those of tetrahydrocannabinol, or THC, the main psychoactive substance in the cannabis plant, but would not share its high-producing effects. THC joins nicotine, alcohol and caffeine as agents that, in moderation, have shown some protection against inflammation in the brain that might translate to better memory late in life.

“It’s not that everything immoral is good for the brain. It’s just that there are some substances that millions of people for thousands of years have used in billions of doses, and we’re noticing there’s a little signal above all the noise,” said Gary Wenk, professor of psychology at Ohio State and principal investigator on the research.

Wenk’s work has already shown that a THC-like synthetic drug can improve memory in animals. Now his team is trying to find out exactly how it works in the brain.

The most recent research on rats indicates that at least three receptors in the brain are activated by the synthetic drug, which is similar to marijuana. These receptors are proteins within the brain’s endocannabinoid system, which is involved in memory as well as physiological processes associated with appetite, mood and pain response.

This research is also showing that receptors in this system can influence brain inflammation and the production of new neurons, or brain cells.

“When we’re young, we reproduce neurons and our memory works fine. When we age, the process slows down, so we have a decrease in new cell formation in normal aging. You need those cells to come back and help form new memories, and we found that this THC-like agent can influence creation of those cells,” said Yannick Marchalant, a study coauthor and research assistant professor of psychology at Ohio State.

Marchalant described the research in a poster presentation November 19 at the Society for Neuroscience meeting in Washington, D.C.

Knowing exactly how any of these compounds work in the brain can make it easier for drug designers to target specific systems with agents that will offer the most effective anti-aging benefits, said Wenk, who is also a professor of neuroscience and molecular virology, immunology and medical genetics.

“Could people smoke marijuana to prevent Alzheimer’s disease if the disease is in their family? We’re not saying that, but it might actually work. What we are saying is it appears that a safe, legal substance that mimics those important properties of marijuana can work on receptors in the brain to prevent memory impairments in aging. So that’s really hopeful,” Wenk said.

One thing is clear from the studies: Once memory impairment is evident, the treatment is not effective. Reducing inflammation and preserving or generating neurons must occur before the memory loss is obvious, Wenk said.

Marchalant led a study on old rats using the synthetic drug, called WIN-55212-2 (WIN), which is not used in humans because of its high potency to induce psychoactive effects.

The researchers used a pump under the skin to give the rats a constant dose of WIN for three weeks – a dose low enough to induce no psychoactive effects on the animals. A control group of rats received no intervention. In follow-up memory tests, in which rats were placed in a small swimming pool to determine how well they use visual cues to find a platform hidden under the surface of the water, the treated rats did better than the control rats in learning and remembering how to find the hidden platform.

“Old rats are not very good at that task. They can learn, but it takes them more time to find the platform. When we gave them the drug, it made them a little better at that task,” Marchalant said.

In some rats, Marchalant combined the WIN with compounds that are known to block specific receptors, which then offers hints at which receptors WIN is activating. The results indicated the WIN lowered the rats’ brain inflammation in the hippocampus by acting on what is called the TRPV1 receptor. The hippocampus is responsible for short-term memory.

With the same intervention technique, the researchers also determined that WIN acts on receptors known as CB1 and CB2, leading to the generation of new brain cells – a process known as neurogenesis. Those results led the scientists to speculate that the combination of lowered inflammation and neurogenesis is the reason the rats’ memory improved after treatment with WIN.

The researchers are continuing to study the endocannabinoid system’s role in regulating inflammation and neuron development. They are trying to zero in on the receptors that must be activated to produce the most benefits from any newly developed drug.

What they already know is THC alone isn’t the answer.

“The end goal is not to recommend the use of THC in humans to reduce Alzheimer’s,” Marchalant said. “We need to find exactly which receptors are most crucial, and ideally lead to the development of drugs that specifically activate those receptors. We hope a compound can be found that can target both inflammation and neurogenesis, which would be the most efficient way to produce the best effects.”

The National Institutes of Health supported this work.

Coauthors on the presentation are Holly Brothers and Lauren Burgess, both of Ohio State’s Department of Psychology.

Scientists say Copernicus' remains, grave found

By MONIKA SCISLOWSKA, Associated Press Writer Monika Scislowska, Associated Press Writer – Thu Nov 20, 6:07 pm ET

AP – In this image provided by the Kronenberg Foundation in Warsaw on Thursday, Nov. 20, 2008, a computer-generated …

WARSAW, Poland – Researchers said Thursday they have identified the remains of Nicolaus Copernicus by comparing DNA from a skeleton and hair retrieved from one of the 16th-century astronomer's books. The findings could put an end to centuries of speculation about the exact resting spot of Copernicus, a priest and astronomer whose theories identified the Sun, not the Earth, as the center of the universe.

Polish archaeologist Jerzy Gassowski told a news conference that forensic facial reconstruction of the skull, missing the lower jaw, his team found in 2005 buried in a Roman Catholic Cathedral in Frombork, Poland, bears striking resemblance to existing portraits of Copernicus.

The reconstruction shows a broken nose and other features that resemble a self-portrait of Copern icus , and the skull bears a cut mark above the left eye that corresponds with a scar shown in the painting.

Moreover, the skull belonged to a man aged around 70 — Copernicus's age when he died in 1543.

"In our opinion, our work led us to the discovery of Copernicus's remains but a grain of doubt remained," Gassowski said.

So, in the next stage, Swedish genetics expert Marie Allen analyzed DNA from a vertebrae, a tooth and femur bone and matched and compared it to that taken from two hairs retrieved from a book that the 16th-century Polish astronomer owned, which is kept at a library of Sweden's Uppsala University where Allen works.

"We collected four hairs and two of them are from the same individual as the bones," Allen said.

Gassowski is head of the Archaeology and Anthropology Institute in Pultusk, in central Poland, and Allen works at the Rudbeck Laboratory of the Genetics and Pathology Department of Uppsala University.

Copernicus was known to have been buried in the 14th-century Frombork Cathedral where he served as a canon, but his grave was not marked. The bones found by Gassowski were located under floor tiles near one of the side altars.

Gassowski's team started his search in 2004, on request from regional Catholic bishop, Jacek Jezierski.

"In the two years of work, under extremely difficult conditions — amid thousands of visitors, with earth shifting under the heavy pounding of the organ music — we managed to locate the grave, which was badly damaged," Gassowski said.

Copernicus is believed to have come up with his main idea of the Sun at the center of the universe between 1508 and 1514, and during those years wrote a manuscript commonly known as Commentariolus (Little Commentary).

His final thesis was only published, however, in the year of his death. His ideas challenged the Bible, the church and past theories, and they had important consequences for future thinkers, including Galileo, Descartes and Newton.

In remote Albania, a centuries-old code of honor survives

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Hektor Pustina .\/ Associated Press

Residents of Theth, a Catholic village in the remote Shala Valley, play soccer. Most residents leave during the harsh winter.

Tribal culture is eroding across the country, but in the Shala Valley, a remote region unapproachable in the winter, the 15th century Kanun endures.

From the Associated Press

September 28, 2008

THETH, ALBANIA -- The "Accursed Mountains" tower high above the Shala Valley, snow clinging to their summits even in the summer. Their jagged peaks hide one of Europe's most remote areas, where tribal culture lives on even as the modern world encroaches.

For about half the year, Shala, a protected national park, is cut off by heavy snowfall that blocks access to the two rock-strewn dirt tracks snaking through the mountains. The only way in or out is a seven-hour trek by foot to the nearest road, if the snow is not too deep.

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Here a rapidly vanishing way of life lingers in the traditions of the Kanun, the code of 15th-century prince Lek Dukagjin. But fewer and fewer locals are willing to endure the harsh winter in Theth, a Catholic village of roughly whitewashed stone houses scattered along a valley where snow piles so high that even visiting a neighbor can be impossible. Less than two decades ago, about 200 families lived in Theth year-round. Now there are 10 or 15.

"Everybody leaves during the winter," says Dilda Dednoja, a lively 69-year-old who stopped spending winters in her home in Theth's Okol area about seven years ago.

"In the winter you got stuck in the snow and you really wanted to leave," she said, describing a life of privation and toil where food was stockpiled in autumn to last until spring, firewood had to be dragged into the house and villagers were isolated even from each other. "There would be 4 meters (13 feet) of snow outside the door; there was no doctor, no school."

Agetina Carku lives on the valley's slopes, in the first house on the dirt track leading from the mountains into Theth. At 76, she has been shuttering her home in the fall and moving into the northern city of Shkodra for the last two winters. But she'd still rather stay in the mountains.

"When I come here, I am reborn," she says, watching fireflies flicker in her garden on a summer night.

"I still wanted to stay, but the young generation doesn't want to work so hard. I can't stay here alone, I have to follow the family. It is a practical need, but it's also the tradition."

It is in isolated pockets such as these that Albania's traditions are strongest.

Many still live at least in part by the Kanun, a code handed down through the centuries in which "besa" -- loosely translated as word of honor or sacred promise -- is paramount. The code was adhered to by Albania's Muslim majority and Catholic and Orthodox Christian minorities.

The code covers everything from inheritances and the rights of the church to the treatment of livestock. Disobeying the Kanun could lead to harsh penalties that might include banishment or the transgressor's household being burned. A slight could lead to a blood feud that lasted for generations.

In Theth, nobody will sell land to an outsider, or even to another villager. Brides must come from outside the valley, a tradition that follows along the lines of the Kanun's rule that marriage within the same clan is forbidden.

"The Kanun is the law. Just like the state law," explains Gjovalin Lokthi, 39, a gruff "kryeplak," or elected chief of the village.

"With the Kanun you can get killed over honor," he says, sipping homemade raki in what was until recently Theth's only bar -- a wooden shack he converted from a goat shed. "But it's better to get killed, because what good is your life [if you spend] 100 years behind bars?"

Theth's "kulla," or tower, is a reminder of the devastating legacy the blood feuds can have. Now a tourist attraction, the windowless stone building was where the men of a feuding family could take refuge -- for months or even years. Easily defendable with sheer walls and slits for windows, the men survived on livestock kept on the ground floor and food brought by the family's women, who were not targeted.

Kullas are no longer used. But there are still families in northern Albania forced into isolation because of feuds, unable to walk out their front door for fear of being killed. And sometimes these days it's not just men but whole families who fear for their lives.

The Kanun has survived despite four decades of communist rule after World War II, with hardships such as mass imprisonment in labor camps and attempts to stamp out tribal practices.

"What the people went through here is pretty amazing," says Michael Galaty, associate professor of anthropology at Millsaps College in Jackson, Miss., who led a four-year anthropological and archaeological research project in the Shala Valley that also studied the effects of isolation. "You go from this isolated tribal culture to one of the harshest totalitarian dictatorships the world's ever known, and from there straight into the globalized community."

But many in Albania -- particularly in the rapidly modernizing capital, Tirana, -- now perceive the Kanun as brutal and arcane, with its dictates that blood be paid for blood and that a woman is "a sack made to endure."

The Kanun "has been repeated for centuries and is deep in the conscience of the people," says Ismet Elezi, a retired professor of criminal law at Tirana University who spent 50 years studying the code. But "the young generation is interested in rock and pop, not in the Kanun, although they apply it. . . . It's usually the older people who push youngsters to apply it, though they don't know how."

Even in an area as isolated as Theth, it's clear the outside world is creeping in. Now satellite TV dishes are visible, and a cellphone relay antenna erected recently ensures near perfect coverage in an area where the country's landline grid is still out of reach.

Increasing numbers of tourists are willing to endure the bone-crunching journey by four-wheel drive to get into the valley. The villagers have started taking paying guests into their homes, and it is not clear how much tourism they will be able to accommodate.

For now the villagers of Theth still greet visitors with raki and small cups of thick, sweet coffee. After all, under Albanian tradition and the Kanun, you cannot turn away a guest.

Moment 600 years ago that terror came to Mummies of the Amazon

Hands over her eyes and her face gripped with terror, the woman's fear of death is all too obvious.

The remarkable mummy was found in a hidden burial vault in the Amazon.

It is at least 600 years old and has survived thanks to the embalming skills of her tribe, the Chachapoyas or cloud warriors.

Eleven further mummies were recovered from the massive cave complex 82ft down.

The vault - which was also used for worship - was chanced upon three months ago by a farmer working at the edge of northern Peru's rainforest. He tipped off scientists who uncovered ceramics, textiles and wall paintings.

The Chachapoyas were a tall, fairhaired, light-skinned race that some researchers believe may have come from Europe.

Little is known about them except that they were one of the more advanced ancient civilisations in the area. Adept at fighting, they commanded a large kingdom from the year 800 to 1500 that stretched across the Andes.

It is not known what the Chachapoyas actually called themselves - they are identified by the name given to them by their rivals and eventual conquerors, the Incas.

It comes from the Inca's Quechua language and means 'cloud people', because of the high forests in the clouds that the Chachapoyas inhabited.

Virtually all record of the tribe was lost when the Incas were themselves overrun by the Spanish conquistadors who landed in 1512.

They have, however, left behind a spectacular citadel, called Kuelap, 10,000ft up in the Andes.

It has more than 400 buildings and defensive towers, many of them with decorated walls, cornices and friezes.

Some experts rate Kuelap more highly than the Incan ruins at Machu Picchu.

Herman Crobera, the leader of the archaeological team that explored the cave, said: 'This is a discovery of transcendental importance.

'It is the first time any kind of underground burial site this size has been found belonging to Chachapoyas or other cultures in the region.'

He said walls near the mummies in the limestone cave were covered with paintings of faces and warriorlike figures which may have been drawn to ward off intruders and evil spirits.

'The remote site for this cemetery tells us that the Chachapoyas had enormous respect for their ancestors because they hid them away for protection,' added Mr Crobera.

'Locals call the cave Iyacyecuj, or enchanted water, because of its spiritual importance and its underground rivers.' The archaeologists have not yet established an accurate age for their finds.

Once they have finished exploring and excavating the tomb, Peruvian authorities want to turn it into a museum. The mummies are going on show at the Museum of the Nation in the capital Lima.

Scientists find prehistoric "nuclear family"

Reuters – Human remains are seen in a grave, near Eulau in Germany in this undated handout photograph received …

LONDON (Reuters) – A 4,600-year-old grave in Germany containing the remains of two adults and their children provides the earliest evidence that even prehistoric tribes attached importance to the family unit, researchers said on Monday.

The researchers used DNA analysis and other techniques to determine that the group buried facing each other -- an unusual practice in Neolithic culture -- consisted of a mother, father and their two sons aged 8-9 and 4-5 years.

"By establishing the genetic links between the two adults and two children buried together in one grave, we have established the presence of the classic nuclear family in a prehistoric context in Central Europe -- to our knowledge the oldest authentic molecular genetic evidence so far," Wolfgang Haak of the University of Adelaide said in a statement.

"Their unity in death suggests a unity in life."

The remains were found in graves that held a total of 13 people, all of whom had been interned simultaneously, Haak and colleagues reported in the journal Proceedings of the National Academy of Sciences.

Several were buried face-to-face, with arms and hands interlinked in many cases. The remains included children ranging from newborns up to 10 years of age, and adults of around 30 years or older.

Tests showed that many had suffered massive injuries, suggesting they were victims of a violent raid. One female had a stone projectile point embedded in her back and another had skull fractures.

"Our study of the Eulau individuals shows that their deaths were sudden and violent, apparent in lesions caused by stone axes and arrows, with evidence of attempts of some of the individuals to defend themselves from blows," the researchers wrote.

An analysis of dental remains also offered up insight into Stone Age society and showed that the females came from different regions than the males and their children.

This is evidence that men sought partners from different regions to avoid inbreeding and that it was customary for women to move to the location of the males, the researchers said.

"Such traditions would have been important to avoid inbreeding and to forge kinship networks with other communities," Alistair Pike, an archaeologist at the University of Bristol, who co-led the study, said in a statement.

(Reporting by Michael Kahn; Editing by Will Dunham and Mark Trevelyan)

The Worst Is Not Behind Us

Beware of those who say we've hit the bottom.

By Nouriel Roubini

November 14, 2008 "Forbes" November 13, 2008 -- It is useful, at this juncture, to stand back and survey the economic landscape--both as it is now, and as it has been in recent months. So here is a summary of many of the points that I have made for the last few months on the outlook for the U.S. and global economy, as well as for financial markets:

--The U.S. will experience its most severe recession since World War II, much worse and longer and deeper than even the 1974-1975 and 1980-1982 recessions. The recession will continue until at least the end of 2009 for a cumulative gross domestic product drop of over 4%; the unemployment rate will likely reach 9%. The U.S. consumer is shopped-out, saving less and debt-burdened: This will be the worst consumer recession in decades.

--The prospect of a short and shallow six- to eight-month V-shaped recession is out of the window; a U-shaped 18- to 24-month recession is now a certainty, and the probability of a worse, multi-year L-shaped recession (as in Japan in the 1990s) is still small but rising. Even if the economy were to exit a recession by the end of 2009, the recovery could be so weak because of the impairment of the financial system and the credit mechanism that it may feel like a recession even if the economy is technically out of the recession.

--Obama will inherit an economic and financial mess worse than anything the U.S. has faced in decades: the most severe recession in 50 years; the worst financial and banking crisis since the Great Depression; a ballooning fiscal deficit that may be as high as a trillion dollars in 2009 and 2010; a huge current account deficit; a financial system that is in a severe crisis and where deleveraging is still occurring at a very rapid pace, thus causing a worsening of the credit crunch; a household sector where millions of households are insolvent, into negative equity territory and on the verge of losing their homes; a serious risk of deflation as the slack in goods, labor and commodity markets becomes deeper; the risk that we will end in a deflationary liquidity trap as the Fed is fast approaching the zero-bound constraint for the Fed funds rate; the risk of a severe debt deflation as the real value of nominal liabilities will rise, given price deflation, while the value of financial assets is still plunging.

--The world economy will experience a severe recession: Output will sharply contract in the Eurozone, the U.K. and the rest of Europe, as well as in Canada, Japan and Australia/New Zealand. There is also a risk of a hard landing in emerging market economies. Expect global growth--at market prices--to be close to zero in Q3 and negative by Q4. Leaving aside the effects of the fiscal stimulus, China could face a hard landing growth rate of 6% in 2009. The global recession will continue through most of 2009.

--The advanced economies will face stag-deflation (stagnation/recession and deflation) rather than stagflation, as the slack in goods, labor and commodity markets will lead advanced economies' inflation rates to become below 1% by 2009.

--Expect a few advanced economies (certainly the U.S. and Japan and possibly others) to reach the zero-bound constraint for policy rates by early 2009. With deflation on the horizon, zero-bound on interest rates implies the risk of a liquidity trap where money and bonds become perfectly substitutable, where real interest rates become high and rising, thus further pushing down aggregate demand, and where money market fund returns cannot even cover their management costs.

Deflation also implies a debt deflation where the real value of nominal debts is rising, thus increasing the real burden of such debts. Monetary policy easing will become more aggressive in other advanced economies even if the European Central Bank cuts too little too late. But monetary policy easing will be scarcely effective, as it will be pushing on a string, given the glut of global aggregate supply relative to demand--and given a very severe credit crunch.

--For 2009, the consensus estimates for earnings are delusional: Current consensus estimates are that S&P 500 earnings per share (EPS) will be $90 in 2009, up 15% from 2008. Such estimates are outright silly. If EPS falls--as is most likely--to a level of $60, then with a price-to-earnings (P/E) ratio of 12, the S&P 500 index could fall to 720 (i.e. about 20% below current levels).

If the P/E falls to 10--as is possible in a severe recession--the S&P could be down to 600, or 35% below current levels.

And in a very severe recession, one cannot exclude that EPS could fall as low as $50 in 2009, dragging the S&P 500 index to as low as 500. So, even based on fundamentals and valuations, there are significant downside risks to U.S. equities (20% to 40%).

Similar arguments can be made for global equities: A severe global recession implies further downside risks to global equities in the order of 20% to 30%.Thus, the recent rally in U.S. and global equities was only a bear-market sucker's rally that is already fizzling out--buried under a mountain of worse-than-expected macro, earnings and financial news.

--Credit losses will be well above $1 trillion and closer to $2 trillion, as such losses will spread from subprime to near-prime and prime mortgages and home equity loans (and the related securitized products); to commercial real estate, to credit cards, auto loans and student loans; to leveraged loans and LBOs, to muni bonds, corporate bonds, industrial and commercial loans and credit default swaps. These credit losses will lead to a severe credit crunch, absent a rapid and aggressive recapitalization of financial institutions.

--Almost all of the $700 billion in the TARP program will be used to recapitalize U.S. financial institutions (banks, broker dealers, insurance companies, finance companies) as rising credit losses (close to $2 trillion) will imply that the initial $250 billion allocated to recap these institutions will not be enough. Sooner rather than later, a TARP-2 will become necessary, as the recapitalization needs of U.S. financial institutions will likely be well above $1 trillion.

--Current spreads on speculative-grade bonds may widen further as a tsunami of defaults will hit the corporate sector; investment-grade bond spreads have widened excessively relative to financial fundamentals, but further spread-widening is possible, driven by market dynamics, deleveraging and the fact that many AAA-rated firms (say, GE) are not really AAA, and should be downgraded by the rating agencies.

--Expect a U.S. fiscal deficit of almost $1 trillion in 2009 and 2010. The outlook for the U.S. current account deficit is mixed: The recession, a rise in private savings and a fall in investment, and a further fall in commodity prices will tend to shrink it, but a stronger dollar, global demand weakness and a larger U.S. fiscal deficit will tend to worsen it. On net, we will observe still-large U.S. twin fiscal and current account deficits--and less willingness and ability in the rest of the world to finance it unless the interest rate on such debt rises.

--In this economic and financial environment, it is wise to stay away from most risky assets for the next 12 months: There are downside risks to U.S. and global equities; credit spreads--especially for the speculative grade--may widen further; commodity prices will fall another 20% from current levels; gold will also fall as deflation sets in; the U.S. dollar may weaken further in the next six to 12 months as the factors behind the recent rally weather off, while medium-term bearish fundamentals for the dollar set in again; government bond yields in the U.S. and advanced economies may fall further as recession and deflation emerge but, over time, the surge in fiscal deficits in the U.S. and globally will reduce the supply of global savings and lead to higher long-term interest rates unless the fall in global real investment outpaces the fall in global savings.

Expect further downside risks to emerging-markets assets (in particular, equities and local and foreign currency debt), especially in economies with significant macro, policy and financial vulnerabilities. Cash and cash-like instruments (short-term dated government bonds and inflation-indexed bonds that do well both in inflation and deflation times) will dominate most risky assets.

So, serious risks and vulnerabilities remain, and the downside risks to financial markets (worse than expected macro news, earnings news and developments in systemically important parts of the global financial system) will, over the next few months, overshadow the positive news (G-7 policies to avoid a systemic meltdown, and other policies that--in due time--may reduce interbank spreads and credit spreads).

Beware, therefore, of those who tell you that we have reached a bottom for risky financial assets. The same optimists told you that we reached a bottom and the worst was behind us after the rescue of the creditors of Bear Stearns in March; after the announcement of the possible bailout of Fannie and Freddie in July; after the actual bailout of Fannie and Freddie in September; after the bailout of AIG (nyse: AIG - news - people ) in mid-September; after the TARP legislation was presented; and after the latest G-7 and E.U. action.

In each case, the optimists argued that the latest crisis and rescue policy response was the cathartic event that signaled the bottom of the crisis and the recovery of markets. They were wrong literally at least six times in a row as the crisis--as I have consistently predicted over the last year--became worse and worse. So enough of the excessive optimism that has been proved wrong at least six times in the last eight months alone.

A reality check is needed to assess risks--and to take appropriate action. And reality tells us that we barely avoided, only a week ago, a total systemic financial meltdown; that the policy actions are now finally more aggressive and systematic, and more appropriate; that it will take a long while for interbank and credit markets to mend; that further important policy actions are needed to avoid the meltdown and an even more severe recession; that central banks, instead of being the lenders of last resort, will be, for now, the lenders of first and only resort; that even if we avoid a meltdown, we will experience a severe U.S., advanced economy and, most likely, global recession, the worst in decades; that we are in the middle of a severe global financial and banking crisis, the worst since the Great Depression; and that the flow of macro, earnings and financial news will significantly surprise (as during the last few weeks) on the downside with significant further risks to financial markets.

I'll stop now.

The newopinion