Governments and central banks around the world are engaged in a fierce battle with asset price deflation. As Byon King says,  “It’s like Napoleon’s retreat from Moscow. There’s no relief from the suffering.”

Eric Roseman says the Fed will eventually triumph over deflation with by a massive expansion of credit.

In the meantime, he recommends a defensive portfolio weighting: 50% cash, 10% gold, and 20% in reverse ETFs, such as Short Dow30 ProShares (AMEX:DOG) or Short S&P500 ProShares (AMEX:SH).

This from The Sovereign Society:

The Fed and other major central banks, including the Chinese, cut benchmark rates by 0.50% today. The central banks are now throwing everything they’ve got at the credit crisis. This is a monetary conflict of the first degree for central banks as they fight the growing threat of accelerated asset price deflation across world markets.

Key asset values, including housing, equities and credit are all collapsing in value this year, and the rate of decline has accelerated markedly since September 1. And despite the concerted global rate cut this morning, world markets are still declining.

Global stock markets are now posting their worst calendar year loss since 1974. The Dow has now plunged more than 15% in six days. The MSCI World Index is down a mind-boggling 35% heading into this morning’s trade. And the MSCI Emerging Markets Index has crashed 47% - its worst loss in 20 years.

The Federal Reserve continues to do the right thing to alleviate credit stress. Bernanke is the right guy for this job. The Fed has an enormous array of policy response tools at its disposal. So combined with other central banks, the Fed will eventually arrest deflation through an unprecedented expansion of bank credit. If not, we’re in serious trouble because this gun is quickly running out of bullets.

Last night, for the first time since the Great Depression, the Fed became the lender of “only” resort to the massive commercial paper market.

The Fed will now directly loan to the biggest companies, including General Electric (NYSE:GE), which require commercial loans to pay for inventory, salaries and account payables to suppliers. Again, the Fed is doing the right thing because banks are not lending - not even to AA and A credits like GE.

I know this is an extremely difficult time for investors. We’re all witnessing a massive purge on our assets over the last 12 months and the latest bout of panic-selling has everyone on edge. But please keep a cool head.

By now your portfolio should have at least 50% in cash with equities representing an under-weighting. You should also have reverse-index funds, like the Short Dow30 ProShares (AMEX:DOG) or Short S&P500 ProShares (AMEX:SH) representing about 20% of your assets. Gold should be at least 10%.

If you don’t have the above allocation or something that looks similar, then you’re bleeding heavily. Wait for a big rebound, which is coming, to sell any unwanted stocks. The last thing you should be doing is selling amid a panic. Be cool and sell on intermittent strength. It’s coming.

Stay strong and keep your head on your shoulders.