Expect a much sharper fall in equity prices in the US, advanced economies and emerging markets from current levels in the rest of 2008 as a severe US recession and global slowdown and a severe financial crisis and credit/liquidity crunch takes a more severe toll on earning of non-financial firms. In a typical US recession the S&P500 falls – from peak to through – by 28%; and this is not your typical run of the mill mild recession.

So the worst is ahead of us for the real economy and financial markets. From time to time markets will rally again reacting to mild and deceptively positive economic news. For example the temporary drug of a $160 billion fiscal package including $100 billion of tax rebates will boost Q2 growth into positive territory (1% to 1.5% growth in Q2). But that boost is deceptive as it is entirely driven by such temporary tax rebates.

The effects of those rebates on consumption are temporary while a half a dozen more persistent shock will lead to a consumption reduction – by late summer –once the effect of the rebates fizzle out. Persistent headwinds hitting consumers on a more protracted basis are: falling home prices, falling home equity withdrawal, falling stock prices, rising oil and food prices, rising debt servicing ratios, falling consumer confidence, falling employment and income generation.

The US economy indeed entered a recession in February of 2008: Q1 GDP is misleading as monthly GDP figures – from MacroAdvisers – show falling GDP between February and April 2008; also falling employment now for six months in a row, falling durable and non-durable consumption, falling demand and supply in housing, financial sector, auto sector, consumer discretionary sector, etc. are consistent with an economic recession that started in Q1.

When it looks and walks and quacks and ducks like a recession duck it is a recession. Of course the cheerleading bulls will rejoice to the news of a Q2 positive growth and argue that we will avoid a recession. The trouble is that we are already in a recession and the Q2 – and possibly Q3 – marginally positive headline GDP growth – will confirm what this author and others –Goldman Sachs, Merrill Lynch and a few others – have argued all along: a protracted U-shaped recession (rather than the short and shallow V-shaped recession of the consensus) may turn into a W-shaped recession if the tax rebate temporary drug boost GDP growth into marginally positive territory in Q2 and possibly Q3.

By Q4 the negative headwinds hitting US consumers will dominate the effect of a disappearing tax rebate and the severity of the economic contraction will become clear again. And indeed in the last few weeks equity markets, credit markets and now even oil and commodity markets are starting to price the scenario of a protracted US recession and a sharp global economic slowdown.

So fasten your seat belts as it will be a bumpy ride for the US and the global economy and for financial market. The most wise and savvy Mohamed El-Erian agrees on that.