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Amid gloom and doom, is there hope for investors?

An author who foresaw the fall of the financial system now sees things getting worse, says this analyst, but he sees some hope in Canada.

All right, let’s have the worst. Then we’ll try and make the best of it.

We’re about to take you into the abyss with an observer who paints a very bleak picture of the financial future ahead.

But that sliver of light you see at the end of the tunnel is Canada, which appears to be one of the brighter spots in the picture.

And behind that are some exchange-traded funds recommended to help investors get through this quicksand.

The observer is Mr. Michael J. Panzner, a veteran of Wall Street and the London markets. His 2007 book Financial Armageddon foretold with chilling accuracy the devastation we now see in the markets.

His latest book is called When Giants Fall and it’s not exactly a happily-ever-after story either. Things will not get better, he writes.

Our guide to this market hell is Mr. Larry MacDonald in Investor's Digest of Canada. He takes his readers into the dark corners of Mr. Panzner’s vision of the future and then makes his own suggestions.

Before the crisis began, Mr. Panzner was predicting scenarios that proved to be all too true.

A domino-like collapse

The fall of U.S. housing market will “drag the United States into a deep and dark abyss, the likes of which we haven’t seen for decades,” this farsighted author wrote before the market did indeed fall.

The result would be “a domino-like collapse of more than a few large intermediaries and allegedly sophisticated global financial firms, including hedge funds, insurers and brokers.”

He got that right.

We’re going further down, he writes in his latest book. Mr. MacDonald quotes one sweeping statement that girds the globe.

“Among the factors causing strains will be the fallout from unraveling economies and heightened resource constraints, waning U.S. power and global competition for influence … boundaries will shift and alliances will unravel, much like they did when the Communist party was no longer able to exert its authority over the Union of Soviet Socialist Republics.”

It’s starting to sound like one of those doomed-civilization scenarios that crops up in science fiction. One way or another, the author states, globalization is going to take it on the chin.

Broken business model

There will be a growing backlash against the global economy, Mr. Panzner says. Emerging countries will gain the upper hand by throwing up barriers to protect jobs and industries.

Beware of investing in global firms. “Key parts of their business models are broken or obsolete.” For instant, all the outsourcing of work to other firms and countries that has been hailed as a cost saver could come to a halt. Politics, logistics and economics may all work against it.

As for investors diversifying their portfolios internationally, that may not be such a great idea, either.

The risks of investing abroad, says the author, “will be far greater than in the past.” Foreign firms and investors will get short shrift at the expense of domestic companies and investors.

There’s more, although it obviously can’t be covered in full. A few of the lowlights — a long dark passage for American consumers and consumer firms; dwindling government finances prompting spending cutbacks and tax hikes; a loss of confidence in the U.S. dollar; a slide in real-estate prices through 2012; and, inevitably, an inflationary spiral brought about by printing more money.

But that’s enough bad news for one day, or a week of days, for that matter. There’s some good news in the book, and it’s about Canada.

A lot going for it

In the face of all this, Mr. MacDonald suggests, it would seem to be wise for Canadian investors to keep more of their wealth in Canada.

This would certainly fit in with Mr. Panzner’s thinking. He believes this country will be better off than most.

Canada, he writes, “seems to offer great promise as an investment destination. With its relatively stable history and political structure … rich deposits of hydrocarbons and other commodities, access to water and arable land for farming, the country would seem to have a lot going for it.”

Mr. MacDonald carries the ball from there. If Mr. Panzner is right about Canada (and if he’s been right about the bad stuff, who’s to say he can’t get the good stuff right as well?), there may be a long-term solution.

Exchange-traded funds grounded in resources are the outlet Mr. MacDonald suggests for his Investor's Digest of Canada readers.

He picks three specifically — Claymore Oil Sands Sector Fund (TSX-CLO), iShares CDN Gold Sector Index Fund (TSX-XGD) and iShares CDN S&P/TSX Small Cap Index Fund (TSX-XCS). They may not promise immediate gratification, but they are tied to Canada’s enduring strength.

So even in the darkest gloom, there’s a faint glimmer of hope. If things are going to go from bad to worse, the best place to be is Canada.