You hear a lot of comparisons these days between the current market downturn and the 1929 stock market crash. That’s mainly due to a lack of comparables. The 2007-2008 (assuming it ends this fall) market downturn is the worst since World War Two. However, nothing since then comes close to the 1929 stock market crash that lasted into the 1930s.

When investors ask, “How bad can it get?”, we need to qualify our answer. If governments around the world were doing nothing to counter the crisis – or, worse, doing all the wrong things as governments did in the 1930s in the wake of the 1929 stock market crash – then the crisis could get a lot worse.

However, our view is that they are taking the kind of steps that will contain the crisis and eventually restore liquidity in the banking system. That didn’t happen after the 1929 stock market crash.

One problem, though is that these steps come at a price. Our best guess is that we’ll see much higher inflation as a result of all this newly supplied liquidity. It will probably come in the early part of the next decade, and it will be a major concern and obstacle for successful investors for many years to come.

How should investors let this influence their investing, particularly in resource stocks?

Our view is that you should keep this inflationary potential in mind, but it’s too early to try to profit from it. That’s partly due to the drawbacks of resources stocks. They do provide a handy hedge against inflation. However, this is the most volatile and erratic of the five main economic sectors. It’s better to be late and/or under-represented in the sector, rather than to get in just prior to what may be a deep, lasting slump.

Over the next year or even two, resource prices are likely to move sideways-to-downwards, as the economy struggles to get back to normal. Meanwhile, commodity consumers are likely to become highly innovative in making do with less of the commodities they need – redesigning products, substituting materials and so on. This will whittle away at demand growth. At the same time, new production that was set in motion during the boom will come on stream.

Even many of the most pessimistic observers now feel that resource prices are bound to rise in the next few years, as millions of Indian and Chinese workers pole-vault into the middle class. But many pessimists felt the same way following the last great resource and commodity boom, in the 1970s and 1980s. After that boom ended, the sector went into a slump that lasted 15 years or more.

We strongly doubt that we’ll see anything so extreme this time around. But we think you should plan to err on the side of too little rather than too much resource exposure in the next few years.