Predictions are tough to make, especially about the future. Either baseball's Yogi Berra, the physicist Neils Bohr, or some other insightful soul is rumored to have uttered those silly but prophetic words.

I can't count how many times I've read about this or that analyst, who “predicted the housing market crash,” as though that prediction lends credibility to everything else the person utters. Very few, if any, of those same analysts predicted that the stock market would recover as it has.

Remarkably, we also have a tendency to mis-remember the past. How many people tell you now that they saw the internet bubble coming, or the housing bubble, or the commodities bubble? So I suppose I should add that predictions about the past are tough, too.

I give you the market view each quarter to help set your expectations. I know that predictions are fallible, but that doesn't mean we throw up our hands and cast our fate to the winds. We can still try. In that effort, we are more likely to consider the range of possibilities, and better understand the factors that affect the economy and our investments.

I'll continue to make predictions, but I'll try not to get overly excited when I'm right. When we recognize the limitations of our predictive abilities, we're less likely to make questionable investment choices, such as putting all our money into a single type of investment. A hefty dose of skepticism about one's own predictions is good for long-term financial health.

Last year I wrote that inflation would eventually be a problem, but that it might not surface for two to four years. That still seems a likely scenario. The immediate concern is deflation – falling prices. You might think lower prices aren't such a bad thing, but once deflation takes hold, it's tough to fix. Witness Japan today and the US during the Depression. That's a reason for the Federal Reserve to keep interest rates low for a while longer, and for the US government not to get overly worried about budget deficits for the next couple of years.

The budget troubles in Europe, and the falling Euro, will mean a bit slower growth in the US, but probably not enough to send us back into a recession. The markets are adjusting. People now realize that they shouldn't have considered Germany and Greece to be equal credit risks, in the same way that investors here realized that no matter how you package them, shaky mortgage loans rarely become high-quality credits. European government officials might fret about the nasty and nefarious markets, but it all seems quite rational to me. I don't want to own Greek bonds. Do you?

Housing starts have dropped 70% from their peak in 2006. While this is painful for anyone in construction, it's necessary. Housing supply was far ahead of demand; and prices were far above incomes.

Consumers have cut their debt from 136% of income to 116%. I don't know what the proper level of debt is, and I don't think anyone else does either. The short answer is: what people can afford.

Unemployment is sticking stubbornly at about 10%. Businesses continue to hold back on hiring. I had expected businesses to add more jobs by now. I still think a large number of private-sector jobs will be created, but the jobs might not arrive until 2011.

So the adjustments are taking place, and that's why I'm optimistic that consumers and businesses will eventually start spending again. Not this year, and maybe not next year, but eventually.

All these concerns, about European debt, about the strength of the US recovery, about life in general, have driven investors into the dollar, and into US government debt. US Treasury bills, notes, and bonds, are still seen as the safest investments. That demand has driven the yield on a 10-year US Treasury bond down to just over 3%.

At the end of the 1990s, when everyone told you it was a no-brainer to own stocks, the 10-year US Treasury bond yielded about 6% in interest, and stocks provided a dividend of about 1%. Today, you can create a diversified portfolio of solid companies that provides a dividend yield of about 3% per year. If you consider only safety, the Treasury bond might be a fine choice. But if you consider safety, inflation, and growth, the portfolio of stocks seems much more appealing.

The Wall Street Journal ran a series of articles on gold as an investment. The author pointed out that a large percentage of current demand comes from the financial sector, which we know is a notoriously fickle group. The financial sector was also part of the reason oil got to $150 a barrel. Gold is strutting across the stage in the spotlight, the current star of the investment scene; but that spotlight can shift to a different star faster than you can say sell. I don't know when gold will punish the unwary, but it will.

Given the limitations of our predictive abilities, I recommend investors stick to their long-term asset allocation strategies and retain a diversified stock portfolio.

Sources: Economist, Wall Street Journal, Value Line, Standard & Poors, Schwab, Fidelity