John Hussman, whose funds have some of the better long-term track records in the industry despite missing out on much of the ’09 rally, says he sees an 80% chance of a market plunge and economic downturn in 2010.

“This is not certainty, but the evidence that we’ve observed in the equity market, labor market, and credit markets to-date is simply much more consistent with the recent advance being a component of a more drawn-out and painful deleveraging cycle,” Hussman writes in a piece entitled “Reckless Myopia” on Hussman Funds’ web site (thanks to The Business Insider for highlighting this.) “Meanwhile, valuations are clearly unfavorable here, and even under the ‘typical post-war recovery’ scenario, we are observing an increasing number of internal divergences and non-confirmations in market action.”

Hussman, who was ahead of the curve on the credit crisis, recession, and ’08 market crash, says Wall Street has been too quick to assume that all is well as economic data has improved in recent months.

“I should have assumed that Wall Street’s tendency toward reckless myopia — ingrained over the past decade — would return at the first sign of even temporary stability,” he said in explaining why he has missed much of the ’09 rally. “The eagerness of investors to chase prevailing trends, and their unwillingness to concern themselves with predictable longer-term risks, drove a successive series of speculative advances and crashes during the past decade. … And here we are again.”

Hussman says there are two possible states of the world. One is that the economy and profits are on the mend, and that things will soon be back to normal. “The other,” he warns, “is a world that has enjoyed a brief intermission prior to a terrific second act in which an even larger share of credit losses will be taken, and in which the range of policy choices will be more restricted because we’ve already issued more government liabilities than a banana republic, and will steeply debase our currency if we do it again.”

Hussman also has an interesting take on the markets as a reliable discounting mechanism — he doesn’t buy it, and says the continuous cycle of bubbles and crashes bears that out. “Rather, investors appear to respond to emerging risks no more than about three months ahead of time,” he writes. And, he adds, analysts’ and strategists’ misguided predictions exacerbate the situation.