The thoughts of Chairman Greenspan

The world's most powerful central banker accepts that oil prices are high and damaging to the US economy. He also highlighted that oil futures now pointed to $35 plus per barrel rather than $20 per barrel.

But his analysis showed that the 'intensity' of oil use in the US was around half that seen in the 1970s, and that prices are significantly lower in real terms that at that time. Consequently there was cause for concern but no reason for great alarm.

Investors rallied around this statement and US stock prices perked up a little. However, with US stocks still highly valued, many investors have begun to query the short term outlook for US stocks and by implication stock markets around the world.

If the US is drifting back into the 'Stagflation' of the 1970s - low growth with higher inflation and interest rates - then what is the outlook for equities?

The 1970s were a dismal time for Wall Street, with a nasty crash in 1974 which brought valuations back to earth. It was the same story for real estate. Only commodities such as oil, gold and silver had a good decade.

It looks as though the post-US election economic management scenario is shaping up. The trade deficit will be dealt with by devaluation. This is an easy option but it will come at some cost to further inflation as import prices will go up while exports become cheaper. Interest rates will drift higher.

For holders of US assets this has major implications as they will loose money in real terms even if nominal values remain static. However, rather like the loose monetary policy of recent years it avoids a major collapse of confidence while broadly stimulating the economy and exporting its problems to other countries, notably the European Union.

On the other hand, buying US equities at this time makes no sense, and indeed buying any asset valued in US dollars carries a large downside risk. Thus the case for a further bull market in commodities can be amply demonstrated, and indeed commodity prices continuously rose in the 1970s at the same time that global economies were struggling with Stagflation.

The lesson would therefore be to dump global equities and real estate in developed markets, and to shift funds either into emerging markets with exposure to commodities, like the Gulf States, or commodities.