Fara Wave

China led the Asian markets sharply lower with shares down 5.7 per cent in Shanghai, 3.5 per cent in Hong Kong and 2.5 per cent in Sydney. But after last Friday’s plunge the big cannons were out on Wall Street to steady nerves and head off a likely Black Monday.

Treasury Secretary Hank Paulson put in an unexpected early morning interview on CNBC, while Fed Chairman Ben Bernanke dropped a few more hints of possible rate rises. This double-act kept the show on the road, although the S&P stayed flat.

Indeed, financial stocks continued their recent weakness while technology stocks picked up the slack. But you do have to wonder where the technology companies are going to be selling their goods in future as demand from the technology-intensive banking sector slows and there is less credit available for consumers.

It is all very well for the dynamic duo of the Plunge Protection Team to paper over the cracks for another session. But how long can this go on? Days, weeks, surely at most months will pass before Wall Street has its crash.

The main driver of stock prices is not market spin but profits. As the recession impacts on profits then share prices will come down, and eventually all the herd will head for the exit at the same time.

With a US presidential election in progress there is a lot of hype in the air and perhaps this is what buoys the animal spirits of investors. It is certainly not a sensible appraisal of the market outlook.

For the sub-prime crisis that started last August is still less than halfway done. From a stock market perspective that means the devastation of the financial and property sectors will now be passed on to the rest of the market.

My guess is that energy and precious metals will prove the most resistant to this contagion as they did in the 1970s under similar conditions of high inflation and low economic growth.

Not least because ultra-low interest rates are financing speculation in commodities rather than countering deflation of other asset classes like housing. As long as this money supply creation continues energy prices and precious metal prices will soar higher, and with the banking sector in a fragile state that will be for years not months.

High energy prices will further erode margins and profits and accentuate the recession and stock market downturn. A downward economic spiral has been instigated and will have to work itself out. In the meantime, holding on to global stocks is madness.

Emerging markets linked to oil will perform much better. And if Goldman Sachs is right about $150-200 oil over the next couple of years this will be the only show in town for stock investors.