Why this crisis will play out in slow-motion

So far the crisis in global investment markets has developed much as I expected the credit markets are crippled, but stock markets remain buoyant.

It's going to be a slow-motion, creeping crisis that stretches ahead of us for the next two or three years. I said that when the crisis broke a month ago. US Treasury chief Hank Paulson now says more or less the same thing the crisis of confidence is likely to last longer than any of the financial shocks of the past two decades.

I agree with Asian investment bank CLSA's conclusion that the turmoil in credit markets "is inevitably going to show up with a lag in the US economy and then, with a further lag, in other global economies."

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Banks are so frightened that they are now generally refusing to lend money to one another, even overnight.

They are worried at how much they are going to be forced to provide to hedge and private equity funds, other clients and their own investment funds in terms of commitments they signed up to in the glory days. They fear major outflows by nervous depositors. And they worry about the risks of lending to other financial institutions with their uncertain exposure to toxic assets.

The epicentre of the developing crisis in credit markets is, remarkably, not in the US but in Europe, the home of many poorly-managed banks favoured by politicians, bureaucrats and sundry establishment deadbeats. There the central bank has already extended more than $400 billion in support.

Meanwhile the prospect of falling interest rates in America as its central bank moves to contain damage in the financial and housing sectors seems to have started a run on the dollar.

Foreign official holdings of US Treasury bonds have started to fall. Foreign private-sector investors, not subject to the same arm-twisting as their governments, are likely to flee the dollar even faster, should they decide to do so.

However in the stock markets, for the moment, the bulls still have the upper hand. Interest-rate cuts are usually good for equities, the world economy outside the financial sectors and US housing is still in good shape, liquidity remains abundant for anything not associated with that deadly word "credit," corporate balance sheets have low levels of debt and are flush with cash, profits remain good.

"Valuations in equity markets are tempting," comments Brewin Dolphin's chief strategist Mike Lenhoff. "The S&P 500 sells on a 12-months-forward p/e ratio of 14.2 and the FTSE 100 on 11.5 times."

As you know, I have identified the shares of the best multinationals as one of the investment classes most likely to emerge well from the current slow-motion crisis. Where else is the mountain of savings generated around the world each year going to be invested?

However, I would wait for the inevitable next round of shocks in the credit markets to hit, and the adverse consequences for corporate earnings to become clearer, before being tempted to invest or invest more in the big-caps.

By Martin Spring in On Target, a private newsletter on global strategy