The global economy has entered an uncertain period in which a growth slowdown is widely expected. In this context, a great deal of attention will be focused on the US economy which is at risk of experiencing recessionary conditions.

Note that we have not explicitly predicted a recession, which by definition is two quarters of negative growth.

One of the problems with making a prediction based on this definition is that measuring GDP is far from being an exact science. Statistics are always revised as statisticians subsequently gather more data. So, what looks like a recession according to the initial estimate, may turn out not to be one after new estimates are made.

There is nothing stopping the economy from experiencing the following growth sequence: a negative, a positive and then a negative quarter.

This is definitely a weak economy, but not one that has had a recession, according to the definition. Also, the NBER (National Bureau of Economic Research) has a complicated way of determining the incidence of a recession, long after it has occurred.

So definitional questions aside, let's just say that for practical purposes what looks, walks, and quacks like a duck is a duck. The US economy is entering a weak phase which will last a number of quarters.

At this point in time, it is not clear how long it will last. The Fed doesn't have a clue, either, but you can bet your depreciated dollars that they will try and make it as short as possible.

Speaking of the dollar, it had perked up during the first half of December, as measured by the trade-weighted index. This happened on the back of some encouraging data and optimism that the US economy may escape a substantial slowdown. Unfortunately, more recent data releases have not been supportive of the earlier optimistic interpretation.

As a result, investors have begun to price-in more aggressive Fed interest-rate cuts. Of course, when such expectations are fortified, it naturally leads to dollar weakness. Meanwhile, gold has reached new highs and oil prices have jumped higher again. The rise in the price of the yellow metal is partly tied to fears about the inflationary consequences of monetary expansion by North American and European central banks. But the demand for gold may also be driven by the desire for asset diversification.

As for oil, if the global economy slows down we would normally expect a softening of prices. But, for now, there is strong demand relative to supply and this is shoring up prices.

Consumption in the fast-growing Asian economies is barrelling ahead and even in the oil-producing countries internal demand is rising rapidly.

In many cases, government subsidies keep oil prices well below market-clearing levels.

This is an artificial boost to demand and distorts the market mechanism. But the issue is politically sensitive and governments are plenty scared about rolling back the subsidisation programmes.

Access to oil and gas resources is of prime geopolitical significance and the major powers such as China and the United States are playing out their rivalry in this game. Meanwhile, Europe is also trying hard to ensure security of supply. Even smaller powers are looking out for their long-term interests.

India and a number of other countries have struck major deals with Iran, ignoring US objections. As Lord Palmerston would have put it, states have economic and strategic interests that override the ephemeral ideological jargon of passing administrations.

In the international arena it isn't wise to become too fervent in one's opinions or too close in alliances. The direction of the wind can change suddenly and you will be left exposed.

Several Arab oil-producing countries have booming economies and rising inflation. The fact that their currencies are pegged to the US dollar is a hindrance in the proper management of the economy. Essentially, pegging a currency means that you surrender an independent monetary policy. So when the Fed eases you are forced to follow in step, even if the consequences are damaging to the domestic economy. Consequently, some countries are under watch for a possible de-pegging of their currencies.

In itself, this wouldn't be particularly damaging to the US currency, though it isn't the best of news, given the greenback's travails. A more important event would be a decision by the Saudis, rather than the Emirates, to move away from the dollar, particularly in the pricing of oil. It is true that relations between Saudi Arabia and America are somewhat frayed, but as a strategic political decision the Saudis are not yet prepared to cause damage to US economic power.

Currency strategists are becoming increasingly bullish about the dollar's fortunes. In part, they argue that much of the bad news is already priced in. This is a variation on the saying that if you've been down this much the only way is up, though this doesn't always apply in financial markets.

There is also another argument in the bull call. Analysts have identified a seven-year cycle in the dollar's fortunes and we are entering the initial phase of the rebound. Asset prices in the US are cheaper than for some time, in foreign-currency terms, and this may attract buyers.

One doesn't want to dismiss these arguments, but there are other factors that support a more nuanced storyline. In a global economic slowdown, debtor countries are considered higher-risk bets than creditor countries, and this would be reflected in their currencies.

And, of course, the United States is a major debtor country. Another factor that is gradually becoming apparent is that the greenback and US Treasuries are no longer considered automatic safe-haven assets, as in the past.

There is a trend underway, namely asset diversification by Asian and Middle-Eastern interests.

Huge dollar holdings, particularly by Asian entities, will gradually be diversified into other currencies. As for asset classes, US Treasuries will no longer be the, virtually, automatic destination of surplus funds. The current evidence is that fund management will be a lot more active than in the past.

Sovereign wealth funds have continued to make news. Several diversified banks in America and Europe have been injected with badly-needed capital from these sources. Not surprisingly, equity markets are warming to the expectation of more investment from sovereign funds.

Stocks in the financial services sector in the US would have performed even worse than they have done were it not for these expectations.

As for the equity market, as a whole, this may help to create a sort of safety net, though it won't provide fuel for a rebound.

There are uncertain times ahead for stocks and we should expect more volatility. Earnings estimates are still too high and disappointments are likely.

The price-to-forward-earnings ratio may look fairly attractive but if the actual earnings don't match expectations then investors have to decide whether to accept the higher multiple or to knock down the price.

Inflation is another worry. Firstly, it no longer makes sense to focus on core, rather than headline inflation. The idea behind preferring core is that it leaves out the erratic food and energy components. However, more recently, these two categories have been trending higher rather than acting erratically. Even the Fed had to face up to the facts about food and energy inflation.

Another issue is that few people take the officially-released inflation data at face value. Part of the reason is the use of hedonic pricing to adjust for quality changes, and partly it is to do with the way the housing component is treated. So, most estimates are that actual US inflation is higher than the reported figures.

The situation isn't too different in many other countries. Understandably, governments are motivated to understate actual inflation. Think of the higher cost of servicing debt and the expense of running programmes where costs are indexed to inflation.

Debt markets are on guard for signs of higher inflation. We will definitely not get a repeat of the 1970's experience, with lenders receiving negative real interest rates.

If the central banks act irresponsibly and stoke up higher inflation, there will be a very quick adjustment in bond markets. An inflation premium will rapidly be priced in, as yields jump higher. The stock market will also be on watch regarding price pressures. Past episodes of elevated inflation have generally not been kind to the market.

Stock markets have welcomed the sloshes of liquidity created by central banks in Europe and North America.

The aim of the bankers was not to juice up stocks but to try and prevent the credit crunch from damaging the financial system and the economy.

However, let's just say in passing, that the Fed is not averse to seeing a liquidity-induced boost to stocks. With house prices under downward pressure, anything that shores up household net worth is welcomed by the Fed.

Central banks are facing challenging times, indeed. They have acted aggressively and implemented special measures to promote lending and lower the price of credit. The issue of moral hazard has been ignored and there are increasing concerns that they may take a lax view of inflationary pressures.

A central question in any economy is: who deserves credit in the private sector? Well, the market mechanism is marvellously efficient and effective in sorting out that question. Market participants take account of risk and price it accordingly. If adequate information is not available and there are doubts about borrowers, lenders may extract a high risk premium or refrain from lending altogether.

The problem in the credit markets is not so much lack of liquidity as concerns about solvency. Some entities, possibly large ones, are insolvent.

Of course, they are not going to come out in the open and declare the fact. Quietly, they are hoping that underlying assets will recover sufficiently to bring them closer to solvency.

With falling house prices in the United States, the value of mortgage-backed securities and the fancy derivatives carried on the books, are out of whack with the real value of houses in the sub-prime sector, and the ability of their occupiers to make mortgage payments.

But it is not just the sub-prime sector that is problematic. House prices, in general, have risen very rapidly in recent years, not just in the US but in many other countries as well.

If past cycles are any guidance, prices in some of the overbought markets will have to decline substantially over a longish period. But, such a hit to their net worth will decidedly dampen consumer spending.

As the sub-prime sector becomes a sob-prime story, the politicians will step in to provide "solutions".

Markets will be subverted, taxpayers may face a bill and the Fed will be under pressure to ease further.

Iraj Pouyandeh is a Strategist and Senior Portfolio Manager at LOM Asset Management. He manages the LOM Global Equity Fund. For more information on LOM Asset Management please visit www.lomam.com