Since the generational credit contraction began in 2008 I’ve thought that understanding the Really Big Picture required a determination as to whether private sector de-leveraging (voluntary or otherwise) was going to prevail or if public sector reflationary efforts would win the day. In other words, would deflation or (hyper)inflation be our future?

As a betting man (!) I’ve been of the view that the public sector reflationary efforts have been, at best, a rear-guard action and, if anything, would only add to the dead weight of eventual deleveraging. I’ve been of the deflationary persuasion.

I’ve anticipated a sequence-of-events based upon my observation that, “the Americans wash their laundry in public, the Europeans don’t, and the Asians definitely don’t.” In other words, the bursting of the credit bubble began in America in 2007/8, it is now hitting Europe with a Tsunami force and next up will be Asia. A synchronistic global economic downturn may be in the making.

I’ve been doubtful of my ability to size-up China. I know that the commodity bulls want to believe that China’s explosive growth will mean that she will buy everything that’s not nailed down….but the Jim Chanos crowd says its all smoke-and-mirrors. Who am I to decide? I’ve been suspicious, but I know I don’t have the facts…who does?

All-time-high residential real estate prices in Vancouver seem to be an extension of the mainland Chinese real estate boom – while prices in many parts of America and Europe (save London) are down…or really down.

IF…and it’s a Really Big IF…the bloom is off the rose in China, then there will be dramatic consequences across markets….from Vancouver residential real estate prices to the price of copper or crude oil or coal…or gold. If the bloom is indeed off the rose in China then thoughts of (hyper)inflation are dashed….and deflationary prospects loom large.

Ambrose Evans-Pritchard, International Business Editor of the Telegraph, is of the view that things have taken a turn for the worse in China. Here is a link to his latest article: China’s epic hangover begins 

Ed Note: Markets have been tough here in the US for the past eight months now, but it’s nothing compared to China’s market struggles.  As shown in the first two charts below, China’s widely followed Shanghai Composite has been making a series of lower lows over the past three days, putting it at a multi-year low.

And a chart of the ratio between the S&P 500 and the Shanghai Composite shows that the US has been outperforming since the middle of 2009 now.  (When the line is rising in the chart, the US is outperforming, and vice versa for a declining line.)

Charts via Bespoke Investment Group