Montreal, Canada

Are we placing too much faith in China and central banks to save the global economy? The answer appears to be a resounding "yes" and the consequences of this hopeful relationship will be absolutely dreadful once the markets turn against the madness of crowds.

Stocks in the United States are still in the midst of their biggest rally in over 100 years since bottoming in March. The MSCI World Index of mature markets is also posting its biggest gains off March lows since the index was introduced by Morgan Stanley Capital International in 1969. And Chinese stocks have now skyrocketed 137% since bottoming about a year ago.

"Bubbles" are now firmly in place in assets like junk bonds, common stocks, Asian real estate, Latin American financial assets, including domestic currencies, non-dollar currencies and several commodities – mostly in the industrialized metals sector. Hedge fund speculation is back with many managers embracing leverage once again, reminiscent of the pre-2008 go-go days.

There's no way global industrial demand justifies current price levels when considering the enormous slack still evident in the United States and Europe coupled with weak pricing pressure across every single industry. Nobody is raising prices. I've got to wonder what sort of economic recovery we have in the West in the absence of massive government spending. The world's biggest economies are still on crutches.

China, which until this decade remained largely an isolationist country since the mid-15th century, is now rapidly being pulled back into the fore as the world seems eager to embrace its financial power and growing economic influence. It's no surprise this shift is occurring at the same time Washington is losing its post-WW II position as the world's only superpower; the United States remains the world's undisputed military champion but 2008 marked the beginning of the end as it pertains to American-style capitalism.

Gradually, over the next 25 years the balance of power will shift to China at the expense of the United States. This transition is inevitable the same way Great Britain reluctantly relented to Germany in the late 19th century and by 1946 was virtually bankrupt relying on U.S. financial assistance.

The Chinese have orchestrated a tremendous state-sponsored economic recovery with almost $600 billion in stimulus spending and trillions more in government-assisted or forced real estate lending. If investors think China is home to a clean balance sheet, they're wrong; asset values in the biggest cities are clearly in "bubble" territory as speculation runs rampant in places like Shanghai and Shenzhen – many other smaller cities are also in a real estate boom.

As we head into 2010 in six weeks' time it is becoming more important to follow the events unfolding in China and, lesser so, in the United States.

Beijing basically controls the big money now and holds the Treasury by the neck as she grows more vocal about the dollar, Treasury bond guarantees and U.S. market regulation. But the irony is that China's economic unraveling is the next shoe to drop over the next 36-48 months because money-supply, bank credit, real estate and stock market speculation make what happened in mortgage-backed assets in the United States look like a side-show. China's lending apparatus is out of control.

If the Fed has done a miserable job controlling inflation since 1913 while basically destroying the dollar imagine what lies ahead in China. Do you honestly think the People's Bank of China can reign in all this credit without triggering a financial disaster at some point?

History is instructive in this argument because like China, the United States emerged as a global power after the Spanish-American War in the late 19th century. But even on the road to economic greatness the United States endured several crashes and economic depressions in the 1890s, 1907 and, of course, the 1930s. It's naïve to believe China won't suffer a similar trajectory.