What a difference a week makes.

A mid-August meltdown in the Chinese stock market suddenly went global, putting major U.S. averages in meltdown mode.

Federal Reserve Bank of New York President Bill Dudley put it bluntly on Aug. 26, suggesting at a news conference that the case for raising interest rates in September is now weaker, thanks in part to the stock market tumble.

And the fact that Dudley would actually make such a statement is part of the reason why markets are in a state of upheaval. China, the world’s second largest economy with GDP approaching
$10 trillion, is way too opaque for its size.

In Shanghai and Beijing, the official line is that GDP will grow at 6.5 percent this year. But many experts doubt the credibility of a government that has spent years learning how to manage results to precisely match projected numbers.

On a conference call on Aug. 25, Wells Fargo economist Mark Vitner said he thinks that China is in a recession or barely registering growth.

Los Angeles-based Capital Group said before the recent meltdown in the Shanghai stock market that it believed growth in China was 3 percent to 4 percent.

Those are not the kind of numbers that could possibly justify the current price-to-earnings ratio for Chinese stocks, still in the range of 60 versus 18 for a tumble-adjusted U.S. stock market. That suggests much more weakness for China’s economy and its stock market, perhaps years of adjustment ahead.

Here are five things to watch as the next chapter in the global markets unfolds:

• The Federal Reserve could have a green light to raise interest rates, but deflation is the key. Remembering the 1937 collapse after it prematurely raised interest rates, the Fed has been reluctant to be the cause of a stock market meltdown. The stock market tumble gives the Fed pretty good cover to raise rates, but there is a real risk of deflation with China as the trigger.

• Any move by China to come clean on what’s really happening with its economy would be a relief. That means fessing up to actual GDP numbers. It also means much better disclosure about bad loans on the books of its banks, particularly as they relate to over-construction of airports, office buildings and housing developments. If there is a big debt bubble that’s about to burst, then China could face its own lost decade.

• Consumers will have a lot to say about what happens going forward to the U.S. economy and stock market. It is not likely that the problems in emerging markets or lower stock prices will derail the Christmas shopping season this year. It’s more likely that people from Syracuse to Stockton will take the dividend from lower oil and gas prices and spend the money.

• California and Europe are the new best neighborhoods on the block. Yes, we have a drought problem.  And a housing problem. And a problem with too much regulation. Europe has a Greek problem, a refugee nightmare, a crisis in Ukraine and large exporters like VW are vulnerable to weakness in China. But, California’s recovery, led by tech, has real momentum. And Europe has, as always, a way of muddling through.

• Finally, a personal note. Over the past 25 years I’ve achieved a roughly 10 percent annual return on my personal portfolio. I never borrow money to buy stocks or bonds. I own mainly low-cost instruments like index funds. I am never a seller.  I always remember that you haven’t lost a thing if you haven’t sold.

• Reach Editor Dubroff at hdubroff@pacbiztimes.com.