The Next Canary in the Coal Mine - California

The phrase "canary in a coal mine" is frequently used to refer to a person or thing which serves as an early warning of a coming crisis.

In 2007, the canary in the coal mine was the collapse of a Bear Stearns hedge fund with mortgage backed securities. It was largely ignored at the time as an isolated incident. By reading the opinions of some experts (and conspiracists alike), I now believe that the "canary in the coal mine for 2009" is the imminent bankruptcy of California.

Starting July 29, California won't have enough cash to pay its bills, state Controller John Chiang told the governor and legislative leaders today. The state will be in the red by $317.1 million that day, Chiang wrote them in a three-page letter. "Two days later, on July 31, our cash deficit increases to a negative $1.02 billion," he added.

Source: Chiang warns state leaders on cash crunch

Just like in 2007, this news is going largely ignored because it is commonly believed that the Fed will bail out California, as it is "too large to fail". It also comes off the heels of a GM bankruptcy and a bank TARP repayment. Unfortunately, what most people are ignoring is the fact that "if California were a separate country, it would rank among the ten largest economies in the world, with a GDP similar to that of Italy, and it would be 35th among the most populous countries." (Source: Wikipedia)

Everyone in the United States of America cannot fathom this great country going bankrupt... but I believe it's already happened. We've bailed out the banks, GM and soon it will be states. What is left?

And who will stand by to bail our government out?

I'm standing by my belief that "something bad is still coming" at the end of 2009, maybe early 2010. Possibly a deflation to hyperinflation trap that will reset the wealth food chain in a very big way. This is no time to be complacent with your investments!

See my previous post regarding Investing in Deflation vs. Inflation and place your bets.