California is Bankrupt

California, the 10th (or up to 7th, depending on who you trust) largest economy in the world with a state domestic product roughly equal to the national GDP of China (or Italy or Spain), is bankrupt. According to this article on California's fiscal situation:

"Next Wednesday we start a fiscal year with a massively unbalanced spending plan and a cash shortfall not seen since the Great Depression," Controller John Chiang said in a statement announcing that he would be forced to use IOUs to pay the state's bills beginning on July 2.

Now, those who still believe in decoupling and the China miracle should be wondering whether or not they think California can drag the global economy into a depression if China can supposedly drag the world out of it. Can't have one without the other. If the so-called miracle Chinese growth story was going to help the globe, the California basket case economy must be enough to negate it. And I doubt that anyone is counting on the equal-sized economies of Spain or Italy to help global growth get back on track.

The references to the "Great Depression" keep popping up and the statistics seem to indicate that the current period is either similar to or worse than our last deflationary economic depression. The arguments against this scenario usually resort to vapid, ignorant comments discussing an unemployment rate of 25% and the lack of soup lines. The unemployment rate in 1930-1931 was 8-9% (sound familiar?). Soup lines are packed but the media doesn't have time to cover them: American Idol and good sex or murder scandals draw more viewers and keep the corporate masters happier.

Iceland's economy collapsed, Eastern Europe is on the brink, California is flat out broke and about to issue IOUs, some of the largest financial institutions in the United States have failed and/or become nationalized (and others needed government hand outs to survive), the worst housing collapse in the USA since the last economic depression is well underway with no end in sight (no, we're not close to the bottom in real estate yet), bank failures are set to accelerate, GM and Chrysler are toast, the PE ratio for the S&P 500 is now well over 100 and sentiment figures indicate either complacency or outright bullishness.

Now I understand that when things seem darkest that it is time to be contrarian and buy anyway. I get it. I really, really do (and apparently the majority of market participants are way ahead of me in getting bullish near the top of this rally if the put to call ratios are a clue). But after a 35-40% rally within a bear market that isn't over by a long shot, why would anyone be something besides bearish unless day trading? I personally think we're on the brink of another quick move down in general stocks that should start before the week is over (possibly tomorrow).

Remember that the banks, financial firms and real estate firms are the weakest sectors and have led and will continue to lead this bear market down. These sectors for the most part peaked over a month ago and are heading down already. Here's a look at the homebuilders ($DJUSHB) using a 4 month candlestick 60 minute intraday chart:



Green shoots, meet my big brown bear boots.