If the VXO is any indication, investors are feeling pretty safe and peaceful right now.

Yes, the financial crisis is over…the storm has passed…happy days are here again.

Or are they?

What most do not realize, is that the fundamentals of the economy are actually in much worse shape today than “near death experience” of the financial system in 2008.

If/when California goes down, it can be likened to the first domino to fall in a chain of OTC derivative detonations.

Greece has been the victim of a short attack through the use of Credit Default Swaps….the unregulated instruments that place wagers on the likelyhood that a firm..and now countries…will go under. It was the same thing with Lehman Brothers, when the financial sharks smell blood in the water, they attack the weakest entity.

Credit Default Swaps are a type of “OTC Derivative”, which the Bank of International Settlements (BIS) has estimated there to be over $600 TRILLION worth – and thats AFTER changing their valuation models to arrive at the new numbers. The previous count was over $1000 TRILLION (Thats a quadrillion).

Expect short attacks on other Sovereigns, as well as US States. When this occurs, there will be two options here:

1. California will be allowed to go under, which could cause a domino effect throughout the US

2. California will be bailed out, which will again increase the chances of hyperinflation in the US (see Quantitative Easing)

Either way, I certainly hope you have some of your wealth stored in other forms than just paper.

California is a greater risk than Greece, warns JP Morgan chief

Jamie Dimon, chairman of JP Morgan Chase, has warned American investors should be more worried about the risk of default of the state of California than of Greece’s current debt woes.

By James Quinn, US Business Editor in New York

Mr Dimon told investors at the Wall Street bank’s annual meeting that “there could be contagion” if a state the size of California, the biggest of the United States, had problems making debt repayments. “Greece itself would not be an issue for this company, nor would any other country,” said Mr Dimon. “We don’t really foresee the European Union coming apart.” The senior banker said that JP Morgan Chase and other US rivals are largely immune from the European debt crisis, as the risks have largely been hedged.

California however poses more of a risk, given the state’s $20bn (£13.1bn) budget deficit, which Governor Arnold Schwarzenegger is desperately trying to reduce.

Earlier this week, the state’s legislature passed bills that will cut the deficit by $2.8bn through budget cuts and other measures. However the former Hollywood film star turned politician is looking for $8.9bn of cuts over the next 16 months, and is also hoping for as much as $7bn of handouts from the federal government.

Earlier this week, John Chiang, the state’s controller, said that if a workable plan to reduce the deficit and increase cash levels is not reached soon, he will have to return to issuing IOU’s, forcing state workers to take additional unpaid leave and potentially freezing spending.

Last summer, California issued $3bn of IOU’s to creditors including residents owed tax refunds as a way of staving off a cash crisis.

“I can’t write checks without money; that’s against the law. My main goal is to keep the state afloat, but I won’t be able to do it without the help of new legislation,” said Mr Chiang.

Source Article

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