Let’s give Meredith some credit

May 6, 2011

Everybody beats up on Meredith Whitney for her muniland panic call.

Yesterday she doubled down on her prediction of “hundreds of billions of dollars’ worth” of municipal-bond defaults.

Whitney was speaking on a panel, Reading the Tea Leaves: What Lies Ahead for Financial Markets?, at the Milken Global Conference.

I want to give Whitney some credit.

Whitney has a very good macro view of the U.S. economy. At the Milken conference she said that housing has contracted for four consecutive years. States have spent at a 30% higher CAGR rate than consumers.

She says that 12% of the U.S. GDP comes from state and local government expenditures.

She said Arizona, California, Florida and Nevada represent 22% of U.S. GDP and have the highest unemployment, lowest relative growth and highest budget gaps.

These four state also relied on housing and construction for major proportions of tax revenue and will face continuing headwinds.

This all sounds true. Let’s give her credit for the grand sweep.

But it’s on the micro level where Whitney falls flat.

She has provided almost no data to support her extreme call on the health of municipal governments.

And she has made some ludicrous claims. Bloomberg quoted her as saying:

“States have been spending at two-and-a-half times their tax receipts,” she said.

Others have contradictory views.

In the Bloomberg video above Peter Hayes, a managing director at BlackRock responsible for a $100 billion of municipal bond investments, talks about his view of muniland.

He begins by agreeing that Whitney’s call has drawn useful attention to the long term problems for state and local governments. He goes on to say that if her predictions were correct then we would being seeing approximatively $5 billion a week of defaults. This is not happening.

And from the Center on Budget and Policy Priorities we hear this:

States have closed the vast majority of deficits by drawing on rainy day funds and reserves, using federal stimulus funds, cutting expenditures, and raising new revenues.

Only a few states — particularly Illinois — have failed to close their deficits responsibly in recent years, instead using a combination of payment delays, borrowing, and other gimmicks. (The fault in Illinois has been largely political gridlock rather than a lack of reasonable options.)

States and localities have issued bonds almost exclusively to fund infrastructure projects, not finance operating costs, and while the amount of outstanding debt has increased slightly over the last decade it remains within historical parameters.

Interest payments on state and local bonds generally absorb just 4 to 5 percent of current expenditures — no more than they did in the late 1970s.

Ms Whitney is doubling down.

It really puzzles me. Why her strong conviction without a willingness to provide more proof and defend herself? And who is buying this research?

Markets are made up of such divergences in opinions. And both sides can triumph depending on the time frame. In the short term Ms. Whitney is not winning. We’ll see if her conviction lasts.

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“States have been spending at two-and-a-half times their tax receipts…”

What does she mean by ‘States’? A number of state governments have constitutional or legislative prohibitions against deficit spending. But that is not true for municipalities, which have seen the state legislatures push responsibility for unfunded mandates down on them.

Posted by ARJTurgot2 | Report as abusive