Meredith Whitney has softened her tone regarding muni bonds. The analyst who famously predicted disaster for the entire market on national TV now she says that new governors have been elected and states have begun reforming. There will be problems in four key states, but she is not predicting a disaster. In fact, she said investors will be safe in general obligation (GO) bonds.
Last week, the Investment Management Consultants Association (IMCA) held its annual conference in Seattle – which it claims is the largest gathering of investment advisors and private wealth managers in the United States. The association’s membership grew 5% last year, pushing the total past 9,000. The conference’s lineup was expanded this year and included industry leaders, economic strategists, and decorated academics.
Whitney, the conference's first speaker, is currently chief executive of Meredith Whitney Advisory Group LLC, which she founded in 2009 after resigning as managing director and senior financial institutions analyst at Oppenheimer & Co. Inc.
She burst on to the scene in 2007 when she uncovered Citigroup’s poor financial prospects in a research report, foreseeing the oncoming economic crises.
Despite her unwanted reputation as a “doom and gloom gal,” Whitney offered an optimistic outlook. She affirmed her comment from a March 18th CNBC Interview that she is more bullish on equities at this point than she has ever been. She presented a look into the next 25 years, predicting the U.S. economy will recover from the depth of the housing- and leverage-backed lending failures, just like it recovered from the outsourcing of the manufacturing industry in the 1970’s.
While things don’t look good for the “Sand States” – California, Nevada, Arizona, and Florida – where high unemployment rates and saturated lending markets make starting new businesses extremely hard, she sees opportunities elsewhere where the 36 newly elected governors from the last election are “able to take great political risks in terms of cutting budgets.”
Rise to fame
Reflecting on the early part of her career, Whitney explained that a red flag was raised when Gary Crittenden was appointed CFO of Citi and invited her to a meet-and-greet cocktail party. Identifying the cocktail event as “kind of a contradiction in terms” of Gary’s Mormon beliefs, Whitney’s intrigue led to her attendance. There she overheard another analyst complain that modeling Citi’s finances was too difficult and was inspired to look into the company herself. By simplifying the model and looking at the bigger picture, she revealed a $30 billion shortfall.
Whitney again made headlines in 2010 for predicting in a 60 Minutes interview that states would soon begin defaulting on municipal bonds. Budgets weren’t being cut and tax revenue wasn’t increasing – the money had to come from somewhere, she said. She continues to concentrate her time on investigating state finances and said she will likely continue to do so for much of her career.
After releasing her report, Whitney began to garner a bullish reputation, which bothered her. “I understood where growth wouldn’t come from, and then I started to think about where growth would come from,” she said. Whitney found growth in the country’s central corridor – by avoiding the housing boom, it also avoided the housing bust. She found consumer spending there was outpacing spending on the coasts by 30%, funded by the cheap natural gas found in the region’s shale formations and new manufacturing jobs in the chemical industry.
The state of the States
Whitney’s findings on the municipal market will be detailed in a book slated for release next month. She said the municipal market is easier to understand than corporate finances because of its required transparency. States must submit budgets a year (sometimes two) before they are implemented or as she put it, you get “to see their playbook” (a sports analogy she admitted her husband, pro wrestler John Layfield, feels she is unqualified to make).
She continues to be pessimistic about the municipal bond market where governors will be faced with the unenviable decision to pay back the bonds or invest in the reeducation and relocation the state needs to retain employees. But she's optimistic about GO bonds.
“GO bonds have the tax backing of the states,” she said. “What I’ve worried about was never the state-issued GO bonds. It was the localities, because the states can always cut off the localities.”
She added that 40% of local funding has to come from the states. Some states – like Ohio – have cut back on that funding by as much as 30%, she said, which has forced cutbacks in education and social services.
Whitney previewed some findings from her book at the conference. She predicted an oncoming middle-class migration towards the central corridor leading to a “negative feedback loop from hell” in coastal states. Burdened by existing debt, those coastal states will increasingly lose the tax revenue they need to invest in job creation. But if advisors look to the central corridor, she said they’ll discover lots of long-term opportunities for investment in the states poised to benefit from the infusion of new workers exiled from the coast.
Ben Huebscher is an associate editor at Advisor Perspectives
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