In 2010 Meredith Whitney made an earth shattering statement during a CBS's "60 Minutes" interview that rocked the municipal bond investment world.
"There is not a doubt in my mind that you will see a spate of municipal-bond defaults,"said Meredith Whitney on Dec 19. She continued, "You could see 50 sizable defaults, and 50 to 100 sizeable defaults, more. This will amount to hundreds of billions of dollars' worth of defaults."
The muni bond market fell far short of Whitney's prediction. But many today feel she was merely ahead of her time.
Recently Detroit has defaulted on its muni bonds leaving investors hoping to get 10% return on their original investment, but there are no guarantees.
As Detroit moves closer to bankruptcy California has 10 cities facing the same fate. The cities of Atwater, Azusa, Compton, Fresno, Hercules, Mammoth Lakes, Monrovia, Oakland, San Jose and Vernon are ready to file for bankruptcy following the now bankrupt Stockton's lead.
Money Morning's Shah Gilani recently talked to Whitney in an exclusive interview about her new book, The Fate Of The States:
The new Geography of American Prosperity
She believes that wealth and opportunity are moving away from the coasts and toward the central corridor. The states of California, Florida and Nevada benefited from the housing boom. However instead of budgeting wisely, local governments spent their windfall profits as fast as they came in on pay increases for public employees, pension increases and pay hikes.
When the housing boom ended, the money stream became just a trickle of new capital. The states were left with pensions they couldn't pay and employees they couldn't afford. They were forced to raise taxes for schools and essential public services.
In contrast a much different scenario was developing in the interior states: N. Dakota, Texas, Indiana. These states avoided the housing crisis. Because foreclosure was not a serious problem they found themselves rich in capital with money to offer tax incentives to companies to relocate and retrain new employees.
These central states are also positioned to reap the massive benefits of from the oil and natural gas boom.
Whether or not this trend is irreversible is anybody's guess but Whitney's track record at predicting trends is pretty impressive. This is why Money Morning wanted to get her opinion:
On the much talked about the Red state-Blue state migration Whitney has definite ideas on the, "How's and Whys'" of the migration.
The Red State-Blue State Migration
Shah Gilani: As far as the book goes, in terms of what you're projecting, are there any bets that should be made, any states to be avoided, any states to be bet on in terms of their potential growth and would you advise staying away from certain municipalities, moving
toward others in terms of investors?
Meredith Whitney: Well, I have never been a municipal bond analyst, but what I did see and have seen and continue to see clearly is there's just economic opportunity in certain states that is accelerating and stagnation in other states that continue to struggle.
And I think that those strong states are going to get stronger and the weak will get weaker. That's just — you know, the more rich – spoil of the riches in terms of the areas that are attracting businesses and jobs-the more they're spending, reinvesting into communities, and that's clearly through the central corridor, as I described in the book. And the areas that don't have job creation, that are losing businesses are continuing to have to cut to the bone in social services, and those are the areas that are struggling most.
Shah Gilani: Is there anything to do in terms of this movement, this shifting having to do with Red States and Blue States, Meredith?
Meredith Whitney: It just so happens that the states that are outgrowing other states happen to be the Red States and the Red States tend to be more commodity agrarian by history, and so, they've had much more fiscal constraints and because they didn't have the big housing boom, and so, they have a lot more
dry powder, they've had smaller governments.
Blue states, if they want to, if they want to turn themselves around, you've had Blue States that really have — that have really turned themselves around. I mean, I think Florida is doing a great job.
This is not a partisan issue. This is a reality issue in that everyone is going to have to make tough choices because their future hangs in the – you know, the safety of streets, the quality of education, the retirees' rights to pensions and, I think, so many of the social services that we rely on really hang in the balance here.
Shah Gilani: Terrific. Meredith, finally, as an analyst, you
seem to take the big picture, snapshots of what's going on in the economy in terms of the country. Where do you see America going?
Meredith Whitney: Well, this is why I wrote this book. It really is a romantic story about where the U.S. economy is going, and I think it's going in a great direction.
So, you have, as I said, a tale of two economies, one very strong economy and one weak economy. And we're just shifting to one industry to another, and we've done that at least six times in the last 200 plus years. What was important to me was to outline how it's happening and how it affects everybody in this book.
ARE GENERAL OBLIGATION BONDS UNSECURED?
Shah Gilani: As far as the muni market goes in general, it's come into question because of what's happened in Detroit that general obligation bonds may be considered unsecured. Is that how you see it? Do you think that's going to face a court test?
Meredith Whitney: Well, I think that — I think we're in unchartered territory. I think tha the threat of bankruptcy is causing a lot of things that people wouldn't — wouldn't imagine could happen and haven't happened since the Great Depression to be on the table. Again, we're in unchartered territory.
Shah Gilani: In your book, you're really looking out to the future and you're seeing the trends that are happening now and you think are going to progress. Could you elaborate a little bit on what exactly it is that you're seeing now and where do you think we're ultimately going to go in terms of this migration from one set of states to another set of
Meredith Whitney: Well, I can just tell you what businesses are already doing. And businesses are moving to states that have better tax policies, more pro-business environments, better infrastructure, more sustainable fiscal situations.
And many businesses are moving closer to cheap energy, cheap oil and gas. And that's not just U.S. businesses, it's businesses all around the world.
MUNI MARKET PREDICTION REVISITED
Shah Gilani: As far as the banks as an investment, the big banks in particular, are there any of those that you'd be a buyer of, is there an area you'd stay away from, and how do you feel about community and regional banks?
Meredith Whitney: Well, I think that the regional banks are going to be interesting, you know, later in the year, early next year. I think that the big banks are focused on — you'll see this certainly in the next several weeks when they report — are focused primarily on expense reduction because the revenue environment remains — you know, remains weak.
But what's happening in the economy right now is – is a tale of really two American economies, one that's doing very well and one that's contracting. And that's what I focus on so much in this book, which is what led to economic strength in the past is really going to hamper economic strength on a go-forward basis. Certain parts of the market are scoring a lot faster than the others, and that's what I wanted most people to focus on.
Shah Gilani: Let's take a look at what you're talking about in the book and, specifically, about the muni markets. Prior to that, you made a great call –what I thought was a great call — that the muni market has the potential for some huge defaults ahead of us. We
haven't seen quite the level of defaults that I think you had predicted, but I'm with you in that they're probably still out there somewhere.
How do you see your prediction of 2010, 2011, in terms of the marketplace now and are there still dust under the cupboard that's yet to be exposed?
Meredith Whitney: Well, what I did in 2010 and what I continue now is — but particularly in 2010 – was worry about the fiscal health of the states and clearly I thought that was going to be a large drag to the overall employment picture and to the overall economy. And because there wasn't enough money to go around, clearly, that was going to affect taxpayers, it was going to affect pensioners and it was going to affect the bond market. And you've seen all three of those areas, you know, be affected.
You know, don't ask me to quantify the amount of pensions that would get renegotiated or the amount of tax dollars that would get raised or the question was, you know, would bonds be in default, and they are. So this is the state we're in andit continues.
So, it's happened, it's happening, and it's going to continue to happen. You know, the most high profile name right now is what is Detroit's going through and bond holders are getting pennies on the dollar, being offered pennies on the dollar. So there's no denying that this stuff is happening.