[evilgenius]

What's up with the stories that accuse Meredith Whitney of some kind of misstep by calling for problems in the municipal bond markets? From what I can tell her critics are mad at her because her predictions did not come true immediately. Was that the expectation? I don't see the problems with the State's budget gaps going away any time too soon. The threat is even worse for cities. Personally I see this act of reprisal as coming from two potential sources: the investors that believed her, but bet that it would happen over a short time horizon or the people who are angry that her forecast has caused so much competition for the monies that investors had hoped to get into in order to offset the kinds of losses they might face should it come true.

[Outcast_Searcher]

What's up with the stories that accuse Meredith Whitney of some kind of misstep by calling for problems in the municipal bond markets? From what I can tell her critics are mad at her because her predictions did not come true immediately. Was that the expectation? I don't see the problems with the State's budget gaps going away any time too soon. The threat is even worse for cities. Personally I see this act of reprisal as coming from two potential sources: the investors that believed her, but bet that it would happen over a short time horizon or the people who are angry that her forecast has caused so much competition for the monies that investors had hoped to get into in order to offset the kinds of losses they might face should it come true.

From what I've seen in the past 24 hours on the boob tube on places like PBS news and CNBC commentary, the critics think:

1). She is overstating the case. There will be local and single project bankruptsies due to this horrendous recession and its strain on revenues, but $20ish billion is more realistic than $100 billion or much more.

2). Since the states can raise taxes and cut services, they will adapt (painful as it will be) and not just let their funding source (bonds) go away by defaulting or even admit to the liklihood of defaulting. They can raise taxes and cut services, if push comes to shove. Same for the large cities.

3). Don't count on a federal bailout of the states, as it will not be necessary due to number 2.

4). The government entities behind the muni bonds haven't disclosed enough pertinent or detailed information for Whitney or anyone else to make such a dire forecast.

. . . .

Don't shoot the messenger. The above is just my most objective summary of the multiple commentaries I've seen recently by people who seem to calmly talk about economic facts instead of wave their arms and rave. To me, number 4 is actually a big risk -- but then again I want disclosure.

I've been happily selling a high percentage of muni bonds of low liquidity and/or a high (> 10 years) duration in recent months in an estate I've been handling as the risk/reward just isn't worth it to me. (While the person was alive, I couldn't talk them out of their love affair with a solid income stream and low taxes, despite the risks). I'd MUCH rather have income from things like oil stocks or MLP's, where there one gets more yield AND there is a good probability of increasing dividends over time, AND if there is inflation, the underlying energy assest have a good chance of appreciating. (I'll happily accept some volatility for the much better long run outcome probability).

I'm even happier with a high yield corporate bond fund with a small (less than 4 years) duration -- given that despite all the denial on this site, GDP and corporate profits are in a recovery despite the unemployment and housing mess.

To me, munis in general look like bad treasuries (low yields in the face of huge inflation risk medium to long term -- AND real question about credit risk).

That doesn't mean that I think Whitney knows what will happen. It means risking getting killed by a bulldozer does NOT justify chasing dimes you may notice directly in its path...

[jdmartin]

I think that's about right. The states will visit a lot of pain on its own citizens before it defaults, or let its cities default, on GO bond issues. No state can afford to abandon or ostracize the bond market right now.

[smiley]

What is interesting about this debate is that the most vocal opponents of Whitney are the holders of big muni portfolio's. The so-called experts that CNBC and CNN bring to the floor to counter her arguments usually have a big stake in the muni market. That in itself is fine, these people are entitled to an opinion and they certainly stick their money where their mouth is, but these should not be presented as independent opinions.

In contrast, the actual holders of debt, like the Illinois and Conneticut controllers, the former GAO chief and the various municipal stateholders tend to agree with Whitneys assesment. Of course these people might have their own agenda's, but at least thy know exactly what is in their books.

If they are concerned I guess so should we. I've said this before in some older treads: I think the Muni market will be the big story of 2011.

- I have a strong suspicion that this situation will escalate in Q2 this year; expiration of the Built America program, Federal budget problems, alt-A resets, rising interest rates.

- I also think that the states cannot cut themself out of this problem, something has to be done on the revenue side.

- With State and Fed both looking for more revenue, there is a real possibility that they will choke-off the economy. I'm no fan of reaganomics, but I do agree that a sudden tax shock can have the opposite effect, namely an economic contraction and decreasing revenues.

- With the amount of debt out there, the states and the government have put themself in a situation that they are entirely dependent on others. For instance if the average interest rate on the federal debt rises by 1%, the administration needs to increase their revenues by 8% to make up for the interest costs alone. The same applies to the muni debt only there there the risk of an interest shock is even higher since the owners of the debt are largely private investors with less consideration for political agenda's and economic stability as the large owners of treasuries have.

America is walking a terribly wobbly fine line here. They need to adress the budget and debt problems, but they cannot afford to dent the economy or to tick off investors. If this happens the situaton could escalate in a matter of days, and then even the predictions of Whitney might prove to be conservative.

[evilgenius]

I like your reasoning, Smiley. What prompted me to start this thread was the nonchalance being put off by Whitney's critics vis a vis her prediction. Those critics almost exclusively use an overall gestalt view of the situation in order to allay fear. I look at that and see how that view is just like not recognizing the danger of subprimes in the mortgage market. Once a sizable enough failure rate amongst the weakest in the class causes a panic level high enough to discredit the investment class, then rates have to rise even if the gestalt model would not have yet predicted a rise. Investors will perceive more risk and demand a higher reward. The thing is, investors can also flee this market altogether thus overstating the reward demand. This kind of reaction could cause perturbations that municipalities and states are not the least bit ready for nor in many cases able to handle.

[smiley]

What prompted me to start this thread was the nonchalance being put off by Whitney's critics vis a vis her prediction. I look at that and see how that view is just like not recognizing the danger of subprimes in the mortgage market.

Your're absolutely right. Last week I saw one of these guys explaining that there was no merit to Whitneys predictions, because there has not been a historical precedent for large scale muni default. We have not seen it yet therefore it cannot happen.

I had to restrain myself from shouting to my screen (Mogambo style): " in the past 3000 years that banks exist we have not seen hundreds of banks do a belly flop worldwide in the same year, yet that is exactly what we have seen in 2008, ya moron ! ".

I don't think they have learned a thing.

[Outcast_Searcher]

What is interesting about this debate is that the most vocal opponents of Whitney are the holders of big muni portfolio's. The so-called experts that CNBC and CNN bring to the floor to counter her arguments usually have a big stake in the muni market. That in itself is fine, these people are entitled to an opinion and they certainly stick their money where their mouth is, but these should not be presented as independent opinions.

True, but generally, MSM will explain how someone is connected to the muni market when asking for their opinion. As long as this is fairly disclosed, then I don't see a problem.

It is hardly surprising that people will tend to "talk their book' and to see things in light of their own self interest.

[Outcast_Searcher]

Today on Fareed Zakaria's "GPS", he interviewed George Soros.

Soros said he thought that we would see some Municipal defaults, but he didn't go into detail or give probabilities.

He also said that he expects the general bond market (Treasuries were implied) to have a big problem when our wonderful Washington political crowd continues to fail to meaningfully address the debt problem.

He declined to give a specific time frame, but he implied that long bond interest rates were likely to go WAY up, induce a lot of pain, and derail the economic recovery.

Whatever your politics may be, Soros has been a successful investor and has a lot of experience investing in the bond market per Zakaria's comments (I think he has credibility anf balance as a news analyst), so I thought this was worth passing on.

One more experienced investor not buying the Bernanke line...

[americandream]

Markets act in a co-ordinated manner, overall. I can't see them leaving events to arise that risk killing the goose thats laying their golden egg, the consumer. In addition, there are ample reserves in the Chinese kitty. Having said that, there are limits to papering over capitalism's many fault lines. So I reckon Whitney's timing is a bit off but her fears are well founded.

[kiwichick]

i'd take whitney and soro's prediction's over the usual idiot on Luddite TV (CNBC)

[smiley]

Well if you include Soros you might also want to add the other investment ultraheavyweight.

June 2 2010 (Bloomberg) -- Warren Buffett, whose Berkshire Hathaway Inc. has been trimming its investment in municipal debt, predicted a “terrible problem” for the bonds in coming years.

“There will be a terrible problem and then the question becomes will the federal government help,” Buffett, 79, said today at a hearing of the U.S. Financial Crisis Inquiry Commission in New York. “I don’t know how I would rate them myself. It’s a bet on how the federal government will act over time.”

<snip>

Buffett, Berkshire’s chairman and chief executive, has previously warned about the risks of insuring municipal bonds. In his annual letter to shareholders in 2009, he said public officials may be tempted to default on bonds whose payments are guaranteed by insurance companies rather than push through needed tax increases.

http://www.businessweek.com/news/2010-0 ... ate1-.html

So we have two older gentlemen with a combined total of $70billion in price money in one corner, and a couple of slick Armani suits in the other. Take your pick.